National Bank Holdings Corp annual report, FY2023

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National Bank Holdings Corporation — FY2023 Form 10-K

Reporting period: Fiscal year ended December 31, 2023; filed February 27, 2024. This is an annual filing, and the supplied text does not provide a clear standalone fourth-quarter income statement. NBHC is a regional financial holding company operating primarily through NBH Bank and Bank of Jackson Hole Trust, with more than 90 banking centers across Colorado, the greater Kansas City region, Utah, Wyoming, Texas, New Mexico and Idaho.

Financial performance and position

  • Scale at year-end: Assets were $9.95 billion, loans $7.70 billion, deposits $8.19 billion and shareholders’ equity $1.21 billion. Trust and wealth assets under management were approximately $0.9 billion.
  • Earnings: Net income was $142.0 million, or $3.72 per diluted share, versus $71.3 million, or $2.18, in 2022. The 2022 comparison included $36.8 million of pretax acquisition-related provision and expenses; excluding those items, management reported 2023 net income growth of 42.7%.
  • Net interest income and margin: GAAP net interest income rose to $362.0 million from $266.8 million. Fully taxable-equivalent (FTE) net interest income was $368.1 million, up 35.1%; FTE net interest margin increased to 4.08% from 3.73%. Earning-asset yield rose to 5.56%, while cost of funds increased to 1.58%.
  • Other revenue and expenses: Non-interest income declined 5.0% to $63.9 million, mainly as mortgage banking income fell 42.7% to $13.6 million amid weaker purchase/refinance activity and tighter sale margins. Non-interest expense rose 14.6% to $242.0 million, reflecting acquisitions, operating costs and higher FDIC insurance expense. The reported efficiency ratio was 56.82%; the company’s adjusted FTE ratio excluding intangible amortization and acquisition expenses was 54.31%.
  • Returns and per-share measures: Return on average assets was 1.45%; return on average equity was 12.29%. Tangible common book value per share, a non-GAAP measure, was $22.77, up from $20.63. Dividends paid were $1.04 per share for the year.
  • Credit quality: The allowance for credit losses (ACL) was $97.9 million, or 1.27% of loans, versus 1.24% a year earlier. Provision expense was $8.3 million in the financial statements; net charge-offs were $1.1 million, or 0.02% of average loans. Non-performing loans increased to 0.37% of loans from 0.23%, and non-performing assets to loans and OREO increased to 0.42% from 0.28%.
  • Liquidity and funding: On-balance-sheet liquidity—cash and unencumbered securities—was $529.4 million, down from $671.8 million. NBHC also reported $1.7 billion of FHLB borrowing availability and access to other funding channels. Year-end FHLB advances were $340 million; deposits funded 94.0% of loans. Approximately 67% of deposits were FDIC insured.
  • Capital and debt: Consolidated CET1 and Tier 1 risk-based capital ratios were 11.89%; Tier 1 leverage was 9.74%. Total risk-based capital was 13.8%. Long-term debt was $54.2 million and FHLB advances were $340 million. The company and banks exceeded applicable well-capitalized thresholds.
  • Cash flow: Net cash provided by operating activities was $166.9 million, compared with $214.6 million in 2022. Investing activities used $404.0 million, principally reflecting loan growth; financing activities provided $230.9 million, including a $317.1 million net increase in deposits and substantial FHLB advances and repayments.

Material changes versus 2022

  • Loans grew 6.6% to $7.70 billion and deposits grew 4.0% to $8.19 billion. Average deposits rose 18.7%, partly reflecting the full-year contribution of the 2022 Rock Canyon Bank and Bank of Jackson Hole acquisitions.
  • NBHC acquired Cambr Solutions in April 2023 for approximately $46.5 million. Cambr provides deposit acquisition and processing services; at acquisition it administered about $1.7 billion across more than 500,000 FDIC-insured accounts.
  • Non-interest-bearing demand deposits fell 24.7% to $2.36 billion; interest-bearing demand and money market balances increased. The deposit cost rose to 1.37% from 0.22%.
  • Available-for-sale and held-to-maturity securities declined to $628.8 million and $585.1 million, respectively. At year-end, unrealized losses were approximately $99.0 million on available-for-sale securities and $81.0 million on held-to-maturity securities. Management attributed these losses mainly to interest rates and said it did not expect to sell the securities before recovery of amortized cost.
  • Mortgage servicing rights sales generated a $1.1 million gain. The company also recorded $4.0 million of impairments on venture-capital-related convertible preferred investments.

Outlook, commentary and risks

  • Management provided no specific numerical earnings or balance-sheet guidance in the supplied filing text. It plans to pursue organic loan and deposit growth, lower-cost core deposits, fee-based businesses, digital investment through 2UniFi, operating efficiencies and selective acquisitions.
  • Management said competition for deposits is expected to remain intense and future earnings will depend on loan production, funding access and funding costs, as well as Federal Reserve rate decisions. The company described itself as well capitalized and liquid and said industry volatility had not materially affected its financial condition, operations, customer base, liquidity, capital or risk profile.
  • NBHC had $9.95 billion in assets at year-end and warned that crossing $10 billion could bring heightened regulation and additional costs, including CFPB supervision for consumer compliance, different FDIC assessment treatment and debit interchange restrictions. Assets could exceed that threshold in 2024.
  • Key exposures include deposit competition and withdrawals, interest-rate and securities valuation changes, commercial real estate and other borrower credit risk, inflation and operating costs, regulatory changes, cybersecurity and third-party technology risks, and execution/integration risks related to acquisitions and digital initiatives.
  • Non-owner-occupied CRE was 24.1% of loans; office and retail properties represented 1.3% and 2.0%, respectively. Management reported no individual CRE property type above 5.0% of loans, but non-performing loans and modified loans increased year over year.
  • A mortgage-loan application irregularity at one office prompted an internal investigation. Management said it did not expect a material adverse effect, although some files remained under review by outside investors. The mortgage repurchase reserve was $1.2 million at year-end.
  • The filing reports no legal proceeding expected to have a material adverse effect. The auditor issued unqualified opinions on the financial statements and internal control; the allowance for credit losses was identified as a critical audit matter because of its significant estimates and model assumptions.

Important facts for investors to verify

  1. Whether deposit balances and mix remain stable, especially non-interest-bearing deposits, uninsured deposits and upcoming time-deposit maturities.
  2. Whether loan growth is replaced by continued high-quality originations, and whether rising delinquencies, modified loans or CRE conditions require higher provisions.
  3. How net interest margin and funding costs evolve as deposits reprice and interest rates change; the filing’s interest-rate sensitivity estimates depend on assumptions.
  4. Whether the company crosses $10 billion in assets and the resulting regulatory and expense impact.
  5. Whether embedded securities losses, liquidity sources and the ability to avoid securities sales remain consistent with management’s assumptions.
  6. Cambr’s deposit retention, economics and contribution, and progress and costs for the 2UniFi digital strategy.
  7. The ongoing review and any subsequent investor demands related to the mortgage application irregularities, and potential mortgage repurchase obligations.