Good morning, everyone. Welcome to the National Bank Holdings Corporation 2021 Second Quarter Earnings Call. My name is Alan; I'll 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, noninterest income, margins, allowance, taxes and noninterest expense. Actual results could differ materially from those discussed today.

Thank you, Alan. Good morning, and thanks for joining National Bank Holdings' Second Quarter 2021 Earnings Call. I'm joined by our Chief Financial Officer, Aldis Birkans. With a renewed focus on growing market share, we realized annualized loan growth of 8.4% during the quarter. Equally important, we entered the third quarter with a very strong pipeline of new relationships. We're realizing new relationship growth across our personal, business and commercial banking segments. Credit quality continues to be near pristine, and we operate in markets that have largely recovered from the pandemic. As a result, I believe we are very well positioned for strong growth during the second half of the year. And on that note, Aldis, I'll hand it off to you.

All right. Thank you, Tim, and good morning, everyone. Thank you for joining our earnings call this quarter. For the second quarter 2021, we reported net earnings of $24.2 million or $0.77 per diluted share. Our return on average tangible assets was 1.41% and our return on average tangible equity was 13.41%. Also earlier in the quarter, we announced a second dividend increase for this calendar year, and our quarterly dividend now stands at $0.22 per share. As we discussed during last quarter's earnings call, we are excited about our loan pipelines, and our loan production this quarter did not disappoint. The second quarter's loan fundings were $362.1 million, which was our second highest non-PPP loan production quarter in history. As a result, we grew our core loan book during the quarter a solid 8.4% annualized. We continue to be very pleased with the business development efforts of our bankers and our loan pipelines are building nicely across all of our markets.

Thanks, Aldis. Look, we like what we're seeing in our markets and our bankers continue to be well positioned to take market share. I believe we have the potential to realize record levels of new relationship growth in loan production during the second half of this year. On that note, I'll say thanks and ask -- Alan, ask you to open up the line for questions.

We'll take our first question from Brett Rabatin with Hovde Group.

Wanted to first ask, if I heard correctly, the guidance for the mortgage for the back half of the year is $20 million to $25 million. And if I was writing down my notes correctly, it sounded like you were feeling a little better about the gain on sale margin in 3Q maybe versus 2Q. Can you just maybe go back over that and just talk maybe about what you're seeing in the pipeline? And if I got this correct, it sounds like you're expecting mortgage to increase a little more from 2Q levels despite maybe a little better gain on sale margin.

Yes, I think you heard it right. So $20 million to $25 million, certainly have to take into account the Q4 seasonality there that typically takes place, although last year fourth quarter and first quarter of this year were unusually profitable quarters for the industry. But in terms of the volumes, the big impact that we saw was the financing activity that certainly was down on a linked quarter basis, almost 50% driven by the higher rate environment. And that one, we're not necessarily seeing the recovery just yet. So while the margins are recovering, the volumes are somewhat steady going on from the second quarter into third quarter.

Aldis, you may want to speak alternatively to what we've seen in new home financing.

Yes. No, certainly, Tim. And so the good news for us is, and we've always focused in what we'd like the mortgage business for us has been the attention that our bankers spend on the purchase market. And that market, we grew linked quarter, we grew 41% volume on purchases and 46% over the same quarter last year. So we certainly see what the activity our markets are providing and opportunities that the markets are providing for our market bankers.

And I think that's the most encouraging point, Brett, is that these markets we operate in continue to be very attractive and grow. And so this -- the real challenges we've discussed before is simply finding the housing. The demand remains strong.

Yes, it's definitely the case in many markets across the country. The other thing I wanted just to ask was you guys were a bit unique this quarter with the strong C&I loan growth. And just wanted to maybe dive a little deeper into that and see if that's increased loan utilization, new client adds, existing clients doing more things, kind of what's driving that loan growth?

Great question. I mean the beauty of it is what we're seeing is market share growth. And when I talk about across the board, I guess in the Olympic -- in the spirit of the Olympic season, I would say whether it was our badminton teams or our weightlifting teams, they're bringing home medals. And the reality of it is I feel like we're close to running on all cylinders in that regard. And so I fully expect to see strong performance in our small business or business banking group through the remainder of the year.

Okay. And the next question we'll take will come from Andrew Liesch with Piper Sandler.

Just sticking with the loan growth theme here. Tim, you mentioned you think you have record production in the second half of the year based on what you just did, that seems reasonable to me. But then the growth guide for non-PPP is mid- to high single digits. I mean what's -- what could keep that from being at that high end? And do you think you could even surpass that growth guidance?

I think we have a track record of being somewhat conservative in our guidance. And look, I think we've all learned what the unexpected can bring to the table. But I believe based on where we're at and the markets we're in, that there's -- should be a reasonably strong expectation that we're performing I'll just say, toward the higher end of that guidance. And then we're always going to -- sorry, Aldis, and then obviously, we're going to always strive to beat that. Go ahead, Aldis.

