National Bank Holdings Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Unaudited consolidated results include NBHC and its wholly owned bank subsidiary. NBHC operated 101 banking centers, primarily in Colorado and the greater Kansas City region.
Financial performance and position
- Revenue and earnings: Net interest income was $50.3 million, down 1.6% from $51.2 million a year earlier. Non-interest income rose 38.0% to $23.5 million, primarily from mortgage banking income, which increased $6.7 million to $13.7 million. Net income fell 16.4% to $15.8 million; diluted EPS was $0.50 versus $0.60.
- Credit costs and expenses: Provision for loan losses was $6.2 million, compared with $1.5 million in Q1 2019, reflecting CECL adoption and management’s increased provision for COVID-19-related economic deterioration. Non-interest expense rose 9.6% to $48.7 million, largely due to higher mortgage banking commissions and salaries.
- Margins and returns: Fully taxable-equivalent net interest margin was 3.87%, down from 4.05% a year earlier; the GAAP margin was 3.78%, versus 3.95%. Return on average assets was 1.09% (1.12% on a tangible basis), compared with 1.34% (1.39% tangible) in Q1 2019.
- Balance sheet: Total assets were $6.03 billion at March 31, up from $5.90 billion at year-end. Loans were $4.51 billion, up $90.3 million, or 2.0%, from December 31; deposits were $4.74 billion, nearly unchanged. Shareholders’ equity was $763.5 million.
- Credit quality: Allowance for credit losses was $51.0 million, or 1.13% of loans, versus $39.1 million, or 0.88%, at year-end. The increase included a $5.8 million CECL transition adjustment and first-quarter provision. Non-performing loans were 0.47% of loans, compared with 0.49% at year-end; annualized net charge-offs were 0.03%.
- Cash flow and liquidity: Operating cash flow was $26.2 million versus cash used of $3.6 million in Q1 2019; investing cash use was $81.6 million and financing cash provided was $79.1 million. Cash and cash equivalents totaled $133.9 million at quarter-end. On-balance-sheet liquidity, including unencumbered securities, was $416.4 million. The Bank had access to $1.0 billion of FHLB funding, of which $341.5 million was used.
- Funding and capital: FHLB advances rose to $341.5 million from $207.7 million at year-end; repurchase-agreement balances fell to $23.7 million from $56.9 million. The Bank’s total risk-based capital ratio was 12.1%, above the 10.5% well-capitalized threshold. Consolidated tangible common equity to tangible assets was 10.97%.
Material changes and notable items
- NBHC adopted the CECL expected-credit-loss standard on January 1, 2020. It recorded a $5.8 million increase in the allowance and a $4.6 million after-tax reduction to retained earnings. Prior-year figures were not recast.
- Mortgage banking activity strengthened as lower rates drove higher loan production; mortgage banking income nearly doubled year over year. Management also reported $373.9 million of SBA Paycheck Protection Program loan approvals for 2,197 clients as of May 3, 2020, after quarter-end.
- The company repurchased 734,117 shares for $19.5 million during the quarter. A new $50 million repurchase authorization was approved in February; $43.1 million remained at March 31. The Board declared a $0.20-per-share dividend on May 5, payable June 15.
- Accumulated other comprehensive income increased to $12.4 million from $2.1 million at year-end, primarily reflecting gains on available-for-sale securities.
Outlook, commentary, and risks
- Management said COVID-19 had disrupted the communities it serves and could continue to materially affect clients, the economy, the company’s operations, financial condition, and prospects. It cited business closures, unemployment, weaker spending, possible line-of-credit draws, and potential increases in credit losses and reserves.
- Management considered the loan portfolio diversified, with no individual highly impacted industry exposure above 5% of total loans; it reported no direct exposure to several sectors including aviation, cruise lines, gaming, and ride-share businesses. Nonetheless, the company has meaningful small- and mid-sized business lending and real-estate collateral exposure.
- Management believed the $51.0 million allowance was adequate at March 31 but warned that future adjustments were likely and that changes in economic forecasts or assumptions could materially affect results, liquidity, or financial condition.
- The company reported it expected liquidity sources to be adequate for at least 12 months. Its interest-rate model indicated asset sensitivity: projected net interest income increased 3.47% for an immediate, sustained 100-basis-point rate increase and declined 0.60% for a 25-basis-point decrease. Actual results may differ from model estimates.
- No specific earnings or financial guidance was provided. The filing identifies risks including COVID-19, credit and interest-rate risk, funding and liquidity needs, regulatory requirements, cybersecurity, and mortgage-loan repurchase or indemnification obligations. Management said pending litigation was not expected to have a material adverse effect.
Important facts for investors to verify
- How COVID-19 borrower stress, loan modifications, PPP lending, and subsequent credit performance affect the allowance and non-performing loans.
- Whether the mortgage banking income surge is sustainable and how lower rates affect net interest margin and servicing-rights valuations.
- Funding and liquidity trends, including FHLB borrowing, deposit mix, and the $716.2 million of time deposits scheduled to mature within 12 months.
- Capital and shareholder-return decisions, including the remaining share-repurchase authorization and the declared dividend.
- Management’s CECL assumptions and economic forecast scenarios; reported allowance adequacy is an estimate subject to change.