National Bank Holdings Corporation Announces Record First Quarter 2018 Financial Results

GREENWOOD VILLAGE, Colo., April 26, 2018 /PRNewswire/ -- National Bank Holdings Corporation (NYSE: NBHC) reported: 

"We've had a solid start to 2018," said Tim Laney, Chief Executive Officer. "After adjusting for Peoples acquisition-related expenses, we delivered record earnings, and for the first time in our short history, over 1% return on average tangible assets and double-digit return on average tangible common equity. The Peoples acquisition was completed on January 1st and provided strong growth in our balance sheet and all revenue lines. Organic loans and deposits grew nicely year-over-year as we continue to grow relationships with our clients. Our loan portfolio continues to perform well with just 0.07% of annualized net charge-offs in the first quarter. Contributing to our record earnings was revenue growth of $22 million, or 49% year-over-year, driven by organic growth and the acquisition of Peoples, coupled with a continued focus on expense management."  

Mr. Laney added, "Our progress is a testament to the dedication and focus of our teammates. Through their efforts, we completed a near perfect conversion of Peoples while continuing to grow and expand our client relationships in the first quarter. This momentum, combined with our strong capital position, allows us to pursue future growth opportunities that we believe will continue to create attractive returns for our shareholders while helping the communities where we do business grow stronger."

Acquisition
On January 1, 2018, the Company completed its acquisition of Peoples, the bank holding company of Colorado-based Peoples National Bank and Kansas-based Peoples Bank. The Company acquired 20 banking centers located in the highly-attractive and geographically-relevant markets of Colorado Springs in Colorado, Overland Park and Lawrence in Kansas, and Taos and Albuquerque in New Mexico, and added approximately $842 million in total assets, net of FHLB payoffs, $543 million in loans and $730 million in deposits. The merger consideration totaled $146.4 million and consisted of $110.2 million in Company stock and $36.2 million in cash. All operating systems were converted during the first quarter of 2018.

First Quarter 2018 Results
(All comparisons refer to the fourth quarter of 2017, except as noted)

Net Interest Income
Fully taxable equivalent net interest income totaled $48.7 million and increased $10.1 million, or 26.2%, driven by a $645.0 million increase in earning assets and a 0.43% widening of the fully taxable equivalent net interest margin to 3.84%. The increase in average earning assets was primarily due to the acquired loans and investments from Peoples. The margin expansion was driven by a 0.41% increase in earning assets yield, while the cost of interest bearing liabilities decreased 0.05% to 0.55% due to Peoples' attractive deposit base. Originated loan yields increased 0.20% to 4.32% due to increases in short-term market rates. In addition, accelerated accretion on 310-30 and acquired loans not accounted for under 310-30 ("acquired loans") totaled $1.3 million, contributing 0.10% to the fully taxable equivalent net interest margin this quarter.

Loans
Total loans ended the quarter at $3.7 billion, increasing $523.4 million primarily driven by the Peoples acquisition. Originated loans grew 2.2% annualized as strong growth in commercial loans of 13.2% annualized was mostly offset by expected payoffs of non-owner occupied commercial real estate loans. Commercial loan originations totaled $162.7 million for the quarter, increasing 27.4% over the first quarter of the prior year. Acquired loans grew $515.4 million, entirely due to the acquisition of Peoples.

Asset Quality and Provision for Loan Losses
Originated and acquired loans totaled $3.6 billion, increasing $531.7 million and represented 97.0% of total loans at March 31, 2018. Minimal provision for loan losses was recorded during the first quarter due to strong credit trends and low net charge-offs of 0.07%, annualized. Non-performing originated and acquired loans (comprised of non-accrual loans and non-accrual TDRs) were 0.66% of total originated and acquired loans, compared to 0.69% at December 31, 2017. The originated and acquired allowance for loan losses was 0.85% compared to 1.02% at the prior quarter end, and decreased as the acquired loans from the Peoples acquisition were recorded at fair value.