Yes. And one just piece of color in terms of what is unknown in the last several quarters we've seen quite elevated paydowns, payoffs, so that's part of the maybe hedge in the guidance.

And to be clear there, when we talk about paydowns, payoffs, it's not losing relationships largely. It's really about an amazing amount of liquidity that resides on our clients' balance sheet. So that's why we've been, frankly, so hyper focused on new market share gain. That's where we're going to see the growth. It's literally all about taking care of existing clients and their -- knowing that their borrowing needs will come back to a greater level but just as important, being hyper focused on growing market share, and we feel good about where we stand on that front.

Got it. That's helpful. And then just looking at where the reserve ratio stands right here, obviously, it's model-driven. But I mean, what do you think is the right level for you guys to operate? I know there's -- you got the benefit in there from the purchase accounting discount, but where do you see your reserve ratio? Like what's most appropriate for you guys?

Yes. I don't know what is most appropriate because of the macroeconomic environment will dictate that. But I can say that the best reference point for us on -- for CECL model in a way was when we entered on day 1 allowance, right? And we entered the 2020 with right around 1% ACL to total loans. So that, in my mind, is kind of the reference point where you start with. But certainly, where we go from here will be dictated by the macroeconomic outlook.

And if we step away from the CECL model, and they're certainly not entirely disconnected, but I'll remind you and the other listeners that beyond our own loan review team stress testing, we do bring in a third party once a year to stress test our loan portfolio at a pretty granular level and look at how that portfolio would perform in the most dire of economic situations and the work coming out of that analysis continues to suggest that the granularity and diversity of our portfolio is extremely beneficial. Having said that -- and could make the argument for lower than 1%. Having said that, our bias is certainly going to be to hold on to that 1% and frankly, fight for it. And again, recognizing the, I guess, objectivity of CECL, there's always going to be a bit of tension there, I suspect, and that we're going to want to hold on to as much reserve as we can. It's as simple as that.

All right. So we will move on to Andrew Terrell with Stephens.

So maybe on the margin really quickly. I think several months ago, we talked about new kind of origination yields in kind of the 4% ballpark. Clearly, the production pictures stepped up since then. Just wanted to get a sense of where kind of blended new production yields were coming on the balance sheet today and then how that compares to what's maybe rolling off the balance sheet?

Yes, great question.

Yes, certainly -- so the second quarter new loan origination volume for that $362 million production was right at 4%. And if you look at our NIM table and look at the first line item originated loans, FTE, certainly there's a benefit of the PPP loan fee acceleration in there. But if you strip out PPP loan benefit, our core originated loan yields were 385 in fourth quarter of last year, 387 for first quarter of this year and 388. So those 4% new origination loan yields certainly seem to be accretive and they're displacing something lower that's rolling off and it is accretive to and rebuilding our originated loan book on accretive basis with the new originations.

And keep in mind, that's virtually all of variable loan book. I mean we're not taking tenured risk to get those rates, which I think is important.

Got it. Okay. And then just to make sure I've got the messaging right on kind of liquidity deployment. It sounds like just given where you think growth is shaping up over the next several quarters, the kind of plan for the excess cash on the balance sheet is just to hold it and maybe deploy into the loan book over the next several quarters? Or should we expect material securities purchases from here?

I don't think you'll see material securities purchases from here. Again, last quarter, we added some of the backup in the yield curve. You can see that. But again, it's all highly cash flowing and be able to stop that and benefit the cash flow or redirect the cash flow and the new loan originations, if needed. But nothing material that we're looking to add in the securities and now that loan growth is back on table, we do expect some of that cash being absorbed and 10 basis point earning asset being displaced with, as we just talked about with the 4% that's quite a powerful benefit to our net interest income growing in the coming quarters.

Very powerful math.

Okay. And then just if I can sneak 1 more in. Apologies if I missed it, but were there any share repurchases made during the quarter? And then I know there's a $75 million authorization out there. Is it fair to say with the valuation coming in a little bit over the past quarter, you might be a little more opportunistic on the buyback?

Yes. To answer the first part of your question, nothing done in the second quarter, but --

And your next question will come from the line of Kelly Motta with KBW.

I wanted to circle back on loan growth and the market share gains. I was just wondering if there's any pattern to where you're getting those gains. If it's the front range or maybe your newer Utah-based expansion or if it's more broad-based than that? Just any color around that would be helpful.

It really is broad-based. I mean we feel very good about the momentum we're seeing in all of our geographic markets and our specialty businesses, and felt good about the second quarter and feel very good about what we're seeing in the pipeline across the board. So I'll remind everyone, I mean, these are pretty incredible markets we operate in, whether you're talking about the front range of Colorado, Dallas, Austin, Salt Lake City, Kansas City, I mean, we clearly benefit from operating in markets that have recovered much faster than a lot of the rest of the country. And then our specialty businesses and teams there have really done a stellar job of stepping up and delivering new relationships to the bank. So I'm really pleased, Kelly, to report that it's diversified and across the board.

