National Bank (NBHC) - 2018 Q4 - Annual Report

PART I Business National Bank Holdings Corporation (NBHC) is a bank holding company with $5.7 billion in assets as of December 31, 2018, operating 104 banking centers primarily in Colorado and Kansas City, focusing on organic growth and selective acquisitions like Peoples, Inc Company Snapshot (as of December 31, 2018) | Metric | Value | | :--- | :--- | | Total Assets | $5.7 billion | | Total Loans | $4.1 billion | | Total Deposits | $4.5 billion | | Shareholders' Equity | $0.7 billion | | Banking Centers | 104 | - The company's long-term business model focuses on organic growth through strong banking relationships, complemented by a disciplined strategy of selective acquisitions of financial institutions[15] - On January 1, 2018, the company acquired Peoples, Inc., adding $875.4 million in assets, $542.7 million in loans, and $729.9 million in low-cost deposits; this acquisition also added a significant retail mortgage platform with over $1 billion in production[22] - The company's core markets include Colorado, the greater Kansas City region, New Mexico, Texas, and Utah, with a focus on markets with attractive demographics and business growth trends[24][25] Products and Services NBH Bank offers a full range of traditional banking products to commercial, business, and consumer clients, including various loan types, comprehensive treasury management solutions, residential mortgages, and diverse deposit products - Commercial banking services include a wide range of loan products such as commercial and industrial loans, owner-occupied and non-owner occupied commercial real estate loans, and SBA loans[35][37][39] - The company offers a comprehensive suite of treasury management solutions for business clients, including online/mobile banking, credit cards, wire transfers, remote deposit capture, and fraud prevention services[40] - Residential real estate lending includes traditional mortgages, a majority of which are sold in the secondary market, providing a significant source of fee income; the Peoples acquisition added substantial capabilities in this area[43] - A variety of consumer and business deposit products are offered, including checking, savings, money market accounts, and time deposits, with a focus on attracting low-cost transaction deposits[45] Supervision and Regulation NBHC operates in a highly regulated environment, supervised by the Federal Reserve, with its subsidiary NBH Bank subject to dual regulation by the Colorado Division of Banking and the Federal Reserve, adhering to capital adequacy requirements and consumer protection laws - NBHC is a bank holding company subject to regulation, supervision, and examination by the Federal Reserve under the Bank Holding Company Act (BHCA)[54][58] - NBH Bank is a Colorado state-chartered bank and a member of the Federal Reserve Bank of Kansas City, making it subject to dual regulation by the Colorado Division of Banking and the Federal Reserve; its deposits are insured by the FDIC[60] - The company and its bank subsidiary are subject to minimum capital requirements, including a common equity tier 1 ratio of 4.5%, a total tier 1 ratio of 6%, and a total capital ratio of 8%; a capital conservation buffer of 2.5% became effective in 2019[66][68] - The Dodd-Frank Act codified the "source of strength" doctrine, requiring the holding company (NBHC) to provide financial assistance to its subsidiary bank (NBH Bank) in the event of financial distress[72][74] - The Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA), enacted in May 2018, modified certain Dodd-Frank Act rules and introduced regulatory relief for community banks, including a simplified "Community Bank Leverage Ratio"[100][101] Risk Factors The company faces diverse risks from banking operations, growth strategies, and the highly regulated financial industry, encompassing credit risk, economic sensitivity, competition, technology dependence, and regulatory compliance challenges Risks Relating to Our Banking Operations Key operational risks include the company's limited operating history, sensitivity to economic conditions and credit risk, intense competition, dependence on information technology and key personnel, and exposure to cybersecurity threats and interest rate fluctuations - The company's business is highly susceptible to credit risk, where borrowers may be unable to repay loans, and the value of collateral, particularly real estate, may be insufficient to cover the debt[110] - The allowance for loan losses (ALL) involves a high degree of subjectivity and may prove insufficient to absorb inherent losses, potentially requiring increases that would decrease net income and capital[112][114] - The company faces significant competition from national, regional, and local financial institutions, as well as non-traditional providers like FinTech companies, which could adversely affect market share and profitability[124][125] - Dependence on information technology and telecommunications systems from third-party providers exposes the company to risks of system failures, interruptions, or security breaches that could disrupt operations and damage its reputation[133][134] - Information security risks, including cyber-attacks, phishing, and data breaches, have increased; a failure to prevent such breaches could result in financial losses, reputational damage, and regulatory scrutiny[135][137][138] Risks Relating to our