Good morning, everyone, and welcome to the National Bank Holdings Corporation 2015 fourth quarter earnings call. My name is Joanna, 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 presentation. As a reminder, this conference is being recorded for replay purposes. And I would like to remind you that this conference call will contain forward-looking statements, including statements regarding the company's loans and loan growth, deposits, strategic capital, potential income streams, gross margin, 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 the National Bank Holdings Corporation undertakes no obligation to update or revise these statements. It is now my pleasure to turn the call over and introduce National Bank Holdings Corporation's CEO, Mr. Tim Laney.

Thank you, Joanna. Good morning, and thank you for joining National Bank Holdings' fourth quarter earnings call. I have with me our Chief Financial Officer, Brian Lilly; and Rick Newfield, our Chief Risk Management Officer. Turning quickly to the quarter and the year, we continued to make progress adding and expanding relationships with clients in our markets. The organic growth of high-quality loans, relationship deposits and fees were solid during 2015 and we feel good about our momentum as we enter 2016. It's also important to point out that we grew our loans, while maintaining a very granular and diversified portfolio. As a reminder, by policy, no industry sector can exceed more than 15% of our total loans. Now, Rick will cover our energy, agriculture and commercial real estate exposures in great detailed during this call. So I'll simply point out that our total energy exposure is only 5.7% of loans or only 3.4% of earning assets. No sector of our commercial real estate exposure is greater than 3.4% of loans. And our total CRE exposure is only 85% of capital, one of the lowest ratios amongst our peers. And our ag exposure is at 6.3% of total loans. The performance on our loan book continues to be strong, as indicated by a decline in criticized and classified loans during the fourth quarter. Finally, to the extent that there is concern about the economic outlook, I'll remind everyone that we currently operate with excess capital of $135 million above a 9% leverage ratio. On that point, Rick, I'll turn the call over to you.

Thank you, Tim, and good morning. First, I'll address our credit quality and our trends during the fourth quarter as well as full year metrics. I'll also cover our energy loan portfolio in detail. And as Tim said, provide some positive color on our non-owner occupied commercial real estate loan portfolio and the quality of our agriculture loan portfolio. Second, I'll discuss our loan origination activity during the fourth quarter and for the full year. Third, I'll discuss our success this past quarter in reducing non-strategic loans and the continuing positive economic benefits generated through those efforts. During the fourth quarter, criticized and classified loan levels improved from September 30, 2015, as did our level of non-accrual loans. Specifically, within the non 310-30 loan portfolio, criticized loans improved 5% or $7.7 million during the fourth quarter and ended $132.5 million, primarily driven by a decrease in classified loans of $6 million or 8%. Non-accrual loans improved from 1.24% of non 310-30 loans to 1.08%, decreasing $3 million from $28.6 million at September 30 to $25.6 million at December 31, 2015. I expect this positive trend to continue over the next several quarters. Overall, past dues were in line and 90-day past dues remained immaterial. And for 2015, net charge-offs were only 12 basis points, solidly within our guidance of 10 basis points to 15 basis points. Let me talk about one commercial loan charge-off that was responsible for two-thirds of our total net charge-offs in 2015. It's always been our practice to identify problem loans early, and then work aggressively to resolve them. Furthermore, within accounting standards and with thorough analysis to support our decisions, we proactively identify reserve against potential credit losses. During the third quarter of 2015, we identified a move, one general industries C&I loan to non-accrual…

