National Bank Holdings Corporation Announces Fourth Quarter and Full Year 2017 Financial Results

Net Interest Income
Fully taxable equivalent net interest income totaled $38.6 million, and decreased $0.8 million due to $0.9 million lower 310-30 accretion income. Average earning assets increased $151.3 million, or 13.8% annualized, as strong deposit growth increased lower yielding short-term investment balances. The fully taxable equivalent net interest margin narrowed 0.19% to 3.41% due to a 0.09% impact from higher short-term investments and a 0.09% impact from lower accretion income on 310-30 loans.

Loans
Total loans ended the quarter at $3.2 billion, increasing $58.4 million, or 7.4% annualized, while non 310-10 loans totaled $3.1 billion and increased $63.4 million, or 8.4% annualized, led by commercial and industrial loan growth of $89.7 million, or 27.7%, annualized. New loan originations totaled $231.7 million, led by commercial and industrial loan originations of $167.7 million. Loan originations totaled $879.2 million during the past twelve months, resulting in originated loan outstandings growth of 15.0% over December 31, 2016.

Asset Quality and Provision for Loan Losses
Non 310-30 loans totaled $3.1 billion and represented 96.2% of total loans at December 31, 2017. These loans are comprised of originated loans and acquired loans not accounted for under 310-30. The non 310-30 provision for loan losses totaled $3.2 million, supporting net charge-offs of $2.1 million and net loan growth. Annualized non 310-30 net charge-offs were 0.27%, or 0.08% excluding energy charge-offs. Non-performing non 310-30 loans (comprised of non-accrual loans and non-accrual TDRs) were 0.69% of total non 310-30 loans, compared to 0.64% at September 30, 2017. The non 310-30 allowance for loan losses was 1.02% of total non 310-30 loans, compared to 1.00% at the prior quarter end.

Acquired problem loans accounted for under 310-30 totaled $120.6 million at December 31, 2017 and decreased $5.0 million during the fourth quarter, an annualized decrease of 15.7%. The life-to-date economic benefit of the accretable yield transfers net of impairments on 310-30 loans totals $222.8 million.

Deposits
Total deposits averaged $4.0 billion and increased $155.2 million, or 15.9% annualized. Average transaction deposits (defined as total deposits less time deposits) increased $158.4 million, or 23.0% annualized, driven by strong business demand deposit growth of $58.9 million, or 26.7% annualized, and interest bearing savings and money market deposit growth of $99.5 million, as we added a number of new commercial clients, and existing clients built cash balances for year-end. Time deposits averaged $1.1 billion and decreased $3.3 million. The cost of deposits was 0.44%, increasing 0.02% from the prior quarter.

Non-Interest Income
Non-interest income totaled $8.9 million, decreasing $0.7 million.  Service charges and bank card fees totaled a combined $7.1 million, representing an increase of $0.4 million from higher instances of service charges and stronger bank card interchange activity. These increases were more than offset by a $0.5 million decrease in interest rate swap income from commercial clients and a $0.2 million seasonal decrease in gain on sale of mortgages. OREO related income decreased $0.1 million compared to the prior quarter, while gain on previously charged-off loans decreased $0.3 million.

Non-Interest Expense
Non-interest expense totaled $34.0 million and decreased $0.6 million. Salaries and benefits increased $1.2 million due to a $1.2 million increase in one-time acquisition costs and a $0.5 million accrual for the special $1,000 bonus payments to 490 associates. Gain on sale of OREO, including problem asset workout expense, improved a combined $2.4 million. Other non-interest expense increased $0.8 million due to a $0.3 million increase in one-time acquisition costs and a $0.5 million increase in other expense categories. One-time acquisition costs totaled $2.0 million during the quarter, increasing $1.6 million.

The "Tax Cuts and Jobs Act" (the "Act") became effective on December 22, 2017, which among other items reduces the federal corporate tax rate to 21% effective January 1, 2018. As a result of the Act, the deferred tax asset was re-measured at December 31, 2017, resulting in a non-cash, one-time charge of $18.5 million recorded in income tax expense. Income tax expense totaled $18.6 million due to the deferred tax asset re-measurement charge, partially offset by $0.8 million in tax benefits from stock compensation activity. Without these discrete items, tax expense would have been $1.0 million, an effective tax rate of 11%. The lower rate compared to the full year effective tax rate of 20% is due to timing of certain taxable one-time acquisition-related costs.

