National Bank Holdings Corporation — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Unaudited consolidated results. NBHC operates through NBH Bank, with 105 banking centers primarily in Colorado and the greater Kansas City region; it announced plans to expand into Salt Lake City’s Wasatch Front.
Financial performance
Amounts are in millions except per-share data and percentages.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net interest income | $52.5 | $49.4 | $103.7 | $97.0 |
| Provision for loan losses | $3.2 | $1.9 | $4.8 | $1.9 |
| Non-interest income | $20.7 | $19.6 | $37.7 | $37.4 |
| Non-interest expense | $46.5 | $46.8 | $90.8 | $102.0 |
| Net income | $20.3 | $17.5 | $39.2 | $26.0 |
| Diluted EPS | $0.64 | $0.56 | $1.24 | $0.83 |
- Q2 net interest margin was 3.91% GAAP and 4.00% fully taxable equivalent (FTE), versus 3.86% and 3.95%, respectively, a year earlier. H1 FTE margin rose 13 basis points to 4.03%.
- H1 FTE net interest income increased 7.0% to $106.2 million. Higher loan yields and originated-loan growth more than offset higher funding costs; H1 cost of funds rose to 0.94% from 0.56%, and cost of deposits to 0.62% from 0.41%.
- H1 non-interest expense fell $11.2 million year over year, chiefly because 2018 included $8.0 million of Peoples acquisition costs and the company cited integration efficiencies. 2018 H1 net income included $6.3 million after-tax of acquisition costs; management’s adjusted comparison was $32.3 million net income and $1.03 diluted EPS.
- H1 return on average assets was 1.37%, return on average tangible assets 1.41%, and FTE efficiency ratio 62.73% (non-GAAP measures).
Financial position, funding and cash flow
- At June 30, 2019, total assets were $5.86 billion, loans $4.33 billion, deposits $4.69 billion and shareholders’ equity $733.9 million. Compared with December 31, 2018, assets rose $181.3 million and loans rose $238.0 million; total investment securities declined $106.8 million.
- Deposits increased $152.4 million from year-end. Transaction deposits represented 77.0% of deposits, versus 76.2% at year-end. The loan-to-deposit ratio was 92.37%, compared with 90.23% at March 31, 2019 and 82.60% at year-end 2018.
- FHLB advances were $272.4 million and repurchase agreements were $60.4 million. The Bank had $1.2 billion of available FHLB credit. H1 cash flows were $(0.8) million from operations, $(119.8) million from investing and $102.2 million from financing; cash and cash equivalents declined $18.4 million. Cash, cash equivalents and restricted cash ended at $101.2 million.
- On-balance-sheet liquidity, including unencumbered securities, was $477.3 million, down from $683.2 million at year-end, primarily as funds were used for loan growth. Management stated that available funding sources should provide adequate liquidity for at least twelve months.
- Consolidated Tier 1 leverage was 10.6%, common equity Tier 1 and Tier 1 risk-based capital were each 12.9%, and total risk-based capital was 13.8%. The Bank exceeded well-capitalized regulatory thresholds.
Changes, credit quality and unusual items
- Total loans grew 5.8% from year-end, with originated and acquired loans increasing $248.2 million; growth was led by commercial lending. Commercial loans were 66.6% of total loans.
- Non-performing loans increased to $33.7 million, or 0.78% of loans, from $24.5 million and 0.60% at year-end. Non-performing assets were $40.8 million, or 0.94% of loans and OREO, versus $35.1 million and 0.85%. Management attributed much of the increase to one previously acquired commercial loan placed on non-accrual in Q2, including a $2.4 million specific reserve.
- The allowance for loan losses was $40.1 million, or 0.93% of loans, versus $35.7 million and 0.87% at year-end. H1 net charge-offs were $0.4 million, an annualized 0.02% of average loans. Management considered the allowance adequate but cautioned that estimates and future adjustments are uncertain.
- Mortgage banking income increased 16.7% in Q2 to $10.4 million, primarily from higher sales of residential mortgage loans. H1 OREO-related income declined $0.7 million year over year. OREO was $7.1 million at quarter-end, down from $10.6 million at year-end.
- Available-for-sale and held-to-maturity securities were mainly government-backed mortgage securities. Management attributed unrealized losses to interest rates and reported no other-than-temporary impairment. A subsequent sale of an OREO property on August 1 generated a $4.4 million gain; the property had zero carrying value at June 30.
Outlook, risks and contingencies
- No quantified earnings or growth guidance was provided. Management emphasized continued high-quality loan growth, transaction-deposit growth, disciplined expansion and the planned Utah market entry. It described stable economic conditions and strong local real estate fundamentals, while noting its portfolio’s real-estate exposure.
- Management reported the company was asset-sensitive at quarter-end. Its model estimated projected net interest income would change +5.64% for an immediate, sustained 200-basis-point increase and −3.84% for a 100-basis-point decrease. These are scenario estimates, not forecasts; actual results may differ materially.
- Key cited risks include economic and credit deterioration, real-estate values, prolonged depressed agricultural commodity prices, competition, deposit and funding costs, interest-rate changes, regulation and capital/liquidity requirements, cybersecurity and technology dependence, and execution of growth or acquisitions.
- Adoption of the expected-credit-loss standard (ASU 2016-13) was scheduled for January 1, 2020; NBHC was evaluating the impact and said adoption could increase its allowance.
- Unfunded commitments totaled $746.4 million, including $738.1 million of loan commitments and $8.3 million of standby letters of credit. Mortgage repurchase and indemnification obligations were reserved at $2.6 million. Management did not expect material losses from commitments or litigation.
- The Board declared a $0.19-per-share quarterly dividend on August 7, payable September 13, 2019. The existing repurchase authorization had $12.6 million remaining; no shares were repurchased under the program during the quarter. Disclosure controls were assessed as effective, and no material change in internal control was reported.
Important facts for investors to verify
- Whether the rise in non-performing loans and the large specific reserve remain isolated to the cited acquired commercial loan, and how subsequent credit trends affect provisions and allowance coverage.
- Whether commercial loan growth and deposit gathering continue to support margin and liquidity as deposit and borrowing costs rise.
- The assumptions and likely balance-sheet effect of the 2020 expected-credit-loss standard.
- Whether the modeled interest-rate sensitivity, funding availability and scheduled $723.6 million of time-deposit maturities within twelve months evolve as management expects.
- The earnings contribution and cash realization from the $4.4 million subsequent OREO sale gain, and the extent to which reported comparisons rely on non-GAAP adjustments for acquisition costs.