National Bank Holdings Corporation Announces First Quarter 2013 Financial Results
GREENWOOD VILLAGE, Colo.--(BUSINESS WIRE)-- National Bank Holdings Corporation (NYS: NBHC) reported net income of $2.1 million, or $0.04 per diluted share, for the first quarter of 2013 compared to the fourth quarter of 2012 net income of $3.0 million, or $0.06 per diluted share, and the first quarter of 2012 net income of $1.6 million, or $0.03 per diluted share.
In announcing these results, President and Chief Executive Officer Tim Laney said, "We continued to realize solid organic growth during the quarter and we believe our prospects for attractive M&A in our target markets remain strong. We grew our strategic loan portfolio while maintaining prudent underwriting standards - standards that we are benefiting from as our portfolio becomes more seasoned. While FDIC resolution activity has been slow, we have been actively engaged in open bank, branch purchase and complimentary specialty business acquisition opportunities."
First Quarter 2013 Highlights
Grew the strategic loan portfolio by 11.4% annualized.
Successfully exited $98.7 million, or 56.3% annualized, of the non-strategic loan portfolio.
Grew average transaction account deposit balances 4.8% annualized, driving a 3 basis point improvement in total cost of deposits.
Added $14.9 million to accretable yield for the acquired loans accounted for under ASC 310-30, partially offset by $0.3 million in impairments.
Credit quality continued to improve, with non-performing loans to total loans improving to 2.08% at March 31, 2013 from 2.23% at December 31, 2012.
Net charge-offs on non 310-30 loans were 0.44% annualized.
Net interest margin was 3.88% during the first quarter, driven by the attractive yields on loans accounted for under ASC 310-30 and lower cost of deposits.
Costs before problem loan/OREO workout expenses were flat for the third consecutive quarter, adjusting for the third quarter IPO expenses.
Problem loan/OREO workout expenses totaled $7.1 million, decreasing $2.9 million from the prior quarter.
Tangible book value per share was $19.13 before consideration of the excess accretable yield value of $0.52 per share.
Approximately $400 million in excess strategic capital (above 10% Tier 1 Leverage), which positions us for future growth opportunities.
First Quarter 2013 Results
(All comparisons refer to the fourth quarter of 2012, except as noted)
Net Interest Income
Net interest income totaled $45.6 million for the first quarter of 2013, and declined $4.0 million compared to the prior quarter. The linked quarter decline was largely due to decreased average balances on loans accounted for under ASC 310-30 (acquired loan pools) as we continue to actively exit the non-strategic loan portfolio, however, the yields on these loans continued to increase as a result of the additional transfers to accretable yield in recent quarters. Additionally, lower yields earned on non 310-30 loans contributed to the decline in net interest income as loans originated during the current low interest rate environment continue to make up a larger portion of the loan portfolio and the accretion of the fair market value discounts continues to moderately decrease. The first quarter yield earned on interest earning assets narrowed by 24 basis points, slightly offset by a 4 basis point decline in the cost of interest bearing liabilities, resulting in the first quarter net interest margin narrowing by 21 basis points to 3.88%.
Strategic loans increased $31.4 million, or 11.4% annualized, over the prior quarter to $1.2 billion at March 31, 2013. Loan originations of $109.4 million were down slightly from the prior quarter, largely due to seasonality and market trends. Strategic loans include all originated loans in addition to those acquired loans inside our operating markets that meet our credit risk profile. Criteria utilized in the designation of an acquired loan as "strategic" include (a) geography, (b) total relationship with borrower and (c) credit metrics commensurate with our current underwriting standards.
"We continued our expansion and development of quality relationships with individuals and small to mid-sized businesses and we continue to expand our strategic loan portfolio, increasing loan originations 32.7% over the same quarter a year ago. We have done this while maintaining strong credit quality standards in our strategic portfolio, where just 0.6% of these loans are considered non-performing," said Mr. Laney.
In conjunction with the strategy of exiting the non-strategic loan portfolio, total loans decreased $67.3 million, or 14.9% annualized, from the prior quarter, ending the first quarter of 2013 at $1.8 billion. Balances of non-strategic relationships declined $98.7 million during the first quarter, or 56.3% annualized, as adversely rated and other non-strategic relationships paid off or paid down.
