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NBCB > SEC Filings for NBCB > Form 10-Q on 14-Aug-2013All Recent SEC Filings

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Form 10-Q for FIRST NBC BANK HOLDING CO


14-Aug-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 June 30, 2013 and December 31, 2012 and for the six months ended June 30, 2013 and June 30, 2012. This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements, accompanying the 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") and in the risk factors discussed in Part II, Item 1A of this report. 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, which 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 its 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 six months ended June 30, 2013, the Company's income available to common shareholders totaled $16.7 million, an increase of $1.3 million, or 8.4%, compared to the six months ended June 30, 2012. Diluted earnings per share for the six months ended June 30, 2012 were $1.06, a decrease of $0.03, or 2.8%, compared to the six months ended June 30, 2012. During the second quarter of 2013, the Company's income available to common shareholders totaled $8.5 million, a decrease of $0.7 million, or 7.5%, compared to second quarter of 2012. Diluted earnings per share for the second quarter of 2013 were $0.49, a decrease of $0.16, or 24.6%, compared to second quarter of 2012. The Company's operating results for the three and six months ended June 30, 2012 were affected by $1.8 million of securities gains taken during the second quarter of 2012. Before securities gains, income available to common shareholders for the second quarter of 2013 totaled $8.5 million, compared to $7.4 million, an increase of $1.1 million, or 14.3%, and $16.4 million, compared to $13.6 million, an increase of $2.7 million, or 20.0%, for the six months ended June 30, 2013 and June 30, 2012, respectively. The 2013 earnings per share amounts were affected by the Company's initial public offering, which closed on May 15, 2013, in which it issued 4,791,667 shares at a price of $24.00 per share. The issuance of the new shares, the proceeds of which are expected to support the Company's continued asset and earnings growth, caused the reduction in earnings per share from the comparable periods of 2012 while not yet impacting the Company's earnings.

Key components of the Company's performance during the first six months of 2013 are summarized below.

The Company completed an initial public offering of 4,791,667 shares of its common stock during the quarter ended June 30, 2013, generating gross proceeds of $115.0 million to support future growth.

Total assets at June 30, 2013 were $3.0 billion, an increase of $356.5 million, or 13.4%, from December 31, 2012.

Total loans at June 30, 2013 were $2.1 billion, an increase of $172.0 million, or 9.0%, from December 31, 2012. The increase in loans was primarily due to increases of $86.3 million, or 8.7%, in commercial real estate loans and $61.5 million, or 9.7%, in commercial loans from December 31, 2012.



Total deposits increased $245.1 million, or 10.8%, from December 31, 2012. The increase was due primarily to increases in NOW deposits of $130.7 million, or 30.0%, and certificates of deposit of $116.4 million, or 10.3%, from December 31, 2012.

Shareholders' equity increased $115.0 million, or 46.4%, to $363.1 million at December 31, 2012. The increase was primarily attributable to the results of the Company's initial public offering and retained earnings over the period.

Interest income increased $3.3 million, or 12.6%, in the second quarter of 2013 compared to the second quarter of 2012. For the six months ended June 30, 2013, interest income increased $6.5 million, or 12.7%, compared to the six months ended June 30, 2012. The increases were driven by loan growth, and were partially offset by lower yields on average interest-earning assets.

Interest expense increased $2.0 million or 26.3%, in the second quarter of 2013 compared to the second quarter of 2012. For the six months ended June 30, 2013, interest expense increased $3.6 million, or 23.8%, compared to the six months ended June 30, 2012. The increases were primarily due to higher average balances of interest-bearing deposits and the Company's tiered rate structure for all of its deposits.

The provision for loan losses increased $0.6 million, or 33.3%, for the second quarter of 2013 compared to the second quarter of 2012. For the six months ended June 30, 2013, the provision totaled $5.0 million, an increase of $0.6 million, or 12.7%, compared to the six months ended June 30, 2012. As of June 30, 2013, the Company's ratio of allowance for loan losses to total loans was 1.32%, compared to 1.40% at December 31, 2012.

Net charge-offs for the second quarter of 2013 were $0.1 million, compared to net loan charge-offs of $4.1 million and $0.7 million for the first quarter of 2013 and second quarter of 2012, 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 second quarter of 2013 decreased $1.2 million, or 31.0%, compared to the second quarter of 2012 due to lower service charges on deposit accounts (down $0.2 million) and lower securities gains (down $1.8 million), which were partially offset by an increase in CDE fees earned ($1.0 million). For the six months ended June 30, 2013, noninterest income decreased $1.3 million, or 18.6%, compared to the six months ended June 30, 2012 due to lower service charges on deposit accounts (down $0.4 million) and lower securities gains (down $1.5 million), which were offset by an increase in CDE fees earned ($1.1 million).

Noninterest expense for the second quarter of 2013 increased $1.3 million, or 9.5%, compared to the second quarter of 2012. The increase in noninterest expense in the second quarter of 2013 compared to the second quarter of 2012 resulted primarily from higher professional fees (up $0.6 million), tax credit amortization (up $0.8 million), and salaries and benefits expense (up $0.5 million). For the six months ended June 30, 2013, noninterest expense increased $3.2 million, or 11.7%, compared to the six months ended June 30, 2012. The increase resulted primarily from increases in tax credit amortization ($1.4 million) and professional fees ($1.1 million).

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 tangible book value per share.


