National Bank Holdings Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited consolidated results. Comparisons below are with Q1 2014 unless otherwise noted. NBHC operates NBH Bank through 97 banking centers in Colorado, the greater Kansas City area and Texas, as well as online and mobile channels.
Financial performance and position
- Profitability: Net income was $1.246 million, or $0.03 per diluted share, versus $1.431 million, or $0.03 per diluted share. Pretax income was $0.823 million versus $2.206 million; Q1 2015 included a $0.423 million income tax benefit, compared with $0.775 million tax expense in Q1 2014.
- Interest income and margins: Net interest income before provision declined 8.9% to $39.5 million. Net interest margin was 3.55% (3.59% fully taxable equivalent, or FTE), down from 3.93% (3.94% FTE). Management attributed the decline mainly to runoff of higher-yielding acquired loans and increased lower-yielding short-term investments. Average loan yield fell to 6.01% from 7.11%.
- Credit costs and asset quality: Provision for loan losses was $1.453 million, down from $1.769 million. Net charge-offs were 0.04% annualized of average loans versus 0.07%. The allowance for loan losses was $18.9 million, or 0.85% of loans, compared with $17.6 million, or 0.81%, at year-end. Non-performing loans were 0.51% of total loans; non-performing assets were 0.71% of total assets, down from 0.85% at year-end.
- Non-interest items and costs: Non-interest income was negative $0.5 million, largely reflecting $7.7 million of non-cash FDIC indemnification asset amortization and $0.8 million of FDIC loss-sharing expense. Non-interest expense fell 5.9% to $36.7 million. Management reported operating expenses, excluding specified workout, warrant and conversion items, down 3.3% year over year.
- Balance sheet: Total assets were $4.991 billion at March 31, up 3.6% from December 31, 2014. Loans were $2.216 billion, up $53.9 million; deposits were $3.832 billion, up $66.3 million. Shareholders’ equity was $762.7 million, down from $794.6 million at year-end, including the effect of share repurchases and other equity movements.
- Funding and liquidity: Cash and cash equivalents were $490.1 million, versus $257.0 million at year-end. Reported on-balance-sheet liquidity, including unencumbered securities, was $1.868 billion versus $1.908 billion. Repurchase-agreement liabilities increased to $284.2 million from $133.6 million; FHLB advances remained $40.0 million. The company reported no brokered deposits. Management stated that available liquidity sources were expected to be adequate for at least 12 months.
- Cash flows: Operating activities used $14.4 million, compared with $15.5 million used in Q1 2014; investing activities provided $70.7 million versus $15.8 million; financing activities provided $176.9 million versus $8.0 million. Cash and cash equivalents increased $233.1 million during the quarter, with financing inflows including increased repurchase agreements and deposits.
- Capital: At March 31, consolidated tier 1 leverage was 14.1%, and common equity tier 1 and tier 1 risk-based ratios were each 26.3%; the Bank’s ratios also exceeded stated well-capitalized thresholds and its higher OCC agreement requirements. The Bank received OCC approval to reduce capital by $50 million and paid that dividend to the holding company during Q1.
Material changes and operating developments
- Strategic loans grew $77.1 million from year-end, an annualized 15.9%; total loan growth was partly offset by a $23.2 million reduction in the non-strategic portfolio. Q1 originations were $203.7 million.
- Transaction deposits rose to 65.4% of deposits from 64.0% at year-end. Non-interest-bearing demand deposits increased, while time deposits declined.
- OREO fell to $23.4 million from $29.1 million at year-end, including $7.2 million of sales. The FDIC indemnification asset declined to $27.9 million from $39.1 million, primarily due to amortization associated with improved expected cash flows from covered assets.
- On February 11, the board authorized a new share repurchase program of up to $50 million. NBHC repurchased 2.087 million shares in Q1; the filing gives a weighted-average price of $18.03 in its narrative but $18.22 in the Part II repurchase table. The company also reported further repurchases after quarter-end through May 7.
Outlook, management commentary and risks
- The filing provides no specific earnings or revenue guidance. Management emphasized continued organic loan and deposit growth, expense control, resolution of acquired non-strategic assets and disciplined acquisition opportunities.
- Management expects pressure on loan yields as higher-yielding acquired loans run off; Q1 originated-loan yield was 3.43%, below the 2014 average portfolio yield of 6.60%. Continued margin performance depends on replacing runoff with sufficient volumes of high-quality originated loans.
- Energy-related loans were $149.6 million, or 6.8% of total loans. Management noted that sustained or further declines in oil and gas prices could stress borrowers and credit quality, while citing conservative structures, borrower liquidity and ongoing reviews as mitigants.
- Real-estate collateral exposure, competition, low interest rates, regulatory and capital requirements, cybersecurity, and the execution of growth and acquisition plans remain risks. Interest-rate modeling indicated asset sensitivity: an immediate sustained 200-basis-point increase was estimated to raise projected net interest income by 6.63%, while a 50-basis-point decrease was estimated to reduce it by 1.44%; actual outcomes may differ materially.
- FDIC loss-sharing agreements create variable income and reimbursement timing. The Hillcrest agreement covers losses through Q4 2015 and the Community Banks of Colorado agreement through Q4 2016; FDIC claims are subject to review and audit. A $37.8 million clawback liability was recorded at quarter-end.
- Management reported no litigation expected to have a material adverse effect and no material change to the risk factors in the 2014 Form 10-K. Disclosure controls were considered effective as of March 31, 2015.
Important facts for investors to verify
- Reconcile the reported Q1 repurchase average price: $18.03 in the narrative versus $18.22 in the repurchase table; confirm final shares and amounts bought back, including post-quarter activity.
- Track net interest margin, loan yields and the pace at which originated strategic lending replaces runoff of acquired higher-yield loans.
- Monitor energy borrower performance, criticized and non-performing loans, the allowance, and collateral values, particularly in real estate.
- Review the remaining FDIC loss-sharing periods, claims and audits, indemnification asset amortization, and potential clawback payments.
- Assess liquidity and funding mix as repurchase agreements rise and approximately $0.9 billion of time deposits are scheduled to mature within 12 months.
- Consider capital and tangible book value effects of buybacks, dividends and the $50 million Bank-to-parent dividend; reported tangible common book value was $18.86 per share.