Asset Quality and Provision for Loan Losses
"Our balance sheet profile continues to be low risk," said Chief Financial Officer Brian Lilly. "Our risk weighted assets to total assets ratio of 35% is one of the lowest in the industry, largely because 30% of our loans and 55% of our OREO are covered by FDIC loss-share agreements, coupled with our low-risk rated investment portfolio, and 61% of our loan portfolio carries acquisition discounts. Additionally, 41% of our loans are accounted for in acquired loan pools, which require quarterly valuation updates."
Loans accounted for under ASC 310-30 totaled $730.2 million at March 31, 2013 and decreased $91.8 million during the first quarter, an annualized decrease of 45.3%, as workout efforts on these purchased loans continued. The quarterly fair value re-measurement on the acquired loan pools resulted in a favorable net transfer of $14.9 million from non-accretable to accretable yield while recording just $0.3 million of impairment through the provision for credit losses thereby increasing the economic value of the acquired loan pools by an additional $14.6 million for the quarter and $83.6 million on a life-to-date basis at March 31, 2013. The increase in accretable yield will be recognized over the remaining life of these loan pools.
The non 310-30 loans totaled $1.0 billion, or 58.6% of total loans, at March 31, 2013. These loans are primarily comprised of originated loans and acquired loans not accounted for under the ASC 310-30 acquired loan pool accounting. Net annualized charge-offs for non 310-30 loans moderated to 44 basis points during the first quarter of 2013. Improvements in credit quality trends were seen in both past due and non-performing loans during the quarter and resulted in a provision for loan losses on the non 310-30 loans of $1.1 million and a non 310-30 allowance for loan losses to total non 310-30 loans ratio of 1.04% as of March 31, 2013. Other real estate owned ended the quarter at $83.3 million and decreased $11.5 million during the quarter primarily due to sales of $25.7 million offset with transfers from the loan portfolio of $17.0 million.
Transaction deposits (defined as total deposits less time deposits) averaged $2.4 billion during the first quarter, increasing $27.8 million, or 4.8% annualized. We continued to focus our deposit base on clients who were interested in market rate time deposits and developing a banking relationship. As a result, average time deposits decreased $134.0 million during the first quarter and the mix of transaction deposits to total deposits improved to 59.2% from 58.3% at the end of the prior quarter. The cost of deposits improved 3 basis points to 0.45% in the first quarter from 0.48% during the prior quarter. The balance sheet continues to be funded by client deposits and repurchase agreements, and at March 31, 2013, these client fundings comprised 98.6% of total liabilities.
Banking related non-interest income (excludes FDIC-related income) totaled $8.5 million during the first quarter of 2013 and decreased $2.3 million compared to the prior quarter, which was driven by a $1.2 million decrease in gains on recoveries of previously charged-off acquired loans and a $0.5 million decrease in service charges. The decline in service charges was largely due to a seasonal decline in NSF and overdraft fees coupled with the implementation of overdraft credit loss-mitigation strategies. FDIC-related income increased $0.5 million as a result of the quarterly activity in covered assets.
Non-interest expense totaled $47.9 million during the first quarter of 2013, a decrease of $3.5 million from the previous quarter. The decrease in non-interest expense during the quarter was largely due to elevated OREO expenses in the fourth quarter. Excluding problem loan/OREO workout expenses, non-interest expense declined $0.5 million from the prior quarter. The OREO and problem loan expenses are expected to continue to fluctuate quarterly as we resolve the acquired problem asset portfolio. Salaries and employee benefits increased $1.1 million compared to the prior quarter, which was largely driven by reduced incentive-based compensation expense recorded during the fourth quarter.
Capital ratios continue to be strong and well in excess of federal bank regulatory agency "well capitalized" thresholds. Shareholders' equity totaled $1.1 billion at March 31, 2013 and decreased $3.8 million during the first quarter, largely due to a $4.4 million decrease in accumulated other comprehensive income, net of tax, which was driven by the fair market value fluctuations of the available-for-sale investment securities portfolio. Tangible book value per share decreased to $19.13 at March 31, 2013 from $19.17 at December 31, 2012, driven by the decrease in accumulated other comprehensive income. The tangible common equity to tangible assets ratio increased 50 basis points during the quarter and ended at 19.35%. This increase was driven by lower total assets at March 31, 2013.
