Business context and reporting period
National Bank Holdings Corporation is a bank holding company operating NBH Bank, a Colorado-chartered bank with 86 banking centers in Colorado, the greater Kansas City area and Texas. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2017; amounts below are in millions unless stated otherwise.
Financial results and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net interest income (GAAP) | $36.9 | $34.8 | $71.6 | $72.8 |
| Provision for loan losses | $4.0 | $6.5 | $5.8 | $17.1 |
| Non-interest income | $12.0 | $10.5 | $20.7 | $18.4 |
| Non-interest expense | $33.4 | $33.3 | $68.0 | $68.2 |
| Net income | $9.2 | $4.5 | $17.5 | $4.8 |
| Diluted EPS | $0.33 | $0.15 | $0.63 | $0.16 |
| FTE net interest margin | 3.55% | 3.26% | 3.49% | 3.47% |
- Q2 FTE net interest income was $38.3 million, up $2.5 million year over year; first-half FTE net interest income was $74.3 million, down $0.5 million. Management attributed the quarterly margin improvement mainly to higher variable-rate loan yields and market-rate increases.
- At June 30, total assets were $4,692.8 million, loans $3,087.9 million, deposits $3,857.5 million and shareholders’ equity $544.5 million. Loans rose $227.0 million from year-end; deposits declined $11.2 million.
- Cash and cash equivalents were $129.8 million. Unencumbered investment securities were $725.9 million, for reported on-balance-sheet liquidity of $855.8 million, down $140.0 million from year-end.
- Borrowings included $119.2 million of repurchase agreements and $129.1 million of FHLB advances, versus $92.0 million and $38.7 million, respectively, at December 31, 2016. The bank reported $763.6 million of available FHLB credit; total advances and lines available were stated as $892.7 million, of which $129.1 million was used.
- For the first half, operating cash flow was $34.6 million, investing cash flow was negative $155.2 million, and financing cash flow was positive $97.6 million. Cash decreased $22.9 million to $129.8 million.
- The allowance for loan losses was $35.0 million, or 1.13% of loans, compared with $29.2 million and 1.02% at year-end. The bank’s total risk-based capital ratio was 11.9%; it remained above the regulatory “well-capitalized” threshold.
Material changes versus comparable periods
- First-half net income increased to $17.5 million from $4.8 million, chiefly alongside a $12.0 million reduction in loan-loss provision compared with the prior year, when energy-related provisions were elevated.
- Q2 non-interest income included a $2.9 million gain from divesting four banking centers. First-half non-interest income also benefited from higher swap-related income; the prior-year period included a $1.8 million building-sale gain.
- Loan growth was funded in part by runoff of investment securities and acquired loans. Originated loan outstandings increased $259.3 million, or 20.4% annualized, from year-end, while total loans increased $227.0 million, or 16.0% annualized. The acquired ASC 310-30 loan portfolio declined $11.4 million.
- The deposit mix shifted toward transaction accounts: these represented 70.8% of deposits at June 30 versus 69.7% at year-end. Time deposits fell $45.6 million, while FHLB advances increased.
- First-half operating results included a $3.4 million tax benefit from stock-compensation activity. Without this benefit, management reported first-half tax expense of $4.3 million and an effective tax rate of 23.5%.
Outlook, management commentary and risks
- The company announced an agreement to acquire Peoples, Inc., expected to close in Q4 2017. Based on Peoples’ March 31, 2017 balances, management expected the transaction to add $865 million in assets, $483 million in loans held for investment and $719 million in deposits, plus a mortgage business originating more than $1.0 billion of loans annually. These are expected, not completed, amounts.
- Management said FTE net interest income reached an inflection point in Q2 as originated-loan growth and higher rates offset runoff of higher-yielding acquired loans. Future interest income depends on continued origination of sufficient high-quality loans; management gave no formal earnings or financial guidance in the provided filing text.
- Energy loans were 3.2% of total loans; management warned that continued oil and gas price volatility could cause further credit stress. Agriculture loans were 4.3% of loans amid depressed commodity prices. A significant share of the portfolio is real-estate-secured, exposing the bank to property-value and credit-quality deterioration.
- Nonperforming assets were 1.51% of loans and OREO, down from 1.61% at year-end. Nonaccrual TDRs increased to $21.7 million from $16.7 million; management also reported five recently modified TDRs that defaulted during the first half.
- Interest-rate modeling indicated an asset-sensitive position: a modeled immediate, sustained 200-basis-point increase would raise projected net interest income 6.74%, while a 50-basis-point decrease would reduce it 2.39%. Actual results may differ as assumptions and market conditions change.
- Management said liquidity sources should be adequate for at least 12 months and the bank had no brokered time deposits. The filing cites competition, interest-rate and credit risks, regulatory and cybersecurity costs, technology dependence, and acquisition execution and integration as ongoing challenges.
- The company declared a quarterly dividend of $0.09 per share on August 2, 2017, payable September 15. It reported no material change to previously disclosed risk factors, no litigation expected to have a material adverse effect, and effective disclosure controls as of June 30.
Most important facts for investors to verify
- Whether the Peoples acquisition receives required approvals, closes on schedule, and delivers expected balances and benefits.
- Whether loan growth and pricing can replace runoff of acquired high-yield loans without weakening underwriting or asset quality.
- Trends in energy-related exposures, criticized and nonperforming loans, TDR defaults, and the adequacy of the loan-loss allowance.
- Whether deposit costs, FHLB funding and other borrowing needs affect margins and liquidity, including the handling of $731.5 million in time deposits scheduled to mature within 12 months.
- How much reported earnings growth reflects sustainable operations versus lower provisions, the banking-center divestiture gain, swap-related income and the stock-compensation tax benefit.