National Bank Holdings Corporation

Good morning, everyone, and welcome to the National Bank Holdings Corporation 2020 Third 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, uncertainties, and other factors, which are disclosed 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 Holdings Corporation's Chairman, President and CEO, Mr. Tim Laney.

Thank you, Miryama. Good morning, and thank you for joining National Bank Holdings' third quarter 2020 earnings call. I have with me our Chief Financial Officer, Aldis Berkins, and Rick Newfield, our Chief Risk Management Officer. I'm pleased to share with you that despite pandemic-related challenges, We delivered record earnings during the third quarter on the strength of record-breaking fee income. We continued to maintain a risk-off position on our balance sheet with the goal of being well prepared to address any further economic downturns should they occur. Having said this, we clearly benefit from operating in markets that are performing better than most of the country. The diversity and granularity of our credit portfolio continues to produce solid results with annualized net charge-offs of just four basis points. In fact, we have experienced continued improvement across a broad set of credit metrics during the quarter. While growth in deposit balances has practically been a given during these times, I'm particularly pleased with the growth in new treasury management relationships we've experienced. Finally, we continue to prudently support our clients and communities, and we're proud to have recently been named Colorado's 2020 Job Creation Bank of the Year by the Small Business Administration. And on that note, Rick, I'll hand off the call to you.

Thank you, Tim, and good morning, everyone. I'll cover three areas in my comments. First, I'll briefly summarize our third quarter credit metrics and performance. Second, I'll discuss the status of our COVID-related modifications. And third, I'll describe the actions we continue to take to reduce risk on our balance sheet while working to prudently support our clients. With respect to our credit metrics, trends held up well during the quarter. 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. While our non-accrual loans decreased during the quarter, a corresponding decrease in loan balances led to our non-accrual ratio remaining flat at .45%. Our criticized loans also decreased during the quarter. Our total non-performing asset ratio improved from .60% at June 30 to .56%, as we not only experienced a decrease in non-accrual loans, but had meaningful reductions in OREO in the quarter. 30-day-plus past dues remained very low at 16 basis points, and net charge-offs for the quarter were only $486,000, or four basis points, annualized. The stable credit trends reflect our conservative underwriting standards and our enhanced loan portfolio management as the pandemic and economic stress continue. As Tim said, I believe being in markets which have generally fared better with the pandemic, as evidenced by unemployment levels lower than national averages, are also favorably impacting our loan book and underlying clients. During the third quarter, loan modifications declined $327 million to $165 million, or 3.9% of our total loans, excluding PPP exposure. It's important to point out that 95% of these modifications still require monthly interest payments versus full payment deferrals. With respect to any second modifications we've extended to clients, those have generally been predicated on receiving cash equity infusions to build reserve accounts, loan pricing considerations, and more restrictive loan covenants. The vast majority of our clients have stabilized revenue and expenses at sufficient levels to cover debt service at contractual levels. In fact, outside of our hotel loans, we have COVID modifications in place for less than 1% of our loans. As a reminder, back in June, 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 and ongoing interest-only loan payments, each client was required to infuse additional cash equity and agree to certain additional loan terms. To date, we've 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 58%. Given the additional equity infusions and other enhancements to our loan structures, I believe our hotel exposure is well positioned to weather the protracted stress from the pandemic. Tim, myself, and our banking teams continued our intensified portfolio management during the third quarter and are maintaining this robust vigilance currently. To put this effort in perspective, on a weekly basis, we're reviewing all commercial and specialty banking clients and business banking clients with either larger credit exposures or within high-risk sectors. During these reviews, we assess each client's currently weekly revenue versus revenue levels required to cover the client's expenses and full contractual debt payments. We discuss operating status to the extent impacted by pandemic-driven, jurisdiction-mandated restrictions as well as weekly and trailing four-week trends. This enables us to quickly detect credit deterioration and to take action proactively where needed as we continue a risk-off approach to our loan portfolio. 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, no indirect auto, no car leasing, and no consumer credit card exposure. I believe maintaining a diverse, granular loan portfolio is a strength. Also, we've conducted twice a year stress tests on our commercial loan book. The most recent of those tests was completed in June by an outside party with a focus on lingering impact and stress from the COVID-19 pandemic and an elongated path to recovery over the coming years. In the most severe scenario modeled, which assumes a weak L-shaped recovery, we remain very well capitalized. Given the risk that commercial real estate, particularly office and retail, will experience further pressure, I'll also point out that non-owner-occupied commercial real estate is only 15% of our total loan portfolio, excluding PPP loans. Furthermore, it is only 85% of our risk-based capital, and what we have is conservatively underwritten relative to loan-to-cost, loan-to-value, and other key metrics. We're 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. And with that, I'll turn the call over to Aldis.