National Bank Holdings Corporation — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Amounts are in millions unless noted. The filing is unaudited.
Business context
NBHC operates NBH Bank through 97 banking centers in Colorado, the greater Kansas City area, and Texas. On August 1, 2015, it acquired Pine River Bank for $9.5 million cash; the acquisition added approximately $64.3 million of loans and $130.1 million of deposits and generated a $1.0 million bargain purchase gain.
Financial performance and condition
- Earnings: Q3 net income was $1.6 million ($0.05 per diluted share), down from $3.3 million ($0.08) a year earlier. Nine-month net income was $1.5 million ($0.04 per diluted share), versus $6.9 million ($0.16). Pretax income was only $0.1 million for Q3 and $0.2 million for nine months; income tax benefits of $1.6 million and $1.3 million, respectively, lifted net income.
- Interest income and margin: Q3 net interest income was $38.7 million, down 7.7% year over year; nine-month net interest income was $117.0 million, down 8.3%. Fully taxable-equivalent net interest margin was 3.54% for Q3 and 3.55% for nine months, versus 3.75% and 3.84% in the comparable 2014 periods. Management cited runoff of higher-yielding acquired loans and increased short-term investments.
- Other income and expenses: Non-interest income was $3.8 million for Q3 and $6.0 million for nine months, including the Pine River bargain gain and variable FDIC-related items. Non-interest expense was $38.7 million and $115.8 million, respectively. The nine-month provision for loan losses rose to $7.0 million from $4.9 million.
- Balance sheet and funding: Assets were $4.79 billion, broadly flat from year-end 2014. Loans rose 16.7% to $2.52 billion, including Pine River; deposits increased 2.9% to $3.87 billion. Transaction deposits increased to 67.6% of deposits from 64.0%. Cash and cash equivalents declined to $153.2 million from $257.0 million.
- Liquidity and cash flow: Reported on-balance-sheet liquidity was $1.44 billion, down from $1.91 billion at year-end, primarily reflecting reduced unencumbered securities. Nine-month operating cash flow was negative $15.2 million, versus positive $14.1 million in 2014; investing cash flow was positive $77.4 million and financing cash flow negative $166.0 million. Management said available sources were expected to fund operations for at least 12 months.
- Borrowings and capital: FHLB advances were $40.0 million; repurchase-agreement liabilities were $169.5 million. The consolidated tier 1 leverage ratio was 11.5%, common equity tier 1 ratio 18.8%, and total risk-based capital ratio 19.6%; the Bank’s ratios also exceeded applicable well-capitalized thresholds.
- Shareholder capital: NBHC repurchased 8.6 million shares for approximately $174.3 million during the nine months. Shareholders’ equity declined to $621.2 million from $794.6 million at year-end, reflecting buybacks and dividends among other changes. A $0.05-per-share quarterly dividend was declared in November.
Material changes and credit quality
- Strategic loans grew $419.1 million, or 28.6% annualized, while non-strategic loans declined $58.4 million. Management reported $728.8 million of loan originations during the nine months.
- Non-performing loans increased to $28.6 million from $10.8 million at year-end; non-performing assets rose to $48.6 million from $40.8 million. The increase included newly impaired commercial relationships and energy-related credits. The allowance for loan losses increased to $23.8 million from $17.6 million.
- Energy loans totaled $147.5 million, or 5.8% of total loans. Management said credit quality in the portfolio had deteriorated and warned that prolonged or further oil and gas price pressure could increase client stress.
- OREO declined to $19.0 million from $29.1 million. The FDIC indemnification asset fell to $18.2 million from $39.1 million, principally as improved expected recoveries on covered assets reduced expected FDIC reimbursements.
Outlook, risks, contingencies, and unusual items
- No specific earnings or growth guidance was provided. Management emphasized continued organic loan growth, low-cost deposit gathering, operating efficiency, and disciplined acquisitions. It noted that replacing acquired-loan yields with new originations may pressure interest income and margin.
- After the quarter, the OCC terminated the Bank’s operating agreement on October 19, 2015. On November 5, the Bank terminated its FDIC loss-share agreements, paying $15.1 million. NBHC expected a one-time after-tax Q4 gain of approximately $2.6 million, or $0.09 per share, from the settlement and elimination of related balances. These are post-quarter events, not Q3 results.
- Other risks include real-estate exposure, competition, interest-rate changes, regulatory and cybersecurity costs, and execution of the core-system conversion. The filing’s modeled immediate rate scenarios estimated net interest income would rise 5.17% with a 200-basis-point increase and fall 1.75% with a 50-basis-point decrease; actual results may differ.
- Unfunded loan commitments totaled $508.2 million, including $8.5 million of standby letters of credit. Management did not expect material losses from these commitments. Management also stated that pending or threatened litigation was not expected to have a material adverse effect; the company disclosed an open IRS examination for tax year 2012.
- The effective tax rate was unusually affected by low pretax income relative to tax-exempt income and other non-taxable items. Management used the discrete interim tax method. The filing also recorded $1.1 million of banking-center closure-related impairment and $0.5 million of Pine River acquisition-related expenses during the nine months.
Most important facts for investors to verify
- Whether rising non-performing and impaired commercial loans, particularly energy exposures, lead to further provisions or charge-offs.
- Whether strategic loan growth and new originations can offset runoff in higher-yielding acquired loans and stabilize net interest margin.
- The final accounting and realized Q4 impact of the FDIC loss-share termination, including the expected $2.6 million after-tax gain.
- Liquidity and deposit retention as time deposits mature, alongside the effects of substantial repurchases and reduced on-balance-sheet liquidity.
- Whether tax benefits, purchase-accounting accretion, and other nonrecurring items obscure underlying operating profitability.