National Bank Holdings Corporation — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. This is an annual report, not a standalone fourth-quarter filing. NBHC is a bank holding company operating primarily through NBH Bank, N.A., with 97 banking centers, mainly in Colorado and the greater Kansas City area.
Financial results and position
| Metric | 2013 | 2012 |
|---|---|---|
| Interest income | $195.5 million | $233.5 million |
| Net interest income | $179.0 million | $204.3 million |
| Net interest margin | 3.81% | 3.98% |
| Provision for loan losses | $4.3 million | $28.0 million |
| Non-interest income | $20.2 million | $37.4 million |
| Non-interest expense | $184.0 million | $209.6 million |
| Net income (loss) | $6.9 million | ($0.5 million) |
| Diluted earnings per share | $0.14 | ($0.01) |
- Balance sheet at year-end: Assets were $4.91 billion, loans $1.85 billion, deposits $3.84 billion and shareholders’ equity $897.8 million. Loans were 48.46% of deposits.
- Cash flow: Operating activities used $25.6 million; investing activities used $80.5 million; financing activities used $473.7 million. Cash and cash equivalents fell $579.7 million to $189.5 million.
- Liquidity and funding: Reported on-balance-sheet liquidity was $2.37 billion, including pledgeable investment securities. Deposits and client repurchase agreements represented 98% of liabilities; there were no brokered deposits. Repurchase agreement liabilities were $99.5 million. The contractual-obligations table reports no long-term debt.
- Capital: Consolidated tier 1 leverage and tier 1 risk-based ratios were 16.6% and 38.9%, respectively; NBH Bank’s were 11.3% and 26.6%. The bank remained subject to OCC agreement capital floors of 10% leverage, 11% tier 1 risk-based and 12% total risk-based capital.
- Returns and margins: Return on average assets was 0.13%; efficiency ratio was 89.70%. Deposit cost declined to 0.41%, while loan yield fell to 7.92% from 8.37%.
Changes versus prior period and fourth-quarter detail
- Net income improved from a small 2012 loss, principally as loan-loss provision declined by $23.7 million and total non-interest expense fell by $25.6 million. Net interest income declined $25.3 million, and non-interest income declined $17.2 million.
- Loan balances increased 1.2% year over year to $1.85 billion. Strategic loans grew 34.0% to $1.50 billion, while non-strategic acquired loans fell $360.6 million. Originations were $714.0 million, up 64.4%.
- Credit indicators improved: non-performing loans were 1.95% of total loans versus 2.23%; non-performing assets were 2.18% of assets versus 2.53%; and net charge-offs were 0.41% of average loans versus 1.20%.
- Deposits declined $362.4 million, including a $257.0 million reduction in time deposits. Transaction deposits rose to 61.0% of deposits from 58.3%.
- Assets declined $496.7 million, partly reflecting deposit runoff, investment purchases and $146.7 million of share repurchases. Equity fell $192.8 million, also affected by $47.3 million of after-tax other comprehensive loss from securities valuation changes.
- Fourth quarter: Net income was $1.0 million, or $0.02 per diluted share, compared with $3.0 million, or $0.06, in fourth-quarter 2012. Net interest income was $43.6 million versus $49.6 million.
Outlook, commentary, risks and unusual items
- Management cited the third quarter as the loan-balance inflection point when originations began outpacing acquired-loan workouts. It reported a modestly improving economy but continuing uncertainty and intense competition for loans.
- No formal earnings or growth guidance is provided. Management expected available liquidity sources to fund operations for at least 12 months and anticipated replacing a significant portion of the $1.0 billion of time deposits maturing within 12 months with transaction and market-rate deposits.
- Management warned that acquired loans generally earned higher yields through purchase-accounting accretion; their runoff may pressure interest income unless replaced with comparable-yielding loans. It also expects FDIC-related income to decline over time as covered assets are resolved.
- FDIC loss-sharing agreements covered $309.4 million, or 16.7%, of loans and $38.8 million, or 55.4%, of OREO at year-end. The company reported $44.7 million of projected future FDIC loss-share billings and a $32.5 million clawback liability. Reimbursements are subject to agreement terms, documentation and FDIC review.
- One covered acquired commercial and industrial loan pool of $14.8 million was placed on non-accrual during 2013. Overall, management reported better credit quality and lower workout expenses, but real-estate collateral values and allowance estimates remain significant risks.
- NBHC repurchased 7.42 million shares for $146.7 million at an average $19.77 per share, reducing shares outstanding by 14.2%. A new authorization allows up to $50 million of repurchases through December 31, 2014. The quarterly dividend was $0.05 per share; bank dividends to the holding company remain subject to OCC non-objection.
- Branch rationalization closed four California banking centers and 32 retirement-center locations at year-end. NBHC recorded $3.4 million in closure expenses and anticipated approximately $2.4 million in expense savings.
- The 2013 results include material estimates for acquired-loan cash flows, FDIC indemnification and loss sharing, loan allowances, OREO and fair values. Rising rates reduced the available-for-sale portfolio to a $30.7 million net unrealized loss; management said it did not consider the losses other-than-temporary.
- Management reported compliance with material OCC and FDIC order terms. The auditor issued unqualified opinions on the financial statements and internal controls; management also concluded controls were effective. The filing reports no legal proceedings expected to have a material adverse effect.
Important facts for investors to verify
- Whether strategic loan growth can offset the runoff of acquired, higher-yielding loans without weakening underwriting or margins.
- The quality and realizability of acquired-loan cash-flow estimates, the $12.5 million allowance, and the reported improvement in non-performing assets.
- FDIC reimbursement eligibility, timing and remaining coverage, including the projected billings and clawback liability.
- Deposit retention and repricing as $1.0 billion of time deposits mature, and whether liquidity remains adequate as cash balances decline.
- Effects of securities valuation and interest-rate changes on earnings, capital and book value; and the regulatory conditions governing dividends and further repurchases.
- Whether branch-closure savings materialize and whether the company can sustain expense reductions while expanding its lending and specialty-banking businesses.