National Bank Holdings Corp quarterly report, Q2 FY2020

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National Bank Holdings Corporation — Q2 2020 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2020; unaudited. Comparisons are primarily with the corresponding 2019 periods or December 31, 2019, as indicated. Amounts below are in millions unless stated otherwise.

Business context

NBHC is a bank holding company operating through NBH Bank, with 101 banking centers primarily in Colorado and the greater Kansas City region. At quarter-end, it reported $6.4 billion in assets, $4.8 billion in loans, $5.4 billion in deposits and $777.0 million in shareholders’ equity. Management shifted priorities in March to address COVID-19, emphasizing employee and client safety, bank soundness, and support for clients and communities.

Financial performance and condition

  • Q2 earnings: Net income was $17.7 million, or $0.57 per diluted share, versus $20.3 million, or $0.64, in Q2 2019. For the first half, net income was $33.5 million, or $1.08 per diluted share, versus $39.2 million, or $1.24. First-half results included $1.3 million after tax of banking-center consolidation costs; excluding these costs, management reported adjusted net income of $34.8 million and adjusted diluted EPS of $1.12. These are non-GAAP measures.
  • Net interest: Q2 net interest income was $47.3 million, down from $52.5 million a year earlier; first-half net interest income was $97.7 million versus $103.7 million. First-half net interest income on a fully taxable-equivalent basis was $100.2 million, down 5.6%. The FTE net interest margin declined to 3.62% for the first half from 4.03%, reflecting lower asset yields following Federal Reserve rate cuts.
  • Provision and credit allowance: Q2 provision for loan losses was $10.3 million versus $3.2 million; first-half provision was $16.4 million versus $4.8 million. The June 30 allowance for credit losses was $60.5 million, or 1.26% of loans (1.36% excluding PPP loans), compared with $39.1 million at year-end. The increase reflects adoption of CECL and the COVID-19 economic outlook.
  • Non-interest income and expense: Q2 non-interest income rose to $38.8 million from $20.7 million, primarily on mortgage banking income of $30.6 million versus $10.4 million. First-half non-interest income was $62.4 million versus $37.7 million. Q2 non-interest expense increased to $53.8 million from $46.5 million; first-half expense rose to $102.4 million from $90.8 million, including $1.7 million for planned banking-center consolidations and higher mortgage commissions.
  • Assets, loans and deposits: Total assets rose to $6.39 billion from $5.90 billion at year-end. Loans increased 8.3% to $4.78 billion, primarily due to $348.7 million of PPP loans outstanding; excluding PPP, loans grew $18.3 million, or 0.4%. Deposits increased 14.3% to $5.41 billion. Non-interest-bearing demand deposits rose 26.8% to $1.50 billion, and transaction deposits were 80.6% of deposits versus 77.7% at year-end.
  • Liquidity and cash flows: Cash and cash equivalents were $142.4 million. Six-month operating cash flow was negative $13.3 million and investing cash flow negative $374.2 million, offset by $419.7 million of financing cash flow; cash, cash equivalents and restricted cash increased $32.2 million to $152.4 million. On-balance-sheet liquidity, including unencumbered securities, was $398.3 million, down from $435.1 million at year-end. The Bank reported $1.0 billion of FHLB borrowing availability, of which $15.0 million was used at quarter-end; management also cited access to PPPLF and correspondent-bank credit lines.
  • Debt and capital: Repurchase-agreement funding was $24.5 million, down from $56.9 million at year-end; FHLB advances were $15.0 million, down from $207.7 million. The remaining $15.0 million FHLB term advance was repaid July 8, 2020. The Bank exceeded well-capitalized regulatory thresholds; its June 30 total risk-based capital ratio was 12.5% and tier 1 leverage ratio 9.1%. Consolidated tier 1 leverage was 10.5%; consolidated common equity tier 1 and tier 1 risk-based ratios were 13.2%.
  • Returns and shareholder capital: First-half return on average tangible common equity was 10.38%, down from 13.30%; tangible common book value per share was $21.67, up from $20.89 at year-end. The company repurchased 734,117 shares for $19.5 million in the first quarter. A quarterly dividend of $0.20 per share was declared August 5, payable September 15, 2020.

Material changes and notable items

  • NBHC adopted CECL on January 1, 2020, recording a $5.8 million increase to the allowance and a $4.6 million after-tax reduction to retained earnings.
  • It funded $358.8 million of PPP loans for 2,164 clients. These loans are fully SBA-guaranteed; $348.7 million was included in quarter-end loans and had no related allowance.
  • During the first half, 463 loans totaling $492.4 million, or 10.3% of the portfolio, received COVID-related modifications. Management said these loans were classified as performing at June 30. Separately, 12 loans totaling $11.9 million were restructured as TDRs during the period.
  • Management approved consolidation of 12 banking centers, recorded $1.7 million in related expense, and recognized $1.6 million of fixed-asset impairment related to locations held for sale.
  • Mortgage production benefited from lower interest rates, lifting mortgage banking income; management also noted lower service charges and bank-card fees associated with pandemic-related changes in customer behavior.

Outlook, risks and contingencies

  • The filing provides no specific earnings or margin guidance. Management stated that available funding sources were expected to provide adequate liquidity for at least 12 months.
  • Management described the economic and operating effects of COVID-19 as uncertain and potentially significantly adverse. Risks include borrower stress and future credit losses, further allowance increases, reduced demand and consumer activity, low interest rates compressing asset yields, and operational disruption affecting employees or third-party providers.
  • Management considered the loan portfolio diversified, with no industry exposure above 5% of total loans among the cited highly affected sectors; it reported no direct exposure to several other affected sectors, including aviation, cruise lines, gaming and casinos. Real-estate values and small- and mid-sized business performance remain important credit sensitivities.
  • The company’s rate-risk model showed it was asset-sensitive: an immediate, sustained 100-basis-point increase was estimated to raise projected net interest income 4.80%, while a 25-basis-point decrease was estimated to reduce it 0.33%. Management cautioned actual results may differ from model assumptions.
  • Unfunded commitments totaled $900.4 million. Mortgage-loan repurchase and indemnification exposure was covered by a $2.7 million reserve. Derivative agreements included $73.3 million of termination value for derivatives in a net liability position; $80.1 million of eligible collateral had been posted. Management did not expect litigation to have a material adverse effect.
  • Management reported effective disclosure controls as of June 30, 2020, with no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

  • How COVID-19 conditions, borrower performance and the CECL forecast assumptions affect future provisions and the $60.5 million allowance.
  • Performance and forgiveness progress for PPP loans, and whether SBA guarantees remain valid under applicable program requirements.
  • Whether modified loans remain current as deferrals expire, particularly the $492.4 million modified balance and commercial real-estate exposures.
  • Whether mortgage banking income remains elevated and how lower interest rates affect net interest margin, servicing rights and related expenses.
  • Execution, costs and expected savings from the 12 banking-center consolidations, alongside liquidity, capital and planned share repurchases and dividends.