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NBCB > SEC Filings for NBCB > Form 10-Q on 24-Jun-2013All Recent SEC Filings

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Form 10-Q for FIRST NBC BANK HOLDING CO


24-Jun-2013

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis is intended to assist readers in understanding the consolidated financial condition and results of operations of First NBC Bank Holding Company and its wholly owned subsidiary, First NBC Bank, as of March 31, 2013 and December 31, 2012 and for the three months ended March 31, 2013 and March 31, 2012. This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements, the accompanying footnotes and supplemental data included herein.

To the extent that statements in this Form 10-Q relate to future plans, objectives, financial results or performance of the Company, these statements are deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements, which are based on management's current information, estimates and assumptions and the current economic environment, are generally identified by the use of words such as "plan," "believe," "expect," "intend," "anticipate," "estimate," "project" or similar expressions, or by future or conditional terms such as "will," "would," "should," "could," "may," "likely," "probably," or "possibly." The Company's actual strategies and results in future periods may differ materially from those currently expected due to various risks and uncertainties.

Forward-looking statements are not historical facts and may be affected by numerous factors, many of which are uncertain and beyond the Company's control. Factors that may cause actual results to differ materially from these forward-looking statements are discussed in the Company's Registration Statement on Form S-1, dated April 8, 2013, filed with the Securities and Exchange Commission ("SEC"). The Company undertakes no obligation to update these forward-looking statements to reflect events or circumstances that occur after the date on which such statements were made.

EXECUTIVE OVERVIEW

The Company is a bank holding company that operates through one segment, community banking, and offers a broad range of financial services to businesses, institutions, and individuals in southeastern Louisiana and the Mississippi Gulf Coast. The Company generates most of its revenue from interest on loans and investments, service charges, and gains on the sale of loans and securities. The Company's primary source of funding for its loans is deposits. The largest expenses are interest on these deposits and salaries and related employee benefits. The Company measures its performance through net interest margin, return on average assets and return on average common equity, while maintaining appropriate regulatory leverage and risk-based capital ratios.

During the first quarter of 2013, the Company earned $8.2 million, an increase of $1.8 million, or 31.8%, compared to first quarter 2012. Diluted earnings per share for the first quarter of 2013 were $0.58, an increase of $0.14, or 31.8%, compared to first quarter of 2012.

Key components of the Company's performance in the first quarter of 2013 are summarized below.

Total assets at March 31, 2013 were $2.8 billion, up $123.9 million, or 4.6%, from December 31, 2012. The increase was primarily a result of increases in total investments of $78.2 million and loans of $64.6 million. The increase in investments resulted from the deposit growth exceeding loan volume for the quarter.

Total loans at March 31, 2013 were $2.0 billion, an increase of $66.1 million, or 3.4%, from December 31, 2012. The increase in loans was primarily due to an $89.2 million, or 9.4%, increase in commercial real estate loans offset by a $30.6 million, or 4.5% decrease in commercial loans from December 31, 2012.

Total deposits increased $114.1 million, or 5.0%, from December 31, 2012. The increase was due primarily to increases in NOW deposits of $69.9 million, or 16.0%, and certificates of deposit of $90.2 million or 8.0% from December 31, 2012.

Shareholders' equity increased $7.8 million, or 3.2%, to $255.9 million at March 31, 2013. The increase was primarily the result of $8.2 million in net income for the first quarter of 2013, offset by $0.8 million, or 27.5%, in other comprehensive loss for the period.

Interest income increased $3.2 million, or 12.7%, in the first quarter of 2013 compared to the first quarter of 2012. This increase was due to a $2.7 million, or 11.6%, increase in interest income on loans compared to the same period last year. The Company's yield on loans decreased 20 basis points compared to the same period last year.



Interest expense increased $1.6 million or 21.1%, in the first quarter of 2013 compared to the first quarter of 2012. The increase was primarily due to the Company's tiered rate structure for all of its deposits, which resulted in a 24 basis point increase in the average rate on NOW accounts and a 10 basis point increase in the average rate on certificates of deposits of $100,000 or more.

