National Bank Holdings Corporation

Good morning everyone and welcome to the National Bank Holdings Corporation 2020 first quarter earnings call. My name is Cheryl and I will be your conference operator for today. At this time, all participants are in a listen-only mode. We will conduct a question and answer session following the prepared remarks. As a reminder, this conference is being recorded for replay purposes. I would like to remind you that this conference call will contain forward-looking statements including but not limited to statements regarding the company's strategy, loans, deposits, capital, net interest income, non-interest income, margins, allowances, taxes and non-interest expense. Actual results could differ materially from those discussed today. Thank you for joining us. National Bank Holdings Corporation's Chairman, President and CEO, Mr. Tim Laney.

Thank you, Cheryl. Good morning and thank you for joining National Bank Holdings first quarter 2020 earnings call. I have with me our Chief Financial Officer, Aldis Birkans, and Rick Newfield, our Chief Risk Management Officer. With the emergence of the COVID-19 pandemic, We quickly shifted our priorities to one, protect the health of our associates and clients, two, ensure the safety and soundness of our bank, and three, to prudently support our clients and communities. We moved quickly to implement remote working arrangements as well as appointment-only services in our lobbies while maintaining drive-through services. We also expanded associate healthcare provisions for COVID-related illness. With respect to safety and soundness of the bank, our teams moved quickly to assess and manage the emerging risk. Further, our internal and third-party stress testing indicate that the diversity and granularity of our loan portfolio supports the ability to maintain strong capital throughout a severe economic downturn. Rick will address stress testing and other critical credit-related details in just a moment. I'm also pleased to report that our operational contingency plans were activated and proved to be highly effective. It's also important to note that we continue to hold high levels of excess liquidity and the bank maintained Tier 1 common equity of 12.9% at quarter end. With respect to supporting our clients and communities, I'm proud of our team's tireless work with the SBA to approve over $332 million in Paycheck Protection Program loans, supporting close to 1,500 of our small and mid-sized business clients, and helping save an estimated 32,000 jobs in the communities where we do business. On that note, I'll turn the call over to Rick Newfield.

Thank you, Tim, and good morning, everyone. I'll cover three areas in my comments. First, I'll briefly summarize our first quarter credit metrics and performance. Second, I'll discuss the actions we have taken to mitigate potential risks emerging in our loan portfolio due to the COVID-19 pandemic. And third, I'll provide information on our exposure to sectors at a higher risk due to the pandemic. With respect to our credit metrics, trends were positive in the first quarter. with reductions in criticized, classified, and non-accrual loans. Our criticized loan ratio improved from 2.90% at December 31, 2019 to 2.35% at March 31, 2020. Our classified loan ratio improved from 0.96% to 0.86% and our non-accrual ratio improved from 0.49% to 0.47% with total non-performing asset ratio improving from 0.66% to 0.63%. Net charge-offs for the quarter were only $352,000 or three basis points annualized. The positive credit trends and strength of our loan portfolio leaves us well-positioned to deal with the challenges presented by the pandemic. Given the impact of the COVID-19 pandemic, Tim, myself, and our banking teams have intensified our portfolio management, diving deep into our loan portfolio with particular focus on higher impacted industries and commercial property types. Consistent with our change in corporate objectives given the pandemic, our teams are working intensely with our clients to monitor impacts and ensure the safety and soundness of our bank. In March, we implemented additional approval requirements for commercial line of credit draws and we experienced no unusual activity in the quarter. The COVID-19 pandemic has reinforced the importance of our discipline adherence to our concentration limits and to prudent underwriting standards and client selectivity. I'll point out that no industry called out by the street as being highly impacted by COVID-19 represents more than 5% of our total loans. With that said, I'll cover a number of highly impacted industries in more detail. Our energy loans are now down to $30.6 million, or just 0.7% of loans. Three midstream operators and one natural gas royalties client, all stable and well capitalized, make up 97% of that exposure. Senior living is only $21.5 million, less than 0.5% of our total loans. Our restaurant exposure is $223.1 million in 5% of loans. Importantly, 77% are QSR franchise clients and thus able to operate with drive-through and carry-out capabilities during the current restrictions. Multifamily loans total $77.3 million, just 1.5% of loans. The average loan-to-value on our exposure is 65%. with average 2019 debt service coverage of 1.35 times. Our hotel exposure is $181.4 million and 4% of total loans. 97% of our exposure is flagged with the major brand families such as Marriott and Hilton. The average loan to value is 56% and the average debt service coverage in 2019 was 1.67 times. Our hospital and medical exposure is $202 million, or 4.5% of total loans. $116 million of that exposure is to very well capitalized municipal critical access hospitals, which have strong liquidity as well. $40 million of our exposure is to doctors and dentists, with an average loan of just $357,000. We have $120.8 million of exposure to retailers. which is 2.7% of loans. 52% of this exposure is to retailers classified as essential and who remain open selling groceries, gas, and staples. We also have $55.5 million of non-owner-occupied retail commercial real estate or only 1.2% of loans. The average loan-to-value is 66% and the average debt service coverage in 2019 was 1.33 times. Our transportation exposure is $139.7 million and 3% of total loans. This is granular in nature, secured by tractors and trailers, with an average exposure per client of $1 million. Credit exposures to industries such as transportation, restaurant, hotel, and multifamily are managed by specially banking teams, including dedicated, specialized underwriters. Finally, it's noteworthy where we have no direct exposure. Aviation, cruise lines, malls, energy services, casinos and gaming, convention centers, and hedge funds. We have no dealer floor plan, indirect auto, car leasing, and no consumer credit card exposure. We remain in frequent contact with our business clients. I do believe also that maintaining a diverse, granular loan portfolio is a strength. We've conducted twice-a-year stress tests on our commercial loan book. Those results demonstrate that in an economic scenario more severe than the Great Recession, we would remain very well capitalized, above 8% Tier 1 leverage. Non-occupied commercial real estate is only 14% of our total loan portfolio and only 95% of our company's risk-based capital. We are well diversified across industry sectors with most industry concentrations at 5% or less of total loans, and all concentration levels remain well below our self-imposed limits. I believe our bank is in a strong position to manage through the challenges presented by the COVID-19 pandemic. That concludes my comments. I'll turn the call over to Aldis.