National Bank Holdings Corporation Announces Second Quarter 2015 Financial Results

GREENWOOD VILLAGE, Colo., July 23, 2015 /PRNewswire/ -- National Bank Holdings Corporation (NYSE: NBHC) reported a net loss of $1.3 million, or $0.04 per diluted share, for the second quarter of 2015, compared to net income of $1.2 million, or $0.03 per diluted share, during the first quarter of 2015, and net income of $2.1 million, or $0.05 per diluted share, during the second quarter of 2014.

In announcing these results, Chief Executive Officer Tim Laney said, "We delivered a record quarter for loan originations of $271.4 million, progressing towards our goal of $1 billion in annual originations.  Strong originations led to loan growth of $112.3 million, or 20.3% annualized, while maintaining excellent credit quality.  We have remained focused on deepening our relationships with our small to mid-sized business clients and expanding our deposit base within our markets.  We continued our success growing average demand deposits, which have grown 9.6% since the second quarter of last year, providing solid low-cost funding sources."

Mr. Laney added, "We remained active in repurchasing our shares during the second quarter and repurchased another 1.8 million shares, or 4.9% of our outstanding shares.  Since early 2013, we have repurchased 33.2% of our shares outstanding, at a weighted average price of $19.45.  In July, we commenced a $100 million cash tender offer at a price per share between $19.60 and $22.50.  We believe that the completion of the tender offer would represent a prudent deployment of our shareholders' capital in the current environment."

Brian Lilly, Chief Financial Officer, added, "We continue to evaluate the progress of building our company by analyzing the financial results that are expected to emerge over time.  We do this by excluding the impact of the non-cash FDIC indemnification asset amortization, FDIC loss-share income/expense, the large expense/income related to the workout of acquired OREO and problem loans, the impacts of the change in the warrant liability, banking center closure expense accruals, and our data processing conversion-related expenses, which can be seen in our non-GAAP reconciliation starting on page 16.  These items negatively impacted the second quarter by a net $0.20 per diluted share.  The net impact of these items may fluctuate on a quarterly basis, but is expected to decrease over time in connection with the expiration of the FDIC loss-sharing agreements over the next 18 months and the decreasing problem asset workout expenses.  The additional $0.20 per diluted share would have resulted in an adjusted net income per diluted share of $0.16 for the second quarter of 2015 compared to an adjusted $0.15 for the second quarter of 2014.  The adjusted return on average tangible assets was 0.56% during the second quarter.  We feel that this analysis provides better clarity to the emerging profitability and the progress toward reaching our goal of 1% return on average tangible assets."

Second Quarter 2015 Highlights
(All comparisons refer to the first quarter of 2015, except as noted)

• Grew the strategic loan portfolio by $134.4 million, or 26.4% annualized.
• Grew total loans $112.3 million, or 20.3% annualized, on the strength of a record $271.4 million of originations.
• Credit quality remained strong, as annualized non 310-30 net charge-offs were only 0.10% of average non 310-30 loans.
• Successfully exited $22.1 million, or 49.7% annualized, of the remaining non-strategic loan portfolio.
• Added a net $4.4 million to accretable yield for the acquired loans accounted for under ASC 310-30.
• Average demand deposits increased $25.1 million, or 13.7% annualized, leading the average transaction deposits and client repurchase agreements increase of $42 million during the second quarter, or 6.3% annualized.
• Net interest income totaled $38.9 million, a $0.6 million decrease from the prior quarter. The quarterly decrease was primarily driven by lower levels of higher-yielding purchased loans.
• FDIC loss-share related non-interest income totaled a negative $6.1 million, including $7.3 million of non-cash amortization of the FDIC indemnification asset.
• Repurchased 1.8 million shares during the second quarter, or 4.9% of outstanding shares. Since early 2013, 17.4 million shares have been repurchased, or 33.2% of then outstanding shares, at a weighted average price of $19.45.
• At June 30, 2015, tangible common book value per share was $18.58 before consideration of the excess accretable yield value of $0.99 per share.

