National Bank Holdings Corporation Announces Third Quarter 2015 Financial Results

Greenwood Village, Colorado - (PR Newswire) – National Bank Holdings Corporation (NYSE: NBHC) reported net income of $1.6 million, or $0.05 per diluted share, for the third quarter of 2015, compared to a net loss of $1.3 million, or $0.04 per diluted share, during the second quarter of 2015, and net income of $3.3 million, or $0.08 per diluted share, during the third quarter of 2014.

In announcing these results, Chief Executive Officer Tim Laney said, “We delivered another quarter of strong loan production with originations totaling $253.7 million, progressing towards our goal of $1 billion in annual originations. We also continued our success in growing average demand deposits which grew 12.3% annualized in the quarter, before the addition of Pine River Bank Corporation (“Pine River”), reflecting the continued relationship building efforts being executed by our experienced team of bankers.”

Mr. Laney added, “We remained very active in repurchasing our shares during the third quarter with the execution of a $100.0 million tender offer resulting in the repurchase of approximately 4.7 million shares. Since early 2013, we have repurchased 42.3% of our shares outstanding, at a weighted average price of $19.88. We will continue to opportunistically manage our capital through a variety of means, including supporting organic growth, mergers and acquisitions, additional share repurchases, and dividends.”

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, bargain purchase gain and one-time expenses from the acquisition of Pine River, and our core system conversion-related expenses, which can be seen in our non-GAAP reconciliation starting on page 16. These items negatively impacted the third quarter by a net $0.12 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 15 months and the decreasing problem asset workout expenses. The additional $0.12 per diluted share would have resulted in an adjusted net income per diluted share of $0.17 for the third quarter of 2015 compared to an adjusted $0.16 for the second quarter of 2015. The adjusted return on average tangible assets was 0.52% during the third 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.”

Third Quarter 2015 Highlights

(All comparisons refer to the second quarter of 2015, except as noted)

Third Quarter 2015 Results

(All comparisons refer to the second quarter of 2015, except as noted)

Net Interest Income

Net interest income totaled $38.7 million, a $0.2 million decrease, largely due to lower levels of higher-yielding purchased loans, which offset the benefits of total loan growth and the addition of Pine River. Average interest earning assets totaled $4.4 billion and decreased $0.1 billion primarily due to the $102.0 million share repurchase during the quarter. The fully taxable equivalent net interest margin widened by 1 basis point to 3.54% during the third quarter from 3.53%.

Loans

Total loans ended the quarter at $2.5 billion, increasing $194.6 million, driven by the organic growth of $130.3 million on the strength of loan originations and $64.3 million from the Pine River acquisition. Excluding Pine River, total loans increased $131.7 million, or 22.4% annualized. Loan originations totaled $253.7 million, a decrease of $17.7 million, or 6.5%, from the prior quarter but increased $50.4 million or 24.8% from the third quarter of 2014. Strategic loans totaled $2.4 billion at September 30, 2015 and grew $207.7 million during the quarter, or 37.9% annualized. Included in strategic loans outstanding are $2.1 billion in originated balances, which increased $172.3 million, or 36.0% annualized, over the prior quarter. Consistent with the strategy of exiting the non-strategic loan portfolio, balances of non-strategic relationships totaled $143.3 million at September 30, 2015, decreasing $13.1 million during the quarter, or 33.1% 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.

Energy sector loan balances totaled $147.5 million at September 30, 2015, representing 5.8% of total loans and 3.4% of earning assets and increased from $144.2 million, or 2.3% from prior quarter. Existing clients reduced borrowings $6.8 million or 4.7%, while the Bank originated a new relationship with a strong company in the midstream sector. Of the $147.5 million energy sector loans, $116.0 million or 78.7% related to the midstream and E&P sectors and $31.5 million or 21.3% related to energy services.

Asset Quality and Provision for Loan Losses

Purchased loans accounted for under 310-30 totaled $220.9 million at September 30, 2015 and decreased $20.4 million during the third quarter, an annualized decrease of 33.5%, 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 $0.8 million from non-accretable difference to accretable yield, which will be

recognized over the lives of the 310-30 pools, as well as a $0.1 million impairment on several small loan pools. This increased the life-to-date economic benefit of the accretable yield transfers net of impairments on 310-30 loans to $201.1 million.

Non 310-30 loans totaled $2.3 billion and represented 91.2% of total loans at September 30, 2015. These loans are comprised of originated loans of $2.1 billion and acquired loans not accounted for under 310-30 of $228.7 million. Net charge-offs within the non 310-30 portfolio remained low at 0.02% annualized. Non-performing non 310-30 loans (comprised of non-accrual loans and non-accrual troubled debt restructurings) represented 1.24% of total non 310-30 loans, compared to 0.72% at June 30, 2015. The increase was primarily due to one energy services loan and one commercial loan totaling $13.6 million in outstandings that moved to non-accrual in the quarter. A provision for loan losses on the non 310-30 portfolio of $3.6 million was recorded during the third quarter of 2015, which was $1.7 million higher than the prior quarter and brought the allowance for loan losses on non 310-30 loans to 1.0% before consideration of $6.0 million of remaining purchase accounting discounts. The increase in provision was driven by loan growth and specific reserves for the previously mentioned non-accrual loans.

