National Bank (NBHC) - 2020 Q4 - Annual Report

PART I Business National Bank Holdings Corporation (NBHC) is a bank holding company operating through NBH Bank with $6.7 billion in assets and 90 banking centers, focusing on client-centered banking and significantly impacted by COVID-19 and PPP in 2020 Summary and Market Area NBHC is a Denver-based bank holding company with $6.7 billion in assets and 90 banking centers across five states, targeting attractive demographic markets with significant presence in Colorado and Kansas City Company Snapshot (as of Dec 31, 2020) | Metric | Value | | :--- | :--- | | Total Assets | $6.7 billion | | Total Loans | $4.4 billion | | Total Deposits | $5.7 billion | | Shareholders' Equity | $0.8 billion | | Banking Centers | 90 | - The company operates under several brand names: Community Banks of Colorado, Bank Midwest (in Kansas and Missouri), and Hillcrest Bank (in Texas, Utah, and New Mexico)[15] Key Market Demographics (2020) | Market | Deposits (billions) | Population (millions) | Unemployment Rate | Median Household Income | | :--- | :--- | :--- | :--- | :--- | | Denver, CO | $106.6 | 3.0 | 8.5% | $83,768 | | Kansas City, MO-KS MSA | $72.4 | 2.2 | 4.8% | $69,742 | | Austin, TX | $51.3 | 2.2 | 5.4% | $82,650 | | Dallas, TX | $375.1 | 7.7 | 6.7% | $73,009 | | Salt Lake City, UT | $59.7 | 1.2 | 3.8% | $78,785 | | U.S. | | | 6.7% | $66,010 | Business Strategy The company's strategy focuses on becoming a leading regional community bank through organic growth and disciplined acquisitions, emphasizing client-centered banking, efficiency, and conservative risk management, with a 2020 adaptation to COVID-19 and PPP support - In 2020, due to the COVID-19 pandemic, the company shifted its immediate focus to three priorities: protecting the health of associates and clients, ensuring the safety and soundness of the bank, and supporting clients and communities, including active participation in the SBA's Paycheck Protection Program (PPP)[22] - Key strategic components include: client-centered banking, commercial expansion, organic growth, profitability and efficiency initiatives, conservative risk management, and disciplined acquisitions[23][27] Products and Services The company offers a full range of traditional banking products and financial services to commercial, business, and consumer clients through 90 banking centers and digital platforms, segmented into Commercial and Specialty Banking and Business, Residential, and Consumer Banking - The company's distribution network as of December 31, 2020, includes 90 banking centers, 128 ATMs, and fully integrated online and mobile banking services[30] - Commercial and Specialty Banking offers Commercial and Industrial Loans, Non-Owner Occupied CRE Loans, SBA Loans (including extensive PPP participation), and Treasury Management services[31][33][35][36] - Business, Residential, and Consumer Banking provides Business Loans, Residential Real Estate Loans (including home equity and construction), Consumer Loans, and a variety of Deposit Products with digital support[38][39][41][42][43] Lending Activities and Competition The company's lending activities are guided by a comprehensive credit policy and concentration limits, with a cautious approach in 2020 due to COVID-19, operating in a highly competitive and fragmented banking market against traditional and FinTech institutions - The company's credit policy requires careful evaluation of a borrower's industry, operating performance, and financial condition, with underwriting based on multiple repayment sources, and adheres to concentration limits for its portfolio[45][46] - The banking markets in Colorado, the Kansas City region, Texas, Utah, and New Mexico are highly competitive, with competition from national, regional, and local banks, credit unions, and FinTech companies[48] - Competition is based on interest rates, fees, client service levels, range of products, location, and digital banking capabilities, with the company believing its advisory approach and personalized service provide a competitive advantage[49] Human Capital The company's human capital strategy, based on core values, employed 1,224 associates as of December 31, 2020, emphasizing equity, diversity, and inclusion, associate development, comprehensive benefits, and COVID-19 safety measures Workforce Diversity and Promotion Statistics (2020) | Metric | Percentage | | :--- | :--- | | Workforce Composition | | | Female Workforce | 68% | | Female