Business context and reporting period
National Bank Holdings Corporation (NBHC) is a bank holding company operating through NBH Bank, with community banking, commercial lending and deposit-gathering businesses concentrated in Colorado and the greater Kansas City region. It also operates in Texas. This Form 10-K covers the fiscal year ended December 31, 2015; quarterly figures below identify the fourth quarter specifically. NBH Bank converted from a national to a Colorado state-chartered bank on December 31, 2015.
NBHC ended 2015 with $4.684 billion in assets, $2.588 billion in loans, $3.841 billion in deposits and $617.5 million in shareholders’ equity. It acquired Pine River in August 2015 for approximately $9.5 million cash, adding four banking centers and recording a $1.0 million bargain-purchase gain.
Financial and operating performance
| Metric | 2015 | 2014 |
|---|---|---|
| Net interest income | $156.9 million | $170.2 million |
| Provision for loan losses | $12.4 million | $6.2 million |
| Non-interest income | $21.4 million | $(1.7) million |
| Non-interest expense | $158.0 million | $150.0 million |
| Net income | $4.9 million; $0.14 diluted EPS | $9.2 million; $0.22 diluted EPS |
| Net interest margin, fully taxable equivalent | 3.60% | 3.85% |
| Return on average assets | 0.10% | 0.19% |
Fourth-quarter 2015 net income was $3.34 million, or $0.11 per diluted share, compared with $2.28 million, or $0.06, in fourth-quarter 2014. Fourth-quarter 2015 results included the FDIC loss-share termination gain.
- Growth and mix: Loans grew $425.3 million, or 19.7%, year over year. Originations totaled $966.9 million, up 11.2%; strategic loans rose 25.9% to $2.468 billion and were 95.4% of total loans. Deposits increased 2.0%. Transaction deposits rose 9.5%, while time deposits declined.
- Credit: Net charge-offs were 0.12% of average loans. Non-performing loans were $25.6 million, or 0.99% of loans, versus $10.8 million and 0.50% a year earlier; the increase primarily reflected two energy-services borrowers. OREO fell to $20.8 million from $29.1 million. The allowance for loan losses rose to $27.1 million from $17.6 million.
- Cash flow and liquidity: Operating cash flow was $(37.7) million, investing cash flow was $182.3 million and financing cash flow was $(235.6) million. Cash and cash equivalents ended at $166.1 million, down from $257.0 million. Reported on-balance-sheet liquidity, including unencumbered securities, was $1.260 billion, down from $1.908 billion, mainly reflecting planned securities runoff and use of liquidity to fund loan growth. Management said available sources were expected to provide adequate liquidity for at least 12 months.
- Funding and debt: Deposits were $3.841 billion. Securities sold under repurchase agreements were $136.5 million and FHLB advances were $40.0 million; the filing reports no other material funded debt. Deposits and client repurchase agreements together represented 97.8% of total liabilities.
- Capital: Consolidated Tier 1 leverage was 11.75%; common equity Tier 1 and Tier 1 risk-based capital ratios were each 17.48%, and total risk-based capital was 18.4%. Tangible common equity to tangible assets was 11.98%, down from 15.25%. NBHC repurchased 8.6 million shares for $175.0 million during 2015.
Material changes, outlook, risks and unusual items
Net interest income declined 7.8%, principally as higher-yielding acquired loans ran off; fully taxable equivalent net interest margin narrowed 25 basis points. The net-income decline also reflected higher loan-loss provision and expenses. Non-interest income improved substantially from 2014, but remained affected by volatile FDIC-related items: the 2015 total included the $4.9 million gain on terminating loss-share agreements, while the agreements’ termination eliminated the related indemnification asset and clawback liability. NBHC paid the FDIC $15.1 million to terminate the agreements in November 2015.
Management reported operating expenses, under its non-GAAP definition and excluding specified items, fell 3.2% excluding Pine River operating costs. The core-system conversion was completed in 2015, with expected annual savings of approximately $4.0 million. Three branches were consolidated during 2015; seven additional Colorado branch consolidations were announced for the second quarter of 2016. The filing provides no specific earnings or revenue guidance. Management emphasized continued organic loan growth, lower funding costs, fee-income initiatives, operating efficiencies and selective acquisitions, while noting that new loan yields may not replace acquired-loan accretion.
- Energy and credit risk: Energy loans were 5.7% of total loans. Two energy-services loans totaling $12.0 million were on non-accrual, with $2.1 million of specific reserves. Management cited prolonged low oil prices as a source of potential further credit stress.
- Acquired-asset earnings: Remaining accretable yield and fair-value marks on acquired loans were $89.2 million, compared with $121.1 million a year earlier. Their runoff could pressure interest income if replaced loan production is insufficient.
- Capital allocation after year-end: In February 2016, the Bank distributed $140 million to the holding company after regulatory approval of a permanent capital reduction. The board also authorized a new $50 million share-repurchase program in January 2016. A $0.05 quarterly dividend was declared.
- Other exposures: $807.2 million of time deposits were scheduled to mature within one year. Loan commitments totaled $627.2 million and standby letters of credit $9.8 million; amounts may not be drawn. Interest-rate models showed asset sensitivity, with projected net interest income increasing 5.81% under an immediate, sustained 200-basis-point rate increase, subject to modeling assumptions.
- Reporting and legal matters: The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective. NBHC reported no legal proceedings expected to have a material adverse effect.
Important facts for investors to verify
- Whether organic loan growth and new-loan yields can offset the continued runoff of high-yield acquired loans and the resulting margin pressure.
- Whether energy-sector weakness, particularly the two non-accrual energy-services credits, leads to additional provisions, charge-offs or reserve needs.
- How the end of FDIC loss sharing affects future earnings and whether reported income comparisons are distorted by termination-related and other FDIC items.
- Whether liquidity remains adequate as time deposits mature, cash balances decline and loan commitments are potentially funded.
- The effects of the $140 million post-year-end Bank capital distribution, share repurchases and dividends on holding-company liquidity, Bank capital and per-share value.