Growth Strategy The company's growth strategy, relying on organic expansion and acquisitions, presents risks related to managing growth, obtaining regulatory approvals, intense competition for targets, and potential inaccuracies in projected operating results or due diligence failures - Expansionary activity places significant demands on operations and management, and the inability to effectively manage growth could materially and adversely affect the company[147] - Acquisitions require approval from governmental regulatory agencies like the Federal Reserve, which could deny applications or impose conditions that restrict growth or reduce the benefits of a transaction[148][151] - The company encounters intense competition from other banking organizations and investment funds for a limited number of acquisition opportunities, which may drive up prices and make consummating deals on attractive terms difficult[153] - There is a risk that delinquencies and losses in acquired loan portfolios may exceed initial forecasts, and due diligence may fail to identify all material issues, potentially leading to write-downs and significant losses[158][159] Risks Relating to the Regulation of Our Industry Operating in a highly regulated environment, the company faces significant compliance costs and risks from the Dodd-Frank Act, potential noncompliance with laws like the Bank Secrecy Act, the Federal Reserve's "source of strength" doctrine, and limitations on dividend payments - The Dodd-Frank Act has resulted in changes to regulatory capital requirements, the creation of new regulatory agencies, and new rules for consumer financial products, which limit business activities and increase compliance costs[161][162] - The company is subject to extensive regulation and supervision that governs nearly all aspects of its operations; failure to comply can lead to restrictions, fines, and other penalties[164] - Under the "source of strength" doctrine, the Federal Reserve may require the company to act as a source of financial and managerial strength to its subsidiary bank, including making capital injections into a troubled subsidiary[168] - Noncompliance with the Bank Secrecy Act and other anti-money laundering statutes could result in significant civil money penalties, fines, and restrictions on the company's ability to execute its business plan, including acquisitions[170] - The company's ability to pay dividends is subject to regulatory limitations, including guidelines from the Federal Reserve regarding capital adequacy and the potential for regulators to prohibit payments if deemed an unsafe or unsound practice[173] Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - There are no unresolved staff comments[175] Properties The company's principal executive offices are in Colorado, with operations in Missouri, and as of December 31, 2018, it operated 104 banking centers across five states, with 73 owned and 31 leased - As of December 31, 2018, the company operated 104 banking centers: 50 in Colorado, 46 in Kansas and Missouri, six in New Mexico, and two in Texas[175] - Of the 104 banking centers, 73 locations were owned by the company and 31 were leased[175] Legal Proceedings The company is involved in various litigation matters incidental to its business but is not currently party to any legal proceedings expected to have a material adverse effect on its operations or financial condition - The company is not presently party to any legal proceedings that it believes would have a material adverse effect on its business, prospects, financial condition, results of operations, or liquidity[176] Mine Safety Disclosures The company has no mine safety disclosures to report - None[177] PART II Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities The company's Class A common stock trades on the NYSE under 'NBHC,' with a history of increasing quarterly cash dividends and a share repurchase program with $12.6 million remaining available as of year-end 2018, alongside active equity compensation plans Quarterly Cash Dividends Paid Per Share | Quarter | 2018 | 2017 | | :--- | :--- | :--- | | Fourth | $0.17 | $0.09 | | Third | $0.14 | $0.09 | | Second | $0.14 | $0.09 | | First | $0.09 | $0.07 | | Total | $0.54 | $0.34 | - On August 5, 2016, the Board of Directors authorized a share repurchase program for up to $50.0 million of common stock; as of December 31, 2018, $12,562,825 remained available for purchase under this authorization[183] - The company has two primary equity compensation plans: the 2014 Omnibus Incentive Plan, with 5,254,682 shares available for issuance, and the 2014 Employee Stock Purchase Plan (ESPP), with 342,644 shares available for issuance as of December 31, 2018[184][185] Selected Financial Data This section summarizes five years of historical consolidated financial data from 2014 to 2018, showing significant growth in total loans from $2.2 billion to $4.1 billion and total assets from $4.8 billion to $5.7 billion, alongside fluctuating net income and key performance ratios Selected Historical Financial Data (in thousands, except per share data) | | 2018 | 2017 | 2016 | 2015 | 2014 | | :--- | :--- | :--- | :--- | :--- | :--- | | Financial Condition Data: | | | | | | | Total assets | $5,676,666 | $4,843,465 | $4,573,046 | $4,683,908 | $4,819,646 | | Loans, net | $4,056,616 | $3,147,683 | $2,831,747 | $2,560,554 | $2,144,796 | | Deposits | $4,535,621 | $3,979,559 | $3,868,649 | $3,840,677 | $3,766,188 | | Total shareholders' equity | $695,006 | $532,407 | $536,189 | $617,544 | $794,575 | | Operations Data: | | | | | | | Net interest income | $197,437 | $146,306 | $145,640 | $156,945 | $170,249 | | Net income | $61,451 | $14,579 | $23,060 | $4,881 | $9,176 | | Per Share Data: | | | | | | | Income per share, diluted | $1.95 | $0.53 | $0.79 | $0.14 | $0.22 | | Book value per share | $22.59 | $19.81 | $20.32 | $20.34 | $20.43 | | Key Ratios: | | | | | | | Return on average assets | 1.10% | 0.31% | 0.50% | 0.10% | 0.19% | | Net interest margin | 3.85% | 3.36% | 3.39% | 3.54% | 3.83% | - The company presents several non-GAAP financial measures, such as tangible common book value and return on average tangible assets, which it believes provide meaningful supplemental information by excluding items not indicative of primary business operations[199] Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion analyzes the company's financial condition and operating results for 2018, highlighting the Peoples, Inc. acquisition's impact on asset, loan, and deposit growth, a sharp rise in net income to $61.5 million, and strong credit quality with non-performing loans at 0.60% - Net income for 2018 was $61.5 million ($1.95 per diluted share), a significant increase from $14.6 million ($0.53 per diluted share) in 2017; after adjusting for one-time acquisition expenses, 2018 net income was $67.8 million ($2.16 per diluted share)[215][300] - Total loans grew by $913.4 million (28.7%) in 2018, driven by the Peoples acquisition and a record $1.2 billion in new loan originations[218] - Credit quality remained strong, with non-performing loans as a percentage of total loans decreasing to 0.60% at year-end 2018 from 0.66% at year-end 2017, and net charge-offs were minimal at 0.02% for 2018[217] - Fully taxable equivalent (FTE) net interest income increased by $49.8 million (32.7%) in 2018, and the FTE net interest margin expanded by 43 basis points to 3.93%, driven by higher asset yields[219][313] - Capital ratios remain strong and in excess of regulatory requirements, with a consolidated tier 1 leverage ratio of 10.5% and a common equity tier 1 risk-based capital ratio of 12.9% as of December 31, 2018[222] Financial Condition As of December 31, 2018, total assets increased to $5.7 billion from $4.8 billion, with total loans reaching $4.1 billion due to the Peoples acquisition and record originations, while deposits grew to $4.5 billion with a favorable shift towards transaction deposits Loan Portfolio Composition (in thousands) | Loan Type | Dec 31, 2018 | Dec 31, 2017 | % Change | | :--- | :--- | :--- | :--- | | Total originated | $3,568,936 | $2,953,339 | 20.8% | | Total acquired | $452,493 | $104,985 | >100% | | ASC 310-30 loans | $70,879 | $120,623 | (41.2)% | | Total loans | $4,092,308 | $3,178,947 | 28.7% | Asset Quality Ratios | Ratio | Dec 31, 2018 | Dec 31, 2017 | | :--- | :--- | :--- | | Non-performing loans to total loans | 0.60% | 0.66% | | Non-performing assets to total loans and OREO | 0.85% | 0.99% | | Allowance for loan losses to total loans | 0.87% | 0.98% | Deposit Composition (in thousands) | Deposit Type | Dec 31, 2018 | Dec 31, 2017 | % Change | | :--- | :--- | :--- | :--- | | Total transaction deposits | $3,455,092 | $2,861,509 | 20.7% | | Total time deposits | $1,080,529 | $1,118,050 | (3.4)% | | Total deposits | $4,535,621 | $3,979,559 | 14.0% | Results of Operations For 2018, net income was $61.5 million, significantly up from $14.6 million in 2017, driven by a $49.8 million increase in fully taxable equivalent net interest income, a decrease in loan loss provision, and substantial growth in non-interest income and expense due to the Peoples acquisition Net Interest Income and Margin (FTE) | Metric | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Net Interest Income (in thousands) | $201,919 | $152,158 | $149,721 | | Net Interest Margin | 3.93% | 3.50% | 3.49% | - The provision for loan losses decreased to $5.2 million in 2018 from $13.0 million in 2017, primarily due to strong credit quality and lower required provisions for originated loan growth[323] - Non-interest income increased by 80.5% to $70.8 million in 2018, largely due to a $28.0 million increase in mortgage banking income following the Peoples acquisition[302][326] - Non-interest expense rose by 38.5% to $189.3 million in 2018, primarily driven by the addition of Peoples' operations, including $8.0 million in one-time acquisition costs[303][329] Liquidity and Capital Resources The company maintains strong liquidity with $683.2 million in on-balance sheet liquidity and $1.1 billion in available FHLB credit, while its capital ratios significantly exceed all regulatory requirements for being well-capitalized under Basel III rules - Total on-balance sheet liquidity was $683.2 million at December 31, 2018, comprised of cash, interest-bearing deposits, and unencumbered investment securities[337] - The company has access to $1.1 billion in available credit from the Federal Home Loan Bank (FHLB), of which $301.7 million was utilized as of December 31, 2018[344] Consolidated Capital Ratios (December 31, 2018) | Ratio | Actual | Required to be Adequately Capitalized | | :--- | :--- | :--- | | Tier 1 leverage ratio | 10.5% | 4.0% | | Common equity tier 1 risk-based capital | 12.9% | 7.0% | | Tier 1 risk-based capital ratio | 12.9% | 8.5% | | Total risk-based capital ratio | 13.8% | 10.5% | Quantitative