National Bank Holdings Corp annual report, FY2019

National Bank Holdings Corporation — FY2019 Form 10-K

Reporting period: Fiscal year ended December 31, 2019. The filing also reports fourth-quarter results. NBHC is a bank holding company operating through NBH Bank, with 101 banking centers concentrated in Colorado and the greater Kansas City region and operations in New Mexico, Texas and Utah.

Financial performance and condition

Metric	FY2019 / Dec. 31, 2019	FY2018 / Dec. 31, 2018
Net income	$80.4 million	$61.5 million
Diluted EPS	$2.55	$1.95
Net interest income	$205.8 million; $210.9 million FTE	$197.4 million; $201.9 million FTE
Net interest margin	3.83%; 3.93% FTE	3.85%; 3.93% FTE
Non-interest income	$82.8 million	$70.8 million
Non-interest expense	$180.7 million	$189.3 million
Provision for loan losses	$11.6 million	$5.2 million
Total assets	$5.90 billion	$5.68 billion
Loans / deposits	$4.42 billion / $4.74 billion	$4.09 billion / $4.54 billion
Shareholders’ equity	$766.9 million	$695.0 million

• Profitability improved: return on average assets was 1.38% versus 1.10%; return on average equity was 10.89% versus 9.28%. The efficiency ratio improved to 62.22% from 69.78%.
• Mortgage banking income rose 40.7% to $42.3 million, driving much of the increase in non-interest income. Management reported record annual net income and record non-interest income.
• Operating cash flow was $42.5 million, down from $73.6 million. Investing activities used $113.3 million and financing activities provided $71.4 million. Cash and cash equivalents were $110.2 million at year-end.
• Year-end borrowings included $207.7 million of FHLB advances and $56.9 million of repurchase agreements. The Bank had $1.1 billion of FHLB borrowing capacity, of which $207.7 million was used.
• On-balance-sheet liquidity—cash and unencumbered securities—was $435.1 million, down from $683.2 million. The loan-to-deposit ratio rose to 93.21% from 90.23%.
• Consolidated regulatory capital ratios were 11.0% tier 1 leverage, 13.2% CET1 and 14.1% total risk-based capital. NBH Bank’s ratios also exceeded well-capitalized thresholds.

Changes versus the prior year

• Net income rose 30.8%; reported 2018 earnings included $6.3 million after-tax of Peoples acquisition costs. Excluding those costs, 2018 net income was $67.8 million, or $2.16 diluted EPS.
• Loans grew 7.9%, while originated and acquired loans grew 8.5%. Commercial loan growth led the increase; residential real estate loans declined.
• Deposits grew 4.4%. Transaction deposits increased $223.9 million, and their share of deposits rose to 77.7% from 76.2%; non-interest-bearing deposits reached 25.0% of deposits.
• FTE net interest margin was unchanged at 3.93%: higher earning-asset yields and volumes were offset by higher funding costs. Cost of deposits increased to 0.64% from 0.45%.
• Non-performing loans declined to 0.49% of loans from 0.60%, and non-performing assets declined to 0.66% from 0.85%. However, net charge-offs increased to $8.3 million from $0.8 million, including a $6.6 million charge-off on one previously acquired commercial loan.
• Non-interest expense fell 4.5%, aided by Peoples integration efficiencies and $6.7 million more in net gains on OREO sales. Salaries and benefits increased $7.8 million, primarily due to mortgage commissions.

Outlook, risks and unusual items

• No quantified earnings, growth or margin guidance is provided. Management said available liquidity sources were expected to be adequate for at least 12 months and emphasized continued organic loan and deposit growth, operating efficiencies and selective acquisitions.
• Management noted three Federal Reserve rate cuts from August through October 2019, after initially anticipating generally rising rates. The Company remained asset-sensitive in its model; a modeled 100-basis-point rate decrease reduced projected net interest income by 3.82%, subject to significant assumptions.
• Management cited competition, rate movements and funding costs, economic and real-estate conditions, credit quality, acquisition execution, regulation, cybersecurity and technology dependence as important risks. Agriculture remained under pressure from depressed commodity prices; food and agriculture loans were 5.6% of total loans.
• CECL was adopted January 1, 2020. Before adoption, the Company estimated an allowance increase of up to $6.0 million and a maximum CET1 capital-ratio reduction of 12 basis points.
• Four banking centers were consolidated. A $0.9 million impairment charge was recorded in 2019, with management expecting payback in less than one year. The 2019 OREO sales gain was $7.2 million versus $0.5 million in 2018.
• Time deposits of $726.9 million were scheduled to mature within 12 months. Loan commitments totaled $850.3 million and standby letters of credit $11.9 million; management did not anticipate material losses from these commitments.
• The auditor gave an unqualified opinion on the financial statements and internal controls; the allowance for loan losses was identified as a critical audit matter. Management reported no material litigation expected to adversely affect the Company.

Important facts for investors to verify

• Whether loan growth and mortgage banking income can be sustained, particularly as mortgage volumes and acquired-loan accretion change.
• The credit and reserve implications of the $6.6 million acquired-loan charge-off, rising net charge-offs, and CECL adoption.
• Deposit retention and repricing, including the maturity and replacement of $726.9 million in time deposits and the effect of rising deposit costs on margins.
• Liquidity headroom after the decline in unencumbered securities and the high loan-to-deposit ratio; review collateral pledged against FHLB borrowing capacity.
• How much earnings depended on OREO gains, mortgage income and other potentially variable items, and whether consolidation savings meet the stated payback expectation.
• Capital and shareholder-return plans: the 2019 dividend was $0.75 per share, and on February 26, 2020 the Board authorized a new $50 million repurchase program.