National Bank Holdings Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited consolidated results. The company operates NBH Bank across Colorado, the greater Kansas City area and Texas, with 97 banking centers. Comparisons below are generally with Q1 2013 unless stated otherwise.
Financial performance and condition
- Profit and revenue: Net income was $1.4 million, or $0.03 per diluted share, versus $2.1 million, or $0.04, a year earlier. Interest and dividend income was $46.9 million versus $50.1 million. Net interest income was $43.3 million versus $45.6 million. Non-interest income was a net expense of $0.4 million, compared with $7.2 million of income.
- Margins: Net interest margin on a fully taxable equivalent basis widened to 3.94% from 3.88%. Average loan yield declined to 7.11% from 8.14%, while cost of deposits improved to 0.37% from 0.45%. The lower funding cost supported margin; runoff of higher-yielding acquired loans and lower loan yields pressured interest income.
- Expenses: Non-interest expense fell 18.5% to $39.0 million. The decrease included $4.7 million less in problem-loan and OREO workout costs and lower salaries and professional fees. Efficiency ratio was 87.65%, versus 88.29%.
- Balance sheet: Total assets were $4.914 billion, essentially unchanged from December 31, 2013. Loans increased 5.8% from year-end to $1.962 billion; deposits rose 0.7% to $3.866 billion. Shareholders’ equity was $895.8 million. Securities totaled about $2.337 billion, primarily mortgage-backed securities.
- Cash flow and liquidity: Operating activities used $15.4 million; investing activities provided $15.7 million and financing activities provided $8.0 million. Cash and cash equivalents increased $8.4 million to $197.8 million. Management reported $2.283 billion of on-balance-sheet liquidity, including unencumbered investment securities, and said available funding sources were expected to provide adequate liquidity for at least 12 months.
- Funding and debt: Deposits were the principal funding source; the company reported no brokered deposits. Repurchase-agreement liabilities were $91.1 million and amounts due to the FDIC were $33.3 million. The filing does not identify material conventional borrowings outstanding.
- Capital: Consolidated Tier 1 leverage, Tier 1 risk-based and total risk-based capital ratios were 16.8%, 36.8% and 37.5%, respectively. The bank subsidiary also exceeded applicable well-capitalized requirements.
Material changes and operating trends
- Organic loan originations were $217.0 million, up 98.4% year over year. Strategic loans grew 36.7% annualized from year-end to $1.640 billion; total loans rose $107.5 million as strategic growth exceeded runoff of non-strategic loans.
- Transaction deposits increased to 62.7% of deposits from 61.0% at year-end, while time deposits declined $51.8 million. Deposits overall increased $27.8 million.
- Non-performing assets declined to $99.4 million, or 2.02% of assets, from $107.3 million, or 2.18%, at year-end. Non-performing loans were 1.65% of loans versus 1.95%. The allowance for loan losses rose to $14.0 million from $12.5 million; provision expense was $1.8 million versus $1.4 million.
- A previously non-accrual covered commercial and industrial loan pool, with a carrying value of about $14.7 million, returned to accrual status after improved performance and cash-flow predictability. Accruing troubled debt restructurings increased to $22.5 million from $11.6 million at year-end.
- FDIC indemnification asset amortization rose to $7.6 million from $4.7 million, reflecting improved expected cash flows on covered assets and lower anticipated FDIC reimbursements. FDIC loss-sharing results shifted to a $1.0 million expense from $3.3 million of income.
- The company repurchased 454,706 shares for $8.8 million at a weighted average price of $19.35. A new $50 million repurchase authorization was approved through December 31, 2014; $41.2 million remained at quarter-end. A quarterly dividend of $0.05 per share was declared in May.
Outlook, risks and contingencies
- No specific earnings or financial guidance was provided. Management described loan originations as outpacing problem-loan resolution, but noted intense loan competition, low interest rates and borrower demand, and expected acquired-loan yields to decline as those balances run off.
- Management expects FDIC loss-sharing income to decline over time as covered assets resolve and agreements expire. FDIC claims remain subject to review and audit; the company also carries a $33.3 million clawback liability that may be payable to the FDIC under the loss-sharing agreements.
- Management identified credit and real-estate risks, including the possibility that falling property values or worsening credit quality could harm the loan portfolio. Other stated risks include interest-rate changes, competition, regulation and capital requirements, acquisition execution, and the ability to sustain organic growth and control costs.
- The company reported $408.2 million of loan commitments and $7.2 million of standby letters of credit at quarter-end; it did not anticipate material losses from these commitments. Management said there were no legal proceedings expected to have a material adverse effect and no material changes to previously disclosed risk factors.
- The bank was asset-sensitive in management’s interest-rate model: an immediate, sustained 200-basis-point increase was estimated to raise projected net interest income 6.04%; a 50-basis-point decrease was estimated to reduce it 1.39%. Actual outcomes may differ from model assumptions.
Important facts for investors to verify
- Whether strategic loan growth and originations remain strong enough to offset acquired-loan runoff and lower loan yields.
- Whether the increase in accruing TDRs and impaired loans signals renewed credit deterioration, and how the allowance compares with subsequent losses.
- How FDIC asset amortization, loss-sharing claims and the clawback liability affect future reported earnings and cash flows.
- Whether deposit growth and migration toward lower-cost transaction accounts continue, particularly as $0.9 billion of time deposits mature within 12 months.
- Whether share repurchases and dividends remain consistent with regulatory capital needs, liquidity and the company’s growth plans.