The provision for loan losses was flat for the first quarter of 2013 compared to the first quarter of 2012. As of March 31, 2013, the Company's ratio of allowance for loan losses to total loans was 1.28%, compared to 1.40% at December 31, 2012.

Net charge-offs for the first three months of 2013 and 2012 were $4.0 million and $0.4 million, respectively. The increase in net charge-offs for the first quarter of 2013 resulted primarily from the partial charge-off of one commercial loan relationship.

Noninterest income for the first quarter of 2013 was flat compared to the first quarter 2012 as lower service charges on deposit accounts (down $0.2 million) and lower gains on sale of loans (down $0.3 million), were offset by increases in gains on other assets sold (up $0.1 million) and increases in CDE fees earned ($0.1 million).

Noninterest expense for the first quarter of 2013 increased $2.0 million, or 14.9%, compared to first quarter 2012. The increase in noninterest expense in the first quarter of 2013 compared to the first quarter of 2012 resulted primarily from higher professional fees (up $0.6 million), Louisiana shares tax (up $0.1 million), FDIC assessments (up $0.1 million) and tax credit amortization (up $0.6 million). The increase in professional fees was due primarily to increases in audit fees (up $0.1 million), CDE management fees (up $0.2 million), and CDE consulting fees (up $0.2 million).

The increase in net income of $2.0 million, compared to first quarter 2012, is due to the increase in income tax benefit. For the three months ended March 31, 2013, the Company had an income tax benefit of $4.0 million, which was due to $5.3 million in tax credits, offset by $1.3 million in income tax expense.

This discussion and analysis contains financial information determined by methods other than in accordance with GAAP. The Company's management uses these non-GAAP financial measures in their analysis of the Company's performance. Tangible book value per common share and the ratio of tangible common equity to tangible assets are not financial measures recognized under GAAP and, therefore, are considered non-GAAP financial measures.

The Company's management, banking regulators, many financial analysts and other investors use these non-GAAP financial measures to compare the capital adequacy of banking organizations with significant amounts of preferred equity and/or goodwill or other intangible assets, which typically stem from the use of the purchase accounting method of accounting for mergers and acquisitions. Tangible common equity, tangible assets, tangible book value per share or related measures should not be considered in isolation or as a substitute for total shareholders' equity, total assets, book value per share or any other measure calculated in accordance with GAAP. Moreover, the manner in which the Company calculates tangible common equity, tangible assets, tangible book value per share and any other related measures may differ from that of other companies reporting measures with similar names. These non-GAAP disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP. The following table reconciles, as of the dates set forth below, shareholders' equity (on a GAAP basis) to tangible common equity and total assets (on a GAAP basis) to tangible assets and calculates the Company's tangible book value per share.


            TABLE 1- RECONCILIATIONS OF NON-GAAP FINANCIAL MEASURES



                                                              As of
                                                  March 31,        December 31,
                                                     2013              2012
     Total Equity GAAP                           $    255,920      $     248,101
     Adjustments
     Preferred equity                                  49,166             49,166
     Goodwill                                           4,808              4,808
     Other intangibles                                  3,812              3,874

     Tangible common equity                           198,134            190,253

     Total assets-GAAP                              2,794,720          2,670,867
     Adjustments
     Goodwill                                           4,808              4,808
     Other intangibles                                  3,812              3,874

     Tangible assets                                2,786,100          2,662,185

     Total common shares                           13,063,025         13,052,583
     Book value per common share                 $      15.83      $       15.24
     Effect of adjustment                                0.66               0.66

     Tangible book value per common share               15.17              14.58

     Total shareholder's equity to assets                9.16 %             9.29 %
     Effect of adjustment                                2.05               2.14

     Tangible common equity to tangible assets           7.11               7.15

FINANCIAL CONDITION

Assets increased $123.9 million, or 4.6%, to $2.8 billion as of March 31, 2013, compared to $2.7 billion as of December 31, 2012 as the Company continued to grow in the New Orleans market area. Net loans increased $67.6 million, or 3.6%, to $2.0 billion as of March 31, 2013, compared to $1.9 billion as of December 31, 2012. Securities available-for-sale decreased $15.4 million, or 3.2%, to $471.0 million as of March 31, 2013, compared to $486.4 million as of December 31, 2012. Deposits increased $114.1 million, or 5.0%, to $2.4 billion as of March 31, 2013, compared to $2.3 billion as of December 31, 2012. Total shareholders' equity increased $7.8 million, or 3.2% to $255.9 million as of March 31, 2013, compared to $248.1 million as of December 31, 2012, primarily as a result of operating earnings.