Second Quarter 2015 Results
(All comparisons refer to the first quarter of 2015, except as noted)

Net Interest Income
Net interest income totaled $38.9 million, a $0.6 million decrease, largely due to lower levels of higher-yielding purchased loans.  Average interest earning assets remained consistent at $4.5 billion.  The fully taxable equivalent net interest margin narrowed 6 basis points to 3.53% during the second quarter from 3.59% during the previous quarter, primarily due to lower levels of higher-yielding purchased loans.  The impact of lower-yielding short-term investments resulting from increased client repurchase agreements earlier this year narrowed the second quarter net interest margin by 11 basis points.  We are forecasting client repurchase funds to remain consistent throughout 2015, lowering our expected net interest margin for the remainder of 2015 to 3.50% to 3.60%, with forecasted net interest income in the range of $38 million to $40 million per quarter driven by interest earning assets in the $4.4 billion to $4.5 billion range.

Loans
Strategic loans totaled $2.1 billion at June 30, 2015 and grew $134.4 million during the quarter, or 26.4% annualized.  Included in strategic loans outstanding are $1.9 billion in originated balances, which increased $155.1 million, or 35.6% annualized, over the prior quarter.  Loan originations totaled $271.4 million and increased $67.7 million, or 33.2%, from the prior quarter. Total loans ended the quarter at $2.3 billion, increasing $112.3 million during the quarter, or 20.3% annualized.  Consistent with the strategy of exiting the non-strategic loan portfolio, balances of non-strategic relationships totaled $156.4 million at June 30, 2015, decreasing $22.1 million during the quarter, or 49.7% annualized.  Strategic loans include all originated loans in addition to those acquired loans inside our operating markets that meet our credit risk profile. Identification as strategic for acquired loans was made at the time of acquisition.  Criteria utilized in the designation of an acquired loan as "strategic" include (a) geography, (b) total relationship with borrower and (c) credit metrics commensurate with our underwriting standards.  We continue to expect full year 2015 total loan growth in the range of 15% to 25%.

Energy sector loan balances totaled $144.2 million at June 30, 2015, representing 6.2% of total loans and 3.3% of earning assets and decreased from $149.6 million at March 31, 2015, a decrease of 3.6%, as clients raised capital, increased cash positions and moderated borrowings in response to oil and natural gas prices that remain at cyclically low levels.

Asset Quality and Provision for Loan Losses
Purchased loans accounted for under 310-30 totaled $241.3 million at June 30, 2015 and decreased $8.6 million during the second quarter, an annualized decrease of 13.7%, reflecting workout efforts on these purchased loans.  The quarterly fair value re-measurement on the 310-30 loans resulted in a favorable net transfer of $4.4 million from non-accretable difference to accretable yield, which will be recognized over the lives of the 310-30 pools.  This increased the life-to-date economic benefit of the accretable yield transfers net of impairments on 310-30 loans to $200.4 million.

Non 310-30 loans totaled $2.1 billion and represented 89.6% of total loans at June 30, 2015.  These loans are comprised of originated loans of $1.9 billion and acquired loans not accounted for under 310-30 of $185.9 million.  Net charge-offs within the non 310-30 portfolio remained low at 0.10% annualized, which reflects the prudent underwriting and well-selected clients within this portfolio.  Non-performing non 310-30 loans (comprised of non-accrual loans and non-accrual troubled debt restructurings) represented 0.72% of total non 310-30 loans, compared to 0.58% at March 31, 2015.  The increase was primarily due to one energy-related loan that moved to non-accrual in the quarter.  A provision for loan losses on the non 310-30 portfolio of $1.9 million was recorded during the second quarter of 2015, which was $0.4 million higher than the prior quarter and brought the allowance for loan losses on non 310-30 loans to 0.93% before consideration of $5.6 million of remaining purchase accounting discounts.  Credit quality is projected to remain strong throughout 2015 with net charge-offs ranging from 10 to 15 basis points for the full year, and provision for loan losses increasing with loan growth.

OREO ended the quarter at $20.4 million, decreasing $3.1 million.  Gains on sales of OREO were $0.6 million during the second quarter (of which $0.3 million of the gains were covered by loss-sharing agreements with the FDIC) compared to $1.5 million in the previous quarter (of which $0.7 million were covered by loss-sharing agreements with the FDIC).  Of the $20.4 million of OREO at June 30, 2015, $13.4 million, or 65.8%, were covered by loss-sharing agreements with the FDIC.

