National Bank Holdings Corporation — Q3 2014 Form 10-Q
Business context and reporting period. Unaudited results cover the quarter and nine months ended September 30, 2014; balance-sheet comparisons are against December 31, 2013. NBHC is a bank holding company operating through NBH Bank, with 97 banking centers in Colorado, the Kansas City area and Texas. Its business combines organic lending with the integration and workout of acquired banks and FDIC-covered assets.
Financial results and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net interest income | $41.9 million | $45.5 million | $127.7 million | $135.4 million |
| Provision for loan losses | $1.5 million | $0.4 million | $4.9 million | $3.5 million |
| Non-interest income | $1.6 million | $3.3 million | $3.4 million | $17.8 million |
| Non-interest expense | $38.0 million | $46.6 million | $116.9 million | $139.7 million |
| Net income | $3.3 million | $0.9 million | $6.9 million | $5.9 million |
| Diluted EPS | $0.08 | $0.02 | $0.16 | $0.11 |
- Revenue and margins: Net interest income fell 8.0% in Q3 and 5.7% year to date. Fully taxable-equivalent net interest margin was 3.75% in Q3 versus 3.80% a year earlier, and 3.84% year to date versus 3.82%. Management attributed the lower interest income primarily to reduced average earning assets and runoff of higher-yielding acquired loans.
- Profit and expenses: Net income rose year over year despite lower net interest income and sharply lower non-interest income. Non-interest expense declined 18.5% in Q3 and 16.4% year to date, helped by efficiency measures and the absence of $3.4 million in 2013 banking-center closure costs. The 2014 nine-month effective tax rate was 25.7%, versus 40.3% in 2013.
- Assets and funding: Total assets were $4.81 billion, down 2.1% from year-end 2013. Loans were $2.17 billion, up $317.3 million; deposits were $3.80 billion, down $40.9 million. Transaction deposits rose to 63.2% of deposits from 61.0%, and the company reported no brokered deposits.
- Liquidity and cash flow: Cash and cash equivalents were $118.7 million. On-balance-sheet liquidity, including unencumbered securities, was $1.89 billion, down from $2.37 billion at year-end. For the nine months, operating cash flow was $14.1 million, investing cash flow was $52.5 million, and financing cash outflow was $137.4 million; cash declined $70.8 million. Management said liquidity sources were expected to be adequate for at least 12 months. It reported a $40 million FHLB advance subsequent to quarter-end.
- Capital and distributions: Shareholders’ equity was $809.0 million. At September 30, the consolidated tier 1 leverage ratio was 15.2%, tier 1 risk-based capital 29.4%, and total risk-based capital 30.1%; the bank and holding company exceeded applicable capital requirements. The company repurchased 5.1 million shares for approximately $100.1 million during the nine months and paid $6.5 million in dividends.
- Debt and other obligations: The balance sheet showed $109.9 million of securities sold under repurchase agreements and $35.1 million due to the FDIC, primarily the clawback liability. The filing does not identify material conventional corporate borrowings at quarter-end.
Material changes and asset quality
- Strategic loans increased $416.1 million, or 37.0% annualized, while non-strategic loans declined $98.8 million. Loan originations totaled $687.0 million, up 46.2% from the comparable 2013 period.
- Non-performing assets fell to $65.7 million, or 1.37% of assets, from $95.6 million, or 1.94%, at year-end. Non-performing loans were $18.9 million, or 0.87% of total loans. The company revised its non-performing asset definition during Q3 and restated prior periods.
- Impaired loans increased to $47.2 million from $21.6 million at year-end; management said the increase was concentrated in two commercial relationships, both current on principal and interest at quarter-end. Accruing troubled debt restructurings rose to $25.0 million from $11.6 million.
- The allowance for loan losses increased to $16.6 million from $12.5 million; its ratio to total loans was 0.76%. Nine-month net charge-offs were $0.9 million, compared with $7.5 million in 2013.
- OREO declined to $45.9 million from $70.1 million. The FDIC indemnification asset fell to $44.4 million from $64.4 million, mainly because improved covered-asset cash flows lowered expected FDIC reimbursements. Covered loans represented 10.1% of total loans, down from 16.7%.
Outlook, commentary, risks and unusual items
- No formal earnings or financial guidance is provided. Management described strong organic loan growth and continued problem-asset resolution, while noting that intense competition and low interest rates constrain new-loan yields. It expects pressure on total loan yields as higher-yielding acquired loans run off unless originated loans replace them at sufficient volume and yield.
- Management’s interest-rate model showed the company was asset-sensitive: a modeled immediate and sustained 200-basis-point rate increase would raise projected net interest income 6.22%; a 50-basis-point decrease would reduce it 1.28%. Actual results may differ due to assumptions, market conditions and management actions.
- Key risks include economic and real-estate conditions, credit quality and collateral values, loan concentration and growth, FDIC claim review and loss-share terms, deposit retention and maturities, interest-rate changes, competition, regulatory requirements, and integration/workout execution. Approximately $482.6 million of loan commitments and letters of credit were outstanding; amounts drawn may differ from contractual totals.
- Unusual items include $19.8 million of FDIC indemnification-asset amortization in the first nine months, recorded as a reduction of non-interest income; a $2.7 million year-to-date benefit from the change in warrant liability; and $100.1 million of share repurchases. The board authorized a further $50 million repurchase program on October 21, 2014. A $0.05-per-share quarterly dividend was declared November 5, payable December 15.
- Management reported effective disclosure controls, no material change in internal control over financial reporting, and no litigation expected to have a material adverse effect. It reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether organic loan growth can offset runoff of acquired loans without reducing portfolio yields or weakening underwriting.
- Trends in impaired loans, TDRs, non-performing assets, charge-offs and reserve adequacy, including the effects of the revised non-performing definition.
- How FDIC indemnification-asset amortization, future claims and clawback obligations affect reported earnings and cash flows as loss-share agreements wind down.
- Deposit retention and repricing as approximately $0.9 billion of time deposits mature within 12 months, and liquidity after share repurchases and the subsequent FHLB advance.
- The sustainability of lower operating costs and improved earnings given reduced non-interest income and the changing contribution of acquired-loan accretion.