National Bank Holdings Corporation — Q2 2015 Form 10-Q
Business context and reporting period. Unaudited results for the three and six months ended June 30, 2015. The bank holding company operates through NBH Bank across Colorado, greater Kansas City and Texas, serving commercial and consumer clients. The filing describes the branch network as 97 centers in one section and 101 in another; investors should verify the count.
Key financial metrics
| Metric | Q2 2015 / June 30, 2015 | Comparable period / prior balance |
|---|---|---|
| Total assets | $4.778 billion | $4.820 billion at Dec. 31, 2014 |
| Loans | $2.329 billion gross; $2.308 billion net | $2.162 billion gross at Dec. 31, 2014 |
| Deposits | $3.762 billion | $3.766 billion at Dec. 31, 2014 |
| Shareholders’ equity | $718.3 million | $794.6 million at Dec. 31, 2014 |
| Net interest income | $38.9 million Q2; $78.3 million H1 | Down 8.4% Q2 and 8.7% H1 year over year |
| Net income (loss) | $(1.3) million Q2; $(95,000) H1 | $2.1 million Q2 and $3.6 million H1 in 2014 |
| Diluted earnings per share | $(0.04) Q2; $0.00 H1 as reported | $0.05 Q2 and $0.08 H1 in 2014 |
| Net interest margin, fully taxable equivalent | 3.53% Q2; 3.56% H1 | 3.83% Q2 and 3.89% H1 in 2014 |
| Non-interest expense | $40.4 million Q2; $77.1 million H1 | Up 1.3% Q2; down 2.2% H1 year over year |
| Allowance for loan losses | $20.2 million; 0.87% of loans | $17.6 million; 0.81% at Dec. 31, 2014 |
| Cash and cash equivalents | $242.4 million | $257.0 million at Dec. 31, 2014 |
| Borrowings | $187.3 million in repurchase agreements; $40.0 million FHLB advances | Repurchase agreements were $133.6 million at Dec. 31, 2014; FHLB advances unchanged |
Cash flow, liquidity and capital
For the six months, operating cash flow was $(22.8) million, investing cash flow was $34.5 million and financing cash flow was $(26.2) million; cash and cash equivalents declined $14.5 million. On-balance-sheet liquidity, including cash, resale agreements and unencumbered securities, was $1.649 billion, down from $1.908 billion at year-end. Management stated that available liquidity sources were expected to be adequate for at least 12 months. The bank and holding company exceeded regulatory “well-capitalized” thresholds; the bank’s tier 1 leverage ratio was 11.3% at quarter-end. A further $36 million capital distribution to the parent was approved in June and paid in July, reducing the bank’s tier 1 leverage ratio to 10.5%.
Material changes versus prior periods
- Loans grew $166.1 million, or 15.5% annualized, from year-end; strategic loans grew $211.4 million, partly offset by a $45.3 million decline in non-strategic loans. H1 originations were $475.1 million, including a record $271.4 million in Q2.
- Net interest margin contracted as higher-yielding acquired loans ran off and short-term investments increased. Management reported a 0.90 percentage-point decline in the six-month average loan yield, to 5.95%.
- Non-performing loans rose to $15.1 million from $10.8 million at year-end, including $5.9 million in two non-covered energy-related loans placed on non-accrual. Non-performing assets were $36.3 million, down from $40.8 million.
- Transaction deposits increased to 66.3% of deposits from 64.0%; total deposits were nearly unchanged. Time deposits declined $89.5 million.
- Shareholders’ equity declined by $76.3 million during H1, including $72.3 million of share repurchases and a $3.7 million dividend payment.
Outlook, management commentary and risks
- No formal earnings or financial guidance is provided. Management expects pressure on total loan yields if originated loans do not replace the higher yields of acquired loans as those balances run off. It also expects FDIC-related income to decline over time as covered assets resolve and loss-sharing agreements expire.
- Energy-related loans were $144.2 million, or 6.2% of loans. Management noted slight credit-quality deterioration and warned that sustained or further weakness in oil and gas prices could increase borrower stress.
- Three Kansas City-area banking centers are planned for consolidation effective September 30, 2015; Q2 included $1.1 million of related impairment expense.
- Reported H1 pre-tax income was $174,000 and income tax expense was $269,000. Management used the discrete interim tax method and cited a $1.7 million tax charge from writing off deferred tax assets related to expired former-executive stock awards; tax rates were unusually high because of low pre-tax income and tax-exempt and non-taxable items.
- Subsequent events: the company expected to complete a $100 million tender offer for approximately 4.65 million shares at $21.50 each. On August 1, it completed the $9.5 million cash acquisition of Pine River Bank Corporation, which had $140.3 million in assets, $65.2 million in loans and $130.2 million in deposits.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. It reported no litigation expected to have a material adverse effect and no material changes to the prior annual report’s risk factors.
Most important facts for investors to verify
- Whether loan growth can offset acquired-loan runoff and continued pressure on net interest margin and earnings.
- Developments in energy-related credits, non-accrual loans, impaired loans and the allowance for loan losses.
- Settlement and final share count following the $100 million tender offer, and the effects of repurchases and dividends on capital and tangible book value.
- Liquidity and capital after the July $36 million distribution, the Pine River acquisition and the tender offer; confirm applicable regulatory restrictions.
- Timing and financial impact of branch consolidations, and the remaining benefits and liabilities under FDIC loss-sharing agreements.