National Bank Holdings Corporation — Q1 2019 Form 10-Q
Business context and reporting period
National Bank Holdings Corporation is a bank holding company operating primarily through NBH Bank, with 104 banking centers concentrated in Colorado and the greater Kansas City region. This unaudited report covers the three months ended March 31, 2019; balance-sheet comparisons are with December 31, 2018.
Financial performance and position
| Metric | Q1 2019 / March 31, 2019 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $51.2 million; $52.4 million FTE | $47.6 million GAAP; $48.7 million FTE in Q1 2018 |
| Net interest margin | 3.95%; 4.05% FTE | 3.76%; 3.84% FTE in Q1 2018 |
| Net income / diluted EPS | $18.9 million / $0.60 | $8.5 million / $0.27 in Q1 2018 |
| Non-interest income / expense | $17.1 million / $44.4 million | $17.8 million / $55.3 million in Q1 2018 |
| Total assets | $5.80 billion | $5.68 billion at December 31, 2018 |
| Loans, gross | $4.25 billion | $4.09 billion at December 31, 2018 |
| Deposits | $4.71 billion | $4.54 billion at December 31, 2018 |
| Cash and cash equivalents | $105.3 million | $109.6 million at December 31, 2018 |
| Shareholders’ equity | $715.0 million | $695.0 million at December 31, 2018 |
Interest expense was $8.3 million, up from $5.1 million a year earlier; the average cost of interest-bearing liabilities rose to 0.88% from 0.55%. The allowance for loan losses was $37.1 million, or 0.87% of gross loans. Annualized net charge-offs were 0.02% of average loans. Non-performing loans were 0.62% of loans and non-performing assets were 0.84% of loans and OREO.
Operating cash flow was negative $3.6 million, investing cash flow negative $94.9 million, and financing cash flow positive $94.2 million. The period-end cash, cash equivalents and restricted cash balance was $115.3 million. On-balance-sheet liquidity, including unencumbered securities, was $610.4 million. FHLB advances totaled $228.4 million, down from $301.7 million; repurchase-agreement funding was $59.5 million. The Bank reported $1.1 billion of available FHLB credit.
Capital remained above regulatory thresholds: consolidated Tier 1 leverage was 10.6%, and common equity Tier 1 and Tier 1 risk-based ratios were each 12.8%. The Bank’s total risk-based capital ratio was 11.7%.
Material changes versus comparable periods
- Net income more than doubled year over year, but Q1 2018 included $7.6 million of pre-tax ($6.0 million after-tax) Peoples acquisition costs. Excluding those costs, management reported Q1 2018 adjusted net income of $14.5 million and diluted EPS of $0.47.
- FTE net interest income increased 7.6% year over year and FTE margin expanded 21 basis points to 4.05%, supported by higher originated-loan yields and volumes. Higher funding costs partly offset the benefit.
- Loans rose $154.6 million, or 3.8%, from year-end, driven by originated lending. Deposits grew $178.8 million; transaction deposits increased $178.3 million and reached 77.1% of deposits.
- Non-interest expense fell $10.9 million year over year, reflecting the prior-year acquisition costs and integration efficiencies. Non-interest income declined $0.8 million, mainly because of lower mortgage banking and OREO-related income.
- Allowance expense increased to $1.5 million from $41 thousand in Q1 2018, primarily to support originated-loan growth. Non-performing loans increased 7.6% from year-end, while non-performing assets as a share of loans and OREO edged down.
Outlook, commentary, risks and unusual items
- No numerical earnings or balance-sheet guidance is provided. Management said it expects available liquidity sources to fund operations and obligations for at least twelve months and is focused on growing commercial lending and lower-cost transaction deposits.
- The company announced a planned expansion into Utah, focused on commercial and business banking in the Salt Lake City area. It also cited competition, interest-rate movements, economic and real-estate conditions, credit quality, deposit funding costs, regulation, cybersecurity, and execution of growth or acquisition plans as risks.
- Management described the company as asset-sensitive. Its model estimated that an immediate, sustained 100-basis-point rate increase would raise projected net interest income by 3.37%, while a 100-basis-point decrease would lower it by 5.37%. These are model estimates, not forecasts, and depend on assumptions about rates, deposits, prepayments and management actions.
- Adoption of the new lease standard on January 1, 2019 added $30.5 million of right-of-use assets and lease liabilities and a $0.3 million opening retained-earnings adjustment. At quarter-end, related assets and liabilities were $29.4 million.
- The company is preparing for the expected-credit-loss standard, effective January 1, 2020; management said adoption could increase the allowance, but its impact was still being evaluated. Investment-security unrealized losses were attributed to interest rates; management reported no other-than-temporary impairment and no intent or expected need to sell before recovery.
- Loan commitments were $738.4 million and standby letters of credit $11.2 million. Mortgage-loan sale representations and warranties were supported by a $3.4 million reserve. Management did not expect pending litigation to have a material adverse effect, and reported no material change to previously disclosed risk factors.
Most important facts for investors to verify
- How much of the earnings improvement persists after separating prior-year Peoples acquisition costs from ongoing operating performance.
- Whether loan growth, deposit mix and net interest margin can hold up as deposit and other funding costs rise.
- Whether asset quality remains stable, particularly given the increase in non-performing loans and the higher loan-loss provision.
- How the CECL transition affects the allowance, retained earnings and regulatory capital when implemented.
- Whether management’s interest-rate sensitivity assumptions and stated liquidity sources remain appropriate under changing market conditions.
- Whether the Utah expansion and other growth initiatives can be executed without materially increasing costs or credit risk.