Business context and reporting period
National Bank Holdings Corporation (NBHC), a bank holding company operating through NBH Bank, filed this unaudited Form 10-Q for the quarter ended September 30, 2020. It served 100 banking centers, primarily in Colorado and the greater Kansas City region. Results reflect the COVID-19 pandemic and the January 1, 2020 adoption of CECL.
Financial and operating highlights
- Profitability: Third-quarter net income was $27.9 million, or $0.90 diluted EPS, versus $21.6 million and $0.69 a year earlier. Nine-month net income was $61.4 million, or $1.97 diluted EPS, versus $60.8 million and $1.93. Nine-month adjusted net income, a non-GAAP measure excluding after-tax branch consolidation costs, was $63.1 million versus $61.5 million.
- Revenue and margins: Q3 net interest income was $46.7 million, down from $51.8 million; non-interest income rose to $44.5 million from $24.8 million, led by mortgage banking income of $34.9 million versus $14.7 million. Nine-month net interest income was $144.4 million versus $155.4 million, while non-interest income was $106.9 million versus $62.5 million. FTE net interest margin fell to 3.21% for Q3 from 3.91%, and to 3.48% year to date from 3.98%.
- Credit costs: Q3 loan-loss provision was $1.2 million versus $5.7 million; nine-month provision was $17.6 million versus $10.5 million. The September 30 allowance for credit losses was $61.0 million, or 1.34% of loans (1.45% excluding fully SBA-guaranteed PPP loans), compared with $39.1 million, or 0.88%, at year-end 2019. Management attributed the increase to CECL and pandemic-related economic deterioration.
- Balance sheet and liquidity: Total assets were $6.60 billion, up from $5.90 billion at year-end 2019. Loans were $4.56 billion, up 3.2%; deposits were $5.62 billion, up 18.6%. Cash and cash equivalents were $445.1 million; on-balance-sheet liquidity, including unencumbered securities, was $790.5 million. Management reported $400 million of excess cash liquidity and access to $2.3 billion in readily available funds.
- Funding, capital and shareholder returns: NBH had no FHLB advances outstanding at September 30, 2020; repurchase-agreement borrowings were $23.9 million. It had access to a $1.0 billion FHLB facility. The Bank exceeded well-capitalized regulatory thresholds; its CET1 ratio was 12.4%, and consolidated Tier 1 leverage was 10.6%. The company repurchased 734,117 shares for $19.5 million in Q1; $43.1 million remained under its $50 million repurchase authorization. A $0.20 quarterly dividend was declared November 5, payable in December.
- Cash flow, nine months: Operating cash flow was negative $61.7 million, investing cash flow negative $204.5 million, and financing cash flow positive $601.1 million. Cash, cash equivalents and restricted cash increased $334.9 million to $455.1 million. Mortgage-loan originations and sales substantially affect operating cash flows.
Material changes versus comparable periods
- Lower interest rates reduced earning-asset yields and net interest margin; lower funding costs partly offset the decline in interest income.
- Mortgage banking income increased sharply amid higher mortgage production. Related salaries and benefits also rose, contributing to higher non-interest expense: up 26.3% in Q3 and 17.2% year to date.
- Prior-year comparisons include $7.2 million of nine-month net gains on OREO sales, versus $25,000 in 2020. Nine-month 2020 also included $2.1 million of branch-consolidation expense; 12 center consolidations were planned.
- CECL adoption increased the allowance by $5.8 million and reduced retained earnings by $4.6 million, net of tax. The allowance-to-loan ratio rose to 1.34% from 0.88% at year-end.
- Non-performing loans declined to $18.9 million from $21.7 million at year-end; non-performing assets were $23.5 million versus $29.0 million.
Outlook, commentary and risks
- No quantified earnings or growth guidance is provided. Management said it expected available liquidity sources to fund the business for at least 12 months, and anticipated interest rates would remain near zero for the foreseeable future.
- Management described a cautious approach to new lending and continued monitoring of credit quality. Of $499.5 million of COVID-related loan modifications during the first nine months, $165.2 million remained on deferral at quarter-end; all modified loans were classified as performing. PPP loans outstanding were $348.3 million and fully guaranteed by the SBA.
- COVID-19 risks include borrower stress, further credit losses and reserve increases, reduced business activity and consumer spending, operational disruption, and effects on liquidity, capital and earnings. Management noted that the pandemic’s duration and economic impact remained uncertain.
- Other key exposures include low rates and interest-rate sensitivity, real-estate collateral values, deposit and loan growth, regulatory changes, cybersecurity and third-party technology dependence. The company reported it was asset-sensitive; its model estimated net interest income would rise 6.01% under an immediate sustained 100-basis-point increase and fall 0.58% under a 25-basis-point decrease, subject to modeling assumptions.
- Management said it did not expect pending or threatened litigation to have a material adverse effect. The filing also describes potential mortgage-loan repurchase and indemnification obligations; the reserve was $2.8 million at September 30.
Most important facts for investors to verify
- Whether mortgage banking income and production remain strong, and how much expense growth accompanies that activity.
- How CECL assumptions, economic forecasts and remaining COVID-related loan deferrals affect future provisions, charge-offs and asset quality.
- Whether deposit growth persists and whether the reported liquidity and borrowing capacity remain available under stress.
- How near-zero rates affect net interest margin and earnings relative to management’s interest-rate sensitivity model.
- Progress, costs and expected benefits of the 12 banking-center consolidations, alongside capital allocation through dividends and repurchases.