Great. No, that's -- you certainly have great market. And then just switching back to expenses. It seems like the guidance, and please correct me if I'm wrong, but is sort of more implying towards the low end of what was last quarter. Is that just related to mortgage and coming in a bit this quarter or it was really nice to see the benefits of the branch plan pull through? Wondering, if there's any kind of changes in better or more minus of your expense, right?

Yes. No. You got the two -- main drivers will be the banking center and efficiencies beginning there that's taking now hold and certainly loading our run rate as well as some of the mortgage commissions, again, talking specifically to the fourth quarter, we do expect some seasonal slowdown there, so that will benefit. So those are 2 main ones. I'll say that we are taking some of the savings that we are realizing. And by the way, if you looked at -- stripped out the commission-related expenses from last year and this year's full year guidance, we are guiding about $8 million in lower core run rate for full year this year than last year. So that is the result of all of the cost efficiencies that we've implemented. But we are taking some of the efficiencies and redeploying those into technology to make sure they'd be staying up there and that's embedded in the guidance. So the $89 million to $91 million guidance is reflecting all of that.

Kelly, what's even more inspiring is that while we're realizing those savings from the brick-and-mortar consolidations, the teams have done -- continue to do an incredible job of retaining the clients in those consolidated locations, and it somewhat ties to Aldis' point on the investment in technology. This trend we're seeing in the industry of converting more and more clients to a digital platform and doing so successfully is really encouraging, and we'll continue to look at our strategy around the mix of brick-and-mortar and digital. And by the way, I think it's an appropriate time to share with this audience that investors and others should expect to see an even greater commitment to our digital offerings and ecosystems around the small and medium-sized business space. More to come on that front, but we're very excited about where we think we can take this company and provide alternatives to, call it, a traditional banking system for small and medium-sized businesses here as we look ahead. But again, what's really I think critical around your expense question on brick-and-mortar sales is the fact that we're retaining the revenue while accomplishing that.

Our next question will be from Levi Posen with D.A. Davidson Companies.

I think it was hinted to maybe a little bit earlier, but I was wondering what's the timing this quarter of the securities that you did add, when those maybe came on?

Yes, they came on -- actually, this was pretty even purchased throughout the quarter with a little heavier lift in April and May than June, for example. A little earlier when the rates really backed up in the early part of the quarter, we did take add on some securities.

Okay. And so is it fair to say that movement in the yield curve, a positive movement of it as it works into your margin calculations would potentially increase your appetite to deploy into both loans and securities?

Certainly would love to deploy all of it in the loans. The securities, again, I think where we are $1.3 billion right now, long-term target for us is about 15% of earning assets being in securities. So we certainly have about -- if you took out today's earning assets, we are about $300 million over that. So that's where I'm saying I'm not necessarily seeing us increasing that portfolio much more from here.

Okay. Great. And then just 1 last 1 for me on the capital and the M&A side of things. Now that you've returned to growth and seems the confidence in the economic environment is back. Any updated thoughts on -- I think a couple of quarters ago, you mentioned there were sort of 3 types of M&A transactions you guys were considering. Are all 3 of those still on the table? Or has that been narrowed down at all?

It's an important question. We'll continue to be opportunistic around traditional banking I will tell you that we've actually looked at a number of opportunities on an exclusive basis and frankly, have not felt like ultimately, they were the right fit our company for 1 reason or another. Where we are hyper focused is on creating an alternative ecosystem for medium and small business. We think there are a lot of problems for small businesses that can be in medium-sized businesses that can be solved using some of the emerging technology, and that we see out there today. And we believe we understand small- and medium-sized businesses as well as any bank in the country regardless of their size. Just given our background and focus as a team, we are very focused on looking at bringing together and working to bring together some very interesting alternatives to traditional banking in that space. So more to come, but I will tell you in the spirit of full transparency that that's where we are spending a lot of our time and energy and hope to be coming back to you soon with more information on that front.

I'm showing we have no further questions at this time. So I'll now turn the call back to Mr. Laney for his closing remarks.

All right. Thank you, Alan, and I want to first thank all of the individuals that asked questions today, for your thoughtful questions and time. Thank you all for joining our second quarter earnings call, and we look forward to reporting before we know it on what we think will be a strong third. So again, thanks, everyone. Have a good day.

And this will conclude today's conference call. If you'd like to listen to the telephone replay of this call, it will be available in approximately 4 hours and will run through August 1, 2021, by dialing 888-203-112 and referencing the passcode 8424776. The earnings release and an online replay of this call will also be available on the company's website on the Investor Relations page. Thank you very much, and have a great day. You may now disconnect.