National Bank Holdings Corporation — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Unaudited consolidated results are in U.S. dollars; financial statement amounts below are in millions unless noted. Comparability with 2011 is limited because the company completed four bank acquisitions between October 2010 and October 2011, so prior-year periods included fewer acquired operations. The company’s shares began trading publicly on September 20, 2012.
Business context
National Bank Holdings is a bank holding company pursuing acquisitions and community banking in Colorado and the greater Kansas City region. At quarter-end it reported 101 full-service banking centers, $5.5 billion of assets, $4.3 billion of deposits and $1.1 billion of stockholders’ equity. Its portfolio includes acquired loans and assets covered by FDIC loss-sharing agreements, as well as loans originated by the company.
Financial and operating highlights
| Metric | Q3 2012 / September 30, 2012 | Comparison |
|---|---|---|
| Net interest income | $49.5 million for the quarter; $154.7 million year to date | Quarterly NII was $40.8 million in Q3 2011; nine-month NII was $105.5 million in 2011 |
| Net income (loss) | $(7.9) million for Q3; $(3.5) million for nine months | Q3 2011 income was $33.8 million and nine-month 2011 income was $39.5 million; 2011 included a $60.5 million bargain-purchase gain |
| Diluted EPS | $(0.15) for Q3; $(0.07) for nine months | $0.65 and $0.76, respectively, in 2011 |
| Net interest margin | 3.92% for Q3; 3.95% for nine months | 3.35% and 3.22%, respectively, in the 2011 comparable periods |
| Provision for loan losses | $5.3 million for Q3; $25.3 million for nine months | $3.8 million and $16.4 million in 2011 |
| Assets / loans / deposits | $5,522.8 million / $1,937.8 million / $4,281.7 million | At December 31, 2011: $6,352.0 million / $2,274.1 million / $5,063.1 million |
| Cash and cash equivalents | $664.7 million | $1,628.1 million at December 31, 2011 |
| Stockholders’ equity | $1,095.8 million | $1,088.7 million at December 31, 2011 |
- Revenue and margins: Q3 interest and dividend income was $56.0 million, while interest expense was $6.5 million. Net interest margin narrowed 8 basis points from Q2 2012, as lower reinvestment yields and reduced discount accretion offset lower funding costs. The reported loan yield was 8.14% for Q3; management said acquired-loan runoff could pressure future interest income.
- Non-interest items and expenses: Q3 non-interest income was $8.1 million, including negative FDIC loss-sharing income of $1.3 million. Non-interest expense was $60.0 million, including $7.6 million of IPO-related costs. Salaries and benefits included a $4.9 million catch-up of previously deferred stock-based compensation after the public listing. Q3 efficiency ratio was 101.82%; the company’s adjusted, non-GAAP ratio was 77.09%.
- Cash flow: For the first nine months, operating cash flow was $(106.2) million, investing cash flow $(74.5) million and financing cash flow $(782.7) million. Deposits declined by $781.3 million, largely as higher-cost acquired time deposits matured and were not renewed. Cash declined by $963.4 million. Management reported $2.8 billion of liquidity, defined as cash and pledgeable securities, at September 30.
- Funding and debt: Deposits were 96.7% of liabilities, and the company reported no brokered deposits. Repurchase agreements were $46.2 million and amounts due to the FDIC were $32.5 million. The filing reports no FHLB advances outstanding at September 30. The holding company had $103.9 million of cash; NBH Bank was restricted from paying dividends to the parent until December 2013.
- Capital: Consolidated Tier 1 leverage ratio was 17.7%; NBH Bank’s was 15.9%. The bank exceeded its agreed regulatory minimums of 10% Tier 1 leverage, 11% Tier 1 risk-based capital and 12% total risk-based capital through 2013. Management estimated approximately $375 million of capital could be deployed while maintaining a 10% Tier 1 leverage ratio.
