Overview
National Bank Holdings Corporation (NASDAQ:NBHC) is a bank holding company that has established a solid financial services franchise with a sizable presence for deposit gathering and building client relationships necessary for growth. The company has executed on strategic acquisition opportunities to expand its presence in attractive markets and to diversify its revenue streams. Additionally, NBHC is innovating and building strategic fintech partnerships with the goal of delivering a comprehensive digital financial ecosystem for its clients.
As of March 31, 2023, NBHC had $9.9 billion in assets, $7.6 billion in loans, $8.5 billion in deposits, $1.2 billion in equity and $0.9 billion in assets under management in its trust and wealth management business. The company reported annual net income of $142,048,000, annual revenue of $563,523,000, annual operating cash flow of $157,948,000, and annual free cash flow of $121,114,000 in its most recent fiscal year.
Business Overview
NBHC's focus is on building relationships by creating a win-win scenario for its clients and the company. The company believes in providing solutions and services to its clients that are based on fairness and simplicity. NBHC has established a solid financial services franchise with a sizable presence for deposit gathering and building client relationships necessary for growth.
The company has executed on strategic acquisition opportunities to expand its presence in attractive markets and to diversify its revenue streams. NBHC is also innovating and building strategic fintech partnerships with the goal of delivering a comprehensive digital financial ecosystem for its clients. The company is focused on providing small and medium-sized businesses with alternative digital access to address borrowing, depository and cash management needs, while also providing information management and access to digital payment tools, under the safety of a regulated bank.
NBHC believes that its established presence in its core markets of Colorado, the greater Kansas City region, Utah, Wyoming, Texas, New Mexico and Idaho, as well as its ongoing investment in digital solutions and strategic acquisitions, position it well for growth opportunities.
Operating Highlights
NBHC reported net income of $31.4 million, or $0.82 per diluted share, for the first quarter of 2023, compared to net income of $40.3 million, or $1.06 per diluted share, for the first quarter of 2022. The return on average tangible assets was 1.39% for the first quarter of 2023, compared to 1.80% for the first quarter of 2022. The return on average tangible common equity was 15.14% for the first quarter of 2023, compared to 20.86% for the first quarter of 2022.
The company continued to invest in digital solutions for its clients through its financial eco-system, 2UniFi, for small and medium-sized businesses. NBHC's balance sheet funding mix improved during the first quarter of 2023, and the company utilized funding provided by deposit growth to pay down $340.0 million of Federal Home Loan Bank advances.
Loan Portfolio
Total loans ended the first quarter of 2023 at $7.6 billion, compared to $7.7 billion at December 31, 2022. NBHC generated loan fundings totaling $200.0 million during the first quarter of 2023, with a weighted average new loan origination rate of 8.8%. The company maintained a conservatively structured loan portfolio represented by diverse industries and concentrations with most industry sector concentrations at 15% or less of total loans and all concentration levels remain well below its self-imposed limits.
Non-owner occupied CRE loans were 166.7% of the company's risk based capital, or 24.6% of total loans, and no specific property type comprised more than 10.0% of total loans at March 31, 2023. NBHC maintains very little exposure to non-owner occupied CRE retail properties and office properties, comprising 3.4% of total loans. Multi-family loans totaled $348.5 million, or 4.6% of total loans as of March 31, 2023.
Credit Quality
NBHC's allowance for credit losses totaled 1.29% of total loans at March 31, 2023, compared to 1.27% at December 31, 2022. The company recorded no provision expense for credit losses during the first quarter of 2023, compared to provision expense for credit losses of $0.9 million during the first quarter of 2022.
Credit quality remained strong, as non-performing loans (comprised of non-accrual loans and non-accrual modified loans) totaled 0.47% of total loans at March 31, 2023, compared to 0.37% at December 31, 2022. Non-performing assets to total loans and OREO totaled 0.53% at March 31, 2023, compared to 0.42% at December 31, 2022. Net charge-offs of $0.1 million and $1.1 million were recorded during the three months ended March 31, 2023 and the year ended December 31, 2022, respectively. Annualized net charge-offs to average total loans totaled 0.00% and 0.02% for the three months ended March 31, 2023 and the year ended December 31, 2022, respectively.
Deposits and Funding
Average total deposits for the first quarter of 2023 increased 6.8% to $8.2 billion, compared to $7.7 billion for the first quarter of 2022. Average transaction deposits for the first quarter of 2023 increased 6.8% to $7.2 billion, compared to $6.8 billion for the first quarter of 2022. The mix of transaction deposits to total deposits was 88.3% and 87.1% at March 31, 2023 and 2022, respectively.