Managerial Roles | 57% | | Minority Workforce | 24% | | Minority Managerial Roles | 20% | | New Hires (390 total) | | | Female New Hires | 74% | | Minority New Hires | 33% | | Promotions (228 total) | | | Female Promotions | 68% | | Minority Promotions | 21% | - The company offers comprehensive benefits, including medical insurance, a 401(k) plan with a company match, and an Associate Stock Purchase Plan (ASPP) with a 10% discount[58][59] - In response to COVID-19, the company implemented safety measures such as premium pay for essential on-site staff, restricted lobby services, paid time off for affected associates, waived medical costs for testing/treatment, and daily health assessments[62] Supervision and Regulation NBHC, as a bank holding company, and its subsidiary NBH Bank are extensively regulated by the Federal Reserve and state authorities, subject to comprehensive frameworks covering capital, activities, and consumer protection, with 2020 operations impacted by COVID-19 regulatory responses like the CARES Act - NBHC is a bank holding company subject to supervision by the Federal Reserve, and its subsidiary, NBH Bank, is a Colorado state-chartered bank supervised by the Colorado Division of Banking and the Federal Reserve[66] - The company and bank are subject to minimum capital requirements, including a common equity tier 1 ratio of 4.5%, a total tier 1 ratio of 6%, a total capital ratio of 8%, and a leverage ratio of 4%, plus a 2.5% capital conservation buffer[78][80] - Regulatory responses to the COVID-19 pandemic, including the CARES Act, impacted the company by providing flexibility for working with affected borrowers, establishing the PPP, and offering forbearance options for federally-backed mortgage loans[113][114][116] Risk Factors The company faces significant risks across its banking operations, growth strategy, and regulatory environment, including adverse COVID-19 impacts, credit risk, cybersecurity threats, competition, acquisition challenges, and stringent regulatory compliance Risks Relating to Our Banking Operations The company's banking operations are exposed to significant risks including the adverse effects of the COVID-19 pandemic, credit risk, economic sensitivity, competition, liquidity challenges, interest rate changes, and cybersecurity threats - The COVID-19 pandemic has adversely affected the company's business and financial results and could continue to do so through reduced economic activity, higher credit losses, and operational disruptions[121][122] - The company is highly susceptible to credit risk, as borrowers may be unable to repay loans, and the value of underlying collateral, particularly real estate, may decline, which could be exacerbated by the pandemic's impact on hospitality, office, and retail properties[130] - A failure or breach of security systems, from internal or third-party providers, could result in financial losses, disclosure of confidential information, and reputational damage, with these risks heightened by increased remote banking and sophisticated cyber-attacks[161][162][164] - The planned cessation of LIBOR after 2021 creates uncertainty that may adversely affect the value and return on financial assets and liabilities linked to the benchmark, potentially leading to litigation and increased regulatory scrutiny[156][157] Risks Relating to our Growth Strategy The company's growth strategy, relying on organic expansion and acquisitions, faces risks including managing growth demands, obtaining regulatory approvals, and intense competition for limited acquisition targets, which could hinder successful implementation - Expansionary activity places significant demands on operations and management, and the inability to effectively integrate acquisitions, scale technology, and attract talent could materially and adversely affect the company[175][176] - Strategic acquisitions require regulatory approvals from agencies like the Federal Reserve, which could deny applications or impose conditions that restrict growth or reduce the benefits of a transaction[176][178] - There is intense competition for a limited number of acquisition opportunities from other banking organizations and investment funds, which may drive up prices and make it difficult to consummate acquisitions on attractive terms[180] Risks Relating to the Regulation of Our Industry Operating in a highly regulated environment, the company faces risks from extensive federal and state laws, with non-compliance