and Qualitative Disclosures about Market Risk This section incorporates information on asset/liability management and interest rate risk from Item 7, indicating the company was asset sensitive at year-end 2018, projecting increased net interest income in a rising interest rate environment - The information required by this item is provided under the caption Asset/Liability Management and Interest Rate Risk in Item 7[360] Interest Rate Sensitivity Analysis on Net Interest Income | Hypothetical Rate Shift (bps) | % Change in Projected NII (Dec 31, 2018) | | :--- | :--- | | +200 | 5.86% | | +100 | 2.98% | | -100 | (4.84)% | Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for the three-year period ended December 31, 2018, including the Consolidated Statements of Financial Condition, Operations, Comprehensive Income, Changes in Shareholders' Equity, and Cash Flows, along with detailed explanatory notes - The independent registered public accounting firm, KPMG LLP, issued an unqualified opinion on the consolidated financial statements, stating they present fairly, in all material respects, the financial position and results of operations in conformity with U.S. GAAP[362] Consolidated Financial Statements The core financial statements show total assets of $5.68 billion and total shareholders' equity of $695.0 million as of December 31, 2018, with net income of $61.5 million for 2018, a significant increase from prior years Consolidated Statement of Financial Condition Highlights (in thousands) | | Dec 31, 2018 | Dec 31, 2017 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $109,556 | $257,364 | | Loans, net | $4,056,616 | $3,147,683 | | Total assets | $5,676,666 | $4,843,465 | | Liabilities & Equity | | | | Total deposits | $4,535,621 | $3,979,559 | | Total liabilities | $4,981,660 | $4,311,058 | | Total shareholders' equity | $695,006 | $532,407 | Consolidated Statement of Operations Highlights (in thousands) | | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Net interest income | $197,437 | $146,306 | $145,640 | | Provision for loan losses | $5,197 | $12,972 | $23,651 | | Non-interest income | $70,775 | $39,205 | $40,027 | | Non-interest expense | $189,334 | $136,677 | $136,009 | | Net income | $61,451 | $14,579 | $23,060 | Notes to Consolidated Financial Statements The notes provide essential context, detailing the Peoples, Inc. acquisition for $146.4 million with $55.4 million goodwill, a $35.7 million allowance for loan losses, confirmation of exceeding regulatory capital requirements, stock-based compensation plans, and the use of derivatives for hedging interest rate risk - The acquisition of Peoples, Inc. on January 1, 2018, for a total consideration of $146.4 million, resulted in the recognition of $55.4 million in goodwill[451][453] - The allowance for loan losses (ALL) was $35.7 million at year-end 2018, with an ALL to total loans ratio of 0.87%; the provision for loan losses for the year was $5.2 million[495] - The company uses interest rate swaps to manage interest rate risk; as of December 31, 2018, it had swaps with a notional amount of $473.4 million designated as fair value hedges against its fixed-rate loan portfolio[567] - As of December 31, 2018, the company had $773.5 million in loan commitments and $10.6 million in standby letters of credit[578] Changes in and Disagreements with Accountants on Accounting and Financial Disclosures The company reported no changes in or disagreements with its accountants on any matter of accounting principles or practices or financial statement disclosure - There were no changes in or disagreements with accountants on accounting and financial disclosures[613] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures and internal control over financial reporting were effective as of December 31, 2018, with KPMG LLP issuing an unqualified opinion on the latter - Based on an evaluation as of December 31, 2018, the principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective[614] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2018; this assessment was audited by KPMG LLP, which also issued an unqualified opinion[615][618] - There were no changes in internal control over financial reporting during the period that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[616] Other Information The company reported no other information for this item - None[625] PART III Directors, Executive Officers, Corporate Governance, Executive Compensation, and Other Matters Information for Items 10 through 14, covering directors, executive officers, corporate governance, executive compensation, security ownership, certain relationships, related transactions, director independence, and principal accountant fees and services, is incorporated by reference from the company's 2019 Annual Meeting of Shareholders proxy statement - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the Registrant's definitive proxy statement for its 2019 Annual Meeting of Shareholders[627][629][630][631][632] PART IV Exhibits, Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed with the annual report, including the consent of the independent registered public accounting firm and certifications by the CEO and CFO - This section provides a list of all financial statements, schedules, and exhibits filed with the annual report, including the consent of the independent registered public accounting firm and certifications by the CEO and CFO[635][636][641]