Acquired problem loans accounted for under 310-30 totaled $112.3 million at March 31, 2018 and decreased $8.3 million during the first quarter, an annualized decrease of 28.0%. The life-to-date economic benefit of the accretable yield transfers net of impairments on 310-30 loans totals $226.8 million.

Deposits
Total deposits averaged $4.6 billion and increased $614.3 million entirely due to the Peoples acquisition. Average transaction deposits (defined as total deposits less time deposits) increased $575.0 million. Excluding Peoples, average transaction deposits decreased $85.5 million, or 3.0%, due to lower average demand deposits of $74.5 million, or 8.0%, and a decrease in average interest bearing savings and money market deposits of $11.0 million, or 0.6%, as our clients had built larger cash balances during the prior quarter followed by the seasonal decrease in the first quarter. Excluding Peoples, total transaction deposits at March 31, 2018 grew $33.9 million, or 1.2%, over year-end. The cost of deposits was 0.41%, decreasing 0.03% from the prior quarter, benefitting from Peoples' low-cost deposits.

Non-Interest Income
Non-interest income totaled $17.8 million, increasing $9.0 million primarily due to the Peoples acquisition. The addition of Peoples clients drove a $1.0 million, or 12.0%, increase in service charges, bank card interchange fees and other fees. Mortgage banking income increased $7.5 million primarily due to sales of $219 million of 1-4 family mortgage loans sold in the secondary market.

Non-Interest Expense
Non-interest expense totaled $55.3 million and increased $21.3 million from the prior quarter driven by the Peoples acquisition. Included in the quarter was $7.6 million of one-time acquisition costs, with $1.1 million included in salaries and benefits, $0.8 million included in occupancy and equipment, $2.0 million included in professional fees and $3.7 million included in other non-interest expenses. Gain on sale of OREO and problem asset workout expense totaled a net expense of $0.9 million, a change of $2.2 million due to higher OREO gains in the prior quarter.

Income tax expense totaled $1.7 million, representing an effective tax rate of 16.7%, and decreased $16.9 million due to a deferred tax asset re-measurement charge in the prior quarter and a decrease in statutory rates. The lower tax rate compared to the statutory rate reflects the continued success of our tax strategies and tax exempt income in relation to the pre-tax income.

Capital
Capital ratios continue to be strong and in excess of federal bank regulatory agency "well capitalized" thresholds. Shareholders' equity totaled $645.9 million at March 31, 2018 and increased $113.5 million from the prior quarter end. The increase in shareholders' equity was due to higher retained earnings and the issuance of stock for the Peoples acquisition and was partially offset by an increase in accumulated other comprehensive loss, which was driven by the fair market value fluctuations of the available-for-sale investment securities portfolio.

Common book value per share was $21.19 at March 31, 2018 and increased $1.38. The tangible common book value per share was $17.27 at March 31, 2018 and decreased $0.67 due to a $0.24 change in accumulated other comprehensive loss and a $65.5 million increase in intangible assets from the Peoples acquisition. The leverage ratio at March 31, 2018 for the consolidated company and NBH Bank was 9.59% and 8.83%, respectively.

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, 2018 accretable yield balance on the 310-30 loans of $45.2 million would add $1.11 after-tax to the tangible book value per share. A more conservative methodology that management uses values the excess yield above a 4.0% yield and then considers the timing of the excess accreted interest income recognition discounted at 5.0%. This would add $0.83 after-tax to our tangible book value per share as of March 31, 2018, resulting in a tangible common book value per share of $18.10.

Year-Over-Year Review
(All comparisons refer to the first quarter of 2017, except as noted)

Fully taxable equivalent net interest income totaled $48.7 million and increased $12.7 million, or 35.3%. Average earning assets increased $892.1 million as average originated loans increased $361.3 million, or 13.9%, and average acquired loans increased $496.2 million due to Peoples acquired loans. These increases were partially offset by the paydowns of higher-yielding 310-30 loans. The fully taxable equivalent net interest margin widened 0.40% to 3.84% as the yield on earning assets increased 0.43%, led by a 0.44% increase in the originated portfolio yields due to short-term rate increases, partially offset by an increase in the cost of deposits of 0.02%.