potentially leading to fines, penalties, business restrictions, increased FDIC assessments, adverse regulatory findings, and limitations on capital support and dividend payments - The company is subject to extensive and costly regulation, and failure to comply with laws governing capital, business activities, and dividends could lead to fines, penalties, and other adverse effects[189] - The Federal Reserve expects a bank holding company to act as a "source of strength" for its subsidiary bank, which could require the company to make capital injections into NBH Bank if it experiences financial distress[195] - Failure to comply with the Bank Secrecy Act and other anti-money laundering regulations could result in significant civil money penalties, restrictions on business plans (including acquisitions), and serious reputational consequences[197] - The company's ability to pay dividends is subject to limitations by the Federal Reserve and Delaware corporate law, and depends on receiving dividends from its bank subsidiary, whose payments are also restricted by federal and state law[199] Unresolved Staff Comments None - The company reports no unresolved staff comments[201] Properties The company's principal executive offices are located south of Denver, Colorado, with significant operations space in Kansas City, Missouri, and as of December 31, 2020, it operated 90 banking centers across six states, 66 owned and 24 leased - As of December 31, 2020, the company operated 90 banking centers: 45 in Colorado, 37 in Kansas and Missouri, five in New Mexico, two in Texas, and one in Utah[201] - Of the 90 banking center locations, 66 were owned by the company and 24 were leased[201] Legal Proceedings The company is periodically involved in litigation incidental to its business but does not anticipate any material adverse effects from pending proceedings - The company does not believe that any of its pending legal proceedings, individually or in the aggregate, will have a material adverse effect on its business, prospects, financial condition, results of operations or liquidity[202] Mine Safety Disclosures Not applicable - The company reports no mine safety disclosures[203] 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 184 shareholders of record as of February 22, 2021, and a stock repurchase program with $43.1 million remaining available at year-end 2020, alongside details on equity compensation plans - The company's common stock is traded on the NYSE under the symbol "NBHC"[205] Stock Performance vs. Indices (Dec 31, 2015 - Dec 31, 2020) | Index | 12/31/15 | 12/31/16 | 12/31/17 | 12/31/18 | 12/31/19 | 12/31/20 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | NBHC | 100.00 | 150.66 | 154.84 | 149.53 | 174.28 | 166.50 | | KBW Regional Banking Index | 100.00 | 139.12 | 141.63 | 116.86 | 144.76 | 132.18 | | Russell 2000 Index | 100.00 | 121.28 | 139.02 | 123.69 | 155.21 | 186.15 | - On February 26, 2020, the Board of Directors authorized the repurchase of up to an additional $50.0 million of common stock, with $43.1 million remaining available for purchase under this authorization as of December 31, 2020[208] Selected Financial Data This section provides a five-year summary of the company's selected historical consolidated financial data from 2016 to 2020, including key financial condition and operations figures, per-share data, and performance ratios, showing consistent growth in assets, loans, and deposits, and an increase in net income from $23.1 million to $88.6 million[214][215] Selected Consolidated Financial Data (2016-2020, in thousands) | Metric | 2020 | 2019 | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | :--- | :--- | | Total Assets | $6,659,950 | $5,895,512 | $5,676,666 | $4,843,465 | $4,573,046 | | Loans, net | $4,293,949 | $4,376,342 | $4,056,616 | $3,147,683 | $2,831,747 | | Total Deposits | $5,676,232 | $4,737,132 | $4,535,621 | $3,979,559 | $3,868,649 | | Total Shareholders' Equity | $820,691 | $766,920 | $695,006 | $532,407 | $536,189 | | Net Interest Income | $192,946 | $205,830 | $197,437 | $146,306 | $145,640 | | Net Income | $88,591 | $80,365 | $61,451 | $14,579 | $23,060 | | Earnings Per Share, diluted | $2.85 | $2.55 | $1.95 | $0.53 | $0.79 | Selected Key Ratios (2016-2020) | Ratio | 2020 | 2019 | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | :--- | :--- | | Return on average assets | 1.40% | 1.38% | 1.10% | 0.31% | 0.50% | | Return on average equity | 11.24% | 10.89% | 9.28% | 2.67% | 3.95% | | Net