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First NBC's path forward remains troubled after DTA valuation, Q4'16 call report

First NBC Bank Holding Co. continues to encounter credit and financial uncertainty, with analysts believing a sizable capital raise could be necessary.

The bank reported several items Jan. 31 that will potentially raise stumbling blocks on its path to recovery. The first is that it expects to record a "material" valuation allowance on its deferred tax asset of an undetermined amount; the second is that credit issues persisted at bank unit First NBC Bank during the fourth quarter of 2016. Analysts wrote in subsequent reports that the bank is positioned for future recapitalization but faces serious headwinds in the meantime.

The bank's deferred tax asset was $315.5 million at year-end 2016, or 77% of the bank's total equity capital, wrote Hovde Group analyst Kevin Fitzsimmons in a Jan. 31 report. He wrote that the DTA had increased about $50 million, or 18%, from the linked quarter.

Bank executives and Crowe Horwath, its newly hired auditor, are in the process of determining the size of a valuation allowance to be applied to the asset. FBR & Co. analyst Christopher Nolan wrote that he had anticipated a valuation allowance, estimating a 15% reduction in a Jan. 31 note.

The bank unit also filed its call report ahead of earnings, giving a "good directional proxy" of what the bank is likely to report, Fitzsimmons wrote. The report shows that the unit recorded a "steep loss" of $58.6 million during the fourth quarter, driven by a "sharply" higher loan loss provision of $85.8 million, compared to $4.3 million a quarter prior, wrote Fitzsimmons. Nonperforming assets also grew by $133.2 million, or 75%, over the linked quarter.

"We're very disappointed to see such a sharply higher provision and accompanying rise in NPAs," he wrote. "Without any active [dialogue]/response from [management] today, it's hard to have much context on the driver behind the increase (e.g., sudden deterioration, a deliberately-incurred, kitchen-sink quarter, or a regulatory-driven move) or the granularity (a few large loans or many smaller loans)."

Additionally, FIG Partners analyst Chris Marinac pointed out that the bank's Tier 1 leverage ratio will temporarily drop to below 5% until the pending asset and branch sale to Hancock Holding Co. closes in March. Upon closing, the ratio should improve by 300 to 400 basis points.

Analysts believe a capital raise could be forthcoming. Marinac wrote in a Jan. 31 report, in which he also lowered his rating to "market-perform," that he believes the bank will need up to $200 million in capital for its continued recovery and repositioning. Nolan believes the bank will need more, pegging the amount at $250 million. He wrote that an offering may follow the publication of the third-quarter 2016 and full-year 2016 audited financial statements, and that the company would issue preferred equity or debt and downstream it to the bank unit as Tier 1 capital. The bank may also record further write-downs once a permanent CEO is installed, he wrote.

Even if the bank's financial condition improves going forward, Fitzsimmons pointed out that management still struggles with being forthcoming and communicative. His report said management is not talking to investors or analysts, and that there may be some time before the external auditor completes and files the bank's delinquent Form 10-Q from the third quarter of 2016. He wrote that it may be late in the first quarter or early in the second before the investment community receives more information about the bank's financial performance and future plans.