Loan Portfolio

The Company's primary source of income is interest on loans to small-and medium-sized businesses, real estate owners in its market area and its private banking clients. The loan portfolio consists primarily of commercial loans and real estate loans secured by commercial real estate properties located in the Company's primary market area. The Company's loan portfolio represents the highest yielding component of its earning asset base.


The following table sets forth the amount of loans, by category, as of the respective periods.

                       TABLE 2- TOTAL LOANS BY LOAN TYPE



                                     March 31, 2013              December 31, 2012
       (dollars in thousands)     Amount        Percent         Amount        Percent
       Construction             $   169,463          8.5 %    $   168,544          8.8 %
       Commercial real estate     1,035,097         52.1          988,994         51.4
       Consumer real estate         103,975          5.2          103,516          5.4
       Commercial                   653,181         32.9          635,661         33.1
       Consumer                      14,820          0.7           14,073          0.7
       Other                         11,774          0.6           11,429          0.6

       Total loans              $ 1,988,310        100.0 %    $ 1,922,217        100.0 %

The Company's primary focus has been on commercial real estate and commercial lending, which constituted 85% of the loan portfolio, as of March 31, 2013, and 84.5% of the loan portfolio, as of December 31, 2012. Although management expects continued growth with respect to the loan portfolio, it does not expect any significant changes over the foreseeable future in the composition of the loan portfolio or in the emphasis on commercial real estate and commercial lending.

A significant portion, $336.7 million, or 32.5%, as of March 31, 2013, compared to $345.4 million, or 36.5%, as of December 31, 2012, of the commercial real estate exposure represents loans to commercial businesses secured by owner occupied real estate which, in effect, are commercial loans with the borrowers' real estate providing a secondary source of repayment. Commercial loans represent the second largest category of loans in the portfolio. The Company attributes its commercial loan growth primarily to the implementation of its relationship-based banking model and the success of its relationship managers in transitioning commercial banking relationships from other local financial institutions and in competing for new business from attractive small to mid-sized commercial customers located in its market for which this approach to customer service is desirable.

Nonperforming Assets

Nonperforming assets consist of nonperforming loans, other real estate owned and other repossessed assets. Nonperforming loans consist of loans that are on nonaccrual status and restructured loans, which are loans on which the Company granted a concession on the interest rate or original repayment terms due to financial difficulties of the borrower. Other real estate owned consists of real property acquired through foreclosure. The Company initially records other real estate owned at the lower of carrying value or fair value, less estimated costs to sell the assets. Estimated losses that result from the ongoing periodic valuations of these assets are charged to earnings as noninterest expense in the period in which they are identified. The Company accounts for troubled debt restructurings in accordance with ASC 310, "Receivables."

The Company generally will place loans on nonaccrual status when they become 90 days past due, unless they are well secured and in the process of collection. The Company also places loans on nonaccrual status if they are less than 90 days past due if the collection of principal or interest is in doubt. When a loan is placed on nonaccrual status, any interest previously accrued, but not collected, is reversed from income.

Once a foreclosure is completed, the loan is reclassified to other real estate owned until a sale date and title to the property is finalized. Once the Company owns the property, it is maintained, marketed, rented and sold to repay the original loan. Historically, foreclosure trends have been low due to the seasoning of the portfolio. Any loans that are modified or extended are reviewed for classification as a restructured loan in accordance with regulatory guidelines. The Company completes a process that outlines the modification, the reasons for the proposed modification and documents the current status of the borrower.


