National Bank Holdings Corporation — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Amounts are in millions of dollars unless otherwise stated. The company operates NBH Bank through 91 banking centers in Colorado, the greater Kansas City area, and Texas.
Financial performance and position
- Profit: Q3 net income was $8.3 million, or $0.30 per diluted share, versus $1.6 million, or $0.05, a year earlier. Nine-month net income was $13.1 million, or $0.45 per diluted share, versus $1.5 million, or $0.04.
- Net interest income and margin: Q3 net interest income was $37.1 million, down from $38.7 million; fully taxable equivalent (FTE) net interest income was $38.1 million, down 3.5%. Q3 FTE net interest margin was 3.59%, up 5 basis points year over year. Nine-month net interest income was $109.9 million, down 6.1%; FTE net interest income was $112.9 million, down 4.9%, and FTE margin was 3.51%, down 4 basis points.
- Income and expenses: Nine-month non-interest income was $30.0 million versus $6.0 million in 2015, when FDIC loss-sharing expense was $20.4 million. Non-interest expense fell 12.3% to $101.6 million. The FTE efficiency ratio improved to 68.19% from 89.55%; comparisons reflect unusual prior-year and current-year items. The nine-month effective tax rate was 18.0%; management cautions that the 2015 tax benefit and the change in interim tax calculation method make the rates poorly comparable.
- Balance sheet: Total assets were $4.61 billion, down from $4.68 billion at year-end 2015. Loans were $2.82 billion, up $234.9 million (9.1% since year-end; 12.1% annualized). Deposits were $3.83 billion, down $15.7 million. Shareholders’ equity was $549.8 million, versus $617.5 million.
- Liquidity and funding: Cash and cash equivalents were $125.0 million. On-balance-sheet liquidity, including unencumbered securities, was $1.03 billion, down from $1.26 billion at year-end. The Bank reported $885.3 million of available FHLB credit and term financing, with $51.4 million outstanding. Deposits and repurchase agreements were key funding sources; deposits represented 97.1% of total liabilities together with client repurchase agreements, according to management.
- Borrowings: At quarter-end, securities sold under repurchase agreements were $113.3 million and FHLB advances were $51.4 million. Nine-month cash from operations was $27.1 million versus cash used of $15.2 million in 2015; financing activities used $119.4 million, including $87.3 million of share repurchases and $4.3 million of dividends. Cash decreased $41.1 million during the period.
- Capital: The Bank’s regulatory ratios were 8.6% Tier 1 leverage, 11.9% common equity Tier 1, and 12.8% total risk-based capital; it remained well-capitalized. The company repurchased 4.2 million shares during the first nine months at a weighted-average $20.62 per share. A new $50 million buyback authorization was approved in August, with $18.8 million remaining at quarter-end.
Changes, credit quality, and notable items
- Loan growth was driven by originations, which totaled $762.3 million year to date; originated loans increased 19.7% annualized from year-end. Acquired credit-impaired loans continued to run off, reducing the higher-yielding acquired portfolio and pressuring interest income and year-to-date margin.
- Provision for loan losses rose to $22.4 million for the first nine months from $7.0 million. The increase was principally tied to energy-sector exposures. Non-310-30 net charge-offs were $21.4 million, including $19.1 million of energy loan charge-offs. Nonperforming loans declined to $22.5 million (0.80% of loans) from $25.6 million (0.99%); nonperforming assets were 1.54% of loans and OREO versus 1.91%. Allowance for loan losses was $28.0 million, or 124.66% of nonperforming loans.
- Energy loans were 3.1% of total loans; management warned that continued low oil and gas prices could cause further credit stress. Energy clients had $97.8 million in unfunded commitments. One midstream and several other energy credits were on non-accrual or otherwise impaired.
- Non-interest income included a $1.8 million gain on sale of a building during the second quarter and a $1.6 million guarantor settlement related to an OREO property in Q3. OREO sales generated $4.1 million of net gains year to date. These items, along with the absence of 2015 FDIC loss-sharing expense, affect period comparisons.
- Management said the company was asset-sensitive: modeled net interest income increased 4.14% under an immediate 100-basis-point rate increase and 6.54% under a 200-basis-point increase, while a 50-basis-point decrease reduced modeled income 3.24%. Actual results may differ based on rates, prepayments, deposit behavior, and management actions.
Outlook, risks, and contingencies
The filing provides no specific quantitative earnings or revenue guidance. Management expected available liquidity sources to provide adequate funding for at least 12 months and anticipated replacing a significant portion of the $801.3 million in time deposits maturing within 12 months with transaction and market-rate time deposits. Management described continued loan growth and client relationship development as priorities, while noting pressure on yields as acquired high-yield loans pay down and originated loans replace them.
Key risks include energy-sector credit deterioration, real-estate values and credit quality, competition for loans and deposits, low interest rates and margin pressure, regulatory and capital requirements, cybersecurity and third-party technology risks, and the execution of growth or acquisition plans. The company reported no material change to the risk factors in its 2015 Form 10-K, no litigation expected to have a material adverse effect, and effective disclosure controls as of September 30, 2016. The board declared a $0.07-per-share quarterly dividend in October, payable in December.
Investor verification priorities
- Track energy exposure, charge-offs, non-accruals, unfunded commitments, and future provision needs.
- Assess whether loan originations can replace acquired-loan runoff without further deterioration in yields or margin.
- Review the sustainability of reported earnings given OREO-related income, the building-sale gain, and the unusually weak 2015 comparison from FDIC loss-sharing expense.
- Monitor deposit mix and pricing, upcoming time-deposit maturities, liquidity levels, and reliance on repurchase agreements and FHLB funding.
- Confirm the effects of continued share repurchases and dividends on tangible book value and regulatory capital.
- Evaluate interest-rate sensitivity alongside the assumptions underlying management’s modeled scenarios.