Capital
Capital ratios continue to be strong and in excess of federal bank regulatory agency "well capitalized" thresholds. Shareholders' equity totaled $532.4 million at December 31, 2017 and decreased $17.8 million from the prior quarter end. The decrease in equity was due to a net loss resulting from higher tax expense from the deferred tax asset re-measurement charge, as well as a decrease in accumulated other comprehensive income, which was driven by the fair market value fluctuations of the available-for-sale investment securities portfolio.

Common book value per share was $19.81 at December 31, 2017 and decreased $0.72, while the tangible common book value per share was $17.94 at December 31, 2017, compared to $18.59 at the prior quarter end. The decreases were primarily driven by the deferred tax asset re-measurement charge of $0.69 and a decrease in accumulated other comprehensive income. The leverage ratio at December 31, 2017 for the consolidated company and the Bank was 9.83% and 8.05%, respectively.

A common convention in the industry is to add the value of the accretable yield to the tangible book value per share. The value of the December 31, 2017 accretable yield balance on the 310-30 loans of $46.6 million would add $1.33 after-tax to the tangible book value per share. A more conservative methodology that management uses values the excess yield above a 4.0% yield and then considers the timing of the excess accreted interest income recognition discounted at 5%. This would add $0.95 after-tax to our tangible book value per share as of December 31, 2017, resulting in a tangible common book value per share of $18.89.

Year-Over-Year Review
(All comparisons refer to the full year 2016, except as noted)

Fully taxable equivalent net interest income totaled $152.2 million and increased $2.4 million, or 1.6%. Average earning assets increased $63.1 million as average originated loans increased $410.4 million, or 17.3%, and were partially offset by the paydowns of higher-yielding 310-30 loans and the continued investment portfolio runoff. The net interest margin widened 0.01% to 3.50% as the yield on earning assets increased 0.07%, led by a 0.27% increase in the originated portfolio yields, mostly offset by an increase in the cost of deposits of 0.05%.

Loan balances at December 31, 2017 totaled $3.2 billion and increased $318.0 million, or 11.1%, while non 310-30 loans outstanding totaled $3.1 billion and increased $343.3 million, or 12.6%. New loan originations between the two periods totaled $879.2 million, led by commercial and industrial loan originations of $515.4 million. The acquired 310-30 loan portfolio declined $25.2 million, or 17.3%.

Total deposits averaged $4.0 billion during the fourth quarter of 2017, increasing $273.5 million, or 7.3% compared to the fourth quarter of 2016, adjusting for the banking center divestitures in the second quarter of 2017. Adjusting for the banking center divestitures, average transaction deposits (defined as total deposits less time deposits) increased $263.1 million, or 10.0% for the fourth quarter of 2017 compared to the fourth quarter of the prior year, with demand deposit growth of $111.8 million, or 13.6%. Time deposits averaged $1.1 billion for the fourth quarter of 2017, increasing $10.4 million on an adjusted basis from the fourth quarter of the prior year. Client repurchase agreements averaged $98.2 million for the fourth quarter of 2017, decreasing $1.3 million from the fourth quarter of the prior year. The mix of transaction deposits to total deposits improved to 71.9% at December 31, 2017 from 69.7% in the prior year. Additionally, the cost of deposits was 0.44% for the fourth quarter of 2017, increasing 0.06% from 0.38% for the fourth quarter of the prior year due to higher cost of savings, money market and time deposits.

Provision for loan loss expense on non 310-30 loans was $13.1 million during 2017, compared to $24.5 million, a decrease of $11.4 million driven entirely by a reduction in the provision for energy loans. Net charge-offs on non 310-30 loans totaled 0.38%, or 0.12% excluding the energy portfolio, compared to 0.85%, or 0.10% excluding the energy portfolio in 2016. Non-performing non 310-30 loans (comprised of non-accrual loans and non-accrual TDRs) were 0.69% of total non 310-30 loans, compared to 1.13% at December 31, 2016. The non 310-30 allowance for loan losses ended the year at 1.02% of total non 310-30 loans compared to 1.07% at the prior year end.

