National Bank Holdings Corporation — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; comparisons are primarily with 2020. NBHC is a bank holding company operating through NBH Bank across Colorado, the greater Kansas City region, Texas, Utah and New Mexico, with 81 banking centers.
Financial performance and condition
Amounts below are in U.S. dollars; annual income-statement and cash-flow amounts are converted from thousands to millions.
| Metric | 2021 | 2020 | Change / context |
|---|---|---|---|
| Total assets at year-end | $7.21 billion | $6.66 billion | Up 8.3% |
| Loans at year-end | $4.51 billion | $4.35 billion | Up 3.7%; excluding PPP loans, up 7.5% |
| Deposits at year-end | $6.23 billion | $5.68 billion | Up 9.7%; noninterest-bearing deposits were 40.2% of total |
| Net interest income | $187.1 million | $192.9 million | Down 3.0%; FTE net interest margin fell to 2.95% from 3.42% |
| Provision for credit losses | $(9.3) million release | $17.6 million expense | Release reflected strong asset quality and improved economic forecasts |
| Noninterest income | $110.4 million | $140.3 million | Down 21.3%, mainly from lower mortgage banking income |
| Noninterest expense | $191.8 million | $206.2 million | Down 7.0% |
| Net income | $93.6 million | $88.6 million | Up 5.7%; diluted EPS was $3.01 versus $2.85 |
| Net interest margin / efficiency | 2.87% / 64.08% | 3.33% / 61.52% | Margin compressed; efficiency ratio increased |
| Shareholders’ equity | $840.1 million | $820.7 million | Year-end; tangible common book value per share was $24.33 |
Cash flow and liquidity: Net cash provided by operating activities was $179.5 million, compared with cash used of $6.2 million in 2020. Investing activities used $473.8 million, while financing activities provided $529.0 million. Cash, cash equivalents and restricted cash increased $234.7 million to $850.2 million. Year-end on-balance-sheet liquidity, including unencumbered securities, was $1.63 billion; management also reported $2.7 billion in readily available funding and $372 million in excess cash liquidity.
Debt and capital: The company issued $40 million of subordinated notes in 2021, reported net of issuance costs at $39.5 million. The notes bear 3.00% interest through November 2026, then reset to three-month SOFR plus 203 basis points, and mature in 2031. The Bank had no FHLB advances outstanding and reported $0.9 billion of FHLB borrowing availability. Consolidated year-end regulatory ratios included 10.39% Tier 1 leverage, 14.26% common equity Tier 1 and 15.9% total risk-based capital; the company and Bank exceeded applicable well-capitalized thresholds.
Credit quality: Nonperforming loans were 0.24% of loans, down from 0.47%; nonperforming assets were 0.39% of loans and OREO, down from 0.58%. The allowance for credit losses was $49.7 million, or 1.10% of loans, versus $59.8 million, or 1.37%, in 2020. Net charge-offs were $1.3 million, or 0.03% of average loans.
Material changes versus 2020
- Net income reached a record $93.6 million, but returns eased: return on average assets was 1.33% versus 1.40%, and return on average tangible common equity was 12.87% versus 13.27%.
- FTE net interest income declined 2.9% as lower earning-asset yields and larger cash balances outweighed lower funding costs. Cost of deposits decreased to 0.23% from 0.45%.
- Mortgage banking income fell $39.0 million, reflecting slower refinancing and tighter gain-on-sale margins. Lower mortgage-related compensation and efficiency measures helped reduce noninterest expenses.
- Commercial and industrial loans increased 16.8% in the reported portfolio mix. PPP balances declined to $21.7 million from $176.1 million as forgiveness progressed. COVID-related payment deferrals outstanding fell to $5.3 million from $173.6 million.
- Transaction deposits rose 15.0% to $5.39 billion and reached 86.5% of deposits, while time deposits fell 15.4%. Cash and cash equivalents increased $240.1 million.
- Available-for-sale securities had $13.3 million of gross unrealized losses at year-end, compared with $0.4 million in 2020; the company attributed the losses to interest-rate movements and said it did not expect credit impairment. AOCI shifted from $9.8 million of income to a $7.0 million loss, net of tax.
Outlook, commentary, risks and unusual items
- Outlook: No quantified earnings, revenue or margin guidance is provided. Management emphasized organic loan and low-cost deposit growth, digital investment, operating efficiencies and selective acquisitions. It noted that the Federal Reserve had indicated likely rate increases beginning in the first quarter of 2022; actual results remain sensitive to rate policy and asset-liability repricing.
- Digital strategy and investments: NBHC announced development of 2UniFi, a proposed digital financial ecosystem for small and medium-sized businesses, including information management and blockchain payment tools. It invested $20.0 million in Finstro Global Holdings and $2.0 million in Figure Technologies; related transaction expenses were $2.5 million.
- Unusual operating items: The company consolidated seven banking centers and sold one. It recorded $4.6 million of consolidation-related income and $1.6 million of related expense, and sold mortgage servicing rights associated with $1.3 billion of unpaid principal balance, recognizing a $1.3 million gain. It repurchased 912,213 shares for $36.4 million and declared $0.87 per share in dividends during 2021.
- Principal risks: Interest-rate changes and margin pressure; competition for loans and deposits; pandemic and borrower-credit uncertainty; real-estate collateral and industry exposures; changes in securities values; execution and integration of 2UniFi and fintech partnerships; cybersecurity and third-party technology dependence; regulatory and capital requirements; and potential mortgage repurchase or indemnification claims. The allowance for credit losses depends on forecasts and significant management judgment.
- Contingencies: Unfunded loan commitments and lines of credit totaled $992.5 million, with standby letters of credit of $7.3 million; these amounts are not necessarily expected to be drawn. The mortgage repurchase reserve was $2.1 million. Management did not believe pending litigation would have a material adverse effect or anticipate material losses from commitments.
- Audit and controls: KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. The allowance for credit losses was identified as a critical audit matter. Management reported effective disclosure controls and internal controls as of December 31, 2021.
Important facts for investors to verify
- Whether loan growth and deposit mix can sustain earnings as excess cash is deployed, and whether net interest margin stabilizes under changing interest rates.
- How much of 2021 earnings depended on the credit-loss provision release, mortgage activity, banking-center gains and equity-method investment gains.
- Whether credit performance and reserve adequacy remain sound as modified loans resume regular payments and economic forecasts change.
- The performance, costs, regulatory implications and expected revenue contribution of 2UniFi and the fintech investments.
- Exposure to rising rates through the mortgage-heavy securities portfolio, including unrealized losses and potential effects on AOCI and capital.
- The terms and future cost of the subordinated notes, and the availability of liquidity after deposit maturities, share repurchases and dividends.
- Potential exposure from mortgage representations and warranties, off-balance-sheet commitments, and third-party cybersecurity or operational incidents.