National Bank Holdings Corporation — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Figures are unaudited; dollar amounts are in millions unless stated otherwise. The company is a bank holding company operating NBH Bank, with community banking franchises principally in Colorado and the greater Kansas City area, as well as Texas and Northern California.
Financial performance and position
- Earnings: Q3 net income was $0.9 million, or $0.02 per diluted share, versus a net loss of $7.9 million, or $0.15 per share, in Q3 2012. Nine-month net income was $5.9 million, or $0.11 per diluted share, versus a $3.5 million loss, or $0.07 per share.
- Net interest income and margin: Q3 net interest income was $45.5 million, down $4.0 million year over year; nine-month net interest income was $135.4 million, down $19.3 million. Net interest margin was 3.80% for Q3 and 3.82% for the nine-month period, compared with 3.92% and 3.95%, respectively, in 2012.
- Other income and expenses: Non-interest income was $3.3 million in Q3 and $17.8 million year to date, down from $8.1 million and $28.4 million. Non-interest expense was $46.6 million and $139.7 million, respectively, compared with $60.0 million and $158.2 million. Q3 included $3.4 million in banking-center closure costs.
- Credit costs and quality: Provision for loan losses was $0.4 million in Q3 and $3.5 million year to date, versus $5.3 million and $25.3 million in 2012. The allowance for loan losses was $11.4 million, or 0.66% of loans, versus $15.4 million, or 0.84%, at year-end 2012. Non-performing loans were 2.60% of total loans, up from 2.23%; non-performing assets were 2.27% of assets, down from 2.53%. Net charge-offs were 0.58% annualized for the nine months, compared with 1.26% in 2012.
- Balance sheet and funding: Total assets were $5.16 billion at September 30, down from $5.41 billion at December 31, 2012. Loans were $1.74 billion, down 4.9%; deposits were $3.95 billion, down 5.9%. Transaction deposits rose to 61.2% of deposits from 58.3%, and the company reported no brokered deposits. Cash and cash equivalents were $349.2 million. The filing reports $116.5 million in repurchase-agreement liabilities and $32.0 million due to the FDIC; it does not report conventional long-term debt in the presented balance sheet.
- Liquidity and cash flow: Reported on-balance-sheet liquidity, including pledgeable securities, was $2.74 billion, down from $2.85 billion at year-end. For the first nine months, operating cash flow was negative $38.3 million, investing cash flow negative $166.8 million, and financing cash flow negative $214.9 million; cash and cash equivalents decreased $419.9 million to $349.2 million. Management said available sources were expected to provide adequate liquidity for at least 12 months.
- Capital and equity: At September 30, the consolidated Tier 1 leverage ratio was 18.5%, Tier 1 risk-based capital ratio 48.0%, and total risk-based capital ratio 48.6%. Total stockholders’ equity was $1.03 billion, down from $1.09 billion, including a $40.7 million nine-month decline in other comprehensive income, mainly reflecting unrealized securities losses. Tangible common book value was $18.60 per share.
Material changes and management commentary
- Management attributed lower net interest income primarily to the runoff of acquired, non-strategic loans and lower yields on investments and originated loans. Reduced funding costs partially offset this: nine-month deposit cost fell to 0.42% from 0.69%.
- Strategic loans grew $207.5 million, or 24.7% annualized, from year-end; originations totaled $469.8 million for the nine months, up 59.5% year over year. Total loans nevertheless declined as non-strategic loans decreased $297.4 million through repayment and workout activity.
- The share of loans covered by FDIC loss-sharing agreements declined to 21.0% from 33.2%. The FDIC indemnification asset fell to $58.1 million from $86.9 million, including $11.8 million of negative accretion and $24.5 million of claims submitted; the company received $77.0 million in FDIC payments during the nine months. Claims remain subject to FDIC review and audit.
- OREO declined to $70.8 million from $94.8 million. The company sold $54.7 million of OREO and recorded $9.1 million of impairments during the nine months.
- The company placed a covered $16.9 million acquired commercial loan pool on non-accrual after determining its cash flows were no longer reasonably estimable. Related accretable yield is not being recognized in income unless the carrying value is fully recovered.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Management expected downward pressure on interest income as acquired high-yielding loans run off unless replaced by comparable-yielding assets. It also cited low rates, competition for loans, guarded economic conditions, and uncertainty around commercial real estate recovery.
- On September 30, the company announced plans to integrate 32 limited-service retirement-center locations and close four Northern California banking centers by year-end. It recorded $3.4 million of related costs and expected approximately $2.4 million in annualized expense savings; management reported no additional material charges or future cash expenditures expected at that time.
- After quarter-end, the bank received OCC approval to reduce capital by $313 million and paid that amount as a dividend to the holding company. The company then repurchased approximately 5.77 million shares for about $115.4 million in November, and authorized a new $35 million repurchase program. The board also declared a $0.05-per-share quarterly dividend payable in December.
- Interest-rate risk modeling showed the company was asset-sensitive: projected net interest income increased 5.32% under an immediate 200-basis-point rate increase and decreased 0.92% under a 50-basis-point decrease. Management cautioned that actual outcomes could differ materially from model estimates.
- Key risks include credit deterioration, loan and deposit growth, rate and liquidity risk, FDIC claim outcomes and clawback obligations, regulatory and capital requirements, and the ability to execute acquisitions and integrate operations. Management reported effective disclosure controls, no material change in internal controls during the quarter, and no litigation expected to have a material adverse effect.
Most important facts for investors to verify
- Whether strategic loan growth and new originations can replace acquired-loan runoff without weakening underwriting or yields.
- Trends in non-performing loans, the $16.9 million non-accrual pool, allowance adequacy, and OREO valuation and sales.
- FDIC reimbursement approvals, remaining loss-share exposure, the indemnification asset, and the $32.0 million clawback liability.
- Whether maturing time deposits—$1.1 billion within 12 months—are retained or replaced at acceptable cost, and whether liquidity remains adequate after capital distributions and repurchases.
- The effect of higher interest rates on securities values and net interest income, given the mortgage-heavy investment portfolio and model assumptions.
- The execution and realized savings from banking-center closures, and the capital impact of the $313 million bank dividend and subsequent share repurchases.