Non-interest income totaled $39.2 million during 2017, representing a decrease of $0.8 million. Service charges and bank card fees increased a combined $1.3 million, or 5.3%, due to higher instances of both business and personal service charges and higher bank card interchange activity. Gain on sale of mortgages decreased $0.7 million due to lower volumes. Other non-interest income increased $0.4 million due to a $2.9 million gain from banking center divestitures in the second quarter of 2017, partially offset by a $0.4 million decrease in swap-related fees and a $1.8 million gain on sale of a building in the prior year. OREO related income also decreased $1.8 million due to income from one large OREO property in the prior year.

Non-interest expense totaled $136.7 million during 2017, and included $3.2 million of one-time expenses primarily related to the Peoples acquisition. Salary and benefits expense increased $0.4 million due to $1.4 million of one-time acquisition costs and a $0.5 million accrual for the special $1,000 bonus payments to 490 associates. Occupancy and equipment expense decreased $1.9 million due to lower depreciation expense. Professional fees decreased $0.2 million and included $0.4 million of one-time acquisition costs. Other non-interest expense increased $2.2 million due to $0.8 million of one-time acquisition costs and a $1.4 million increase in other expense categories primarily due to telecommunications and data processing.

Income tax expense totaled $21.3 million and included an $18.5 million non-cash one-time charge related to the deferred tax asset re-measurement, partially offset by $4.2 million in tax benefits from stock compensation activity. Without these discrete items, tax expense would have been $7.1 million, an effective tax rate of 20%. The lower tax rate compared to the statutory rate reflects the continued success of our tax strategies and tax exempt income in relation to pre-tax income.

Conference Call
Management will host a conference call to review the results at 11:00 a.m. Eastern Time on Friday, January 26, 2018. Interested parties may listen to this call by dialing (877) 272-6762 (United States) / (615) 800-6832 (International) using the Conference ID of 92242832 and asking for the National Bank Holdings Corporation Fourth Quarter Earnings conference call. A telephonic replay of the call will be available beginning approximately two hours after the call's completion through February 9, 2018, by dialing (855) 859-2056 (United States) / (404) 537-3406 (International) using the Conference ID of 92242832. The earnings release will also be available on the Company's website at www.nationalbankholdings.com by visiting the investor relations area.

About Non-GAAP Financial Measures
Certain of the financial measures and ratios we present, including "tangible assets," "return on average tangible assets," "return on average tangible assets before provision for loan losses and taxes," "return on average tangible common equity," "tangible common book value," "tangible common book value per share," "tangible common equity," "tangible common equity to tangible assets," "adjusted net income," "adjusted income per share," and "fully taxable equivalent" metrics, are supplemental measures that are not required by, or are not presented in accordance with, U.S. generally accepted accounting principles (GAAP). We refer to these financial measures and ratios as "non-GAAP financial measures." We consider the use of select non-GAAP financial measures and ratios to be useful for financial and operational decision making and useful in evaluating period-to-period comparisons. We believe that these non-GAAP financial measures provide meaningful supplemental information regarding our performance by excluding certain expenditures or assets that we believe are not indicative of our primary business operating results or by presenting certain metrics on a fully taxable equivalent basis. We believe that management and investors benefit from referring to these non-GAAP financial measures in assessing our performance and when planning, forecasting, analyzing and comparing past, present and future periods.

These non-GAAP financial measures should not be considered a substitute for financial information presented in accordance with GAAP and you should not rely on non-GAAP financial measures alone as measures of our performance. The non-GAAP financial measures we present may differ from non-GAAP financial measures used by our peers or other companies. We compensate for these limitations by providing the equivalent GAAP measures whenever we present the non-GAAP financial measures and by including a reconciliation of the impact of the components adjusted for in the non-GAAP financial measure so that both measures and the individual components may be considered when analyzing our performance.

A reconciliation of non-GAAP financial measures to the comparable GAAP financial measures is included at the end of the financial statement tables.

About National Bank Holdings Corporation
National Bank Holdings Corporation is a bank holding company created to build a leading community bank franchise delivering high quality client service and committed to shareholder results. Through its bank subsidiary, NBH Bank, National Bank Holdings Corporation operates a network of 105 banking centers, serving individual consumers, small, medium and large businesses, and government and non-profit entities. Its banking centers are located in its core footprint of Colorado, the greater Kansas City region, Texas and New Mexico. Its comprehensive residential mortgage banking group primarily serves the bank's core footprint with additional offices in Arizona, California, Nevada and Utah. NBH Bank operates under the following brand names: Bank Midwest in Kansas and Missouri, Community Banks of Colorado in Colorado and Hillcrest Bank in Texas and New Mexico. It also operates as Community Banks Mortgage, a division of NBH Bank, in Arizona, California, Colorado, Nevada and Utah. Additional information about National Bank Holdings Corporation can be found at www.nationalbankholdings.com.

