National Bank Holdings Corporation — Q3 2017 Form 10-Q
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2017, compared with the corresponding 2016 periods. NBHC is a bank holding company operating through NBH Bank, with 85 banking centers in Colorado, the greater Kansas City area and Texas. Amounts below are in U.S. dollars; financial statement figures are generally in millions.
Financial performance and condition
- Q3 earnings: Net income was $7.2 million, or $0.26 diluted EPS, versus $8.3 million, or $0.30, in Q3 2016. Pretax income was $9.0 million versus $10.0 million.
- Nine-month earnings: Net income was $24.7 million, or $0.89 diluted EPS, versus $13.1 million, or $0.45. The improvement reflected lower loan-loss provision; 2017 results also included a $3.4 million discrete tax benefit from stock-based compensation.
- Net interest income and margin: Q3 GAAP net interest income was $37.9 million versus $37.1 million; fully taxable equivalent (FTE) net interest income was $39.4 million versus $38.1 million. Nine-month GAAP net interest income was $109.5 million versus $109.9 million; FTE net interest income was $113.7 million versus $112.9 million. Management reported nine-month FTE net interest margin of 3.53%, up from 3.51%. For Q3, management reported 3.60% and described a one-basis-point year-over-year increase, although the filing’s comparative schedules do not consistently show the same prior-year margin.
- Other income and expenses: Nine-month non-interest income was $30.2 million, essentially unchanged from $30.0 million. Non-interest expense rose to $102.7 million from $101.6 million, including $0.7 million of acquisition-related costs and lower gains on OREO sales. Q3 non-interest income decreased to $9.6 million from $11.6 million, mainly reflecting lower OREO-related income.
- Loans and credit: Loans were $3.12 billion at September 30, up 9.1% from year-end 2016; originated loan balances grew $313.4 million. The allowance for loan losses was $30.0 million, or 0.96% of loans. Nine-month provision was $9.7 million versus $22.4 million, while net charge-offs were $8.8 million. Non-performing assets were $31.5 million, or 1.01% of loans and OREO, compared with $46.4 million and 1.61% at year-end 2016. Energy loans were 2.6% of total loans; management cited continuing exposure to energy-sector stress.
- Balance sheet and liquidity: Total assets were $4.77 billion, deposits $3.95 billion, and shareholders’ equity $550.2 million. Cash and cash equivalents were $241.2 million. Reported on-balance-sheet liquidity, including unencumbered securities, was $886.1 million, down from $995.8 million at year-end 2016. The loans-to-deposits ratio was 79.38%.
- Funding and capital: Repurchase agreements were $92.8 million and FHLB advances $129.1 million, versus $92.0 million and $38.7 million, respectively, at year-end 2016. The Bank had $787.4 million of available FHLB credit. The Bank remained well-capitalized; its September 30 total risk-based capital ratio was 11.9%, and consolidated Tier 1 leverage was 10.4%.
- Cash flow: For the nine months, operating cash flow was $38.7 million, investing cash flow was negative $108.2 million, and financing cash flow was positive $157.9 million. Cash and cash equivalents increased $88.4 million to $241.2 million.
Material changes and notable items
- Management said the shift from securities and acquired loans toward originated lending supported FTE net interest income. Higher interest rates also benefited yields on variable-rate loans, while funding costs rose: nine-month interest expense increased to $13.1 million from $10.9 million, and average deposit cost increased to 0.41% from 0.36%.
- Asset quality measures improved, partly due to $8.6 million of charge-offs on identified energy and commercial-and-industrial loans and the return to accrual status of an energy loan. Non-accrual loans declined, but special-mention loans increased from year-end.
- Four banking centers were divested in Q2, producing a $2.9 million gain. In Q2, NBHC announced an agreement to acquire Peoples, Inc.; the filing cited approximately $865 million in assets, $483 million in loans and $719 million in deposits at March 31, 2017. Completion, regulatory approval and integration remain relevant considerations.
- The Board declared a $0.09-per-share dividend on November 1, payable December 15, 2017. No shares were repurchased under the publicly announced program during the first nine months; $12.6 million remained authorized at quarter-end.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management said future interest-income growth depends on continued high-quality loan originations as higher-yielding acquired loans run off. Its interest-rate model indicated asset sensitivity: an immediate, sustained 100-basis-point increase was estimated to raise projected net interest income 4.53%, while a 50-basis-point decrease was estimated to reduce it 3.35%; actual results may differ with market conditions and management actions.
Risks highlighted include competition for loans and deposits, rising funding costs, interest-rate and liquidity risk, real-estate values, energy and agricultural credit conditions, regulatory changes, cybersecurity and third-party technology reliance, and acquisition execution. Unfunded loan commitments totaled $662.2 million. Management did not expect material losses from commitments or litigation and reported no legal proceedings it believed would have a material adverse effect. Disclosure controls were judged effective, with no material change in internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- Confirm the status, terms, approvals, expected closing and integration costs of the announced Peoples, Inc. acquisition.
- Track energy and other commercial credit performance, charge-offs, non-performing assets and the adequacy of the loan-loss allowance.
- Assess loan and deposit growth against rising deposit costs, FHLB borrowing and the scheduled maturity of $690.7 million in time deposits within 12 months.
- Separate recurring earnings from the $3.4 million stock-compensation tax benefit and the $2.9 million banking-center divestiture gain.
- Review the FTE net interest margin comparison: the filing’s Q3 discussion and comparative schedules present inconsistent prior-year figures.