National Bank Holdings Corporation — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Unaudited consolidated results. NBHC is a regional bank holding company operating through NBH Bank, with 81 banking centers across Colorado, the greater Kansas City region, Texas, Utah and New Mexico.
Financial results and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net interest income | $56.0 million | $44.9 million | $102.7 million | $90.1 million |
| Net interest margin, FTE | 3.38% | 2.82% | 3.15% | 2.92% |
| Provision for (release of) loan losses | $2.5 million | ($5.9 million) | $2.2 million | ($9.4 million) |
| Non-interest income | $16.8 million | $25.3 million | $35.8 million | $58.6 million |
| Non-interest expense | $45.6 million | $46.3 million | $89.6 million | $96.0 million |
| Net income | $20.4 million | $24.2 million | $38.7 million | $51.0 million |
| Diluted EPS | $0.67 | $0.77 | $1.27 | $1.63 |
- Q2 pretax income was $24.7 million versus $29.6 million a year earlier. Six-month net income included $1.3 million of acquisition-related costs; management reported adjusted six-month net income of $39.7 million and adjusted diluted EPS of $1.30.
- For the first six months, operating cash flow was $127.2 million. Investing activities used $478.7 million and financing activities used $47.3 million; cash, cash equivalents and restricted cash decreased $398.8 million.
- At June 30, assets were $7.17 billion, loans $4.82 billion, deposits $6.19 billion and shareholders’ equity $815.6 million. Loans rose 6.7% from year-end 2021; deposits declined 0.5%.
- Cash and cash equivalents were $448.4 million, down from $845.7 million at year-end. On-balance-sheet liquidity, including unencumbered securities, was $1.13 billion, versus $1.63 billion at year-end.
- Long-term subordinated debt was $39.5 million net of issuance costs; repurchase-agreement funding was $24.4 million. There were no FHLB advances, and $1.0 billion of FHLB borrowing capacity was available. The company and bank exceeded regulatory capital requirements; consolidated CET1 and Tier 1 risk-based ratios were 13.8%.
- Book equity was affected by securities valuation: accumulated other comprehensive loss was $58.0 million, versus $7.0 million at year-end. Available-for-sale securities had $76.7 million of unrealized losses and held-to-maturity securities had $66.1 million, primarily attributed by management to interest-rate changes.
Changes versus comparable periods
- Net interest income and margin improved as loan yields rose, cash was redeployed into loans and securities, and deposit funding costs remained low. Management cited Federal Reserve rate increases as a contributor.
- Profit fell year over year despite stronger net interest income. Mortgage banking income declined 50% in Q2 and 54% for the six-month period, which management attributed to lower refinancing activity and tighter gain-on-sale margins. Other non-interest income also declined.
- Provision expense replaced the prior-year provision releases, reflecting loan growth and higher CECL model reserve requirements. The allowance was $50.9 million, or 1.06% of loans, at quarter-end.
- Non-interest expense decreased 6.6% for the first six months, mainly due to lower mortgage-related compensation; this included $1.3 million of acquisition costs. The six-month FTE efficiency ratio was 63.09%, broadly flat with 63.08% a year earlier; adjusted for acquisition costs, it was 62.19%.
- Credit indicators remained favorable: non-performing loans were 0.20% of loans versus 0.24% at year-end; non-performing assets were 0.31% of loans and OREO versus 0.39%.
Outlook, management commentary and risks
- The filing provides no specific numerical earnings or growth guidance. Management said liquidity sources were adequate for short- and long-term needs and anticipated sufficient funding for at least 12 months.
- Management described the bank as asset-sensitive. Its model estimated net interest income changes of +6.45% for an immediate 200-basis-point increase, +3.22% for a 100-basis-point increase and -1.39% for a 25-basis-point decrease. These are model estimates and depend on assumptions; actual outcomes may differ.
- NBHC announced agreements to acquire Community Bancorporation (holding company for Rock Canyon Bank) and Bancshares of Jackson Hole. Community Bancorporation received regulatory approval July 21, 2022, with closing expected in September; approval for Bancshares of Jackson Hole remained a risk. Management estimated pro forma assets of about $9.6 billion for the combined transactions, based on December 31, 2021 figures.
- Integration timing, costs and realization of expected benefits are uncertain. The company identified inflation and labor costs, economic and real-estate conditions, credit and interest-rate risk, deposit competition, cybersecurity and technology dependence, and regulatory changes as material challenges. Management noted that $536.7 million of time deposits were scheduled to mature within 12 months.
- Unfunded loan commitments totaled $1.16 billion. Mortgage loans sold may be subject to repurchase or indemnification obligations; the related reserve was $1.9 million. Management did not believe pending or threatened litigation would materially affect the company.
- The board declared a $0.23 quarterly dividend on August 2, 2022, payable September 15, 2022. The filing also reported $38.6 million remaining under the existing $75 million share repurchase authorization.
Important facts for investors to verify
- Whether loan growth and higher yields can sustain net interest income as deposit costs respond to rising rates.
- Whether mortgage banking income stabilizes and how lower production affects servicing assets and related earnings.
- Credit performance, CECL assumptions and allowance adequacy as economic and real-estate conditions change.
- Unrealized securities losses, their effect on tangible book value and liquidity, and management’s ability to hold securities until recovery.
- Regulatory approval, closing, integration costs and expected benefits of both announced acquisitions.