            TABLE 1- RECONCILIATIONS OF NON-GAAP FINANCIAL MEASURES



                                                             As of
                                                                    December 31,
   (in thousands, except per share data)        June 30, 2013           2012
   Total Equity GAAP                           $       363,089      $     248,101
   Adjustments
   Preferred equity                                     49,166             49,166
   Goodwill                                              4,808              4,808
   Other intangibles                                     3,750              3,874

   Tangible common equity                      $       305,365      $     190,253

   Total assets-GAAP                           $     3,027,395      $   2,670,867
   Adjustments
   Goodwill                                              4,808              4,808
   Other intangibles                                     3,750              3,874

   Tangible assets                             $     3,018,837      $   2,662,185

   Total common shares                              17,859,692         13,052,583
   Book value per common share                 $         17.58      $       15.24
   Effect of adjustment                                   0.48               0.66

   Tangible book value per common share        $         17.10      $       14.58

   Total shareholders' equity to assets                  11.99 %             9.29 %
   Effect of adjustment                                   1.88               2.14

   Tangible common equity to tangible assets             10.12 %             7.15 %

FINANCIAL CONDITION

Assets increased $356.5 million, or 13.4%, to $3.0 billion as of June 30, 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 $171.2 million, or 9.0%, to $2.1 billion as of June 30, 2013, compared to $1.9 billion as of December 31, 2012. Securities available-for-sale increased $54.5 million, or 11.2%, to $540.9 million as of June 30, 2013, compared to $486.4 million as of December 31, 2012. Deposits increased $245.1 million, or 10.8%, to $2.5 billion as of June 30, 2013, compared to $2.3 billion as of December 31, 2012. Total shareholders' equity increased $115.0 million, or 46.4%, to $363.1 million as of June 30, 2013, compared to $248.1 million as of December 31, 2012, primarily from the gross proceeds of the initial public offering of 4,791,667 shares of its common stock during the second quarter of 2013.


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



                                     June 30, 2013               December 31, 2012
       (dollars in thousands)     Amount        Percent         Amount        Percent
       Construction             $   182,577          8.7 %    $   168,544          8.8 %
       Commercial real estate     1,075,276         51.3          988,994         51.4
       Consumer real estate         108,712          5.2          103,516          5.4
       Commercial                   697,124         33.3          635,661         33.1
       Consumer                      17,150          0.8           14,073          0.7
       Other                         13,354          0.6           11,429          0.6

       Total loans              $ 2,094,193        100.0 %    $ 1,922,217        100.0 %

The Company's primary focus has been on commercial real estate and commercial lending, which remained at 84% of the loan portfolio as of June 30, 2013 and 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, $365.9 million, or 34.0%, as of June 30, 2013, compared to $345.4 million, or 34.9%, as of December 31, 2012, of the commercial real estate exposure represented 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 has 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 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 the 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



                                                                               December 31,
(dollars in thousands)                               June 30, 2013                 2012
Nonaccrual loans:
Construction                                        $         2,050           $          806
Commercial real estate                                        8,673                    5,831
Consumer real estate                                          2,443                      818
Commercial                                                    2,678                   13,556
Consumer                                                         13                       72

Total nonaccrual loans                                       15,857                   21,083
Restructured loans                                            1,319                    2,336

Total nonperforming loans                                    17,176                   23,419
Other assets owned (1)                                          298                       -
Other real estate owned                                       6,364                    8,632

Total nonperforming assets                          $        23,838           $       32,051

Accruing loans past due 90+ days                    $            -            $           -

Nonperforming loans to total loans                             0.82 %                   1.22 %
Nonperforming loans to total assets                            0.57 %                   0.88 %
Nonperforming assets to total assets                           0.79 %                   1.20 %
Nonperforming assets to loans, other real
estate owned and other assets owned                            1.14 %                   1.66 %

(1) Represents repossessed property other than real estate.

Approximately $0.5 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 June 30, 2013 and December 31, 2012.

The Company's historically strong asset quality improved during the second quarter of 2013. Total nonperforming assets decreased $8.2 million, or 25.6%, as compared to December 31, 2012, and total nonperforming assets as a percentage of loans and other real estate owned decreased by 52 basis points over the period. The decrease resulted from a $4.0 million partial charge-off on a commercial loan during the first quarter of 2013. 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 June 30, 2013 is included in Note 4 to the Company's financial statements for the periods ended June 30, 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 $27.7 million, or 1.32% of total loans, as of June 30, 2013, compared to $27.0 million, or 1.40% of total loans, as of December 31, 2012, a decrease of 8 basis points over the period. The decrease in allowance for loan losses as a percent of total loans, was primarily attributable to the increase in net charge-offs for the first quarter of 2013 which related to the partial charge-off of one commercial loan. This loss was fully reserved at December 31, 2012. Net charge-offs as a percentage of average loans was 0.21% for the second quarter of 2013, compared to 0.21% for the first quarter of 2013, and 0.04% for the second quarter of 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 Six Months Ended
                                                           June 30,
      (dollars in thousands)                         2013              2012
      Beginning balance                          $     26,977        $  18,122
      Charge-offs:
      Construction                                         -                -
      Commercial real estate                              135               -
      Consumer real estate                                 24              242
      Commercial                                        4,014              365
      Consumer                                            143              148

      Total charge-offs                                 4,316              755

      Recoveries:
      Construction                                         -                 6
      Commercial real estate                               11                1
      Consumer real estate                                 -                -
      Commercial                                           56               39
      Consumer                                             20               20

      Total recoveries                                     87               66

      Net charge-offs                                   4,229              689
      Provision for loan loss                           5,000            4,435

      Balance at end of period                   $     27,748        $  21,868

      Net charge-offs to average loans                   0.21 %           0.04 %
      Allowance for loan losses to total loans           1.32 %           1.26 %

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 are 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 securities. The other securities are short-term trade receivables purchased on an exchange. All of the securities have 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 June 30, 2013 were classified as Level 2 assets, as their fair value was estimated using . . .
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