interest margin | 3.33% | 3.83% | 3.85% | 3.36% | 3.39% | | Efficiency ratio | 61.52% | 62.22% | 69.78% | 70.80% | 70.30% | | Non-performing loans to total loans | 0.47% | 0.49% | 0.60% | 0.66% | 1.07% | Management's Discussion and Analysis of Financial Condition and Results of Operations This section discusses the company's financial condition and results for 2020 versus 2019, highlighting its COVID-19 response, strong deposit and liquidity growth, record mortgage banking income, net interest margin pressure, 13.0% asset growth to $6.7 billion, and 10.2% net income increase to $88.6 million[237] Overview and Key Challenges Management's overview highlights the company's relationship-focused model and COVID-19 response, including PPP participation, while facing challenges like intense competition, low interest rates, credit risk, and rising regulatory costs, yet achieving a 10.2% net income increase to $88.6 million in 2020[237] - Net income for 2020 increased 10.2% to $88.6 million, or $2.85 per diluted share, with adjusted net income (excluding banking center consolidation expenses) at $90.4 million, or $2.91 per diluted share[237][323] - The company funded $358.9 million in SBA PPP loans and consolidated 11 banking centers in 2020 to improve operating efficiencies[243] - Key challenges include the low interest rate environment, economic strain from the COVID-19 pandemic, and increased competition from traditional banks and FinTechs[249][252][254][258] - The company has low exposure to industries highly impacted by COVID-19, with no single high-impact industry sector (e.g., restaurants, hotels, retail) exceeding 5% of total loans[255] Financial Condition As of December 31, 2020, total assets increased 13.0% to $6.7 billion due to strong deposit growth, while total loans decreased 1.4% to $4.4 billion; asset quality remained strong, the allowance for credit losses increased 53.0% to $59.8 million with CECL adoption, and total deposits grew 19.8% to $5.7 billion, maintaining robust capital ratios Loan Portfolio Composition (in thousands) | Loan Category | Dec 31, 2020 | Dec 31, 2019 | % Change | | :--- | :--- | :--- | :--- | | Total Commercial | $3,044,065 | $2,992,307 | 1.7% | | PPP Loans | $176,106 | $0 | 100.0% | | Commercial real estate non-owner occupied | $631,996 | $630,906 | 0.2% | | Residential real estate | $658,659 | $770,417 | (14.5)% | | Consumer | $19,006 | $21,776 | (12.7)% | | Total Loans | $4,353,726 | $4,415,406 | (1.4)% | Asset Quality Ratios | Ratio | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Non-performing loans to total loans | 0.47% | 0.49% | | Non-performing assets to total loans and OREO | 0.58% | 0.66% | | Allowance for credit losses to total loans | 1.37% | 0.88% | | Allowance for credit losses to total loans (ex-PPP) | 1.43% | 0.88% | - In response to the pandemic, the company executed COVID-related loan modifications totaling $519.0 million, with $173.6 million (4.0% of total loans) remaining on a payment deferral plan as of year-end[302][304] Deposit Composition (in thousands) | Deposit Type | Dec 31, 2020 | Dec 31, 2019 | % Change | | :--- | :--- | :--- | :--- | | Non-interest bearing demand | $2,111,045 | $1,184,945 | 78.2% | | Total transaction deposits | $4,690,100 | $3,678,979 | 27.5% | | Total time deposits | $986,132 | $1,058,153 | (6.8)% | | Total Deposits | $5,676,232 | $4,737,132 | 19.8% | Results of Operations For 2020, net income increased to $88.6 million from $80.4 million in 2019, driven by a $60.0 million (141.8%) rise in mortgage banking income, offsetting a $12.9 million decline in net interest income and a 51 basis point compression in net interest margin to 3.42% (FTE), with provision for loan losses increasing to $17.6 million and non-interest expense rising 14.1%[250][327][329][338][339][340] - Fully taxable equivalent (FTE) net interest income decreased by $12.8 million (6.1%) to $198.0 million in 2020, as the FTE net interest margin narrowed 51 basis points to 3.42% due to lower earning asset yields[250][327][329] - Non-interest income increased by $57.5 million (69.5%) to $140.3 million, driven by record mortgage banking income of $102.4 million, a 141.8% increase from 2019[339] - Non-interest expense increased by $25.4 million (14.1%) to $206.2 million, primarily due to an $18.4 million increase in salaries and benefits related to higher mortgage banking compensation[340] - The provision for loan losses was $17.6 million in 2020, compared to $11.6 million in 