National Bank Holdings Corporation — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions where appropriate. NBHC is a bank holding company operating through NBH Bank, with 86 banking centers at quarter-end.
Financial performance
- Q3 net income was $15.8 million ($0.50 diluted EPS), versus $19.8 million ($0.64) a year earlier. Nine-month net income was $54.6 million ($1.77 diluted EPS), versus $70.8 million ($2.27).
- Net interest income rose to $69.1 million in Q3 from $47.6 million; nine-month net interest income increased to $171.8 million from $137.7 million. Fully taxable-equivalent (FTE) net interest margin was 4.01% for Q3 and 3.44% year to date, compared with 2.93% and 2.92%, respectively, in 2021.
- Credit provision: Q3 provision expense was $12.7 million, versus none in Q3 2021. Nine-month provision expense was $14.9 million, compared with a $9.4 million release in 2021. Management attributed the 2022 provision mainly to loan growth, revised economic forecasts and the Rock Canyon Bank acquisition.
- Non-interest income fell 39% year over year to $17.4 million in Q3 and to $53.2 million for nine months, principally as higher mortgage rates reduced mortgage activity and gain-on-sale margins. Nine-month mortgage banking income declined to $21.1 million from $53.0 million.
- Non-interest expense was $53.9 million in Q3, up 5.1%, and $143.6 million year to date, down 2.5%. The nine-month FTE efficiency ratio improved to 62.69% from 64.43%; excluding acquisition costs and core deposit intangible amortization, it was 58.66%.
- Management reported nine-month adjusted net income of $65.0 million ($2.11 adjusted diluted EPS), excluding $10.5 million after tax in acquisition-related adjustments. These are non-GAAP measures; reported GAAP results are lower.
- Cash flow: For the first nine months, operating activities provided $181.1 million, investing activities used $588.7 million, and financing activities used $183.4 million. Cash, cash equivalents and restricted cash decreased $591.0 million to $259.2 million.
Financial position, liquidity and capital
- Total assets were $7.92 billion at September 30, up $708.9 million from year-end 2021, primarily reflecting the Rock Canyon Bank acquisition. Loans were $5.72 billion, up 26.8%; deposits were $6.80 billion, up 9.2%.
- Transaction deposits were 87.7% of deposits, compared with 86.5% at year-end. The loan-to-deposit ratio was 84.1%. Average deposit cost for the nine-month period was 0.17%, versus 0.24% in 2021.
- On-balance-sheet liquidity—cash and unencumbered securities—was $853.7 million, down from $1.63 billion at year-end. The company also reported $1.0 billion of available FHLB credit and no FHLB advances outstanding. Management stated liquidity sources were adequate for foreseeable needs and at least the next 12 months.
- Debt included $39.6 million net carrying value of subordinated notes and $20.0 million of repurchase-agreement balances. The $40 million note is unsecured, pays 3.00% through November 2026, then resets to three-month SOFR plus 203 basis points, and matures in 2031.
- Regulatory capital ratios exceeded well-capitalized thresholds: consolidated Tier 1 leverage was 10.5%, common equity Tier 1 was 12.8%, and total risk-based capital was 14.3%. Tangible common equity to tangible assets was 9.60%.
- Accumulated other comprehensive loss increased to $89.3 million from $7.0 million at year-end, reflecting primarily interest-rate-driven securities valuation losses. Available-for-sale securities had $115.3 million of unrealized losses; held-to-maturity securities had $97.3 million. Management said it did not intend, and did not expect to be required, to sell them before recovery of amortized cost.
Material changes and transactions
- On September 1, NBHC completed its acquisition of Community Bancorporation, parent of Rock Canyon Bank, for approximately $140.4 million in cash and stock. The deal added seven Utah banking centers, approximately $832 million of assets, $538 million of loans and $734 million of deposits. Core operating systems were converted in October; purchase accounting remained preliminary.
- On October 1, after quarter-end, NBHC completed its acquisition of Bancshares of Jackson Hole, parent of Bank of Jackson Hole, for approximately $213.4 million in cash and stock. It added 12 banking centers, approximately $1.5 billion of assets, $1.2 billion of loans, $1.4 billion of deposits and $0.8 billion of assets under management. Management cited pro forma combined assets of approximately $9.4 billion.
- Nine-month loan growth reflected both strong originations and the Rock Canyon acquisition. Management reported record $1.5 billion of loan fundings year to date and 30.2% annualized organic loan growth.
Outlook, commentary and risks
- The filing provides no specific earnings or revenue guidance. Management said results will depend in part on loan and deposit growth, future Federal Reserve policy, the ability to maintain low-cost deposits, and the execution and integration of acquisitions.
- The bank described itself as asset sensitive at September 30. Its model estimated projected net interest income would rise 5.40% under an immediate, sustained 200-basis-point rate increase, but fall 12.96% under a 200-basis-point decrease. These are model estimates, not forecasts, and depend on assumptions about rates, deposits, prepayments and management actions.
- Key risks include acquisition integration and costs, inflation and wage pressure, competition for loans and deposits, real estate values and credit quality, cybersecurity and third-party technology risks, and regulatory or liquidity requirements. The company highlighted that it expects significant integration costs for both acquisitions.
- Credit quality metrics remained low but showed some movement: non-performing loans were 0.26% of loans versus 0.24% at year-end, while non-performing assets to loans and OREO improved to 0.32% from 0.39%. The allowance for credit losses was 1.15% of loans.
- Unfunded commitments totaled $1.37 billion. Mortgage loan sales carry possible repurchase or indemnification obligations; the related reserve was $1.8 million. Management did not expect pending or threatened litigation to have a material adverse effect.
- The board declared a $0.25-per-share quarterly dividend on November 8, payable December 15, 2022. No shares were repurchased during Q3; $38.6 million remained authorized under the repurchase program.
Most important facts for investors to verify
- Whether acquisition integration, system conversion and expected synergies proceed on schedule and within anticipated costs, particularly following the October Bank of Jackson Hole closing.
- Whether net interest margin gains persist as deposit costs reprice and interest rates change; compare actual results with the disclosed sensitivity model.
- Whether credit quality and the allowance remain adequate as the loan portfolio expands and economic forecasts evolve.
- How much mortgage banking income continues to decline and whether other fee income offsets the pressure.
- How securities valuation losses, deposit behavior and potential commitment drawdowns affect liquidity, tangible book value and capital.
- Reconcile reported GAAP performance with management’s non-GAAP adjusted results and confirm the adjustments excluded from those measures.