National Bank Holdings Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Financial statements are unaudited. Comparisons below are generally with Q1 2022 for operating results and December 31, 2022 for balance-sheet amounts.
Business context
NBHC is a bank holding company operating through NBH Bank and Bank of Jackson Hole Trust, with more than 95 banking centers across several western and central U.S. markets. It reported $9.9 billion in assets, $7.3 billion in loans and $7.6 billion in deposits at quarter-end. The company cites organic growth, acquisitions and digital services as elements of its strategy.
Key financial metrics
| Metric | Q1 2023 / March 31, 2023 | Comparable period / change |
|---|---|---|
| Net income | $40.3 million | $18.4 million in Q1 2022 |
| Diluted EPS | $1.06 | $0.60 in Q1 2022 |
| Net interest income | $94.9 million GAAP; $96.3 million FTE | $46.7 million GAAP; $48.0 million FTE in Q1 2022 |
| Net interest margin | 4.32% GAAP; 4.39% FTE | 2.82% GAAP; 2.90% FTE in Q1 2022 |
| Non-interest income / expense | $14.7 million / $58.3 million | Income down 23.0%; expense up 32.2% year over year |
| Loans / allowance for credit losses | $7.35 billion / $90.3 million | Loans up $124.8 million from year-end; allowance was $89.6 million |
| Deposits / FHLB advances | $7.58 billion / $1.00 billion | Deposits down $290.9 million; advances were $385.0 million at year-end |
| Cash and cash equivalents | $369.7 million | $195.5 million at year-end |
| Shareholders’ equity | $1.13 billion | $1.09 billion at year-end |
| Operating cash flow | $(18.8) million | $48.8 million provided in Q1 2022 |
Return on average assets was 1.70%; return on average tangible assets was 1.80%. The FTE efficiency ratio, excluding intangible amortization, was 51.30%. The loan-to-deposit ratio was 96.88%. Approximately 70% of deposits were FDIC insured, and management said the deposit base had no venture-capital or crypto deposits.
Consolidated regulatory capital ratios were 9.5% for Tier 1 leverage, 11.3% for common equity Tier 1 and Tier 1 risk-based capital, and 13.2% for total risk-based capital. Management reported ratios above applicable well-capitalized thresholds.
Material changes and drivers
- Net interest income more than doubled year over year, supported by higher earning-asset yields, loan growth, acquisitions and prior Federal Reserve rate increases. FTE earning-asset yield rose to 5.24%, while FTE cost of funds increased to 0.90% from 0.19%.
- Non-interest income declined $4.4 million, principally because mortgage banking income fell $6.5 million amid lower refinancing activity and tighter gain-on-sale margins. Service charges and bank-card fees together increased $0.9 million.
- Non-interest expense rose $14.2 million, largely reflecting the 2022 acquisitions. FDIC insurance expense increased $1.7 million, including the effect of a higher assessment rate effective January 2023.
- Quarter-end deposits declined $290.9 million from year-end, with transaction deposits down $396.0 million and time deposits up $105.1 million. FHLB advances increased by $615.0 million; the company said these borrowings funded loan originations and increased cash.
- Loans grew 1.7% from year-end; non-owner-occupied commercial real estate represented 24.8% of loans. Non-performing loans declined to $9.5 million, or 0.13% of loans, from $16.5 million, or 0.23%, at year-end. Net charge-offs were $0.3 million.
- Available-for-sale securities had $101.8 million of gross unrealized losses; held-to-maturity securities had $83.2 million of gross unrealized losses at quarter-end. Management attributed losses to interest rates and said it did not intend, and did not expect to be required, to sell the securities before recovery of amortized cost.
Outlook, risks and unusual items
- Outlook and liquidity: No quantified earnings or margin guidance is provided. Management expected intense deposit competition and said excess cash, borrowing capacity and other funding sources should meet liquidity needs for at least 12 months. It intended to repay the $1.0 billion of FHLB advances over the next 12 months. On-balance-sheet liquidity was $844.8 million, including cash and unencumbered securities.
- Subsequent acquisition: In April 2023, NBH Bank acquired Cambr Solutions, a deposit acquisition and processing platform. By April 30, it had added $0.5 billion in deposits and used the funds to repay $0.5 billion of FHLB advances. Management described the platform as a potential source of diversified, lower-cost core funding.
- Interest-rate exposure: The company described itself as asset-sensitive. Its model estimated that an immediate, sustained 200-basis-point rate increase would raise projected net interest income 1.58%; a 200-basis-point decrease would reduce it 4.15%. Actual outcomes may differ from the model.
- Credit and sector risks: Management cited real-estate values, credit deterioration, economic conditions and deposit competition as risks. Non-owner-occupied CRE was 24.8% of loans and 176.3% of risk-based capital. Management considered the allowance adequate but noted future adjustments may be necessary.
- Mortgage investigation: The company disclosed irregularities in mortgage loan applications at one office that prompted an investigation. The investigation was incomplete, and management gave no assurance about whether the outcome could materially affect the business or financial condition.
- Banking-sector and regulatory risks: The filing highlights possible deposit outflows following bank failures, increased regulatory scrutiny, potential FDIC special assessments or higher assessment rates, and associated cost and profitability impacts.
- Other items: The Board authorized a new $50 million share-repurchase program on May 9, 2023, replacing the prior authorization. It also declared a $0.26-per-share quarterly dividend payable June 15, 2023. Management reported effective disclosure controls and no material litigation expected to adversely affect the company.
Important facts for investors to verify
- Whether deposit levels, mix and costs stabilize, and whether the planned FHLB advance repayment is achieved without weakening liquidity.
- How unrealized securities losses, pledged collateral and any need to sell securities could affect liquidity or capital under adverse conditions.
- Developments and potential financial effects of the mortgage-loan application investigation and any related repurchase or indemnification exposure.
- Credit trends in commercial real estate and other loan portfolios, including non-performing loans, criticized loans and allowance adequacy.
- Whether Cambr’s deposits are retained and provide durable, cost-effective funding; also monitor acquisition integration expenses and operating-cost trends.
- The filing gives different weighted-average Q1 new-loan origination rates in different MD&A passages (7.9% and 7.5%); verify the intended figure with the company’s disclosures.