- Credit quality: Non-performing assets were $168.3 million, or 3.05% of assets, versus $172.9 million at year-end 2011. Non-performing loans were $37.6 million versus $50.7 million. OREO increased to $129.3 million from $120.6 million; $64.5 million was FDIC-covered. The allowance for loan losses rose to $17.5 million from $11.5 million, and nine-month net charge-offs were $19.4 million.
Material changes and unusual items
- Total deposits fell $781.3 million and total loans fell $336.3 million from year-end 2011. Management attributed the loan decline to workout and runoff of non-strategic acquired credits; $295 million of organic loan originations partly offset paydowns. Strategic loans were $1.1 billion and approximately flat with year-end.
- The company transferred $754.1 million of mortgage securities from available-for-sale to held-to-maturity during Q1 2012. Held-to-maturity securities consequently rose to $643.7 million at quarter-end; their reported fair value was $653.8 million.
- FDIC indemnification assets declined to $113.2 million from $223.4 million at year-end, reflecting claims and improved expected cash flows on covered assets. The company filed $109.1 million of claims in the first nine months; $75.9 million had been paid, with remaining claims subject to FDIC review.
- Management recorded $17.4 million of impairment provision on acquired loans accounted for under ASC 310-30, primarily in commercial real estate and land pools. It also reclassified a net $38.6 million from non-accretable difference to accretable yield, expected to be recognized over the remaining lives of the loans.
- OREO sales generated $6.8 million of net gains in the first nine months, while OREO impairments totaled $8.6 million. Management said most of the impairment was on FDIC-covered assets.
- The Q3 loss included IPO costs and stock-compensation catch-up. The nine-month effective tax rate was unusually high at 599.4%, which management attributed primarily to non-deductible IPO expenses and the small pre-tax loss.
Outlook, commentary and risks
The filing gives no quantified earnings or revenue guidance. Management said guarded economic conditions, weak high-quality loan demand and low interest rates challenge organic growth and asset yields. It expects acquired loans to run off and their yields to decline; resolution of troubled assets and loan payoffs may offset new originations in the near term. It also expects FDIC loss-sharing income to be inconsistent and to decline over time as covered assets are resolved. Management reported that all acquired banks had been integrated onto a common operating platform by July 2012 and anticipated further operating efficiencies.
Key risks include credit deterioration and real estate values, elevated OREO and workout costs, deposit runoff and penalty-free withdrawal rights on $232.0 million of time deposits, FDIC claim approval and loss-sharing compliance, interest-rate changes, acquisition execution and regulatory constraints. The company’s rate-sensitivity model estimated projected net interest income would rise 9.07% under an immediate sustained 200-basis-point increase, rise 5.47% under a 100-basis-point increase, and fall 1.89% under a 50-basis-point decrease; actual results may differ. Management reported disclosure controls were effective and no material quarterly change in internal controls, while noting a material weakness had been identified for 2011 and remediation efforts were ongoing. Management did not expect pending litigation to have a material adverse effect.
After quarter-end, on October 31, 2012, the board approved a $25 million share repurchase authorization and declared a $0.05-per-share quarterly dividend, payable December 14, 2012. The filing cautions that dividends remain subject to regulatory and funding limitations.
Important facts for investors to verify
- Whether deposits continue shifting from time deposits to lower-cost transaction accounts, and how the $1.4 billion of time deposits scheduled to mature within 12 months affects funding and liquidity.
- Whether organic originations can replace acquired-loan runoff without weakening underwriting or materially reducing loan yields and net interest margin.
- Trends in non-performing loans, OREO, charge-offs and the allowance; assess commercial real estate concentration, acquired-loan cash-flow estimates and the coverage of FDIC loss-sharing agreements.
- Timing, approval and collection of FDIC claims, including the remaining unpaid claims and the future impact of the indemnification asset and clawback liability.
- Recurring earnings and expenses after separating IPO costs, stock-based compensation catch-up, acquired-loan accretion and other acquisition-related effects; compare GAAP results with management’s non-GAAP adjustments.
- Whether the holding company can sustain the announced dividend and repurchase plan while its bank subsidiary remains restricted from paying dividends to the parent until December 2013.