National Bank Holdings Corporation (NYSE: NBHC) — FY 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. Unless noted, financial figures are for the full year or as of year-end and are in U.S. dollars. The filing also provides selected fourth-quarter deposit data.
Business context
NBHC is a financial holding company operating primarily through NBH Bank and Bank of Jackson Hole Trust. It serves commercial and consumer clients across Colorado, the greater Kansas City region, Utah, Wyoming, Texas, New Mexico and Idaho, with more than 95 banking centers. Its strategy emphasizes relationship-based community banking, organic loan and deposit growth, selective acquisitions, trust and wealth services, and its small-business digital platform, 2UniFi.
In 2022, NBHC acquired Rock Canyon Bank (September 1; consideration of $140.4 million) and Bank of Jackson Hole (October 1; consideration of $213.4 million). The acquisitions expanded the company’s footprint and added approximately $1.7 billion of loans and $2.1 billion of deposits at acquisition dates. Bank of Jackson Hole also brought a trust business with $0.8 billion of assets under management.
Key financial metrics
| Metric | FY 2022 / Dec. 31, 2022 | FY 2021 / Dec. 31, 2021 |
|---|---|---|
| Total assets | $9.57 billion | $7.21 billion |
| Total loans | $7.22 billion | $4.51 billion |
| Total deposits | $7.87 billion | $6.23 billion |
| Shareholders’ equity | $1.09 billion | $840.1 million |
| Net interest income | $266.8 million | $187.1 million |
| Net interest margin, FTE | 3.73% | 2.95% |
| Non-interest income | $67.3 million | $110.4 million |
| Net income | $71.3 million | $93.6 million |
| Diluted earnings per share | $2.18 | $3.01 |
| Net cash from operating activities | $214.6 million | $179.5 million |
Revenue, defined here as net interest income plus non-interest income, was approximately $334.1 million, versus $297.5 million in 2021. The filing reports an FTE net interest margin of 3.73%; the FTE measure is non-GAAP.
- Margins and efficiency: FTE net interest income rose 41.6% to $272.3 million. The FTE efficiency ratio was 62.19%, compared with 63.38%; adjusted for acquisition-related expenses and specified intangible amortization, it was 57.07%.
- Credit: Provision expense was $36.7 million, compared with a $9.3 million provision release in 2021. The allowance for credit losses was $89.6 million, or 1.24% of loans, versus $49.7 million, or 1.10%. Net charge-offs were $1.8 million (0.03% of average loans). Non-performing loans were 0.23% of loans, compared with 0.24%.
- Liquidity and funding: Cash and cash equivalents were $195.5 million; reported on-balance-sheet liquidity, including unencumbered securities, was $671.8 million, down from $1.63 billion. The loan-to-deposit ratio was 91.72%. The company reported $385 million of FHLB advances and $53.9 million of long-term debt, net, plus $20.2 million of repurchase agreements. It stated that total FHLB advances, lines and other short-term borrowing availability was $1.1 billion.
- Capital: Consolidated Tier 1 leverage was 9.29%, common equity Tier 1 was 10.54%, and total risk-based capital was 12.2%. The company said its capital ratios exceeded applicable well-capitalized thresholds.
- Cash flows: Investing activities used $752.1 million and financing activities used $114.2 million. Cash, cash equivalents and restricted cash decreased $651.7 million during the year. The company attributed lower cash balances principally to deploying liquidity into loans and securities.
- Shareholder measures: The annual dividend was $0.94 per share. Book value per share was $29.04; tangible common book value per share, a non-GAAP measure, was $20.63, down from $24.33.
Material changes versus 2021
- Assets increased 32.7%, deposits 26.4%, and loans 60.0%, with the two acquisitions accounting for a significant portion of the increases. Excluding acquired loans, loans grew approximately $981 million, led by commercial lending.
- Net interest income increased as rates rose, loan balances grew and cash was redeployed into higher-yielding assets. FTE margin expanded 78 basis points.
- Net income declined by $22.3 million. FY 2022 included $36.8 million of acquisition-related provision and other expenses, including $21.7 million of Day 1 CECL provision expense. Excluding these items, management reported non-GAAP adjusted net income of $99.6 million and adjusted diluted EPS of $3.05.
- Non-interest income fell 39.0%, chiefly because mortgage banking income declined $39.6 million amid slower refinancing and tighter gain-on-sale margins.
- Net unrealized losses on available-for-sale securities were $113.5 million at year-end, compared with $13.3 million a year earlier; held-to-maturity securities had $91.8 million of unrealized losses. Management attributed these losses primarily to higher interest rates and said it did not expect to sell the securities before recovery of amortized cost.
Outlook, risks and unusual items
The filing provides no specific earnings, revenue or margin guidance. Management said future earnings will depend on continued high-quality loan origination, deposit growth and Federal Reserve rate decisions. It described the company as well positioned to support clients, while citing inflation, labor costs, competition for deposits, economic uncertainty and ongoing technology investment as challenges.
- Interest-rate changes may affect net interest income, deposit pricing, loan demand and securities values. The company’s year-end model showed projected net interest income increasing 2.60% under an immediate, sustained 200-basis-point rate increase, but decreasing 8.24% under a 200-basis-point decrease; actual results may differ.
- Credit risks include borrower stress and exposure to real estate. Non-owner-occupied commercial real estate was 23.5% of loans; office and retail loans were 1.6% and 2.0%, respectively. Management described portfolio concentrations as within self-imposed limits.
- Integration of the 2022 acquisitions, fair-value estimates for acquired loans and deposits, and realization of expected synergies remain important execution risks. Purchase accounting valuations were preliminary and subject to refinement.
- Operational and regulatory risks include cybersecurity, third-party technology dependence, compliance obligations, and the scaling of 2UniFi. Mortgage banking also faces lower refinancing activity and potential repurchase or indemnification claims.
- Unfunded loan commitments totaled $2.01 billion, compared with $1.00 billion in 2021; these do not necessarily represent future cash needs because some commitments expire undrawn. The mortgage repurchase reserve was $1.7 million.
- The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. However, the assessment excluded the acquired Rock Canyon Bank and Bank of Jackson Hole controls, representing approximately 22% of consolidated assets and 8% of revenues at year-end. The auditor identified the allowance for credit losses and acquisition-date fair-value measurements as critical audit matters.
Important facts for investors to verify
- How much of 2022’s earnings and loan growth is sustainable after separating acquisition effects, Day 1 credit provisions, and other acquisition costs?
- Whether deposit pricing and deposit retention keep pace with market rates, and how liquidity evolves as time deposits mature and loan growth continues.
- The sensitivity of earnings and capital to interest-rate changes and the substantial unrealized losses in the securities portfolio.
- Credit trends in commercial real estate and acquired loan portfolios, including the assumptions underpinning the $89.6 million allowance for credit losses.
- Progress integrating the acquisitions and bringing their internal controls into NBHC’s reporting-control assessment.
- Whether mortgage banking, fee income and 2UniFi investment produce durable revenue as refinancing activity remains lower.