Deposits
Transaction deposits (defined as total deposits less time deposits) and client repurchase agreements averaged $2.7 billion during the second quarter, increasing $42.0 million, or 6.3% annualized.  Total average deposits and average client repurchase agreements remained consistent in the second quarter at $4.0 billion.  Average total demand deposits increased $25.1 million, or 13.7% annualized, during the second quarter, primarily driven by the growth of our small and mid-sized business clients.  Higher-cost average time deposits declined $45.0 million or 13.5% annualized.  The average cost of total deposits increased one basis point to 0.37% compared to the prior quarter.  The balance sheet continues to be strongly funded by client deposits and client repurchase agreements and at June 30, 2015, these client fundings comprised 97.3% of total liabilities. We continue to forecast transaction deposit growth in the mid-single digits, a continued decline in time deposits, and flat total deposit growth through the end of 2015.

Non-Interest Income
Banking related non-interest income (excludes FDIC-related non-interest income, gain on previously charged-off acquired loans and OREO related income) totaled $8.7 million during the second quarter of 2015, an increase of $1.2 million or 16.4%, over the prior quarter.  Growth and seasonal increases in service charges and bank card fees contributed $0.5 million of the increase.  Also contributing to the increase were higher gains on sales of mortgages of $0.1 million, as well as a positive mark-to-market adjustment of $0.6 million related to fair value interest rate swaps on fixed-rate term loans  We project banking related non-interest income growth in the mid-single digits on a full year-over-year basis.

FDIC loss-share related non-interest income totaled a negative $6.1 million for the second quarter compared to a negative $8.5 million during the prior quarter, increasing $2.4 million.  The increase was primarily due to a $1.9 million increase in other FDIC loss-sharing income related to fewer covered OREO gains in the current quarter compared to last quarter, and increased FDIC expense reimbursements.  As of June 30, 2015, the FDIC indemnification asset was $23.2 million.

"We continue to have success in our workout efforts regarding our purchased troubled loan portfolio and related OREO assets," said Brian Lilly.  "While this means higher returns on the covered loans, it also means we have to share the gains with the FDIC and as a result, we have lower expected reimbursements from the FDIC.  This translates into additional non-cash write-downs of the FDIC indemnification asset receivable.  In the second quarter, we wrote-down this receivable $7.3 million, or $0.12 per diluted share.  While we expect that the FDIC loss-share related non-interest income will continue to fluctuate and be a reflection of our workout efforts, our current expectation is that the non-cash write-down of the FDIC indemnification asset receivable will be between $7.0 million and $14.0 million, or $0.12 and $0.24 per diluted share for the remainder of 2015.  We continue to discuss with the FDIC a potential early termination of the loss sharing agreements."

Non-Interest Expense
Total non-interest expense was $40.4 million during the second quarter of 2015, increasing $3.7 million. Operating expenses totaled $37.5 million and increased $1.1 million due to higher salaries and benefits expense driven by an additional day and normal annual merit and promotional increases occurring during the second quarter.  Additionally, the first quarter salaries and benefits expenses were lower due to reversals of 2014 incentive accruals.  Operating expenses exclude OREO expenses, problem loan expense, the impact from the change in the warrant liability, data processing conversion-related expenses, and banking center closure expense accruals.  Forecasted operating expenses are between $37.0 million and $38.0 million per quarter for the remainder of the year, with data processing conversion-related charges in the range of $2.5 million to $3.5 million for the remainder of 2015.

We plan to close three banking centers in our Bank Midwest footprint during the third quarter 2015 and consolidate them with nearby locations to better align our resources to focus on serving our clients.  Two owned banking centers were classified as held-for-sale during the second quarter, resulting in a fair value impairment charge of $1.1 million. The payback on the consolidation is expected to be less than two years.

OREO and problem loan expenses totaled $1.1 million and increased $0.7 million from the prior quarter.  The increase was due to fewer OREO gains realized compared to the prior quarter.  OREO and problem loan expenses are expected to continue to fluctuate quarterly as the acquired problem asset portfolio is resolved.  OREO and problem loan net expense is projected to be approximately $1.0 million per quarter for the remainder of 2015.

