National Bank Holdings Corporation — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. NBHC is a bank holding company operating primarily through NBH Bank, with 104 banking centers concentrated in Colorado and the greater Kansas City region. Unless stated otherwise, dollar amounts below are in millions.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net interest income, GAAP | $49.4 | $36.9 | $97.0 | $71.6 |
| Net interest income, FTE | $50.5 | $38.3 | $99.2 | $74.3 |
| Provision for loan losses | $1.9 | $4.0 | $1.9 | $5.8 |
| Non-interest income | $19.6 | $12.0 | $37.4 | $20.7 |
| Non-interest expense | $46.8 | $33.4 | $102.0 | $68.0 |
| Net income | $17.5 | $9.2 | $26.0 | $17.5 |
| Diluted EPS | $0.56 | $0.33 | $0.83 | $0.63 |
| Net interest margin, FTE | 3.95% | 3.55% | 3.90% | 3.49% |
- Q2 net income increased year over year, supported by higher net interest income and mortgage banking income. Six-month GAAP income included $8.0 million of pretax Peoples acquisition costs; management reported adjusted six-month net income of $32.3 million and adjusted diluted EPS of $1.03, both non-GAAP measures.
- Six-month FTE net interest income rose 33.6% year over year. Management attributed margin expansion chiefly to higher earning-asset yields, including rate increases on originated loans; deposit costs also rose modestly.
- Non-interest income growth reflected the acquired mortgage business and higher service charges and bank-card fees. The prior-year period included a $2.9 million gain from banking-center divestitures.
Financial position, liquidity and capital
- At June 30, 2018, total assets were $5.65 billion, loans $3.83 billion, deposits $4.63 billion and shareholders’ equity $660.2 million. Loans increased $646.6 million and deposits increased $651.9 million from December 31, 2017, primarily reflecting the Peoples acquisition.
- Cash and cash equivalents were $137.9 million, down from $257.4 million at year-end. Reported on-balance-sheet liquidity, including unencumbered securities, was $792.4 million. The Bank had $966.1 million of available FHLB credit under the note disclosure; MD&A describes total FHLB advances and lines available of $1.2 billion, with $188.3 million used.
- Six-month operating cash flow was negative $30.8 million, versus positive $34.6 million a year earlier. The filing shows substantial mortgage-loan originations and sale proceeds in operating cash flows. Investing activities provided $31.7 million and financing activities used $110.3 million.
- Deposits funded most assets: transaction deposits were 75.6% of total deposits, up from 71.9% at year-end. The loans-to-deposits ratio was 82.6%. Deposits cost 0.41% for the first half, compared with 0.40% in the prior-year period.
- Combined repurchase agreements and FHLB advances on the balance sheet totaled $261.8 million. Shareholders’ equity included accumulated other comprehensive loss of $17.4 million, compared with $6.2 million at year-end.
- NBHC reported a 9.9% consolidated Tier 1 leverage ratio and 12.6% consolidated Tier 1 and common equity Tier 1 risk-based ratios. The Bank exceeded regulatory well-capitalized thresholds.
Material changes and notable items
- NBHC completed its acquisition of Peoples, Inc. on January 1, 2018, for $146.4 million in cash and stock. Peoples added approximately $842 million in assets, net of FHLB payoffs, $543 million in loans, $730 million in deposits and 20 banking centers. Systems conversions were completed during the first half.
- The acquisition generated $55.4 million of provisional goodwill, a $10.5 million core deposit intangible, and a $4.3 million mortgage servicing right. Purchase accounting remained subject to refinement during the measurement period.
- Mortgage banking income was $8.9 million in Q2 and $16.9 million for the first half, compared with $0.6 million and $1.0 million in the corresponding 2017 periods, largely due to the acquired mortgage business. Loans held for sale were $113.1 million at quarter-end.
- Other real estate owned rose to $35.5 million from $10.5 million at year-end. The increase primarily reflected transfer of a $24.1 million acquired problem loan to OREO. Non-performing assets were 1.58% of loans and OREO, versus 0.99% at year-end; excluding that transfer, the ratio was 0.82%.
- Available-for-sale securities had $29.0 million of gross unrealized losses at quarter-end, versus $18.2 million at year-end. Management attributed losses to interest-rate changes and reported no other-than-temporary impairment.
- Cash dividends declared were $0.23 per share for the first half. No shares were repurchased under the public repurchase authorization during the quarter; $12.6 million remained authorized.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management said liquidity sources were expected to provide adequate funding for at least 12 months and described the company as asset-sensitive. Its model estimated net interest income would change by +7.25% under an immediate 200-basis-point rate increase and by −6.45% under a 100-basis-point decrease. These are modeled estimates, not forecasts, and depend on assumptions.
- Management highlighted competition, execution of organic growth and acquisition strategy, loan and deposit growth, interest-rate and liquidity risk, regulatory costs, cybersecurity and technology dependence, and real-estate and credit risks. It noted that agricultural commodity prices remained depressed, although agriculture was 5.1% of loans and described as diversified.
- Risks added or emphasized in the filing include potential declines in mortgage servicing rights when rates fall and potential mortgage-loan repurchases or indemnification claims for breaches of representations and warranties. A $4.0 million mortgage repurchase reserve was recorded at June 30.
- Unfunded commitments totaled $772.9 million, including $764.6 million of loan commitments and $8.3 million of standby letters of credit. Management said commitments often expire undrawn and did not expect material losses from them.
- Management stated that pending or threatened litigation was not expected to have a material adverse effect. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported during the quarter.
Investor verification priorities
- Separate Peoples-related growth and costs from organic performance, and monitor integration benefits after the completed systems conversions.
- Track the $24.1 million transferred loan, OREO levels, non-performing assets and subsequent charge-offs or recoveries.
- Assess sustainability of mortgage banking results and the valuation, prepayment sensitivity and impairment risk of mortgage servicing rights; monitor the $4.0 million repurchase reserve against claims.
- Reconcile operating cash flow and the reported cash-and-restricted-cash figures, and assess liquidity against the $684.3 million of time deposits scheduled to mature within 12 months.
- Monitor deposit pricing, modeled interest-rate sensitivity, securities unrealized losses/AOCI, and capital ratios as the capital conservation buffer reaches full phase-in.