2019, with the 2020 provision recorded under the CECL model and driven by deteriorating economic conditions from COVID-19[338] Liquidity and Capital Resources The company maintained strong liquidity and capital in 2020, with on-balance sheet liquidity increasing to $1.1 billion from $435.1 million in 2019 due to strong deposit growth, access to $0.9 billion in FHLB credit lines, and robust capital ratios including a 10.70% consolidated Tier 1 leverage ratio and 14.70% common equity Tier 1 ratio[344][350][522] On-Balance Sheet Liquidity (in thousands) | Component | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Cash and due from banks | $605,065 | $109,690 | | Unencumbered investment securities | $513,945 | $324,918 | | Total | $1,119,510 | $435,108 | Consolidated Capital Ratios (as of Dec 31, 2020) | Ratio | Actual | Well-Capitalized Minimum | | :--- | :--- | :--- | | Tier 1 Leverage | 10.70% | N/A (Bank: 5.0%) | | Common Equity Tier 1 | 14.70% | N/A (Bank: 6.5%) | | Tier 1 Risk Based Capital | 14.70% | N/A (Bank: 8.0%) | | Total Risk Based Capital | 15.82% | N/A (Bank: 10.0%) | - The company has a share repurchase program authorized by the Board of Directors, with $43.1 million remaining available for repurchase under the program authorized in February 2020 as of December 31, 2020[352] Asset/Liability Management and Interest Rate Risk The company actively manages interest rate risk through its Asset Liability Committee, with its balance sheet being asset sensitive as of December 31, 2020, expecting net interest income to increase in a rising rate environment, and a strategy focusing on shorter-duration, variable-rate loans and growing low-cost transaction deposits Interest Rate Sensitivity Analysis (% Change in Projected NII) | Hypothetical Rate Shift (bps) | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | +200 | 14.22% | 6.16% | | +100 | 7.46% | 3.13% | | -25 | (0.46)% | (0.54)% | - The company's asset/liability management strategy emphasizes a balanced approach to loan origination with a focus on shorter duration and variable rate loans, and growth in non-maturing transaction accounts[361] Quantitative and Qualitative Disclosures about Market Risk Information for this item is incorporated by reference from the "Asset/Liability Management and Interest Rate Risk" section within Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations - This section incorporates by reference the information provided under the caption Asset/Liability Management and Interest Rate Risk in Part I, Item 2-Management's Discussion and Analysis of Financial Condition and Results of Operations[365] Financial Statements and Supplementary Data This section includes the company's audited consolidated financial statements for the three-year period ended December 31, 2020, and KPMG LLP's unqualified audit report on both financial statements and internal controls, highlighting CECL adoption as a critical audit matter Report of Independent Registered Public Accounting Firm KPMG LLP issued an unqualified opinion on the company's consolidated financial statements and internal control over financial reporting for the period ended December 31, 2020, identifying the assessment of the allowance for credit losses (ACL) under CECL as a critical audit matter due to complex judgment - The independent auditor, KPMG LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting[367][368] - The auditor identified the assessment of the Allowance for Credit Losses (ACL) for loans evaluated on a collective basis under the new CECL standard (ASC Topic 326) as a Critical Audit Matter, due to the complex and subjective judgments involved in the methodology and assumptions[372][373][374] Consolidated Financial Statements The consolidated financial statements show total assets of $6.7 billion at year-end 2020, up from $5.9 billion in 2019, with net income of $88.6 million for 2020 compared to $80.4 million in 2019, and significant cash flow changes from financing, investing, and operating activities[379][381] Consolidated Statement of Financial Condition Highlights (in thousands) | Account | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Total Assets | $6,659,950 | $5,895,512 | | Cash and cash equivalents | $605,565 | $110,190 | | Loans, net | $4,293,949 | $4,376,342 | | Total Liabilities | $5,839,259 | $5,128,592 | | Total deposits | $5,676,232 | $4,737,132 | | Total Shareholders' Equity | $820,691 | $766,920 | Consolidated Statement of Operations Highlights (in