Loan balances at March 31, 2018 totaled $3.7 billion and increased $748.7 million, or 25.3%, while originated and acquired loans outstanding totaled $3.6 billion and increased $776.4 million, or 27.6%, driven by Peoples acquired loans and an increase in originated loans of $294.3 million, or 11.0%. New loan originations between the two periods totaled $890.9 million, led by commercial loan originations of $640.3 million. The 310-30 loan portfolio declined $27.8 million, or 19.8%.

Total deposits averaged $4.6 billion, increasing $732.1 million. Adjusting for the Peoples deposits added this quarter and the banking center divestitures in the second quarter of 2017, average total deposits grew $113.4 million, or 3.0%, while average transaction deposits increased $134.6 million, or 5.0%. The mix of transaction deposits to total deposits improved to 75.6% from 70.1% in the prior year. Additionally, the cost of deposits was 0.41%, increasing 0.02% compared to the first quarter of the prior year due to slightly higher cost of savings, money market and time deposits.

Provision for loan loss expense on originated and acquired loans was $0.0 million, compared to $1.8 million last year. Annualized net charge-offs on originated and acquired loans totaled 0.07%, compared to 0.02%. Non-performing originated and acquired loans decreased to 0.66% of total originated and acquired loans, compared to 1.20% at March 31, 2017, primarily due to the resolution of non-accrual energy loans. The originated and acquired allowance for loan losses totaled 0.85% of total originated and acquired loans compared to 1.09% in the first quarter of 2017, and decreased as the acquired loans from the Peoples acquisition were recorded at fair value.

Non-interest income totaled $17.8 million, representing an increase of $9.1 million primarily due to the Peoples acquisition. Service charges, bank card interchange fees and other fees grew $1.5 million due to organic growth and the addition of Peoples' client base. Mortgage banking income increased $7.5 million primarily due to increased volume from the acquisition of Peoples. OREO related income increased $0.2 million compared to the prior year.

Non-interest expense totaled $55.3 million the first quarter of 2018, representing an increase of $20.7 million driven by the Peoples acquisition. Included in the quarter was $7.6 million of one-time acquisition costs.

Income tax expense totaled $1.7 million and increased $2.9 million. Income tax expense included a large $2.8 million tax benefit from stock compensation activity in the first quarter of 2017. The effective tax rate of 16.7%, compares to an adjusted effective tax rate of 22.9% in the first quarter of 2017.

Conference Call
Management will host a conference call to review the results at 11:00 a.m. Eastern Time on Friday, April 27, 2018. Interested parties may listen to this call by dialing (877) 272-6762 (United States) / (615) 800-6832 (International) using the Conference ID of 92242833 and asking 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 11, 2018, by dialing (855) 859-2056 (United States) / (404) 537-3406 (International) using the Conference ID of 92242833. The earnings release 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 assets before provision for loan losses and taxes," "return on average tangible common equity," "tangible common book value," "tangible common book value per share," "tangible common equity," "tangible common equity to tangible assets," "adjusted non-interest expense to average assets," "adjusted net income," "adjusted income per share," "adjusted return on average tangible assets," "adjusted return on average tangible common equity," and "fully taxable equivalent" metrics, are supplemental measures that are not required by, or are not presented in accordance with, U.S. generally accepted accounting principles (GAAP). We refer to these financial measures and ratios as "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 or by presenting certain metrics on a fully taxable equivalent basis. 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.