The energy services portfolio totaled $31.5 million or 1.4% of non 310-30 loans, down 29.6% from December 31, 2014, and includes $12.1 million of non-accrual credits with a specific allowance as of September 30, 2015 of $1.0 million.

OREO ended the quarter at $19.0 million, decreasing $1.3 million. Gains on sales of OREO were $0.2 million during the third quarter compared to $0.6 million in the previous quarter. Of the $19.0 million of OREO at September 30, 2015, $11.4 million, or 60.0%, were covered by loss-sharing agreements with the FDIC.

Deposits

Transaction deposits (defined as total deposits less time deposits) and client repurchase agreements averaged $2.8 billion during the third quarter, increasing $53.0 million, or 7.7% annualized. Total average deposits and average client repurchase agreements remained consistent in the third quarter at $4.0 billion, as the reduction in a temporary client repurchase agreement was offset by the addition of Pine River.  Average total demand deposits, excluding the addition of Pine River, increased $23.6 million, or 12.3% annualized, during the third quarter, primarily driven by our continued relationship building efforts being executed by our experienced team of bankers. Higher-cost average time deposits, excluding the effect of Pine River, declined $48.6 million or 14.9% annualized. The average cost of total deposits decreased two basis points to 0.35% compared to the prior quarter, benefiting from the growth in the lower cost deposit categories and a decrease in higher-cost time deposits. The balance sheet continues to be strongly funded by client deposits and client repurchase agreements and at September 30, 2015 these client funds comprised 97.1% of total liabilities.

Non-Interest Income

Banking related non-interest income (excludes FDIC-related non-interest income, bargain purchase gain, gain on previously charged-off acquired loans and OREO related income) totaled $8.3 million during the third quarter of 2015, a decrease of $0.4 million or 4.4%. Service charges and bank card fees increased $0.4 million or 5.7%, and gain on sale of mortgages increased $0.1 million or 15.0% during the third quarter. These increases were offset by a linked quarter decrease in mark-to-market adjustments of $0.9 million related to fair value interest rate swaps on fixed-rate term loans. The third quarter also included a $1.0 million bargain purchase gain from the acquisition of Pine River.

FDIC loss-share related non-interest income totaled a negative $5.8 million for the third quarter compared to a negative $6.1 million during the prior quarter. The increase was driven by a $1.5 million decrease in FDIC indemnification asset amortization partially offset by $1.1 million lower FDIC expense reimbursements. As of September 30, 2015, the FDIC indemnification asset was $18.2 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 third quarter, we wrote-down this receivable $5.8 million, or $0.11 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 approximately $5.0 million, or $0.09 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 $38.7 million during the third quarter of 2015, decreasing $1.7 million. The decrease was driven by $0.7 million in lower salaries and benefits expenses due to lower health care costs realized from our self-insured health plan coupled with lower incentive accruals. OREO and problem loan expenses totaled $1.6 million and increased $0.5 million from the prior quarter. The increase was primarily due to higher problem loan expenses of $0.4 million. OREO and problem loan expenses are expected to continue to fluctuate quarterly as the acquired problem asset portfolio is resolved. Warrant liability fair value adjustments totaled $0.5 million during the third quarter, decreasing $1.0 million from prior quarter due to the change in our share price. The second quarter included $1.1 million of banking center closure related expenses, while the third quarter included one-time costs of $1.2 million from the core system conversion-related expenses and Pine River acquisition-related costs.  

Operating expenses totaled $36.4 million and decreased $1.1 million due to lower salaries and benefits. Operating expenses exclude OREO expenses, problem loan expense, the impact from the change in the warrant liability, core system conversion-related expenses, acquisition-related one-time expenses, and banking center closure expense accruals.

Income tax benefit totaled $1.6 million during the third quarter due to quarterly tax-exempt income of $2.7 million as well as the non-taxable Pine River $1.0 million bargain purchase gain and $0.5 million warrant fair value adjustment which reduced our quarterly tax liability. 

Capital

Capital ratios continue to be strong and well in excess of federal bank regulatory agency “well capitalized” thresholds.  Shareholders’ equity totaled $621.2 million at September 30, 2015 and decreased $97.1 million from the prior quarter. The decrease was due to the repurchase of 4.8 million shares for $102.0 million, offset by a $4.3 million increase 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 13.6% reduction in shares outstanding during the quarter, which brings the cumulative shares repurchased since early 2013 to 42.3% of the shares then outstanding.