thousands) | Account | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net interest income | $192,946 | $205,830 | $197,437 | | Provision for loan losses | $17,630 | $11,643 | $5,197 | | Non-interest income | $140,258 | $82,752 | $70,775 | | Non-interest expense | $206,177 | $180,745 | $189,334 | | Net Income | $88,591 | $80,365 | $61,451 | Notes to Consolidated Financial Statements The notes provide detailed disclosures on accounting policies and account composition, including the adoption of CECL and lease standards, breakdowns of investment and loan portfolios, asset quality, allowance for credit losses, deposits, borrowings, regulatory capital, stock-based compensation, earnings per share, derivatives, and fair value measurements - Note 3 (Recent Accounting Pronouncements): The company adopted ASU 2016-13 (CECL) on January 1, 2020, resulting in a $5.8 million increase to the allowance for credit losses and a corresponding $4.6 million reduction to retained earnings, net of tax[450] - Note 7 (Allowance for Credit Losses): The ACL increased from $39.1 million at year-end 2019 to $59.8 million at year-end 2020, driven by a $5.8 million cumulative effect adjustment from adopting CECL and a $17.5 million provision for loan losses during the year[495] - Note 14 (Regulatory Capital): As of December 31, 2020, both the consolidated company and NBH Bank exceeded all regulatory capital requirements to be considered "well-capitalized," with the consolidated Common Equity Tier 1 ratio at 14.7%[521][522] - Note 26 (Acquisition Activities): On January 1, 2018, the company completed its acquisition of Peoples, Inc. for total consideration of $146.4 million, resulting in the recognition of $55.4 million in goodwill[614][616] Changes in and Disagreements with Accountants on Accounting and Financial Disclosures There were no changes in or disagreements with accountants on accounting and financial disclosures - The company reports no changes in or disagreements with its accountants[619] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2020, an assessment also affirmed by KPMG LLP's unqualified opinion, with no material changes reported - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2020[620] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2020, an assessment audited by KPMG LLP, which also issued an unqualified opinion[621][624] Other Information None - The company reports no other information under this item[631] PART III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's definitive proxy statement for its 2021 Annual Meeting of Shareholders - Information regarding directors, executive officers, and corporate governance is incorporated by reference from the 2021 Proxy Statement[633] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's definitive proxy statement for its 2021 Annual Meeting of Shareholders - Information regarding executive compensation is incorporated by reference from the 2021 Proxy Statement[635] Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters Information regarding security ownership of certain beneficial owners and management, and related shareholder matters, is incorporated by reference from the company's definitive proxy statement for its 2021 Annual Meeting of Shareholders - Information regarding security ownership is incorporated by reference from the 2021 Proxy Statement[636] Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships and related transactions, and director independence, is incorporated by reference from the company's definitive proxy statement for its 2021 Annual Meeting of Shareholders - Information regarding related transactions and director independence is incorporated by reference from the 2021 Proxy Statement[637] Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the company's definitive proxy statement for its 2021 Annual Meeting of Shareholders - Information regarding principal accountant fees and services is incorporated by reference from the 2021 Proxy Statement[638] PART IV Exhibits, Financial Statement Schedules This section lists the financial statements, financial statement schedules, and exhibits filed as part of the Form 10-K report, noting the omission of inapplicable schedules and providing an index of filed or incorporated exhibits - This section lists the financial statements and exhibits filed with the Form 10-K, with all financial statement schedules omitted as they are inapplicable or the required information is included elsewhere in the report[641][642]