The cost of deposits totaled 2.15% for the first quarter of 2023, compared to 0.58% for the first quarter of 2022. NBHC's total deposit beta through this rate cycle remains low at 37.5%. Approximately 79% of the company's deposits were FDIC insured as of March 31, 2023.
Liquidity
On-balance sheet liquidity included $0.3 billion of cash and $1.3 billion of investment securities as of March 31, 2023. Liquidity is monitored and managed to ensure that sufficient funds are available on-demand to meet the company's business needs. Additionally, NBHC has access to various off-balance sheet third party funding sources including FHLB advances, the Federal Reserve discount window, Cambr deposits, federal funds purchased and the brokered deposit marketplace.
NBHC's investment securities portfolio has a short average duration and is largely backed by U.S government or government sponsored entities giving the company confidence that it will not realize material losses. Regarding the fair value of investment securities, the company's accumulated other comprehensive loss does not have a material impact on its capital position. NBHC's tangible common equity capital ratio, which includes the accumulated other comprehensive loss, totaled 9.2% as of March 31, 2023, compared to 9.0% as of December 31, 2022.
Capital ratios continue to be strong and in excess of federal bank regulatory agency "well capitalized" thresholds. As of March 31, 2023, NBHC's consolidated tier 1 leverage ratio was 9.99%, and its consolidated common equity tier 1 and tier 1 risk based capital ratios were 12.35%.
Financials
Revenues
Fully taxable equivalent ("FTE") net interest income totaled $85.7 million for the first quarter of 2023, compared to $96.3 million for the first quarter of 2022. The FTE net interest margin narrowed 61 basis points to 3.78% for the three months ended March 31, 2023, compared to the first quarter of 2022. The yield on earning assets increased 64 basis points, primarily due to multiple increases in the federal funds rate since March 2022. The cost of funds increased 135 basis points to 2.25% for the three months ended March 31, 2023, compared to the same period in the prior year.
Non-interest income totaled $17.7 million during the three months ended March 31, 2023, compared to $14.7 million for the three months ended March 31, 2022, driven by increases from NBHC's diversified sources of fee revenue including SBA loan income, trust income, Cambr income, fair value adjustments on company-owned life insurance, swap fee income and a $0.6 million gain from the sale of a banking center building. Mortgage banking income decreased $0.6 million during the three months ended March 31, 2023, compared to the same period in the prior year. Service charges and bank card fees increased a combined $0.2 million during the three months ended March 31, 2023, compared to the first quarter of 2022.
Expenses
Non-interest expense totaled $62.8 million during the three months ended March 31, 2023, representing an increase of $4.5 million, or 7.8%, compared to the three months ended March 31, 2022. Salaries and benefits increased $3.5 million primarily due to payroll tax credits realized in the first quarter of 2022. Occupancy and equipment increased $0.9 million, and other intangible assets amortization increased $0.6 million due to intangible assets acquired through NBHC's Cambr acquisition in April of 2022. These increases were partially offset by a decrease of $0.9 million in professional fees.
The FTE efficiency ratio, excluding other intangible assets amortization, during the three months ended March 31, 2023 totaled 58.82%, compared to 54.31% during the year ended December 31, 2022. Income tax expense totaled $7.5 million during the three months ended March 31, 2023, compared to $10.1 million during the three months ended March 31, 2022 driven by lower pre-tax income. The effective tax rate for the first quarter 2023 was 19.3%, compared to 19.1% for the full year 2022.
Outlook
For the second half of 2023, NBHC projects its fee income to be in the range of $33 million to $35 million. The company expects its non-interest expense to be in the range of $127 million to $130 million for the second half of 2023, with the increase relative to the $126 million expense realized during the first six months of 2023 entirely due to a step up in 2UniFi-related expenses.
The company continues to grow its excess capital, with a tangible common equity ratio of 9.4% and a CET1 ratio of 12.4% as of March 31, 2023, providing NBHC with various strategic alternatives. Tangible book value per share grew another 2 percentage points during the first quarter, ending at $23.74.
Conclusion
National Bank Holdings Corporation has established itself as a diversified and resilient community bank, with a strong balance sheet, prudent risk management, and a focus on building long-term client relationships. The company's investments in digital solutions and strategic acquisitions position it well for future growth, while its diversified revenue streams and conservative underwriting provide stability in the current economic environment. With a solid capital position and a promising outlook, NBHC appears well-equipped to navigate the challenges and capitalize on the opportunities in the banking industry.