National Bank Holdings Corporation

Good morning everyone and welcome to the National Bank Holdings Corporation 2020 Second Quarter Earnings Call. My name is Mariama 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, allowance, taxes, and non-interest expense. Actual results could differ materially from those discussed today. These forward-looking statements are subject to risks and uncertainties and other factors which are disposed in more detail in the company's most recent filings with the U.S. Securities and Exchange Commission. These statements speak only as of the date of this call and National Bank Holdings Corporation undertakes no obligation to update or revise these statements. In addition, the call today will reference certain non-GAAP measures which National Bank Holdings Corporation believes provides useful information for investors. Reconciliations of these non-GAAP financial measures to the GAAP measures are provided in the news release posted on the investor relations section. of www.nationalbankholdings.com. It is now my pleasure to turn the call over and introduce National Bank Holding Corporation's Chairman, President and CEO, Mr. Tim Laney.

Thank you, Miryama. Good morning and thank you for joining National Bank Holdings' second quarter 2020 earnings call. I have with me our Chief Financial Officer, Aldis Birkans, and Rick Newfield, our Chief Risk Management Officer. We continue to address the challenges presented by the COVID-19 pandemic head-on. During the quarter, we realized annualized net charge-offs of just five basis points while also experiencing a decline in our non-performing loan ratio. Adjusted net income of 62 cents per share during the quarter resulted in growth of our tangible book value by 40 cents per share to $21.67. We continue to fortify our balance sheet with our common equity tier one capital ratio growing during the quarter to 13.2%. The stress in the current environment represents a legitimate test to our underwriting approach and I like what I'm seeing. Underwriting with conservative LTVs, cash flow coverage, and reasonable liquidity reserves tends to provide solid downside protection during challenging periods. We also benefit from operating in markets that have performed better than the national average during the COVID pandemic. Ensuring the safety and soundness of our bank remains a top priority, and I've asked Rick to speak to the actions we've taken on this front thus far.

Rick? Thank you, Tim, and good morning, everyone. I'll cover three areas in my comments. First, I'll briefly summarize our second quarter credit metrics and performance. Second, I'll discuss the COVID-related modifications we've completed through June 30. And third, I'll describe the actions we've taken to mitigate credit risk within our portfolio while working to prudently support our clients. With respect to our credit metrics, trends held up well. I'll note that the asset quality ratios I'm about to cover exclude the Paycheck Protection Program loans, thereby showing a more conservative view of asset quality. Our non-accrual loans decreased during the quarter, with our non-accrual ratio improving from .47% at March 31, 2020 to .45% at June 30, 2020. Our classified loans remained relatively flat, with the ratio ticking up to .90% at June 30, from 0.86% at March 31, but lower than 0.96% at December 31, 2019. Our total non-performing asset ratio improved to 0.60% from 0.63% at March 31 and 0.66% at December 31, 2019. 30-day plus past dues were very low 14 basis points, improved from 27 basis points at March 31. Net charge-offs for the quarter were only $616,000, or five basis points annualized. The positive credit trends and strength of our loan portfolio leaves us well-positioned to deal with the continued challenges presented by the pandemic and the current and expected economic stress. The provision expense this quarter was driven by a worsening economic outlook relative to March 2020, and Aldis will cover that in more detail during his comments. Cumulatively through June 30, we have executed modifications on 10.3% of our total loans. 98% of these modifications were for 90 days, and 52% required clients to continue to make interest payments versus full payment deferral. We expect the majority of our clients to return to regular contractual payments during the current quarter after the initial 90-day modification. In fact, as of today, The percentage of loans on a payment modification has fallen to about 7% of total loans. Tim, myself, and our banking teams have continued our intensified portfolio management and further refined our process. We are reviewing all commercial and specialty banking clients, as well as business banking clients with either larger credit exposures or in higher risk sectors on a weekly basis. During these reviews, we assess weekly revenue, versus revenue required to cover the client's expenses and contractual debt payments. We discuss operating status, particularly to the extent impacted by pandemic-driven jurisdiction-mandated restrictions, as well as weekly and trailing four-week trends. Not only has this enabled us to quickly detect credit deterioration and take actions faster to address as needed, but it has put our bankers in a position to be more advisory with our clients, as they are having a minimum of weekly discussions on each client's operations and trends. While the vast majority of our clients have been able to stabilize revenue and expenses at sufficient levels to cover debt service at contractual levels, we recognize that our hotel clients, representing only 3.8% of our total loans, will most likely face a longer road to recovery. Beginning in June, well before initial 90-day payment modifications were set to expire, we began working with our hotel clients on a conservatively forecasted path to sufficient occupancy and average daily rates to represent restabilization. Based on any operating deficits forecast and ongoing interest-only loan payments, each client is required to infuse additional cash equity and agree to certain additional loan terms. Today, we have successfully negotiated such agreements with the majority of our hotel clients. We benefit from our conservative underwriting of this portfolio and are further protected by an average loan-to-value of 56%. Given the additional equity infusions and other enhancements to our loan structures, I believe our hotel exposure is well positioned to weather the potentially protracted stress from the pandemic. Given the pandemic's continuing impacts, 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. I believe maintaining a diverse, granular loan portfolio is a strength. We've conducted twice a year stress tests on our commercial loan book. The most recent of those tests was just completed by an outside party. with a focus on continuing stress by the COVID-19 pandemic and an elongated path to recovery over the coming years. In the most severe scenario model, which assumes no meaningful rebound in the economy in 2020 and a weak L-shaped recovery, we remain very well capitalized. I'll also point out that non-underoccupied commercial real estate is only 14% of our total loan portfolio, excluding PPP loans, and as conservatively underwritten as Tim said relative to loan to cost, loan to value and other key metrics. 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'll now turn the call over to Aldis.