Well, thank you, Rick. That was excellent detail. And good morning everyone. As Tim and Rick have shared, we accomplished much in the quarter and we're very well-positioned for growing success in 2016. We covered a lot in last night's release, so I will limit my comments to the fourth quarter highlights as well as providing our outlook for 2016. Before going too far, I should point out that inherent within our guidance, our economic assumption is consistent with the current outlook of leading economist, where our markets continue to perform better than the national averages and we look for 2016 to continue to provide excellent growth opportunities. Please note that we have not included any interest rate increases in our guidance. Given our asset-sensitive position, we would benefit nicely from increasing interest rates, but we decided to be more conservative entering this year. For the fourth quarter we earned $0.11 per share. Quarter delivered on our prior guidance with the exceptions of additional provisions for loan losses that we set aside for a few non-accrual loans and a negative $0.08 impact from the retirement of one of our founding executives, primarily due to the stock compensation of deferred tax asset write-off. We are very pleased to have delivered on our guidance for the balance sheet, net interest income, non-interest income and expenses. Total loans ended the quarter at $2.6 billion and grew a strong 20% over last year. The originated loan portfolio now spans at $2.2 billion and grew a very strong 32.5% over 2014. With the $238 million fourth quarter originations, we ended the year just shy of $1.967 billion. During the fourth quarter, we did experience higher than normal loan paydowns as well as a steady exit of the non-strategic loans, which contributed to the lower than…

Thanks, Brian, and well done. I want to take this opportunity to thank all of our teammates for helping us safely grow our company during 2015. I also want to thank our Board and associates who worked diligently behind the scenes to complete an important trifecta of regulatory initiatives. Finally, I want to thank and congratulate my teammates for the successful integration of the Pine River Valley Bank acquisition and the complete conversion of our banks operating systems. All of these accomplishments are important steps on our path to a 1%-plus return on assets and $2-plus of earnings per share. And on that note, Joanna, we will now open the call for questions.

[Operator Instruction] Your first question comes from Chris McGratty with KBW.

Brian, a question on the fee guidance. I just want to make sure I'm starting with the right number. The mid-single digits, what's the dollar that you're jumping off of?

Well, for 2015 that would have been just about $33 million.

So take $33 million and then the growth rate off of that.

Right.

If I could ask a question, the color on the energy portfolio was great. I wanted to know, one of the topics that's coming up on energy, it's not only direct, but it's kind of indirect, whether it be in the in real estate markets. Can you just remind me, how much of this portfolio was acquired through your failed banks? Whether any of it was previously covered? And also, kind of the growth trajectory to get to the 140 and change number that we see today?

Look, we had some modest energy exposure that came with the bank acquisitions. But first of all, all of it's been re-underwritten and in many cases restructured under our watch, and truly all of that I would call originated to our standards. I think your second question was or the first part was about just derivative risk or exposure. I'll just remind folks again that we don't have downtown Denver office exposure, for example, that's come into the news. We don't see negative impacts across our broader C&I portfolio. In fact, lower energy prices, in many cases, translates to lower operating cost. And we just maintain, as Tim and I both pointed out that that concentration policy to avoid any particular issues that can come whether they are direct or indirect.

Chris, I would add that while we don't have the downtown energy exposure, this is anecdotal, but we were talking to some CBRE folks recently, and they were saying that they actually wish they had more services, energy services companies vacating space, because they've got such a demand, they were looking forward to the turnover and the opportunity to generate new commissions. So again, I can say that objectively, because we're not really in that lending business. But I do think it speaks more broadly to the diversification of Denver and the State of Colorado, and while we still feel very good about the Colorado economy.

Tim, if I could, Chris just one other point to that. You see a lot of folks talking about the net increase in jobs in Texas, for example, despite the loss of energy sector jobs, we really had the same dynamic in Colorado. As Tim said, it's highly-diversified. And I think two years ago the percentage of the workforce somehow associated with energy was around 3.4%. I believe that's in the low-2s now. So again, we feel like we're well-cushioned and well-diversified.

If I could ask a follow-up Tim. The one on tangible assets and the $2 number, I think in the past you've talked about you need a little bit of help from rates, and I guess we're starting to get a little bit of help. Obviously, you guys are being conservative with not factoring in more in the forecast. But if I look out to any of the comments that late '17 or early '18, you could start seeing a little bit more clearly. What needs to be done on the expenses? And I can appreciate what you've done in the fourth quarter in the Colorado branches that you're addressing now. What else is on the expense horizon to get to that number? Because I think where some of the analysts and investors, there's a little bit of disconnect is how do you get there without something more drastic on expenses?

