National Bank Holdings Corporation — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Financial amounts below are in U.S. dollars; monetary figures are rounded to millions unless stated otherwise.
Business context
NBHC is a bank holding company operating through NBH Bank, with 91 banking centers in Colorado, the greater Kansas City area, and Texas. At quarter-end, the company reported $4.63 billion of assets, $2.74 billion of loans, $3.80 billion of deposits, and $598.9 million of shareholders’ equity.
Financial performance and condition
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net interest income | $34.8m | $38.9m | $72.8m | $78.3m |
| Provision for loan losses | $6.5m | $1.9m | $17.1m | $3.3m |
| Non-interest income | $10.5m | $2.7m | $18.4m | $2.3m |
| Non-interest expense | $33.3m | $40.4m | $68.2m | $77.1m |
| Net income (loss) | $4.5m | ($1.3m) | $4.8m | ($0.1m) |
| Diluted earnings (loss) per share | $0.15 | ($0.04) | $0.16 | $0.00 |
| Net interest margin, FTE | 3.26% | 3.53% | 3.47% | 3.56% |
For the six months, operating cash flow was $26.5 million, investing cash flow was $41.8 million, and financing cash flow was negative $86.4 million. Cash and cash equivalents ended the period at $147.9 million, down from $166.1 million at year-end 2015. On-balance-sheet liquidity, including unencumbered securities, was $1.04 billion, compared with $1.26 billion at year-end.
Deposits were $3.80 billion, down $39.7 million from December 31, 2015. Borrowings included $126.1 million in repurchase agreements and $40.0 million of FHLB advances. Total assets decreased to $4.63 billion from $4.68 billion; net loans rose to $2.70 billion from $2.56 billion. Equity was $598.9 million, compared with $617.5 million.
The Bank was classified as well-capitalized. At June 30, NBH Bank’s Tier 1 leverage, common equity Tier 1, Tier 1 risk-based, and total risk-based capital ratios were 8.3%, 12.1%, 12.1%, and 13.4%, respectively. The consolidated ratios were 11.0%, 16.2%, 16.2%, and 17.5%.
Material changes versus comparable periods
- Net interest income declined 10.6% in Q2 and 7.1% for the first half. Management cited lower balances of higher-yielding acquired loans and securities runoff; growth in originated-loan income partly offset the decline. The FTE margin narrowed 27 basis points in Q2 and 9 basis points for the first half year over year.
- Credit costs increased substantially: first-half provision rose to $17.1 million from $3.3 million, principally reflecting a $15.0 million increase in energy-sector reserves. The allowance for loan losses rose to $40.1 million from $27.1 million at year-end.
- Reported non-interest income rose sharply from 2015, when FDIC loss-sharing items reduced income by $6.1 million in Q2 and $14.6 million in the first half. Q2 2016 also included a $1.8 million gain on sale of a building.
- Non-interest expense declined 17.5% in Q2 and 11.5% for the first half. Lower data-processing costs following the core system conversion, lower staffing and incentive costs, and reduced workout expenses contributed; 2015 also included branch-consolidation costs and warrant-liability expense.
- Loans increased $150.8 million from year-end, or 11.7% annualized, while the acquired ASC 310-30 loan portfolio continued to run off. The company repurchased 1.67 million shares for $32.9 million during the first half.
Outlook, commentary, and risks
- No specific earnings guidance was provided. Management expected available liquidity sources to be adequate for at least 12 months and anticipated replacing a significant portion of the $803.4 million in time deposits maturing within 12 months with transaction and market-rate deposits.
- Management noted that new loan yields are lower than the yields on acquired loans, whose runoff may pressure interest income and margins. The average yield on first-half loan originations was 3.74% on an FTE basis, versus 5.71% for the 2015 total loan portfolio.
- Energy-related loans were 3.8% of total loans. Two energy relationships totaling $20.1 million were placed on non-accrual in Q1; non-accrual loans reached $37.4 million, up from $25.6 million at year-end. Non-performing assets increased to $61.6 million from $47.4 million. Management cited continued energy-price pressure as a risk to credit quality.
- The company reported $552.4 million in total unfunded commitments and $9.6 million in standby letters of credit. These commitments may create credit or liquidity exposure if drawn.
- Interest-rate modeling indicated asset sensitivity: a modeled immediate, sustained 100-basis-point increase would raise projected net interest income 4.19%; a 50-basis-point decline would reduce it 2.79%. Actual results may differ from model assumptions.
- Derivative net-liability termination value was $29.2 million, with $31.2 million of collateral posted. Certain agreements may permit counterparties to terminate positions if the company’s capital status or other specified conditions are breached.
- Management stated that litigation was not expected to have a material adverse effect and that disclosure controls were effective. The filing reported no material change in risk factors.
After quarter-end, the board authorized an additional $50 million share-repurchase program on August 5, 2016, and declared a $0.05-per-share quarterly dividend payable September 15, 2016.
Important facts for investors to verify
- Whether energy-sector borrowers stabilize and whether elevated provisions, non-accrual loans, and charge-offs persist.
- Whether loan growth and new originations can offset runoff of acquired higher-yielding loans and support net interest income and margins.
- Deposit retention and repricing, time-deposit maturities, liquidity levels, and the use of securities as collateral.
- The adequacy of the $40.1 million loan-loss allowance and the assumptions used in credit and collateral valuations.
- The sustainability of reported income, considering the prior-year FDIC-related items and the current-period building-sale gain.
- Capital and liquidity effects of the additional buyback authorization, actual repurchases, dividends, and potential derivative collateral requirements.