National Bank Holdings Corporation — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise indicated.
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. At quarter-end, it reported $9.9 billion in assets, $7.5 billion in loans and $8.1 billion in deposits. Its April 2023 acquisition of Cambr added a deposit acquisition and processing platform.
Key financial metrics
| Metric | Q3 2023 | Comparable period |
|---|---|---|
| Net interest income | $87.8 | $69.1 in Q3 2022 |
| Provision for credit losses | $1.1 | $12.7 in Q3 2022 |
| Non-interest income | $19.4 | $17.4 in Q3 2022 |
| Non-interest expense | $60.6 | $53.9 in Q3 2022 |
| Net income | $36.1 | $15.8 in Q3 2022 |
| Diluted earnings per share | $0.94 | $0.50 in Q3 2022 |
| FTE net interest margin | 3.92% | 4.01% in Q3 2022 |
- For the first nine months, net income was $108.9 million, up 99.7% year over year, and diluted EPS was $2.85 versus $1.77. Prior-year results included $10.5 million of after-tax acquisition-related costs; excluding these costs, management reported net income growth of 67.5%.
- Nine-month FTE net interest income increased 57.5% to $276.9 million, and FTE net interest margin rose 68 basis points to 4.12%. Higher asset yields and acquired/organic balance growth supported results, while deposit and funding costs rose materially.
- Nine-month non-interest income declined 10.0% to $47.9 million, chiefly due to lower mortgage banking activity and tighter gain-on-sale margins. Non-interest expense rose 25.3% to $179.9 million, largely reflecting acquisitions, operating costs and higher FDIC assessments. The adjusted FTE efficiency ratio was 53.74%, versus 58.66% a year earlier.
- Nine-month operating cash flow was $122.3 million; investing cash flow was negative $205.4 million and financing cash flow was positive $177.3 million. Cash, cash equivalents and restricted cash increased $94.3 million to $292.8 million.
Balance sheet, capital and credit
- Compared with December 31, 2022, total assets increased 3.1% to $9.87 billion; loans rose 3.6% to $7.48 billion and deposits rose 3.5% to $8.15 billion. Total shareholders’ equity was $1.16 billion.
- Cash and cash equivalents were $291.3 million. Reported on-balance-sheet liquidity, including unencumbered securities, was $705.6 million. FHLB advances were $316.8 million, down from $385.0 million; long-term debt, net, was $54.1 million.
- About 70% of deposits were FDIC-insured; transaction deposits were 87.8% of total deposits. Deposit cost was 1.18% for the first nine months, compared with 0.17% a year earlier. The loan-to-deposit ratio was 91.77%.
- Regulatory capital remained above well-capitalized thresholds: consolidated Tier 1 leverage was 9.6%, common equity Tier 1 was 11.6%, and total risk-based capital was 13.5%. Tangible common equity to tangible assets was 8.50%.
- The allowance for credit losses was $93.4 million, or 1.25% of loans, versus $89.6 million, or 1.24%, at year-end 2022. Nine-month net charge-offs were $0.8 million, or 0.02% of average loans, annualized.
- Non-performing loans increased to $33.2 million, or 0.44% of loans, from $16.5 million, or 0.23%, at year-end. Non-performing assets were 0.49% of loans and OREO, versus 0.28%. A $13.5 million modified commercial real estate loan had defaulted on its modified terms and was non-accrual.
- Available-for-sale securities had $128.0 million of pretax unrealized losses; held-to-maturity securities had $106.3 million of unrealized losses relative to fair value. Management attributed the losses mainly to interest rates and stated it did not expect to need to sell the securities before recovery of amortized cost.
Material changes, outlook and risks
- Cambr was acquired for approximately $46.5 million in April. At acquisition it administered approximately $1.7 billion across more than 500,000 FDIC-insured cash accounts. NBHC recorded $26.9 million of goodwill and $18.0 million of intangibles; purchase accounting remained preliminary.
- Management said deposit competition and sector liquidity pressures were expected to continue. It cited higher rates, unrealized securities losses, deposit mix and cost, real estate values, credit quality, inflation, regulation, cybersecurity and execution of digital and acquisition strategies as risks. It stated recent banking-sector stress had not materially affected NBHC’s financial condition, customer base, liquidity, capital or risk profile.
- Management considered liquidity adequate for short- and long-term needs and anticipated access to funding sources, including $1.7 billion of FHLB borrowing capacity and the Federal Reserve Bank Term Funding Program. It stated these sources were expected to provide adequate liquidity for at least 12 months. No specific earnings or margin guidance was provided.
- Management disclosed an ongoing investigation of irregularities in mortgage loan applications at one office; it said the investigation was incomplete but did not expect a material adverse impact. Mortgage loans sold may also involve repurchase or indemnification obligations. Management did not believe pending litigation would have a material adverse effect.
- The Board authorized a $50 million share repurchase program in May; none had been used through September 30. A quarterly dividend of $0.27 per share was declared November 7, 2023, payable December 15.
- Interest-rate sensitivity modeling indicated a near-neutral position at quarter-end. A modeled immediate 200-basis-point increase projected a 0.19% increase in net interest income; a 200-basis-point decrease projected a 1.19% decline. Actual results may differ from modeled estimates.
Important facts for investors to verify
- Whether the rise in non-performing loans, especially the defaulted modified CRE exposure, leads to further delinquencies, charge-offs or reserve increases.
- Deposit retention, pricing and mix, including the runoff or repricing of $666.3 million of time deposits scheduled to mature within 12 months.
- How deposit costs and interest-rate changes affect margins and earnings; Q3 FTE margin was down year over year despite stronger nine-month results.
- The economic and liquidity implications of unrealized securities losses, pledged securities and the bank’s ability to avoid selling securities at a loss.
- Cambr’s deposit stability, integration, fee contribution and final acquisition accounting, as well as the progress and cost of digital initiatives.
- The outcome of the mortgage application investigation and any resulting repurchase, indemnification or other liabilities.
- Reported results alongside non-GAAP measures: adjusted efficiency, returns and prior-period earnings comparisons depend on management’s exclusions and should be assessed against GAAP figures.