National Bank Holdings Corporation — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; balance-sheet comparisons are to December 31, 2023 unless noted. Amounts are in U.S. dollars; financial-statement amounts are generally in millions. The company operates through NBH Bank, Bank of Jackson Hole Trust and 2UniFi, serving primarily Colorado, the greater Kansas City region, Utah, Wyoming, Texas, New Mexico and Idaho.
Financial performance and condition
| Metric | Q1 2024 / March 31, 2024 | Comparison |
|---|---|---|
| Net interest income | $84.0 million GAAP; $85.7 million fully taxable equivalent (FTE) | Down from $94.9 million GAAP and $96.3 million FTE in Q1 2023 |
| Net interest margin | 3.70% GAAP; 3.78% FTE | 4.32% GAAP and 4.39% FTE in Q1 2023 |
| Net income / diluted EPS | $31.4 million / $0.82 | $40.3 million / $1.06 in Q1 2023 |
| Non-interest income / expense | $17.7 million / $62.8 million | Income up 20.7%; expense up 7.8% year over year |
| Total assets | $9.97 billion | Up 0.2% from year-end; near $10 billion |
| Loans / deposits | $7.57 billion / $8.52 billion | Loans down 1.7%; deposits up 4.0% from year-end |
| Cash and cash equivalents | $292.9 million | $190.8 million at year-end |
| Shareholders’ equity | $1.23 billion | $1.21 billion at year-end |
Profitability weakened as higher deposit costs more than offset increased interest income. The FTE yield on earning assets was 5.88%, while the cost of interest-bearing liabilities was 3.07%; deposit cost was 2.15%, versus 0.58% in Q1 2023. The efficiency ratio was 61.77%, compared with 53.21% a year earlier. Return on average assets was 1.28%; return on average tangible common equity was 15.14%.
Cash flow from operating activities was $30.0 million, compared with cash used of $18.8 million in Q1 2023. Investing activities provided $93.6 million, versus $123.9 million used; financing activities used $23.0 million, versus $315.4 million provided. Cash, cash equivalents and restricted cash increased $100.6 million during the quarter to $292.9 million.
Borrowings included $54.3 million of long-term debt, net of applicable adjustments, and $19.6 million of repurchase agreements. FHLB advances were nil at quarter-end, down from $340.0 million at year-end; the company reported $1.8 billion of FHLB borrowing availability. On-balance-sheet liquidity, including unencumbered securities, was $700.9 million. The company reported consolidated CET1 and Tier 1 risk-based capital ratios of 12.4%, and a total risk-based capital ratio of 14.3%; its banks exceeded well-capitalized thresholds.
Material changes and notable items
- Interest expense increased to $47.7 million from $18.6 million in Q1 2023, driven chiefly by deposit costs. The increase in interest expense exceeded the growth in interest and dividend income, reducing net interest income.
- Non-interest income increased by $3.0 million. Management cited growth in SBA, trust and Cambr income, swap fees and life-insurance fair-value adjustments, as well as a $0.6 million gain on sale of a banking-center building. Mortgage banking income declined by $0.6 million.
- Non-interest expense rose $4.5 million, including higher salaries and benefits, occupancy costs and acquired-intangible amortization. Management attributed much of the salary increase to payroll tax credits recorded in Q1 2023; lower professional fees and FDIC insurance expense partly offset increases.
- Deposit growth funded repayment of $340.0 million of FHLB advances. Total deposits grew $327.4 million from year-end; non-interest-bearing demand deposits declined while money-market balances increased.
- Available-for-sale securities had $103.1 million of gross unrealized losses; held-to-maturity securities had $85.1 million. Management attributed the losses primarily to interest rates, said it did not intend to sell and believed it would not be required to sell before recovery of amortized cost. Most securities are government or government-sponsored-entity backed.
Credit, outlook and risks
The allowance for credit losses was $97.6 million, or 1.29% of loans, compared with $97.9 million, or 1.27%, at year-end. The company recorded no provision expense in Q1 2024; net charge-offs were $0.1 million. Non-performing loans increased to $35.8 million, or 0.47% of loans, from $28.2 million, or 0.37%, at year-end. Non-performing assets were $39.9 million, or 0.53% of loans and OREO. Specific reserves were $9.8 million on 13 individually evaluated loans. Four modified loans with $18.8 million of amortized cost defaulted on modified terms during the twelve months ended March 31, 2024.
Non-owner-occupied commercial real estate was 24.6% of loans; retail and office properties together were reported at 3.4% of loans. Management described the loan portfolio as diversified and said no individual property type exceeded 10% of loans. It also cited continuing deposit competition, uncertain economic conditions, interest-rate sensitivity, potential real-estate valuation declines, inflationary expense pressures and regulatory changes as challenges. The company reported no material impact from current industry pressures and said modeled liquidity stress scenarios indicated sufficient liquidity. It expects available liquidity sources to fund operations for at least 12 months. No specific earnings, loan-growth or margin guidance was provided.
Management described interest-rate exposure as relatively neutral, but somewhat more liability-sensitive than at year-end. Its model projected net interest income changes of -0.19% for an immediate 200-basis-point rate increase and -0.61% for a 200-basis-point decrease; actual results may differ. Management said future earnings depend on loan and earning-asset growth, funding access and funding costs. Other risks include potential regulatory and funding effects if consolidated assets exceed $10 billion, technology and cybersecurity risks, and risks tied to loan concentrations and mortgage repurchase obligations. Unfunded commitments totaled $1.56 billion. The mortgage repurchase reserve was $1.2 million. Management did not expect pending or threatened litigation to have a material adverse effect. No material changes to reported risk factors were disclosed.
The board declared a $0.28-per-share quarterly dividend on May 1, 2024, payable June 14, 2024. A $50 million share-repurchase authorization remained unused at March 31, 2024. Disclosure controls were reported effective, with no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether deposit pricing and competition continue to pressure net interest margin and earnings.
- Whether the rise in non-performing loans, including modified-loan defaults, leads to higher provisions, charge-offs or specific reserves.
- How deposit mix, uninsured deposits, near-term time-deposit maturities and liquidity availability evolve; approximately 79% of deposits were FDIC insured.
- Whether the substantial unrealized securities losses remain manageable without forced sales, particularly as assets approach $10 billion and related regulatory considerations become relevant.
- Whether fee-income growth and expense trends persist after the building-sale gain and other quarter-specific items.