National Bank Holdings Corporation — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; comparisons are primarily with fiscal 2015. Amounts are U.S. dollars. The filing describes a regional community bank operating through NBH Bank, with 91 banking centers in Colorado, the greater Kansas City area and Texas.
Key financial results and position
| Metric | 2016 | 2015 | Change / context |
|---|---|---|---|
| Total assets | $4.57 billion | $4.68 billion | Down 2.4% |
| Loans | $2.86 billion | $2.59 billion | Up 10.6%; originated loans grew 17.8% |
| Deposits | $3.87 billion | $3.84 billion | Up 0.7%; transaction deposits were 69.7% of deposits |
| Shareholders’ equity | $536.2 million | $617.5 million | Down $81.4 million, reflecting substantial share repurchases |
| Net interest income | $145.6 million | $156.9 million | Down 7.2%; fully taxable equivalent (FTE) amount was $149.7 million, down 6.2% |
| Net interest margin | 3.39% | 3.54% | FTE margin was 3.49%, versus 3.60% |
| Provision for loan losses | $23.7 million | $12.4 million | Increase driven principally by energy-sector reserves |
| Non-interest income | $40.0 million | $21.4 million | 2015 included negative FDIC-related income; excluding specified FDIC and bargain-purchase items, 2016 increased $4.1 million, or 11.3% |
| Non-interest expense | $136.0 million | $158.0 million | Down 13.9% |
| Net income | $23.1 million | $4.9 million | Diluted EPS was $0.79 versus $0.14 |
| Operating cash flow | $(3.9) million | $(37.6) million | Cash and cash equivalents ended the year at $152.7 million |
Profitability, credit and capital
- Return on average assets was 0.50%, up from 0.10%; return on average equity was 3.95%, up from 0.70%. The non-GAAP return on average tangible common equity was 5.04%, versus 1.29%.
- Net charge-offs were $21.6 million, or 0.80% of average loans; $19.1 million were energy-sector charge-offs. Excluding energy, non-310-30 net charge-offs were 0.10% of average loans, versus 0.12% in 2015.
- Non-performing loans were $30.7 million, up from $25.6 million; non-performing assets were $46.4 million, down from $47.4 million. The allowance for loan losses was $29.2 million, or 1.02% of loans, compared with $27.1 million, or 1.05%.
- Energy loans represented 3.2% of total loans. The company recorded $18.9 million of energy-sector provision expense and reported $12.6 million of non-accrual energy loans at year-end.
- Consolidated regulatory capital ratios were 10.4% Tier 1 leverage, 14.2% common equity Tier 1 and Tier 1 risk-based capital, and 15.0% total risk-based capital. The Bank was above well-capitalized regulatory thresholds.
Material changes versus 2015
- Loan growth and originations were strong: total loans rose 10.6%, and the company reported record 2016 originations of $1.04 billion. Meanwhile, the acquired, higher-yielding ASC 310-30 loan portfolio declined 28.1% to $145.9 million.
- Runoff of higher-yielding acquired loans and investment securities, together with lower yields on new loans, reduced FTE net interest income by $9.9 million and narrowed FTE net interest margin by 11 basis points.
- Provision expense rose $11.2 million, primarily reflecting energy-sector credit deterioration. Energy balances fell 38.5% year over year, partly through charge-offs and repayments.
- Expenses declined $22.0 million. Management cited lower data-processing costs following the core system conversion, lower staffing and other expense reductions, and improved problem-asset workout costs.
- Share repurchases totaled 4.50 million shares for $93.6 million, at a weighted-average price of $20.78. Dividends paid were $0.22 per share; the quarterly dividend increased to $0.07 during 2016.
- The company’s loss-share agreements with the FDIC had ended in the fourth quarter of 2015; accordingly, FDIC-related income was zero in 2016, compared with negative $15.6 million in 2015.
Liquidity, funding and other notable items
- On-balance-sheet liquidity, defined by the company as cash and unencumbered investment securities, was $995.8 million at year-end, down from $1.26 billion. Management attributed the decline largely to planned securities reductions used to support loan growth.
- Funding included $3.87 billion of deposits, $92.0 million of repurchase agreements and $38.7 million of Federal Home Loan Bank advances. Reported FHLB advances and lines of credit available totaled $903.9 million, of which $38.7 million was used.
- Time deposits of $788.8 million were scheduled to mature within 12 months. Total contractual cash obligations were $1.25 billion, primarily time deposits.
- Net cash used in investing activities was $3.9 million? The cash-flow statement reports net cash used in operating activities of $3.9 million, $114.6 million provided by investing activities and $124.0 million used in financing activities. Net cash decreased $13.4 million.
- The Bank distributed $140.0 million of capital to the holding company in February 2016, following regulatory approval. The company also received $15.4 million in Bank dividends during 2016.
- Four banking-center sale agreements were expected to close in the second quarter of 2017; management estimated a $3.0 million gain. One additional Colorado banking center was to be consolidated in the first quarter of 2017.
- Income tax expense was $2.9 million, reflecting a reported effective tax rate of 11.3%. Adoption of ASU 2016-09 generated a $2.1 million excess tax benefit. A $1.8 million building-sale gain also contributed to 2016 non-interest income.
Outlook, risks and contingencies
The filing gives no quantified earnings or financial guidance. Management emphasized continued organic loan and deposit growth, expense discipline, relationship banking, fee-income initiatives and selective acquisitions. It noted that replacing the higher yields from acquired loans as they run off depends on producing sufficient volumes of high-quality originated loans; the weighted-average rate on 2016 originations was 3.70% FTE.
- Management described economic improvement and stronger real-estate fundamentals in its markets with guarded optimism. It warned that further weakness in property values or borrower credit quality could affect its real-estate-secured portfolio.
- Prolonged low oil and gas prices could cause further stress in energy lending; the filing reports energy exposure, non-accrual relationships and substantial 2016 energy charge-offs and provisions.
- Other principal risks include interest-rate and margin sensitivity, competition for loans and deposits, liquidity and deposit-retention risk, acquisition execution and integration, regulatory and compliance costs, cybersecurity and third-party technology dependence, and the subjectivity of acquired-loan cash-flow estimates and allowance assessments.
- The company’s interest-rate model indicated asset sensitivity: an immediate, sustained 100-basis-point increase was estimated to raise projected net interest income 3.66%; a 50-basis-point decrease was estimated to reduce it 2.49%. Management cautioned that actual results may differ materially from model estimates.
- Loan commitments totaled $602.2 million and standby letters of credit $13.5 million. Management did not anticipate material losses from these commitments. The company reported no litigation expected to have a material adverse effect.
- KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting; management also concluded disclosure controls and internal controls were effective at year-end.
Important facts for investors to verify
- Whether ongoing loan growth and new-loan yields can offset runoff of the acquired high-yield loan portfolio and the resulting pressure on net interest income and margin.
- Subsequent credit performance in energy and other commercial lending, including charge-offs, criticized loans, non-accruals, provision expense and allowance adequacy.
- Deposit retention and repricing as $788.8 million of time deposits mature within 12 months, and the availability and cost of contingent funding.
- How much of 2016 earnings depended on nonrecurring or timing-sensitive items, including the stock-compensation tax benefit and building-sale gain.
- Completion and realized economics of the planned banking-center sales, and the effects of capital distributions and continuing share repurchases on capital and per-share value.
- Regulatory capital levels, interest-rate sensitivity assumptions, and the eventual impact of the expected credit-loss accounting standard.