We understand that question and it's very fair. And I would point to the regulatory actions taken in the fourth quarter is an important catalyst for being able to address some significant expense, not even necessarily all identified at this point. We're working through every element of our current infrastructure. Keeping in mind, everyone should keep in mind, that in order to obtain our charter were being held to the midsize bank standards of the OCC. So when banks talk about the additional cost being born by crossing over the $10 billion threshold, here we were as a $5 billion bank carrying those additional costs. And working with our new regulators there's an understanding that we will be regulated as a community bank, and that brings with it the opportunity to right-size a number of those related cost. Furthermore, I'm not going to go into much more detail at this point, Chris. I will tell you that the work that we've done with the banking center consolidations is really, you could almost think of it is as a couple of pilots. And the results to date are encouraging, because one of the things we wanted to understand is how far apart we could have two banking centers get them consolidated and what percentage of the total business of the two we could retain, and the results have actually exceeded our expectations. I'll tell you that we are also at a point, as the company has evolved, where we understand not only the direct contribution of each our banking centers, but equally important have done all of the market analysis to understand what we believe to be the market potential within the service area of those banking centers. And we believe what that will translate to will be one of a…

Your next question comes from Matt Olney with Stephens.

Matt, I hope you appreciated the detail on energy we provided today.

I do appreciate that. And Rick, I'll tell you that I had a whole list of questions prepared, and you just went by down all the questions one by one. I checked them all off, for energy, ag, everything. So I appreciate being well-prepared, Rick.

Thanks, Matt, appreciate that too.

There was some commentary about the paydowns in the fourth quarter that were a little bit higher than you guys expected. Anything you can point to as far as a trend, whether if they were in a certain industry or certain loan type that you can share with us?

We are seeing and expect to continue to see a number of our energy-related clients, as they've continued -- I mean, even as recently as the last two weeks, continued to raise capital or sell assets, we're going to see our energy senior bank debt go down. Now, I've said publicly, if we could find energy clients, despite concerns of that low oil prices, if we could find all energy clients that we could get comfortable with in this environment, which would require passing some very tough standards, we would actually love to add some clients in that space. But the fact of the matter is, we think the reality is going to be that we're going to continue to see reductions in senior bank debt in the energy space. And outside of that I would tell you that we did have a couple of situations in the fourth quarter, where we had some clients sell their businesses and they were just simply liquidity events, and those events hit, I should say a couple of few situations like that interestingly enough and those certainly hit our loan balances.

That's pretty granular Matt.

Going back to the energy discussion and the opportunity to add energy clients, did you add any new energy clients in 2015 at all?

In the year 2015, Matt, we added several, but none recently. Although, we do have a very high-quality client in production space, where we have participated out a portion of their total needs. And as their needs have reduced, we brought that in-house and slightly increased our loan outstanding in the fourth quarter, but nothing that would have materially impacted the second half of the year.

And then on the expense discussion, Brian, can you clarify the outlook on the operating expenses? I think you said the run rate for the first quarter, you thought it would be around the $36 million range. What's the apples-to-apples number in the fourth quarter on that? Is it the reporting number or the core number?

Well, the pieces I gave you, we had $42.2 million in total expenses and we do have 3.7x in total one-times. And so if you net that down you're into the 0.37%. So we're dropping that down into around $36 million.

And to be clear Matt, to the credit of my entire senior leadership team, we're doing cornerstone work. We're looking at every function in our business. And we do believe there is a lot of opportunity. We're going to do it methodically. We're not going to do anything to create additional risk or disrupt revenue. But we're pretty excited about where we're at as a company and the ability to exceed those targets, when it comes to expense reduction.

