National Bank Holdings Corporation (NBHC) — Q1 2022 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2022. NBHC is a bank holding company operating through NBH Bank, with 81 banking centers in Colorado, the greater Kansas City region, Texas, Utah and New Mexico, alongside online and mobile services. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial results and condition
| Metric | Q1 2022 / March 31, 2022 | Comparable / prior date |
|---|---|---|
| Net income; diluted EPS | $18.4 million; $0.60 | Q1 2021: $26.8 million; $0.86 |
| Net interest income | $46.7 million; FTE $48.0 million | Q1 2021: $45.2 million; FTE $46.5 million |
| Net interest margin | 2.82%; FTE 2.90% | Q1 2021: 2.94%; FTE 3.02% |
| Non-interest income | $19.1 million | Q1 2021: $33.4 million |
| Non-interest expense | $44.1 million | Q1 2021: $49.7 million |
| Total assets | $7,341.5 million | December 31, 2021: $7,214.0 million |
| Loans, net of allowance | $4,625.4 million; total loans $4,674.2 million | December 31, 2021: $4,463.7 million net; $4,513.4 million total |
| Deposits | $6,364.8 million | December 31, 2021: $6,228.2 million |
| Cash and cash equivalents | $786.4 million | December 31, 2021: $845.7 million |
| Shareholders’ equity | $820.2 million | December 31, 2021: $840.1 million |
Lower mortgage banking income was the main reason earnings declined year over year: mortgage banking income fell 56.8% to $9.7 million, reflecting lower refinancing activity and tighter gain-on-sale margins. The efficiency ratio rose to 66.63% from 62.83% in Q1 2021. Return on average assets was 1.04% versus 1.61%; return on average tangible common equity was 10.31% versus 15.20%.
Q1 operating cash flow was $48.8 million, versus $7.5 million in Q1 2021. Investing activities used $240.4 million, principally reflecting $140.0 million of net loan growth and purchases of available-for-sale securities. Financing activities provided $130.8 million, including a $136.6 million increase in deposits. Cash, cash equivalents and restricted cash declined $60.8 million during the quarter.
Long-term debt, net of issuance costs, was $39.5 million, representing a $40 million subordinated note; repurchase-agreement balances were $24.7 million. NBH Bank had no FHLB advances outstanding and reported $0.9 billion of available FHLB credit. The company reported $1.56 billion of on-balance-sheet liquidity, including unencumbered securities. Management stated that available liquidity sources were adequate for expected needs for at least 12 months.
Material changes versus comparable periods
- Net income fell 31.6% year over year, while net interest income before provision increased 3.2% on an FTE basis. The FTE margin narrowed 12 basis points.
- Non-interest income declined $14.3 million, chiefly from mortgage banking. Non-interest expense decreased $5.6 million, mainly due to lower mortgage-related compensation and the absence of $1.3 million of prior-year banking-center consolidation expense.
- Total loans increased $160.9 million, or 3.6%, from year-end; excluding PPP loans, loan growth was $174.9 million, or 15.8% annualized. First-quarter fundings were $419.7 million.
- Deposits increased $136.6 million from year-end. Transaction deposits rose to 87.4% of deposits from 86.5%, and the reported cost of deposits was 0.17%.
- Accumulated other comprehensive loss widened to $38.6 million from $7.0 million, largely reflecting unrealized losses on available-for-sale securities as interest rates rose. Available-for-sale securities had $51.8 million of gross unrealized losses at quarter-end; held-to-maturity securities had $43.6 million. Management attributed the losses to rates and stated it did not intend, and did not expect to be required, to sell the securities before recovery of amortized cost.
Outlook, commentary, risks and unusual items
- No numerical earnings or financial guidance was provided. Management described the bank as asset-sensitive: its model estimated projected net interest income would rise 5.30% for a 100-basis-point parallel rate increase and 11.09% for a 200-basis-point increase; a 25-basis-point decrease was estimated to reduce it 1.87%. These are model-based estimates, not forecasts, and depend on assumptions.
- After quarter-end, NBHC announced agreements to acquire Bancshares of Jackson Hole for aggregate stated value of $230 million and Community Bancorporation for $136 million, with consideration including cash and NBHC shares. Both transactions were expected to close in the second half of 2022, subject to approvals and other conditions. Management estimated approximately $9.6 billion of pro forma assets after completion, using December 31, 2021 figures.
- Risks highlighted include acquisition approval, timing, integration costs and disruption; inflation, labor and supply-chain pressures; changes in interest rates; competition for loans and deposits; real-estate and credit deterioration; regulatory requirements; and cybersecurity and third-party technology risks.
- Credit quality indicators remained favorable: non-performing loans were 0.24% of total loans, non-performing assets were 0.35% of loans and OREO, and the allowance for credit losses was 1.04% of loans. Net charge-offs were $0.6 million; the quarter included a $0.3 million provision release. Management cautioned that future reserve adjustments may be necessary.
- Unfunded commitments totaled $1.08 billion. Mortgage loans sold to investors remain subject to repurchase or indemnification provisions; the related reserve was $2.0 million. Management said pending or threatened litigation was not expected to have a material adverse effect. The company and bank reported capital ratios above applicable well-capitalized thresholds.
Important facts for investors to verify
- Review the definitive merger terms, regulatory approvals, expected integration expenses, closing timetable and potential share dilution for both acquisitions.
- Track mortgage banking revenue and margins, loan growth, deposit mix and cost, and whether margin pressure changes as rates move.
- Assess the impact of rising rates on the securities portfolio, accumulated other comprehensive loss, tangible book value and liquidity; distinguish available-for-sale from held-to-maturity valuation effects.
- Monitor credit quality, charge-offs, criticized loans, real-estate exposures and the allowance for credit losses, including sensitivity to economic forecasts.
- Confirm ongoing capital and liquidity levels, time-deposit maturities, unfunded commitments, and the use of the $38.6 million remaining share-repurchase authorization.