The following table sets forth information regarding nonperforming assets as of the dates indicated:

                          TABLE 3-NONPERFORMING ASSETS



                                                        March 31,            December 31,
(dollars in thousands)                                    2013                   2012
Nonaccrual loans:
Construction                                           $     2,009          $          806
Commercial real estate                                       7,593                   5,831
Consumer real estate                                         3,252                     818
Commercial                                                   9,955                  13,556
Consumer                                                        23                      72

Total nonaccrual loans                                      22,832                  21,083
Restructured loans                                           1,342                   2,336

Total nonperforming loans                                   24,174                  23,419
Other assets owned(1)                                           -                       -
Other real estate owned                                      5,205                   8,632

Total nonperforming assets                             $    29,379          $       32,051


Accruing loans past due 90+ days                       $        -           $           -

Nonperforming loans to total loans                            1.22 %                  1.22 %
Nonperforming loans to total assets                           0.86 %                  0.88 %
Nonperforming assets to total assets                          1.05 %                  1.20 %
Nonperforming assets to loans, other real estate
owned and other assets owned                                  1.47 %                  1.66 %

(1) Represents repossessed property other than real estate.

Approximately $0.2 million and $0.4 million of gross interest income would have been accrued if all loans on nonaccrual status had been current in accordance with their original terms at March 31, 2013 and December 31, 2012.

The Company has maintained low levels of nonperforming assets since its inception in 2006. Total nonperforming assets decreased $2.7 million, or 8.3%, as compared to December 31, 2012, and total nonperforming assets as a percentage of loans and other real estate owned decreased by 18 basis points over the period. The decrease resulted from a $4.0 million charge-off on a commercial loan. Management believes that the Company's historical low level of nonperforming assets reflects the strength of the local economy, as well as the Company's long-term knowledge of and relationships with a significant percentage of its borrowers.

Potential problem loans are those loans that are not categorized as nonperforming loans, but where current information indicates that the borrower may not be able to comply with present loan repayment terms. These are generally referred to as its watch list loans. The Company monitors past due status as an indicator of credit deterioration and potential problem loans. A loan is considered past due when the contractual principal or interest due in accordance with the terms of the loan agreement remains unpaid after the due date of the scheduled payment. To the extent that loans become past due, management assesses the potential for loss on such loans as it would with other problem loans and considers the effect of any potential loss in determining its provision for probable loan losses.


Management also assesses alternatives to maximize collection of any past due loans, including, without limitation, restructuring loan terms, requiring additional loan guarantee(s) or collateral or other planned action. Additional information regarding past due loans as of March 31, 2013 is included in Note 4 to the Company's financial statements for the periods ended March 31, 2013 and December 31, 2012 included in this report.

Allowance for Loan Losses

The Company maintains an allowance for loan losses that represents management's best estimate of the loan losses and risks inherent in the loan portfolio. In determining the allowance for loan losses, management estimates losses on specific loans, or groups of loans, where the probable loss can be identified and reasonably determined. The balance of the allowance for loan losses is based on internally assigned risk classifications of loans, historical loan loss rates, changes in the nature of the loan portfolio, overall portfolio quality, industry concentrations, delinquency trends, current economic factors and the estimated impact of current economic conditions on certain historical loan loss rates.

The allowance for loan losses is increased by provisions charged against earnings and reduced by net loan charge-offs. Loans are charged-off when it is determined that collection has become unlikely. Recoveries are recorded only when cash payments are received.

The allowance for loan losses was $25.5 million, or 1.28% of total loans, as of March 31, 2013, compared to $27.0 million, or 1.40% of total loans, as of December 31, 2012, a decrease of 12 basis points over the period. The decrease in allowance for loan losses as a percent of total loans, during the first quarter of 2013, was primarily attributable to net charge-offs as a percentage of average loans for the first quarter 2013 which were 0.21%, compared to 0.02%, for the first quarter of 2012. The increase in net charge-offs for the first quarter of 2013 resulted primarily from the charge-off related to one commercial loan. This loss was fully reserved at December 31, 2012.


