Business context and reporting period
National Bank Holdings Corporation (NYSE: NBHC) filed its Form 10-K for the fiscal year ended December 31, 2020. It is a bank holding company operating through NBH Bank, serving commercial and consumer clients primarily in Colorado, the greater Kansas City region, Texas, Utah and New Mexico through 90 banking centers and digital channels.
Financial and operating metrics
Amounts are in U.S. dollars; financial statement figures are in millions unless noted.
| Metric | 2020 | 2019 |
|---|---|---|
| Total assets, year-end | $6,659.9 | $5,895.5 |
| Loans, year-end | $4,353.7 | $4,415.4 |
| Deposits, year-end | $5,676.2 | $4,737.1 |
| Shareholders’ equity, year-end | $820.7 | $766.9 |
| Net interest income | $192.9 | $205.8 |
| Non-interest income | $140.3 | $82.8 |
| Net income | $88.6 | $80.4 |
| Diluted EPS | $2.85 | $2.55 |
| Provision for credit losses | $17.6 | $11.6 |
| Net interest margin | 3.33% (3.42% FTE) | 3.83% (3.93% FTE) |
| Efficiency ratio | 61.52% | 62.22% |
- Net income increased 10.2%. Non-interest income rose 69.5%, driven by record mortgage banking income of $102.4 million; mortgage banking activity benefited from low rates and higher production.
- Net interest income declined 6.3% as lower interest rates reduced earning-asset yields; FTE net interest income fell 6.1%. The FTE yield on earning assets fell 76 basis points, while funding costs also declined.
- Non-interest expense increased 14.1% to $206.2 million, reflecting higher mortgage-related compensation, $2.3 million of banking-center consolidation costs, and the absence of the prior-year $7.2 million net gain on OREO sales.
- Operating cash flow was negative $9.9 million, versus positive $42.5 million in 2019; mortgage loan originations for sale and related sale proceeds materially affect this measure. Cash and cash equivalents ended the year at $605.6 million. Cash, cash equivalents and restricted cash at year-end were $615.6 million.
- Year-end liquidity included $1.12 billion of on-balance-sheet cash and unencumbered securities, $365 million of reported excess cash liquidity, and access to $2.2 billion in readily available funds. FHLB borrowing capacity was $0.9 billion; there were no FHLB advances outstanding at year-end. Repurchase-agreement balances were $22.9 million.
- Credit quality indicators included an allowance for credit losses of $59.8 million, or 1.37% of loans (1.43% excluding PPP loans); non-performing loans were 0.47% of loans, and net charge-offs were 0.06% of average loans.
- Capital ratios remained above well-capitalized thresholds: consolidated Tier 1 leverage 10.7%, CET1 14.7%, and total risk-based capital 15.8%. Tangible common equity to tangible assets was 10.80%.
Material changes versus the prior comparable period
- Deposits rose 19.8%, including a 27.5% increase in transaction deposits; non-interest-bearing deposits reached 37.1% of total deposits, versus 25.0% a year earlier. The filing attributes strong deposit growth partly to stimulus-related inflows and client operating balances.
- Loans declined 1.4% despite $176.1 million of PPP loans outstanding, as commercial and industrial balances fell. Total loans originated during the year were $1.16 billion, including $358.9 million of PPP originations.
- The allowance increased 53.0%, including a $5.8 million day-one increase from adoption of CECL on January 1, 2020 and additional provision for pandemic-related economic uncertainty. The accounting change reduced opening retained earnings by $4.6 million, net of tax.
- The company consolidated 11 banking centers during 2020 and one more in January 2021. It announced seven further consolidations expected to be substantially completed in the first half of 2021.
- Mortgage loans held for sale increased to $247.8 million from $117.4 million. Mortgage loans serviced for others rose to $1.4 billion from $308.4 million.
Outlook, commentary, risks and unusual items
- No formal earnings or financial guidance was provided. Management said the duration and economic effects of COVID-19, the pace and effectiveness of vaccine distribution, and the timing of recovery remained uncertain. It described a cautious approach to new lending and continued monitoring of clients and credit exposures.
- Management’s priorities included supporting clients through PPP and loan modifications, protecting employees and clients, maintaining bank safety and soundness, growing core deposits, pursuing organic growth, improving efficiency and considering disciplined acquisitions.
- At year-end, $173.6 million of loans remained on COVID-related deferral plans, or 4.0% of loans; all COVID-modified loans were classified as performing. Of the $519.0 million modified during 2020, $345.4 million had resumed payments or been paid in full.
- Key risks include pandemic-driven borrower stress and credit losses; commercial real estate and collateral-value declines; prolonged low rates and margin pressure; liquidity and deposit competition; mortgage repurchase and servicing risks; regulatory and capital requirements; cybersecurity and third-party system dependence; and the LIBOR transition.
- Unusual or important items include record mortgage banking income, CECL adoption, banking-center consolidation charges, share repurchases of $19.5 million, and dividends declared of $0.80 per share for 2020. In February 2021, the board authorized a new $75 million repurchase program to replace the prior authorization.
- The independent auditor issued an unqualified opinion on the financial statements and internal control. The collective allowance for credit losses was identified as a critical audit matter because of its model assumptions, forecasts and significant management judgment. Management reported effective disclosure controls and internal control over financial reporting.
Important facts for investors to verify
- Whether exceptional mortgage banking revenue can be sustained and how results normalize as rates, refinancing activity and loan-sale margins change.
- Whether loan growth resumes and whether the pandemic-era allowance proves adequate as deferrals end and borrower performance develops.
- The composition and durability of the sharp deposit growth, including the level and cost of transaction deposits and maturities of $659.5 million in time deposits due within 12 months.
- How interest-rate changes affect net interest income: management’s model projected a 14.22% increase under an immediate, sustained 200-basis-point rise, subject to significant assumptions.
- The effects of announced branch consolidations, their execution costs and expected efficiency benefits; the filing provides no quantified savings target.
- Potential mortgage repurchase exposure, the $2.7 million repurchase reserve, derivative collateral requirements, and the transition of LIBOR-linked contracts.
- That non-GAAP measures, including adjusted earnings and FTE metrics, supplement rather than replace GAAP results.