Warrant liability fair value adjustments totaled $0.5 million in expense during the second quarter, increasing $0.9 million from prior quarter due to the change in our share price.

Income tax expense totaled $0.7 million during the second quarter.  The net tax expense includes $1.7 million of non-cash deferred tax asset write-offs.  As previously disclosed, these charges were related to stock compensation agreements which expired during the quarter.  Without the $1.7 million of non-cash charges, we would have recorded a net tax benefit of $1.0 million which is reflective of the continued success of our tax strategies and tax-exempt income of $1.4 million.  We forecast another $0.2 million of non-cash deferred tax asset write-offs related to expired stock compensation agreements in the fourth quarter of 2015.

Capital
Capital ratios continue to be strong and well in excess of federal bank regulatory agency "well capitalized" thresholds.  Shareholders' equity totaled $718.3 million at June 30, 2015 and decreased $44.4 million from the prior quarter.  The decrease was due to the repurchase of 1.8 million shares coupled with a $7.6 million decrease in accumulated other comprehensive income, net of tax, which was driven by the fair market value fluctuations of the available-for-sale investment securities portfolio.  The shares repurchased represented a 4.9% reduction in shares outstanding during the quarter, which brings the cumulative shares repurchased since early 2013 to 33.2% of the shares then outstanding.

Tangible common book value per share at June 30, 2015 was $18.58, compared to $18.86 at March 31, 2015, and the tangible common equity to tangible assets ratio decreased 0.27% to 13.83% at June 30, 2015.

The leverage ratio at June 30, 2015 for the consolidated company and the Bank was 13.51% and 11.27%, respectively.  Subsequent to June 30, 2015, the Bank distributed $36.0 million of capital to the holding company, which decreased the Bank's leverage ratio to 10.52%.

A common convention in the industry is to add the value of the accretable yield to the tangible book value per share.  The value of the June 30, 2015 accretable yield balance on the 310-30 loans of $103.4 million would add $1.80 after-tax to the tangible book value per share.  A more conservative methodology, that management uses, values the excess yield and then considers the timing of the accreted interest income recognition.  Under this more conservative methodology, we first net the accretable yield on 310-30 loans and the amortization of the FDIC indemnification asset and then calculate the excess above a 4.0% yield (an approximate yield on new loan originations), and finally discount the amounts at 5%.  The result would add $0.99 after-tax to our tangible book value per share as of June 30, 2015.

Year-Over-Year Review
(All comparisons refer to the first six months of 2014)

For the first six months of 2015, the net loss totaled $0.1 million, or $0.00 per diluted share, compared to net income of $3.6 million for the first six months of 2014, or $0.08 per diluted share.  Net interest income totaled $78.3 million and decreased $7.4 million, or 8.7%, from the first six months of 2014, largely due to lower levels of higher-yielding purchased loans.  Average interest earning assets remained relatively stable as increases in the originated loan portfolio and cash offset a reduction in the investment portfolio and non-strategic purchased loans.  The continued resolution of the higher-yielding acquired non-strategic loan portfolio led to a 33 basis point narrowing of the fully taxable equivalent net interest margin to 3.56% from 3.89%.  The elevated level of lower-yielding short-term investments that resulted from the increased client repurchase agreements negatively impacted the net interest margin by 12 basis points for the first six months of 2015.

Loan balances as of June 30, 2015 totaled $2.3 billion and increased $240.7 million, or 11.5%, since June 30, 2014.  Strategic loans increased $372.7 million since June 30, 2014, a 20.7% increase, on the strength of $860.6 million in loan originations between the two periods.  The strong loan originations were the result of continued market penetration and the success of specialty lending groups.  Non-strategic loans declined $132.0 million from a year ago, a 45.8% decrease, as a result of the continued workout progress on exiting acquired problem loans.