The following table provides an analysis of the allowance for loan losses and net charge-offs for the respective periods.

         TABLE 4- SUMMARY OF ACTIVITY IN THE ALLOWANCE FOR LOAN LOSSES



                                                  For the Three Months Ended
                                                           March 31,
     (dollars in thousands)                         2013                2012
     Beginning balance                          $      26,977         $  18,122
     Charge-offs:
     Construction                                          -                 -
     Commercial real estate                                 2               215
     Consumer real estate                                  -                 22
     Commercial                                         4,009                35
     Consumer                                              96                96

     Total charge-offs                                  4,107               368

     Recoveries:
     Construction                                          -                  6
     Commercial real estate                                10                 1
     Consumer real estate                                  -                 -
     Commercial                                             8                 4
     Consumer                                               9                 7

     Total recoveries                                      27                18

     Net charge-offs                                    4,080               350
     Provision for loan loss                            2,600             2,635

     Balance at end of period                   $      25,497         $  20,407

     Net charge-offs to average loans                    0.21 %            0.02 %
     Allowance for loan losses to total loans            1.28 %            1.20 %

Although management believes that the allowance for loan losses has been established in accordance with accounting principles generally accepted in the United States and that the allowance for loan losses was adequate to provide for known and inherent losses in the portfolio at all times shown above, future provisions will be subject to ongoing evaluations of the risks in the loan portfolio. If the economy declines or if asset quality deteriorates, material additional provisions could be required.

The allowance for loan losses is allocated to loan categories based on the relative risk characteristics, asset classifications and actual loss experience of the loan portfolio. Note 4 of the footnotes to the consolidated financial statements provides further information on the Company's allowance for loan losses.

Securities

The securities portfolio is used to make various term investments, maintain a source of liquidity and serve as collateral for certain types of deposits and borrowings. The Company manages its investment portfolio according to a written investment policy approved by the Board of Directors. Investment balances in the securities portfolio are subject to change over time based on the Company's funding needs and interest rate risk management objectives. Liquidity levels take into account anticipated future cash flows and all available sources of credits and is maintained at levels management believes are appropriate to assure future flexibility in meeting anticipated funding needs.


The securities portfolio consists primarily of U.S. government agency obligations, mortgage-backed securities and municipal securities, although the Company also holds corporate bonds and other debt securities, all with varying contractual maturities. However, these maturities do not necessarily represent the expected life of the securities as the securities may be called or paid down without penalty prior to their stated maturities, and the targeted duration for the investment portfolios is in the three to four year range. No investment in any of these securities exceeds any applicable limitation imposed by law or regulation. The Asset Liability Committee reviews the investment portfolio on an ongoing basis to ensure that the investments conform to the Company's investment policy. All securities as of March 31, 2013 were classified as Level 2 assets, as their fair value was estimated using pricing models or quoted prices of securities with similar characteristics.

The investment portfolio consists entirely of "available-for-sale" securities. As a result, the carrying values of the Company's investment securities are adjusted for unrealized gain or loss as a valuation allowance, and any gain or loss is reported on an after-tax basis as a component of other comprehensive income in shareholders' equity.

The Company's investment securities portfolio totaled $471.0 million at March 31, 2013, a decrease of $15.4 million, or 3.2% from December 31, 2012. The decrease in available-for-sale securities was primarily due to sales and maturities of investment securities during the first quarter of 2013, offset by purchases of U.S. government agency and other securities. As of March 31, 2013, investment securities having a carrying value of $187.1 million were pledged to secure public deposits, securities sold under agreements to repurchase and borrowings.

The following table presents a summary of the amortized cost and estimated fair value of the investment portfolio, which was held entirely as available-for-sale.

                     TABLE 5- CARRYING VALUE OF SECURITIES



                                                     March 31, 2013                                 December 31, 2012
                                                     Unrealized                                        Unrealized
                                      Amortized        Gain /          Estimated       Amortized         Gain /         Estimated
(dollars in thousands)                   Cost          (Loss)          Fair Value         Cost           (Loss)         Fair Value
. . .
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