National Bank Holdings Corporation — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Comparisons are with the corresponding 2020 periods unless otherwise noted; balance-sheet comparisons are with December 31, 2020. Amounts are in U.S. dollars.
Business context and reporting period
NBHC is a bank holding company whose primary operations are conducted through NBH Bank. It serves commercial and consumer clients through 81 banking centers, primarily in Colorado and the greater Kansas City region, as well as online and mobile channels. At quarter-end, the company reported $7.1 billion in assets, $4.4 billion in loans and $6.1 billion in deposits.
Financial performance and condition
| Metric | Q3 2021 / September 30, 2021 | Comparison |
|---|---|---|
| Net income | $19.8 million; diluted EPS $0.64 | Q3 2020: $27.9 million; $0.90 diluted EPS |
| Net income, nine months | $70.8 million; diluted EPS $2.27 | 2020: $61.4 million; $1.97 diluted EPS |
| Net interest income | Q3: $47.6 million; nine months: $137.7 million | 2020: $46.7 million and $144.4 million, respectively |
| FTE net interest margin | Q3: 2.93%; nine months: 2.92% | 2020: 3.21% and 3.48%, respectively |
| Non-interest income | Q3: $28.5 million; nine months: $87.1 million | 2020: $44.5 million and $106.9 million, respectively |
| Non-interest expense | Q3: $51.3 million; nine months: $147.3 million | 2020: $55.3 million and $157.8 million, respectively |
| Loans and allowance | Loans: $4.42 billion; allowance for credit losses (ACL): $49.2 million, or 1.11% of loans | Loans rose $68.0 million from year-end; ACL was $59.8 million, or 1.37%, at year-end |
| Deposits and cash | Deposits: $6.13 billion; cash and equivalents: $807.4 million | Deposits increased $458.4 million and cash increased $201.8 million from year-end |
| Capital | Consolidated Tier 1 leverage ratio: 10.4%; common equity Tier 1 ratio: 14.6%; total risk-based capital ratio: 15.5% | Company and Bank met regulatory capital requirements |
For the nine months, operating cash flow was $144.9 million, investing cash flow was negative $366.2 million, and financing cash flow was positive $417.7 million. Cash, cash equivalents and restricted cash ended the period at $811.9 million. The company reported $1.57 billion of on-balance-sheet liquidity and access to $0.9 billion of FHLB credit; management stated the Bank had $2.6 billion in readily available funds.
Outstanding securities sold under repurchase agreements were $21.4 million; the Bank had no FHLB borrowings at quarter-end. Shareholders’ equity was $844.7 million. The company repurchased 527,214 shares for $19.4 million during Q3 and declared a quarterly dividend of $0.22 per share in November. The Bank’s loan-to-deposit ratio was 72.1%.
Material changes versus comparable periods
- Q3 net income fell year over year, primarily alongside a sharp decline in mortgage banking income; nine-month net income increased, helped by a $9.4 million provision release versus $17.6 million of provision expense in 2020.
- Nine-month FTE net interest income declined 4.5% and FTE margin narrowed 56 basis points year over year. Management cited lower earning-asset yields, the shift into lower-yielding cash and the effects of prior Federal Reserve rate cuts. Lower funding costs partly offset these pressures.
- Nine-month non-interest income fell 18.5%, mainly because of lower mortgage refinance demand and tighter mortgage loan sale margins. Non-interest expense declined 6.6%, reflecting lower mortgage-related compensation and efficiency initiatives.
- Non-PPP loans grew $167.3 million, or 4.0%, from year-end; total loans grew $68.0 million as PPP balances declined. Deposits rose 8.1%, with non-interest-bearing demand deposits increasing $336.1 million.
- Credit metrics improved: non-performing loans declined to $12.8 million, or 0.29% of loans, from $20.4 million, or 0.47%, at year-end. The ACL-to-loans ratio fell to 1.11% from 1.37%.
Outlook, management commentary, risks and unusual items
- Outlook: The filing provides no quantified earnings or financial guidance. Management said it expects available liquidity sources to provide adequate funding for at least 12 months. It described loan growth, disciplined underwriting and deployment of excess cash into quality loans and securities as priorities.
- Interest-rate sensitivity: Management characterized the balance sheet as asset-sensitive. Its model projected net interest income increases of 12.11% and 6.04% under immediate, sustained rate increases of 200 and 100 basis points, respectively, and a 0.17% decline under a 25-basis-point decrease. The filing cautions that actual results may differ materially from model estimates.
- COVID-19 and credit: Management noted continuing uncertainty around variants, vaccine effectiveness and economic effects. COVID-related loans still on payment deferral totaled $0.9 million at quarter-end, down from $173.6 million at year-end 2020. Risks include real-estate values, borrower performance, economic conditions and estimates underlying the ACL.
- Strategic and unusual items: NBHC invested $20.0 million in Finstro Global Holdings and $2.0 million in Figure Technologies to support a digital financial ecosystem initiative; nine-month expenses included $2.5 million of related transaction costs. It completed seven banking-center consolidations and sold one center; nine-month consolidation expense was $1.6 million. It also sold servicing rights on $1.3 billion of mortgage balances, recognizing a $1.3 million gain, and recorded $0.8 million of OREO impairment during Q3.
- Subsequent financing: On November 5, 2021, the company agreed to issue $40.0 million of unsecured subordinated notes due 2031. The notes bear 3.00% interest through November 15, 2026, then reset quarterly to three-month SOFR plus 203 basis points. Proceeds are intended for general corporate purposes.
- Other risks and contingencies: The company identifies competition, interest-rate and liquidity exposure, credit risk, cybersecurity and third-party technology dependence, regulatory changes, and execution of digital and growth strategies as risks. Unfunded commitments totaled $1.05 billion. Management did not expect pending or threatened litigation to have a material adverse effect; it reported no material risk-factor changes and concluded disclosure controls were effective.
Important facts for investors to verify
- Whether loan growth and the deployment of excess liquidity can offset continued pressure on earning-asset yields and net interest margin.
- Whether the improvement in non-performing loans and the ACL release remain supported by subsequent credit performance and economic conditions.
- How deposit balances and costs evolve as stimulus-related cash flows recede and $592.6 million of time deposits mature within 12 months.
- The ongoing effects of lower mortgage activity and the strategic sale of servicing rights on mortgage banking income and servicing exposure.
- The performance, valuation and strategic returns of the Finstro and Figure investments, along with the completed branch actions and associated costs.
- The terms, capital treatment and future interest expense of the $40.0 million subordinated notes, and the company’s use of remaining share-repurchase authorization.
- The assumptions behind management’s interest-rate sensitivity estimates and the extent to which modeled results depend on deposit behavior, prepayments and future rate movements.