Average transaction deposits and client repurchase agreements totaled $2.7 billion during the first six months of 2015 and increased $212.1 million, or 8.5% from the same period in 2014, and were led by a $144.4 million increase in average client repurchase agreements and a $66.3 million, or 9.8%, increase in average demand deposits as a result of our strategic focus on relationship banking.  Total deposits and client repurchase agreements averaged $4.0 billion during the first six months of 2015, increasing $79.8 million, or 2.0%, from the first six months of the prior year.  The increase was due to the aforementioned increases in client repurchase agreements and demand deposits, offset by lower time deposits of $132.3 million.  The mix of transaction deposits to total deposits improved to 66.3% at June 30, 2015 from 63.0% at June 30, 2014.  Additionally, the cost of total deposits was consistent at 0.37% in the first six months of 2015 and 2014.

Provision for loan losses expense was $3.3 million compared to $3.4 million during the first six months of 2014, a decrease of $0.1 million.  The non 310-30 allowance was 0.93% of total non 310-30 loans compared to 0.84% in the prior year.  Net charge-offs on non 310-30 loans remained low at only 0.06% during the first six months of 2015 compared to 0.04% during the same period of 2014.

Non-interest income totaled $2.3 million for the first six months of 2015 compared to $1.8 million during the same period of 2014, an increase of $0.5 million.  Banking related non-interest income of $16.1 million during the first six months of 2015 was up $1.6 million, or 11.3%, compared to the same period last year as a result of increases in bank card fees, gain on sale of mortgages and bank owned life insurance income and was partially offset by a decrease in client overdraft fees.  FDIC-related non-interest income totaled $14.6 million and increased $0.5 million as income from FDIC expense billings more than offset the additional FDIC indemnification asset amortization.

Non-interest expense totaled $77.1 million compared to $78.9 million, a decrease of $1.8 million, or 2.3%.  Operating expenses decreased $1.7 million, or 2.3%, during the first six months compared to prior year.  OREO and problem loan expenses declined $3.3 million and were driven by $2.0 million less OREO expenses and increased net gains on OREO sales of $1.1 million.  Expense from the change in the fair value of the warrant liability increased $1.6 million during the first six months of 2015 compared to the first six months of 2014.  Banking center closure expense accruals totaled $1.1 million in the first six months of 2015 due to fair value impairment charges on banking centers classified as held-for-sale.

Other
The acquisition of Pine River Bank Corporation has received regulatory approval, with an expected close date of July 31, 2015.  The Company will acquire Pine River Bank Corporation for cash at tangible book value at closing, adjusted for certain items.  At March 31, 2015, Pine River Bank Corporation held assets of $140.0 million; loans of $67.6 million; deposits of $125.0 million; and capital of $13.8 million.

All prior comments on forecasted results do not consider the impact of the Pine River Bank Corporation acquisition.

About Non-GAAP Financial Measures
Certain of the financial measures and ratios we present, including "operating expenses," "tangible assets," "return on average tangible assets," "return on average tangible common equity," "tangible common book value," "tangible common book value per share," "tangible common equity," "tangible common equity to tangible assets," "fully taxable equivalent" metrics, "adjusted net income," "adjusted basic earnings per share," "adjusted diluted earnings per share," and "adjusted return on average tangible assets," are supplemental measures that are not required by, or are not presented in accordance with, U.S. generally accepted accounting principles (GAAP).  We refer to these financial measures and ratios as "non-GAAP financial measures." We consider the use of select non-GAAP financial measures and ratios to be useful for financial and operational decision making and useful in evaluating period-to-period comparisons. We believe that these non-GAAP financial measures provide meaningful supplemental information regarding our performance by excluding certain expenditures or assets that we believe are not indicative of our primary business operating results or by presenting certain metrics on a fully taxable equivalent basis. We believe that management and investors benefit from referring to these non-GAAP financial measures in assessing our performance and when planning, forecasting, analyzing and comparing past, present and future periods.

These non-GAAP financial measures are presented for supplemental informational purposes only and should not be considered a substitute for financial information presented in accordance with GAAP. The non-GAAP financial measures we present may differ from non-GAAP financial measures used by our peers or other companies. In particular, the items that we exclude in our adjustments are not necessarily consistent with the items that our peers may exclude from their results of operations and key financial measures and therefore may limit the comparability of similarly named financial measures and ratios. We compensate for these limitations by providing the equivalent GAAP measures whenever we present the non-GAAP financial measures and by including a reconciliation of the impact of the components adjusted for in the non-GAAP financial measure so that both measures and the individual components may be considered when analyzing our performance.