And I think you can appreciate the math and the numbers I gave you that we already have backed into our guidance, quite a nice reduction year-over-year, just on the operating. But thank goodness, going forward, we're not going to be using that operating versus total anymore. We'll just talk about the total expenses. So when I say that 36, that's including everything, Matt. That's including our loan workout and OREO, and we'll stay at the total, and then point out the unusuals as we go quarter-to-quarter.

Your next question comes from Gary Tenner with D.A. Davidson.

One follow-up question on the termination of the agreement with the OCC and the charter change, you addressed the expense part of the equation. Was there anything in terms of the operating agreement vis-à-vis revenue growth or kind of asset growth that would now be eliminated from the equation?

I would suggest to you that our in-house limits and standards were actually tighter as it related to loan growth than OCC expectations. I will tell you that for a number of reasons, as we look at acquisitions that there were times when it was simply challenging to get an answer in a timely fashion. Now, I want to point out that we hold the midsize bank group, Bill Haas, of the OCC in the highest regard. But it's just a big, big organization and they've got a lot of very big banks to say, grace over. And if there was a challenge for them and for us, it was some times more centered around acquisition and the ability to get to an answer, whether that was yes or no. Finally, I would point out that even on the surface, if you just simply look at the basic fees of moving from the OCC to the state, that's a $400 million to $500 million, I wish -- $400,000 to $500,000 savings a year, call it $0.5 million savings and just the outright fee, much less the opportunity to attack infrastructure cost.

Your next question comes from Tim O'Brien with Sandler O'Neill.

Following-up on the charter change. Do you guys have a sense of when will the state will do your examination? And I am assuming your next examination?

That's right. I think combined.

Combined with the FDIC?

With the Federal Reserve.

And when will that take place? Do you have an idea ballpark?

The sort of full annual exam is currently slated for some time in the fourth quarter, most likely October, November. But they are going to come in and do a sort of a check-in, probably towards the end of second quarter. I will point out that as part of becoming a state fed member, we did have the state fed come in late last year to do a review really across the company that was part of the pre-membership process.

That was a December review of our credit book, our other enterprise risk areas. And there is some continuity here, right, and that the fed has regulated our holding company, has done a partner with the OCC, very familiar with our credit processes or credit book, always received copies of all OCC examination. So I think that's one of the reasons we were able to move so swiftly with this conversion.

So in addition to that initial review, were you also subject to an OCC annual examination in the fourth quarter?

I'll remind the group that with the OCC midsize supervisory approach, we had, I want to say 13 targeted exams during 2015. And so it was really a continuous process.

There was never a time when we weren't being in exam with the OCC.

Like proctologist.

I'm not going to respond to that comment.

The guidance was great that you guys provided. Out of curiosity, so just kind of looking back trailing, as far as the breakdown of overhead cost by line item that you provided, really the biggest piece is consistently salary and employee benefits, 50% occupancy is another big chunk. And then lately, anyway, other expenses have been the third piece. And to combine those, those three items tend to account for 80%, 90% of total cost. And I mean in most cases, how will they be affected or come down in order to hit the numbers that you anticipate putting up you're going to go-forward basis?

Well, I think that we got to remember there is another side of that equation as well. If you're talking about efficiency and that's that we certainly intend to continue to grow revenue as well. I mean the productivity is key. And when it comes to the other expenses, we did have a number of one-time significant events that we view as catalyst for moving the company forward in '15. And I would be disappointed, we certainly don't have outside of a potential acquisition. We don't add any big strategic expenditures in our plan that would be considered a big one-timers dig others outside of potentially launching another round of consolidations or distribution action. But I'm hesitant to go any further, as it relates to other actions.

Thank you. I'm showing that we have no further questions at this time. I'll now turn the call back to Mr. Laney for his closing remarks. End of Q&A

Well, I would certainly want to thank Chris, Matt, Gary and Tim for their questions. I am pleased that you are happy with the level of detail that Rick shared on the portfolio. We've put a lot of time and work into trying to be as transparent as absolutely possible there. I feel good about where the company is today and where we're headed, so more to come. Thanks to everyone for joining in today. Take care.