Business context and reporting period
National Bank Holdings Corporation is a bank holding company operating primarily through NBH Bank, with 82 banking centers concentrated in Colorado and the greater Kansas City region. The supplied filing is a Form 10-Q for the quarter ended June 30, 2021, covering the second quarter and six-month period; this differs from the request metadata’s “2021 Q1.” Unless stated otherwise, amounts below are in millions.
Financial results and condition
- Second quarter: Net income was $24.2 million, or $0.77 per diluted share, versus $17.7 million, or $0.57, a year earlier. Net interest income was $44.9 million versus $47.3 million; non-interest income was $25.3 million versus $38.8 million; and non-interest expense was $46.3 million versus $53.8 million. A $5.9 million provision release supported earnings, compared with $10.3 million of provision expense in Q2 2020.
- First half: Net income was $51.0 million, or $1.63 per diluted share, versus $33.5 million, or $1.08, in the first half of 2020. Net interest income was $90.1 million versus $97.7 million; non-interest income was $58.6 million versus $62.4 million; and non-interest expense was $96.0 million versus $102.4 million. The $9.4 million provision release compares with $16.4 million of provision expense a year earlier.
- Margins and returns: First-half net interest margin was 2.84% (2.92% fully taxable equivalent, or FTE), down from 3.53% (3.62% FTE) a year earlier. FTE net interest income fell 7.6% to $92.6 million, primarily from lower asset yields and lower non-PPP loan balances. First-half return on average assets was 1.49%; return on average tangible assets was 1.53%.
- Balance sheet at June 30: Assets were $7.14 billion, up 7.1% from December 31, 2020. Loans were $4.30 billion, down 1.2%; deposits were $6.16 billion, up 8.5%; and shareholders’ equity was $851.9 million. Cash and cash equivalents were $1.00 billion, while investment securities totaled about $1.29 billion.
- Credit quality: The allowance for credit losses was $49.0 million, or 1.14% of loans, down from $59.8 million, or 1.37%, at year-end. Non-performing loans were $13.9 million (0.32% of loans), down from $20.4 million (0.47%); non-performing assets were $19.0 million. First-half annualized net charge-offs were 0.04% of average loans.
- Cash flow, debt and liquidity: First-half operating cash flow was $130.2 million, investing cash outflow was $203.8 million, and financing cash inflow was $467.5 million. The Bank had no FHLB advances outstanding and had $0.9 billion of FHLB borrowing capacity; repurchase-agreement balances were $23.0 million. Management reported $2.6 billion in readily available funds and $1.74 billion of on-balance-sheet liquidity, including unencumbered securities.
- Capital and shareholder returns: The consolidated Tier 1 leverage ratio was 10.6%, and common equity Tier 1 and Tier 1 risk-based ratios were each 15.3%. The company declared dividends of $0.43 per share in the first half and announced a subsequent quarterly dividend of $0.22 per share. A new $75 million repurchase authorization was approved in February; the full amount remained available at June 30.
Material changes versus comparable periods
- Profit increased year over year in both the second quarter and first half, substantially aided by a shift from loan-loss provision expense in 2020 to provision releases in 2021.
- Mortgage banking income declined 54.4% in Q2 and 17.9% in the first half versus 2020, reflecting lower refinance activity. First-half non-interest income declined 6.0% overall.
- First-half non-interest expense decreased 6.3%, reflecting lower mortgage-related compensation and efficiency actions. The company completed plans to consolidate seven banking centers.
- Deposits and cash grew materially, while total loans edged lower. PPP loan balances declined $46.5 million from year-end, in part due to $203.8 million of PPP loan forgiveness during the first half.
- Transaction deposits increased to 85.0% of deposits from 82.6% at year-end, and the first-half cost of deposits fell to 0.26% from 0.55% in the prior-year period.
- The efficiency ratio was 64.16% for the first half versus 63.63% a year earlier; the FTE ratio was 63.08% versus 62.63%.
Outlook, commentary, risks and unusual items
- The filing gives no specific earnings or financial guidance. Management expects available liquidity sources to provide adequate funding for at least 12 months and says it intends to deploy excess cash into high-quality loans and securities while maintaining underwriting standards.
- Management described economic conditions as improving but said the pandemic, new variants, vaccine effectiveness and possible renewed restrictions could affect customers and results. It cited low interest rates, competition, loan and deposit growth, cybersecurity and regulatory costs, and real-estate values as ongoing challenges.
- The company reported an asset-sensitive interest-rate position. Its model estimated that an immediate, sustained 100-basis-point rate increase would raise projected net interest income 5.96%; a 200-basis-point increase would raise it 12.09%; and a 25-basis-point decrease would reduce it 0.23%. Actual outcomes may differ because of assumptions and management actions.
- COVID-related loans still on payment deferral totaled $108.6 million (2.5% of loans), down from $173.6 million (4.0%) at year-end; all were classified as performing. Commercial real estate non-owner occupied accounted for most of the remaining deferrals.
- Unusual items included $1.6 million of impairment expense related to banking centers held for sale and $2.4 million of gains on fixed-asset sales during the first half. Management reported no material adverse effect expected from pending or threatened litigation and no material changes to previously disclosed risk factors.
- Potential risks include credit losses exceeding the allowance, rate changes affecting margins or securities values, deposit outflows, mortgage-loan repurchase or indemnification claims, and derivative-counterparty or collateral requirements. Unfunded commitments totaled $1.00 billion at quarter-end.
Important facts for investors to verify
- Confirm the reporting-period discrepancy: the filing covers the quarter ended June 30, 2021, not Q1.
- Assess whether earnings growth is sustainable without further provision releases, and track credit performance, allowance adequacy and the remaining COVID-related deferrals.
- Monitor loan growth excluding PPP, deployment of excess liquidity, deposit mix and the effect of interest rates on net interest margin.
- Review mortgage banking income trends, efficiency improvements, and the realized costs and benefits of the seven banking-center consolidations.
- Check capital and liquidity levels alongside the $75 million repurchase authorization, dividend commitments, unfunded credit commitments and derivative collateral exposure.