A reconciliation of non-GAAP financial measures to the comparable GAAP financial measures is included at the end of the financial statement tables.

About National Bank Holdings Corporation
National Bank Holdings Corporation is a bank holding company created to build a leading community bank franchise delivering high quality customer service and committed to shareholder results. National Bank Holdings Corporation operates a network of 97 banking centers located in Colorado, the greater Kansas City region and Texas. Through the Company's subsidiary, NBH Bank, N.A., it operates under the following brand names: Bank Midwest in Kansas and Missouri, Community Banks of Colorado in Colorado and Hillcrest Bank in Texas. Additional information about National Bank Holdings Corporation can be found at www.nationalbankholdings.com.

Certain Information Regarding the Tender Offer
The information in this press release describing the Company's tender offer is for informational purposes only and does not constitute an offer to buy or the solicitation of an offer to sell shares of the Company's Class A common stock in the tender offer. The tender offer is being made only pursuant to the Offer to Purchase and the related materials that the Company is distributing to its stockholders, as they may be amended or supplemented. Stockholders should read such Offer to Purchase and related materials carefully and in their entirety because they contain important information, including the various terms and conditions of the tender offer. Stockholders of the Company may obtain a free copy of the Tender Offer Statement on Schedule TO, the Offer to Purchase and other documents that the Company has filed with the Securities and Exchange Commission from the Securities and Exchange Commission's website at www.sec.gov. Stockholders or investors who have questions or need assistance or may obtain a copy of these documents, without charge, by calling Keefe, Bruyette & Woods, Inc., the dealer manager and information agent for the tender offer, toll free at 877-892-9475. Stockholders are urged to carefully read all of these materials prior to making any decision with respect to the tender offer.

Forward-Looking Statements
This press release contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements contain words such as "anticipate," "believe," "can," "would," "should," "could," "may," "predict," "seek," "potential," "will," "estimate," "target," "plan," "project," "continuing," "ongoing," "expect," "intend" or similar expressions that relate to the Company's strategy, plans or intentions. Forward-looking statements involve certain important risks, uncertainties and other factors, any of which could cause actual results to differ materially from those in such statements. Such factors include, without limitation, the "Risk Factors" referenced in our most recent Form 10-K filed with the Securities and Exchange Commission (SEC), other risks and uncertainties listed from time to time in our reports and documents filed with the SEC, and the following additional factors: ability to execute our business strategy; business and economic conditions; economic, market, operational, liquidity, credit and interest rate risks associated with the Company's business; effects of any changes in trade, monetary and fiscal policies and laws; changes imposed by regulatory agencies to increase capital standards; effects of inflation, as well as, interest rate, securities market and monetary supply fluctuations; changes in consumer spending, borrowings and savings habits; the Company's ability to identify potential candidates for, consummate, integrate and realize operating efficiencies from, acquisitions; the Company's ability to successfully convert core operating systems, at the estimated cost, without significant business interruption and to realize the anticipated benefits; the Company's ability to achieve organic loan and deposit growth and the composition of such growth; changes in sources and uses of funds; increased competition in the financial services industry; the effect of changes in accounting policies and practices; the share price of the Company's stock; the Company's ability to realize deferred tax assets or the need for a valuation allowance; continued consolidation in the financial services industry; ability to maintain or increase market share and control expenses; costs and effects of changes in laws and regulations and of other legal and regulatory developments; technological changes; the timely development and acceptance of new products and services; the Company's continued ability to attract and maintain qualified personnel; ability to implement and/or improve operational management and other internal risk controls and processes and reporting system and procedures; regulatory limitations on dividends from the Company's bank subsidiary; changes in estimates of future loan reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements; widespread natural and other disasters, dislocations, political instability, acts of war or terrorist activities, cyberattacks or international hostilities; impact of reputational risk; and success at managing the risks involved in the foregoing items. The Company can give no assurance that any goal or plan or expectation set forth in forward-looking statements can be achieved and readers are cautioned not to place undue reliance on such statements. The forward-looking statements are made as of the date of this press release, and the Company does not intend, and assumes no obligation, to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events or circumstances, except as required by applicable law.

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