Tangible common book value per share at September 30, 2015 was $18.31, compared to $18.58 at June 30, 2015, and the tangible common equity to tangible assets ratio decreased to 11.76% at September 30, 2015 from 13.83% at June 30, 2015. Decreases in these ratios were primarily driven by shares repurchased during the quarter. The leverage ratio at September 30, 2015 for the consolidated company and the Bank was 11.50% and 10.87%, respectively.

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 September 30, 2015 accretable yield balance on the 310-30 loans of $93.0 million would add $1.87 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 $1.11 after-tax to our tangible book value per share as of September 30, 2015.

Year-Over-Year Review

(All comparisons refer to the first nine months of 2014)

Net income for the first nine months of 2015 was $1.5 million, or $0.04 per diluted share, compared to net income of $6.9 million for the first nine months of 2014, or $0.16 per diluted share. Net interest income totaled $117.0 million and decreased $10.7 million, or 8.4%, from the first nine 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 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 29 basis point narrowing of the fully taxable equivalent net interest margin to 3.55% from 3.84%.

Loan balances as of September 30, 2015 totaled $2.5 billion and increased $351.8 million, or 16.2%, since September 30, 2014. Strategic loans increased $459.6 million since September 30, 2014, a 23.9% increase, on the strength of $911.0 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 $107.8 million from a year ago, a 42.9% 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 nine months of 2015 and increased $229.9 million, or 9.2% from the same period in 2014, and were led by a $122.0 million increase in average client repurchase agreements and a $76.2 million, or 11.0%, 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 nine months of 2015, increasing $93.5 million, or 2.4%, from the first nine 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 $136.4 million. The mix of transaction deposits to total deposits improved to 67.6% at September 30, 2015 from 63.2% at September 30, 2014. Additionally, the cost of total deposits improved to 0.36% for the first nine months of 2015 versus 0.37% for the first nine months of 2014.

Provision for loan losses expense was $7.0 million compared to $4.9 million during the first nine months of 2014, an increase of $2.1 million as a result of increased loan originations and specific reserves for non-accrual loans. The non 310-30 allowance was 1.00% of total non 310-30 loans compared to 0.85% in the prior year. Net charge-offs on non 310-30 loans remained low at only 0.05% during the first nine months of 2015 compared to 0.06% during the same period of 2014.

Non-interest income totaled $6.0 million for the first nine months of 2015 compared to $3.4 million during the same period of 2014, increasing $2.6 million primarily related to the change in FDIC-related non-interest income. Banking related non-interest income of $24.4 million during the first nine months of 2015 was up $2.1 million, or 9.2%, compared to the same period last year as a result of increases in bank card fees, gain on sale of mortgages and other non-interest income primarily due to bank-owned life insurance income. FDIC-related non-interest income totaled a negative $20.4 million and increased $2.0 million as income from FDIC expense billings more than offset the increased FDIC indemnification asset amortization. The first nine months of 2015 included a $1.0 million bargain purchase gain from the acquisition of Pine River.

Non-interest expense totaled $115.8 million compared to $116.9 million, a decrease of $1.1 million, or 0.9%. Operating expenses decreased $2.7 million, or 2.4%, during the first nine months compared to prior year as a result of management expense initiatives, led by lower health care costs, data processing and telecommunications expenses and insurance costs. OREO and problem loan expenses declined $3.6 million and were driven by $3.2 million less OREO expenses. Expense from the change in the fair value of the warrant liability increased $2.4 million during the first nine months of 2015 compared to the first nine months of 2014 due to fluctuations of our share price. Core system conversion and acquisition-related expenses totaled $1.8 million during the first nine months of 2015. Banking center closure expense accruals totaled $1.1 million in the first nine months of 2015 due to fair value impairment charges on banking centers classified as held-for-sale.

Other

On October 19, 2015, the Company announced the termination of the operating agreement between the Bank, and its primary regulator, the Office of the Comptroller of the Currency. The operating agreement was entered into in December 2010 as part of the Bank’s approval to operate as a de novo bank. The agreement required the Bank to maintain certain capital levels, placed restrictions on its ability to pay dividends and limited its ability to make certain other business decisions.

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.

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.

Contact:

Analysts/Institutional Investors: Brian Lilly, Chief Financial Officer; Chief of M&A and Strategy, (720) 529-3315, ir@nationalbankholdings.com

Media: Whitney Bartelli, Chief Marketing Officer, (816) 298-2203, media@nbhbank.com

NATIONAL BANK HOLDINGS CORPORATION

FINANCIAL SUMMARY

Consolidated Statements of Operations (Unaudited)

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NATIONAL BANK HOLDINGS CORPORATION

Consolidated Statements of Condition (Unaudited)

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NATIONAL BANK HOLDINGS CORPORATION

Loan Portfolio Update

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Accounting Treatment and Loss-Share Coverage Period End Loan Balances:

Strategic/Non-Strategic Period-End Loan Balances:

Originations:

NATIONAL BANK HOLDINGS CORPORATION

Summary of Net Interest Margin

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NATIONAL BANK HOLDINGS CORPORATION

Summary of Net Interest Margin

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