National Bank Holdings Corporation — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. The company is a bank holding company operating through NBH Bank, with 82 banking centers primarily in Colorado and the greater Kansas City region. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net income | $24.2 | $17.7 | $51.0 | $33.5 |
| Diluted EPS | $0.77 | $0.57 | $1.63 | $1.08 |
| Net interest income, GAAP | $44.9 | $47.3 | $90.1 | $97.7 |
| Net interest margin, FTE | 2.82% | 3.39% | 2.92% | 3.62% |
| Non-interest income | $25.3 | $38.8 | $58.6 | $62.4 |
| Non-interest expense | $46.3 | $53.8 | $96.0 | $102.4 |
| Efficiency ratio, FTE | 64.48% | 61.13% | 63.08% | 62.63% |
- Profitability: Q2 pre-tax income was $29.6 million and income tax expense was $5.4 million. Six-month return on average assets was 1.49%; return on average tangible common equity was 14.29%. Six-month effective tax rate was 17.9% (18.5% after adjustment for stock compensation activity).
- Credit provision and asset quality: Q2 included a $5.9 million total provision release, versus $10.3 million of provision expense a year earlier. The six-month provision release was $9.4 million, attributed to strong asset quality and an improved economic forecast. Allowance for credit losses was $49.0 million, or 1.14% of loans, at June 30. Non-performing loans were $13.9 million (0.32% of loans), down from $20.4 million (0.47%) at year-end 2020; six-month annualized net charge-offs were 0.04% of average loans.
- Balance sheet and liquidity: Assets were $7.14 billion, up 7.1% from December 31, 2020. Cash and cash equivalents were $1.00 billion; investment securities totaled approximately $1.29 billion. Loans were $4.30 billion, down 1.2%, while deposits increased 8.5% to $6.16 billion. Transaction deposits represented 85.0% of deposits, versus 82.6% at year-end. On-balance-sheet liquidity, including unencumbered securities, was $1.74 billion; management reported $2.6 billion of readily available funds and expected adequate liquidity for at least 12 months.
- Capital and borrowings: Shareholders’ equity was $851.9 million. Consolidated Tier 1 leverage was 10.6%, and common equity Tier 1 and Tier 1 risk-based ratios were each 15.3%; the Bank exceeded well-capitalized thresholds. There were no FHLB advances outstanding; repurchase agreements were $23.0 million. The Bank had $0.9 billion of FHLB credit availability.
- Cash flows: For the six months, operating activities provided $130.2 million, investing activities used $203.8 million and financing activities provided $467.5 million. Cash, cash equivalents and restricted cash ended at $1.01 billion; this includes restricted cash and differs from balance-sheet cash and cash equivalents of $1.00 billion.
Material changes versus comparable periods
- Net income and diluted EPS rose year over year, while net interest income declined. The six-month FTE margin fell 70 basis points to 2.92%, mainly reflecting lower earning-asset yields and a larger share of lower-yielding cash; lower funding costs partly offset the pressure.
- Mortgage banking income fell 54.4% in Q2 and 17.9% for the six months, primarily due to lower refinancing activity. Bank card fees rose, and other non-interest income benefited from fixed-asset sale gains of $0.8 million in Q2 and $2.4 million year to date.
- Non-interest expense declined 6.3% for the six months, principally due to lower mortgage-related compensation and efficiency measures. The company completed plans to consolidate seven banking centers; related expense was $1.6 million for the six months. It also recorded $1.6 million of impairment on premises and equipment held for sale.
- Loans declined by $53.0 million from year-end, including a $46.5 million decline in PPP loans as forgiveness progressed. Excluding PPP, loans were down $6.5 million. Q2 non-PPP originations more than doubled Q1, increasing $189.0 million, or 109.2%.
- COVID-related loans remaining on payment deferral declined to $108.6 million, or 2.5% of loans, from $173.6 million, or 4.0%, at year-end. All such modified loans were classified as performing at June 30.
- Cash rose $398.9 million and investment securities increased $253.1 million from year-end, amid substantial deposit inflows. Held-to-maturity securities grew to $687.6 million from $376.6 million.
Outlook, risks and contingencies
- No quantified earnings or full-year financial guidance is provided. Management expects Federal Reserve rates to remain near zero for the foreseeable future, while noting that future earnings depend on rate policy and the ability to deploy excess liquidity into loans and other earning assets. New loans funded in the first half carried a weighted average origination rate of 3.27%, compared with a 3.97% FTE yield on the originated loan portfolio.
- The company described its rate position as asset-sensitive. Its model estimated net interest income would increase 12.09% under an immediate, sustained 200-basis-point rise and 5.96% under a 100-basis-point rise; a 25-basis-point decline was estimated to reduce it 0.23%. Management cautions actual results may differ materially due to assumptions, market conditions and management actions.
- Key risks include COVID-19 and new variants, economic and real-estate conditions, credit quality, interest-rate and securities-market movements, competition, regulatory and capital requirements, deposit and loan growth, cybersecurity and third-party technology risks. Management noted improving economic conditions but said the pandemic’s duration and effects remain uncertain.
- Unfunded commitments totaled $1.00 billion, including $455.4 million of commitments to fund loans, $539.6 million of unused lines and $9.2 million of letters of credit. These are not necessarily expected cash outflows because commitments may expire undrawn.
- Mortgage loans sold to investors may be subject to repurchase or indemnification claims; the related reserve was $2.4 million. Management stated that pending or threatened litigation was not expected to have a material adverse effect. The filing reported no material changes to previously disclosed risk factors.
- The Board authorized a $75 million stock repurchase program in February 2021; the full authorization remained available at June 30, and no shares were purchased under the program during the quarter. A $0.22-per-share quarterly dividend was declared August 4, payable September 15, 2021.
Important facts for investors to verify
- Whether loan growth excluding PPP resumes, and whether excess cash can be deployed at yields that support net interest income and margins.
- Whether improving credit trends persist, particularly as COVID-related deferrals end; review non-performing loans, charge-offs, reserve assumptions and concentrations in commercial real estate and other exposed sectors.
- How deposit inflows, deposit costs and the $677.2 million of time deposits scheduled to mature within 12 months evolve.
- Whether reduced mortgage refinancing, banking-center consolidation costs and fixed-asset sale gains affect future recurring revenue and expenses.
- Review the assumptions behind the interest-rate sensitivity analysis, liquidity availability, derivative collateral obligations and the potential drawdown of unfunded commitments.