A common convention in the industry is to add the value of the accretable yield to the tangible book value per share. The value of the March 31, 2013 accretable yield balance on the ASC 310-30 loans of $127.2 million would add $1.47 after-tax to the tangible book value per share. A more conservative methodology, that management uses, values the excess yield and then considers the timing of the accreted interest income recognition. Under this more conservative methodology, we first net the accretable yield on ASC 310-30 loans and the accretable yield on the FDIC indemnification asset and then calculate the excess of a 4.5% yield (an approximate yield on new loan originations), and finally discount the amounts at 5%. The result would add $0.52 after-tax to our tangible book value per share as of March 31, 2013.
(All comparisons refer to the first quarter of 2012, except as noted)
Net income for the first quarter of 2013 was $2.1 million, or $0.04 per diluted share, compared to $1.6 million for the first quarter of 2012, or $0.03 per diluted share. Net interest income declined $7.7 million, which resulted from the lower loan balances of ASC 310-30 loans as non-strategic loans were paid off or paid down, coupled with lower yields earned on the investment portfolio and on the non 310-30 loan portfolio. Loan originations increased 32.7% to $109.4 million from $82.4 million in the same quarter of the prior year. Average balances of interest earning liabilities declined $815.4 million, driven by an $881.3 million decline in average time deposits as we focused our deposit base on clients who were interested in market rate time deposits and developing a banking relationship.
Provision for loan loss expense was $1.4 million during the first quarter of 2013, compared to $7.8 million during the first quarter of 2012, a decrease of $6.4 million. The decrease in provision was due to lower impairment charges on the ASC 310-30 loan pools coupled with reduced net charge-offs in the non 310-30 portfolio. Non-interest income was $7.2 million in the first quarter of 2013 compared to $10.3 million during the same period in 2012, a decline of $3.1 million, which was largely due to a $1.4 million decline in FDIC-related income coupled with a $1.1 million decline in gain on previously charged-off acquired loans.
Non-interest expense totaled $47.9 million in the first quarter of 2013 compared to $53.0 million during the first quarter of 2012, a decline of $5.1 million. The decline in non-interest expense was primarily due to lower OREO expenses of $3.9 million, coupled with a $1.3 million decrease in professional fees, and a $1.4 million valuation decrease in the warrant liability. These decreases were partially offset by a $1.4 million increase in occupancy and equipment expense, which was largely due to the additional depreciation of the premises and equipment purchased in the Bank of Choice and Community Banks of Colorado acquisitions.
Management will host a conference call to review the results at 11:00 a.m. Eastern Time on Tuesday, April 30, 2013. Interested parties may listen to this call by dialing (877) 272-6762 (United States)/ (615) 800-6832 (International) using the Conference ID of 33675559 and ask for the National Bank Holdings Corporation First Quarter Earnings conference call. A telephonic replay of the call will be available beginning approximately two hours after the call's completion through May 14, 2013, by dialing (855) 859-2056 (United States)/ (404) 537-3406 (International) using the Conference ID of 33675559. The earnings release and an on-line replay of the call will also be available on the Company's website at www.nationalbankholdings.com by visiting the investor relations area.
About Non-GAAP Financial Measures
Certain of the financial measures and ratios we present, including "tangible assets," "return on average tangible assets," "return on average tangible equity," "tangible book value," "tangible book value per share," and "tangible common equity," are supplemental measures that are not required by, or are not presented in accordance with, accounting principles generally accepted in the United States, or "non-GAAP financial measures." We consider the use of select non-GAAP financial measures and ratios to be useful for financial and operational decision making and useful in evaluating period-to-period comparisons. We believe that these non-GAAP financial measures provide meaningful supplemental information regarding our performance by excluding certain expenditures or assets that we believe are not indicative of our primary business operating results. We believe that management and investors benefit from referring to these non-GAAP financial measures in assessing our performance and when planning, forecasting, analyzing and comparing past, present and future periods.
