National Bank Holdings Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Unaudited consolidated results. NBHC is a bank holding company operating through NBH Bank, with 90 banking centers in Colorado, the greater Kansas City area and Texas.
Financial performance
| Metric | Q1 2017 | Q1 2016 / prior date |
|---|---|---|
| Total assets | $4.728 billion | $4.573 billion at Dec. 31, 2016 |
| Loans, gross | $2.954 billion | $2.861 billion at Dec. 31, 2016 |
| Deposits | $3.968 billion | $3.869 billion at Dec. 31, 2016 |
| Net interest income | $34.7 million; $36.0 million FTE | $38.0 million; $39.0 million FTE |
| Net interest margin | 3.31%; 3.44% FTE | 3.59%; 3.68% FTE |
| Net income | $8.3 million; $0.30 diluted EPS | $0.3 million; $0.01 diluted EPS |
| Operating cash flow | $21.2 million | $7.1 million |
| Cash and cash equivalents | $218.4 million | $152.7 million at Dec. 31, 2016 |
| Shareholders’ equity | $537.6 million | $536.2 million at Dec. 31, 2016 |
Net income improved primarily as the provision for loan losses fell to $1.8 million from $10.6 million, including a $10.7 million energy-related provision in Q1 2016. A $2.8 million excess tax benefit from stock-based compensation also contributed to Q1 2017 earnings; the reported income tax benefit was $1.2 million. Non-interest income rose 9.8% to $8.7 million, while non-interest expense declined 0.9% to $34.6 million.
Balance sheet, liquidity and credit
- Loans increased $92.7 million, or 3.2%, from year-end; management reported 13.1% annualized growth. Deposits rose $99.3 million, with transaction deposits increasing $86.3 million to 70.1% of deposits.
- On-balance-sheet liquidity was $1.045 billion, including $218.4 million cash and $827.1 million in unencumbered investment securities. FHLB borrowing capacity was $830.2 million, of which $76.8 million was utilized.
- Repurchase agreements were $91.7 million and FHLB advances were $76.8 million at quarter-end. The filing reports total liabilities of $4.191 billion.
- Non-performing loans increased to $33.7 million from $30.7 million at year-end; non-performing assets rose to $49.3 million from $46.4 million. Non-performing assets were 1.66% of loans and OREO. The allowance for loan losses was $30.9 million, or 1.04% of loans.
- Non-accruing TDRs increased to $25.1 million from $16.7 million, principally reflecting commercial exposures. Energy was 3.0% and agriculture 4.3% of total loans. Management cited continued energy-sector stress and depressed agricultural commodity prices.
- Regulatory capital remained above well-capitalized thresholds: consolidated Tier 1 leverage was 10.2%, common equity Tier 1 was 13.5%, and total risk-based capital was 14.4%. NBH Bank’s corresponding ratios were 8.4%, 11.1% and 12.0%.
Material changes and management commentary
- FTE net interest income declined $3.0 million year over year and FTE margin narrowed 24 basis points to 3.44%. Management attributed the pressure chiefly to runoff of higher-yielding acquired loans and a higher cost of interest-bearing liabilities.
- Loan originations were $196.6 million during the quarter; originated loan balances grew $107.7 million from year-end. Management reported record originations of $1.1 billion over the preceding 12 months and expects growth in interest income to depend on generating sufficient high-quality originated loans to replace acquired-loan runoff.
- Net cash from investing activities was a use of $84.9 million, compared with a source of $95.1 million in Q1 2016, reflecting loan growth and purchases of available-for-sale securities. Financing activities provided $129.3 million, primarily from deposit growth and net FHLB funding.
- Interest-rate modeling indicated the company was asset-sensitive: an immediate, sustained 100-basis-point increase was estimated to raise projected net interest income 4.16%; a 50-basis-point decrease was estimated to reduce it 2.80%. These are model estimates, not guidance, and depend on assumptions.
Outlook, contingencies and unusual items
- No specific earnings or financial guidance was provided. Management described economic conditions as modestly improving but expressed guarded optimism regarding real estate markets. It cited competition, interest-rate and regulatory changes, cybersecurity, and the ability to grow loans and deposits as ongoing challenges.
- Four banking-center sales closed in Q2 2017. The locations included buildings valued at $1.6 million, loans carried at $13.9 million and deposits carried at $100.5 million at quarter-end; management estimated a $3.0 million Q2 gain.
- After quarter-end, the board declared a $0.09-per-share dividend payable June 15, 2017. The remaining authorization under the share repurchase program was $12.6 million; the company reported no program repurchases during Q1.
- Unfunded loan and line commitments totaled $655.8 million, with standby letters of credit of $14.3 million. Management did not expect material losses from commitments or contingencies. It stated pending or threatened litigation was not expected to have a material adverse effect and reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether loan growth and new-loan yields can offset runoff of acquired high-yield loans and continued margin compression.
- Trends in non-performing loans and TDRs, especially commercial, energy and agriculture exposures, and the adequacy of reserves.
- How much of the reported earnings improvement is repeatable, given the lower prior-year credit provision and the Q1 2017 stock-compensation tax benefit.
- Deposit pricing, funding needs and liquidity after the planned banking-center sales and upcoming time-deposit maturities.
- The assumptions behind projected interest-rate sensitivity and the expected timing and final gain from the four branch sales.