For more information visit: bankmw.com, cobnks.com, hillcrestbank.com or nbhbank.com. Or, follow us on any of our social media sites:
Bank Midwest: facebook.com/bankmw, twitter.com/bank_mw, instagram.com/bankmw;
Community Banks of Colorado: facebook.com/cobnks, twitter.com/cobnks, instagram.com/cobnks;
Hillcrest Bank: facebook.com/hillcrestbank, twitter.com/hillcrest_bank;
NBH Bank: twitter.com/nbhbank;
or connect with any of our brands on LinkedIn.

Forward-Looking Statements
This press release contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements contain words such as "anticipate," "believe," "can," "would," "should," "could," "may," "predict," "seek," "potential," "will," "estimate," "target," "plan," "project," "continuing," "ongoing," "expect," "intend" or similar expressions that relate to the Company's strategy, plans or intentions. Forward-looking statements involve certain important risks, uncertainties and other factors, any of which could cause actual results to differ materially from those in such statements. Such factors include, without limitation, the "Risk Factors" referenced in our most recent Form 10-K filed with the Securities and Exchange Commission (SEC), other risks and uncertainties listed from time to time in our reports and documents filed with the SEC, and the following factors: ability to execute our business strategy; business and economic conditions; economic, market, operational, liquidity, credit and interest rate risks associated with the Company's business; effects of any changes in trade, monetary and fiscal policies and laws; changes imposed by regulatory agencies to increase capital standards; effects of inflation, as well as, interest rate, securities market and monetary supply fluctuations; changes in the economy or supply-demand imbalances affecting local real estate values; changes in consumer spending, borrowings and savings habits; the Company's ability to identify potential candidates for, consummate, integrate and realize operating efficiencies from, acquisitions or consolidations; the Company's ability to realize anticipated benefits from enhancements or updates to its core operating systems from time to time without significant change in client service or risk to the Company's control environment; the Company's dependence on information technology and telecommunications systems of third party service providers and the risk of systems failures, interruptions or breaches of security; the Company's ability to achieve organic loan and deposit growth and the composition of such growth; changes in sources and uses of funds; increased competition in the financial services industry; the effect of changes in accounting policies and practices; the share price of the Company's stock; the Company's ability to realize deferred tax assets or the need for a valuation allowance; continued consolidation in the financial services industry; ability to maintain or increase market share and control expenses; costs and effects of changes in laws and regulations and of other legal and regulatory developments; technological changes; the timely development and acceptance of new products and services; the Company's continued ability to attract and maintain qualified personnel; ability to implement and/or improve operational management and other internal risk controls and processes and reporting system and procedures; regulatory limitations on dividends from the Company's bank subsidiary; changes in estimates of future loan reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements; widespread natural and other disasters, dislocations, political instability, acts of war or terrorist activities, cyberattacks or international hostilities; impact of reputational risk; and success at managing the risks involved in the foregoing items. The Company can give no assurance that any goal or plan or expectation set forth in forward-looking statements can be achieved and readers are cautioned not to place undue reliance on such statements. The forward-looking statements are made as of the date of this press release, and the Company does not intend, and assumes no obligation, to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events or circumstances, except as required by applicable law.

NATIONAL BANK HOLDINGS CORPORATION
FINANCIAL SUMMARY
Consolidated Statements of Operations (Unaudited)
(Dollars in thousands, except share and per share data)
	For the three months ended									For the year ended
	December 31,			September 30,			December 31,			December 31,			December 31,
	2017			2017			2016			2017			2016
Total interest and dividend income	$	41,889		$	42,579		$	39,658		$	164,421		$	160,448
Total interest expense		4,976			4,681			3,873			18,115			14,808
Net interest income		36,913			37,898			35,785			146,306			145,640
Taxable equivalent adjustment		1,676			1,518			1,028			5,852			4,081
Net interest income FTE(1)		38,589			39,416			36,813			152,158			149,721
Provision for loan losses		3,272			3,880			1,282			12,972			23,651
Net interest income after provision for loan losses FTE(1)		35,317			35,536			35,531			139,186			126,070
Non-interest income:
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