We believe that these measures provide useful information to management and investors that is supplementary to our financial condition, results of operations and cash flows computed in accordance with GAAP; however we acknowledge that our non-GAAP financial measures have a number of limitations relative to GAAP financial measures. The items that we exclude in our adjustments are not necessarily consistent with the items that our peers may exclude from their results of operations and key financial measures and therefore may limit the comparability of similarly named financial measures and ratios. We compensate for these limitations by providing the equivalent GAAP measures whenever we present the non-GAAP financial measures and by including a reconciliation of the impact of the components adjusted for in the non-GAAP financial measure so that both measures and the individual components may be considered when analyzing our performance.
A reconciliation of our non-GAAP financial measures to the comparable GAAP financial measures is included at the end of the financial statement tables.
About National Bank Holdings Corporation
National Bank Holdings Corporation is a bank holding company created to build a leading community bank franchise delivering high quality customer service and committed to shareholder results. National Bank Holdings Corporation currently operates a network of 101 full-service banking centers, with the majority of those banking centers located in Colorado and the greater Kansas City region. Through the Company's subsidiary, NBH Bank, N.A., it operates under the following brand names: Bank Midwest in Kansas and Missouri, Community Banks of Colorado in Colorado and California and Hillcrest Bank in Texas.
Forward Looking Statements
This press release contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements contain words such as "believes," "expects," "may," "should," "will," "seeks," "approximately," "intends," "plans," "estimates," "targets" or "anticipates" or similar expressions that relate to the Company's strategy, plans or intentions. Forward-looking statements are statements about future, not past, events and involve certain important risks and uncertainties, any of which could cause the Company's actual results to differ materially from those expressed in forward-looking statements, including, without limitation, the factors more fully described under the caption "Risk Factors" in our Form 10-K that we filed with the Securities and Exchange Commission and: (1) changes in business and economic conditions generally and in the financial services industry; (2) changes in the laws, regulations and the regulatory environment; (3) the Company's ability to identify potential candidates for, consummate, integrate and realize operating efficiencies from, acquisitions of banking franchises on attractive terms, or at all; (4) the Company's ability to achieve organic loan and deposit growth and the composition of such growth; (5) a weakening of the economy which could materially impact credit quality trends and local real estate values; and (6) increased competition in the financial services industry, nationally, regionally or locally. Except as required by law, the Company undertakes no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made and which reflect management's estimates, expectations or beliefs as of such time. For a discussion of additional risks and uncertainties that may affect the future results of the Company, please see the Company's filings with the Securities and Exchange Commission.
NATIONAL BANK HOLDINGS CORPORATION
Consolidated Statements of Operations (Unaudited)
(In thousands, except share and per share data)
For the three months ended
Total interest and dividend income
Total interest expense
Net interest income before provision for loan losses
Provision for loan losses on 310-30 loans
Provision for loan losses on non 310-30 loans
Net interest income after provision for loan losses
FDIC indemnification asset accretion
Other FDIC loss-sharing income
Bank card fees
Gain on sale of mortgages, net
Gain on sale of securities, net
Gain on recoveries of previously charged-off acquired loans
Other non-interest income
Total non-interest income
Salaries and employee benefits
Occupancy and equipment
Other real estate owned expenses
Problem loan expenses
Intangible asset amortization
Other non-interest expense
Total non-interest expense
Income before income taxes
Income tax expense
Income per share - basic
Income per share - diluted
NATIONAL BANK HOLDINGS CORPORATION
Consolidated Statements of Condition
(Dollars in thousands, except share and per share data)
Cash and due from banks
Due from Federal Reserve Bank of Kansas City
Federal funds sold and interest bearing bank deposits
Cash and cash equivalents
Investment securities available-for-sale
Investment securities held-to-maturity
Loans receivable, net (covered loans of $537,096 and $608,222)
Allowance for loan losses
Loans held for sale
Federal Deposit Insurance Corporation ("FDIC") indemnification asset, net
Other real estate owned
Premises and equipment, net
Intangible assets, net