National Bank Holdings Corp quarterly report, Q2 FY2019

National Bank Holdings Corporation — Q2 2019 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2019. Unaudited consolidated results. NBHC operates through NBH Bank, with 105 banking centers primarily in Colorado and the greater Kansas City region; it announced plans to expand into Salt Lake City’s Wasatch Front.

Financial performance

Amounts are in millions except per-share data and percentages.

Metric	Q2 2019	Q2 2018	Six months 2019	Six months 2018
Net interest income	$52.5	$49.4	$103.7	$97.0
Provision for loan losses	$3.2	$1.9	$4.8	$1.9
Non-interest income	$20.7	$19.6	$37.7	$37.4
Non-interest expense	$46.5	$46.8	$90.8	$102.0
Net income	$20.3	$17.5	$39.2	$26.0
Diluted EPS	$0.64	$0.56	$1.24	$0.83

Q2 net interest margin was 3.91% GAAP and 4.00% fully taxable equivalent (FTE), versus 3.86% and 3.95%, respectively, a year earlier. H1 FTE margin rose 13 basis points to 4.03%.
H1 FTE net interest income increased 7.0% to $106.2 million. Higher loan yields and originated-loan growth more than offset higher funding costs; H1 cost of funds rose to 0.94% from 0.56%, and cost of deposits to 0.62% from 0.41%.
H1 non-interest expense fell $11.2 million year over year, chiefly because 2018 included $8.0 million of Peoples acquisition costs and the company cited integration efficiencies. 2018 H1 net income included $6.3 million after-tax of acquisition costs; management’s adjusted comparison was $32.3 million net income and $1.03 diluted EPS.
H1 return on average assets was 1.37%, return on average tangible assets 1.41%, and FTE efficiency ratio 62.73% (non-GAAP measures).

Financial position, funding and cash flow

At June 30, 2019, total assets were $5.86 billion, loans $4.33 billion, deposits $4.69 billion and shareholders’ equity $733.9 million. Compared with December 31, 2018, assets rose $181.3 million and loans rose $238.0 million; total investment securities declined $106.8 million.
Deposits increased $152.4 million from year-end. Transaction deposits represented 77.0% of deposits, versus 76.2% at year-end. The loan-to-deposit ratio was 92.37%, compared with 90.23% at March 31, 2019 and 82.60% at year-end 2018.
FHLB advances were $272.4 million and repurchase agreements were $60.4 million. The Bank had $1.2 billion of available FHLB credit. H1 cash flows were $(0.8) million from operations, $(119.8) million from investing and $102.2 million from financing; cash and cash equivalents declined $18.4 million. Cash, cash equivalents and restricted cash ended at $101.2 million.
On-balance-sheet liquidity, including unencumbered securities, was $477.3 million, down from $683.2 million at year-end, primarily as funds were used for loan growth. Management stated that available funding sources should provide adequate liquidity for at least twelve months.
Consolidated Tier 1 leverage was 10.6%, common equity Tier 1 and Tier 1 risk-based capital were each 12.9%, and total risk-based capital was 13.8%. The Bank exceeded well-capitalized regulatory thresholds.

Changes, credit quality and unusual items

Total loans grew 5.8% from year-end, with originated and acquired loans increasing $248.2 million; growth was led by commercial lending. Commercial loans were 66.6% of total loans.
Non-performing loans increased to $33.7 million, or 0.78% of loans, from $24.5 million and 0.60% at year-end. Non-performing assets were $40.8 million, or 0.94% of loans and OREO, versus $35.1 million and 0.85%. Management attributed much of the increase to one previously acquired commercial loan placed on non-accrual in Q2, including a $2.4 million specific reserve.
The allowance for loan losses was $40.1 million, or 0.93% of loans, versus $35.7 million and 0.87% at year-end. H1 net charge-offs were $0.4 million, an annualized 0.02% of average loans. Management considered the allowance adequate but cautioned that estimates and future adjustments are uncertain.
Mortgage banking income increased 16.7% in Q2 to $10.4 million, primarily from higher sales of residential mortgage loans. H1 OREO-related income declined $0.7 million year over year. OREO was $7.1 million at quarter-end, down from $10.6 million at year-end.
Available-for-sale and held-to-maturity securities were mainly government-backed mortgage securities. Management attributed unrealized losses to interest rates and reported no other-than-temporary impairment. A subsequent sale of an OREO property on August 1 generated a $4.4 million gain; the property had zero carrying value at June 30.

Outlook, risks and contingencies

No quantified earnings or growth guidance was provided. Management emphasized continued high-quality loan growth, transaction-deposit growth, disciplined expansion and the planned Utah market entry. It described stable economic conditions and strong local real estate fundamentals, while noting its portfolio’s real-estate exposure.
Management reported the company was asset-sensitive at quarter-end. Its model estimated projected net interest income would change +5.64% for an immediate, sustained 200-basis-point increase and −3.84% for a 100-basis-point decrease. These are scenario estimates, not forecasts; actual results may differ materially.
Key cited risks include economic and credit deterioration, real-estate values, prolonged depressed agricultural commodity prices, competition, deposit and funding costs, interest-rate changes, regulation and capital/liquidity requirements, cybersecurity and technology dependence, and execution of growth or acquisitions.
Adoption of the expected-credit-loss standard (ASU 2016-13) was scheduled for January 1, 2020; NBHC was evaluating the impact and said adoption could increase its allowance.
Unfunded commitments totaled $746.4 million, including $738.1 million of loan commitments and $8.3 million of standby letters of credit. Mortgage repurchase and indemnification obligations were reserved at $2.6 million. Management did not expect material losses from commitments or litigation.
The Board declared a $0.19-per-share quarterly dividend on August 7, payable September 13, 2019. The existing repurchase authorization had $12.6 million remaining; no shares were repurchased under the program during the quarter. Disclosure controls were assessed as effective, and no material change in internal control was reported.

Important facts for investors to verify

Whether the rise in non-performing loans and the large specific reserve remain isolated to the cited acquired commercial loan, and how subsequent credit trends affect provisions and allowance coverage.
Whether commercial loan growth and deposit gathering continue to support margin and liquidity as deposit and borrowing costs rise.
The assumptions and likely balance-sheet effect of the 2020 expected-credit-loss standard.
Whether the modeled interest-rate sensitivity, funding availability and scheduled $723.6 million of time-deposit maturities within twelve months evolve as management expects.
The earnings contribution and cash realization from the $4.4 million subsequent OREO sale gain, and the extent to which reported comparisons rely on non-GAAP adjustments for acquisition costs.