National Bank Holdings Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Amounts below are in millions unless noted. NBHC is a bank holding company operating primarily through NBH Bank, with 104 banking centers in Colorado and the greater Kansas City region. It acquired Peoples, Inc. on January 1, 2018; results include Peoples from that date, limiting direct comparability with Q1 2017.
Financial results and position
| Metric | Q1 2018 / March 31, 2018 | Comparable period / prior year-end |
|---|---|---|
| Total assets | $5,657.6 | $4,843.5 at Dec. 31, 2017 |
| Loans, net of allowance | $3,671.6 | $3,147.7 at Dec. 31, 2017 |
| Total deposits | $4,709.3 | $3,979.6 at Dec. 31, 2017 |
| Net interest income | $47.6 GAAP; $48.7 fully taxable equivalent (FTE) | $34.7 GAAP; $36.0 FTE in Q1 2017 |
| Net income | $8.5; diluted EPS $0.27 | $8.3; diluted EPS $0.30 in Q1 2017 |
| Provision for loan losses | $0.04 | $1.8 in Q1 2017 |
| Non-interest income / expense | $17.8 / $55.3 | $8.7 / $34.6 in Q1 2017 |
| Cash flow | $10.5 operating; $102.9 investing; $(73.9) financing; cash, cash equivalents and restricted cash increased $39.5 | $21.2 operating; $(84.9) investing; $129.3 financing in Q1 2017 |
FTE net interest margin was 3.84%, up 40 basis points from Q1 2017; GAAP net interest margin was 3.76%. Yield on earning assets (FTE) was 4.25%, while the cost of interest-bearing liabilities was 0.55% and cost of deposits was 0.41%. The allowance for loan losses was $30.7, or 0.83% of total loans. Shareholders’ equity was $645.9.
Cash and cash equivalents were $286.9 at quarter-end; cash-flow reporting includes $10.0 of restricted acquisition-related cash, producing ending cash, cash equivalents and restricted cash of $296.9. Reported on-balance-sheet liquidity, including unencumbered investment securities, was $918.0.
Changes versus comparable periods
- Peoples added approximately $842 million of assets net of FHLB payoffs, $543 million of loans, and $730 million of deposits. The transaction consideration was $146.4 million: $110.2 million in NBHC stock and $36.2 million in cash. NBHC converted core operating systems during the quarter.
- Total loans increased 16.5% and deposits increased 18.3% from December 31, 2017, primarily due to the acquisition. Excluding acquired deposits, average deposits grew 3.0% year over year; originated loans grew 2.2% annualized during Q1.
- FTE net interest income rose 35.3% year over year, reflecting higher loan balances and yields, including acquisition-related balances and rising short-term rates. Non-interest income more than doubled, largely due to mortgage banking income of $8.0 versus $0.5, including sales of about $219.6 million of residential mortgage loans.
- Non-interest expense rose 59.8% year over year, including $7.6 million of acquisition costs. Reported net income was $8.5, but management’s non-GAAP adjusted net income was $14.5, or $0.47 per diluted share, excluding $6.0 million of after-tax acquisition-related costs. These adjustments are not GAAP results.
- Q1 2018 diluted EPS was lower than Q1 2017 despite slightly higher net income; weighted-average diluted shares increased to 31.1 million from 27.7 million, including acquisition-related share issuance.
- Available-for-sale securities had $26.4 million of gross unrealized losses at March 31, versus $18.2 million at year-end, primarily attributed to interest-rate changes. Comprehensive income was $1.3 million, reflecting $7.2 million of after-tax other comprehensive loss.
Capital, credit, outlook and risks
- Consolidated Tier 1 leverage was 9.6%; consolidated Common Equity Tier 1 and Tier 1 risk-based ratios were each 12.4%; total risk-based capital was 13.2%. The Bank exceeded well-capitalized regulatory thresholds.
- Non-performing loans were 0.64% of total loans and non-performing assets were 0.96% of loans plus OREO, compared with 0.66% and 0.99% at year-end. Non-accrual originated and acquired loans rose to $23.7 million, partly due to $5.7 million of acquired Peoples loans; one $2.3 million commercial loan returned to accrual. Net charge-offs were 0.07% annualized.
- Management described credit quality as strong and cited low net charge-offs as the reason for minimal Q1 provision. It noted that special-mention and substandard loan balances increased, primarily with acquired portfolios. A $24.9 million substandard acquired loan pool relationship was being worked out and could transfer to OREO in Q2.
- No specific earnings or revenue guidance was provided. Management said available liquidity sources were expected to provide adequate funding for at least 12 months. Its interest-rate model showed asset sensitivity: an immediate, sustained 100-basis-point increase was estimated to raise projected net interest income 4.63%; a 50-basis-point decrease was estimated to reduce it 2.88%. Actual results may differ materially from these model estimates.
- Management highlighted competitive pressures for loans and deposits, potential compression of acquired-loan accretion as acquired portfolios run off, real-estate and agricultural credit exposure, interest-rate and liquidity risks, regulation, and cybersecurity. It added risks related to mortgage servicing rights (MSRs) losing value when rates fall and mortgage-loan repurchase or indemnification claims. The Peoples purchase-price allocation remained provisional and could change during the measurement period.
- NBHC recorded $55.3 million of acquisition goodwill and a $4.0 million mortgage repurchase reserve related to Peoples; the total recorded mortgage repurchase reserve was $4.3 million. Management reported no material litigation, and disclosure controls were considered effective.
Important facts for investors to verify
- How much of the increase in revenue, loans, deposits and earnings is sustainable organic growth versus Peoples acquisition effects and purchase-accounting accretion.
- Whether the stated $7.6 million of acquisition costs and management’s $14.5 million adjusted net income reconcile to the GAAP statements; adjusted figures are non-GAAP.
- Integration progress, realized cost savings, and any revisions to the provisional fair values, goodwill, loan marks, or mortgage repurchase reserve.
- Trends in non-accrual loans, special-mention/substandard balances, the $24.9 million workout exposure, and adequacy of the $30.7 million allowance as acquired loans season.
- Interest-rate sensitivity, deposit pricing and retention, $697.1 million of time deposits scheduled to mature within 12 months, and unrealized securities losses.
- Mortgage banking volumes, MSR valuation and impairment assumptions, and potential repurchase or indemnification claims.