These non-GAAP financial measures should not be considered a substitute for financial information presented in accordance with GAAP and you should not rely on non-GAAP financial measures alone as measures of our performance. The non-GAAP financial measures we present may differ from non-GAAP financial measures used by our peers or other companies. 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 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 client service and committed to shareholder results. Through its bank subsidiary, NBH Bank, National Bank Holdings Corporation operates a network of 104 banking centers, serving individual consumers, small, medium and large businesses, and government and non-profit entities. Its banking centers are located in its core footprint of Colorado, the greater Kansas City region, Texas and New Mexico. Its comprehensive residential banking group primarily serves the bank's core footprint with additional offices in Arizona, Nevada and Utah. NBH Bank operates under the following brand names: Bank Midwest in Kansas and Missouri, Community Banks of Colorado in Colorado and Hillcrest Bank in Texas and New Mexico. It also operates as Community Banks Mortgage, a division of NBH Bank, in Arizona, Colorado, Nevada and Utah. Additional information about National Bank Holdings Corporation can be found at www.nationalbankholdings.com.

For more information visit: bankmw.com, cobnks.com, hillcrestbank.com or nbhbank.com. Or, follow us on any of our social media sites:
Bank Midwest: facebook.com/bankmw, twitter.com/bank_mw, instagram.com/bankmw;
Community Banks of Colorado: facebook.com/cobnks, twitter.com/cobnks, instagram.com/cobnks;
Hillcrest Bank: facebook.com/hillcrestbank, twitter.com/hillcrest_bank;
NBH Bank: twitter.com/nbhbank;
or connect with any of our brands on LinkedIn.

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 "anticipate," "believe," "can," "would," "should," "could," "may," "predict," "seek," "potential," "will," "estimate," "target," "plan," "project," "continuing," "ongoing," "expect," "intend" or similar expressions that relate to the Company's strategy, plans or intentions. Forward-looking statements involve certain important risks, uncertainties and other factors, any of which could cause actual results to differ materially from those in such statements. Such factors include, without limitation, the "Risk Factors" referenced in our most recent Form 10-K filed with the Securities and Exchange Commission (SEC), other risks and uncertainties listed from time to time in our reports and documents filed with the SEC, and the following factors: ability to execute our business strategy; business and economic conditions; economic, market, operational, liquidity, credit and interest rate risks associated with the Company's business; effects of any changes in trade, monetary and fiscal policies and laws; changes imposed by regulatory agencies to increase capital standards; effects of inflation, as well as, interest rate, securities market and monetary supply fluctuations; changes in the economy or supply-demand imbalances affecting local real estate values; changes in consumer spending, borrowings and savings habits; the Company's ability to identify potential candidates for, consummate, integrate and realize operating efficiencies from, acquisitions or consolidations; the Company's ability to realize anticipated benefits from enhancements or updates to its core operating systems from time to time without significant change in client service or risk to the Company's control environment; the Company's dependence on information technology and telecommunications systems of third party service providers and the risk of systems failures, interruptions or breaches of security; the Company's ability to achieve organic loan and deposit growth and the composition of such growth; changes in sources and uses of funds; increased competition in the financial services industry; the effect of changes in accounting policies and practices; the share price of the Company's stock; the Company's ability to realize deferred tax assets or the need for a valuation allowance; continued consolidation in the financial services industry; ability to maintain or increase market share and control expenses; costs and effects of changes in laws and regulations and of other legal and regulatory developments; technological changes; the timely development and acceptance of new products and services; the Company's continued ability to attract and maintain qualified personnel; ability to implement and/or improve operational management and other internal risk controls and processes and reporting system and procedures; regulatory limitations on dividends from the Company's bank subsidiary; changes in estimates of future loan reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements; widespread natural and other disasters, dislocations, political instability, acts of war or terrorist activities, cyberattacks or international hostilities; impact of reputational risk; and success at managing the risks involved in the foregoing items. The Company can give no assurance that any goal or plan or expectation set forth in forward-looking statements can be achieved and readers are cautioned not to place undue reliance on such statements. The forward-looking statements are made as of the date of this press release, and the Company does not intend, and assumes no obligation, to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events or circumstances, except as required by applicable law.