BNC Bancorp : Announces Increase in Earnings during Third Quarter 2013

HIGH POINT, N.C., Oct. 24, 2013 /PRNewswire/ -- BNC Bancorp (NASDAQ: BNCN) ("Company"), parent company for Bank of North Carolina ("Bank"), today reported financial results for the quarter ended September 30, 2013.

For the quarter ended September 30, 2013, net income totaled $5.0 million, an increase of 7.8% compared to net income of $4.7 million for the quarter ended June 30, 2013, and an increase of 262.1% compared to net income of $1.4 million for the third quarter of 2012.  Net income available to common shareholders for the quarter ended September 30, 2013 was $5.0 million, or $0.19 per diluted share, an increase of 21.6% compared to net income available to common shareholders of $4.1 million, or $0.16 per diluted share, for the quarter ended June 30, 2013, and an increase of 538.3% compared to net income available to common shareholders of $788,000, or $0.04 per diluted share, for the third quarter of 2012. 

For the nine months ended September 30, 2013, net income totaled $14.0 million, an increase of 158.6% when compared to net income of $5.4 million for the nine months ended September 30, 2012.  Net income available to common shareholders for the nine months ended September 30, 2013 was $12.9 million, or $0.49 per diluted share, an increase of 258.6% compared to net income available to common shareholders of $3.6 million, or $0.25 per diluted share, for the nine months ended September 30, 2012.  The financial results for the nine months ended September 30, 2012 include $7.7 million of pre-tax bargain purchase gain the Company recorded on the acquisition of Carolina Federal Savings Bank.

Average common shares outstanding increased significantly during the second half of 2012 as a result of the conversion of the Company's preferred stock to common stock, as well as common stock issued in connection with the acquisitions of KeySource Financial ("KeySource") and First Trust Bank ("First Trust").  For the nine months ended September 30, 2013 and 2012, average fully-diluted shares outstanding were 26.5 million and 15.4 million, respectively.

Total assets at September 30, 2013 were $2.97 billion, a decrease of 3.7% as compared to total assets of $3.08 billion at December 31, 2012.  During the first nine months of 2013, the Company utilized excess liquidity to primarily repay wholesale and non-core deposits as they matured. The Company's success in reducing this inefficient component of the acquired balance sheets has resulted in a decline in total assets during the first nine months of 2013.  This deleveraging has helped the Company execute on its strategic initiative to improve capital ratios and net interest margin.  Excess liquidity was also used to purchase higher yielding investment securities, which has also contributed to the improved net interest margin.  

On October 1, 2013, the Company completed the previously announced merger with Randolph Bank & Trust Company ("Randolph").  None of the assets acquired, liabilities assumed or results of operations for Randolph are included in the financial information for the three and nine months ended September 30, 2013. 

Highlights for Quarter Ended September 30, 2013:

• Diluted earnings per share of $0.19, an increase of 375% compared to the third quarter of 2012;
• Net income available to common shareholders of $5.0 million, an increase of 538.3% compared to the third quarter of 2012;
• Nonperforming assets decreased 13.4% from June 30, 2013;
• Loans not recorded at fair value increased 6.9% from June 30, 2013;
• Fully taxable-equivalent net interest margin increased to 4.26%, compared to 3.75% for the third quarter of 2012;
• Fully taxable-equivalent net interest margin, before hedging costs, increased to 4.65%, compared to 4.11% for the third quarter of 2012;
• Tangible common equity ratio of 7.71% at September 30, 2013, compared to 6.48% at September 30, 2012; and
• Opened new branch in Murrells Inlet, further expanding our footprint in coastal South Carolina.

Richard D. Callicutt II, President and CEO, stated, "I am pleased to report another strong quarter, with earnings per share of $0.19 on a GAAP basis, and $0.20 on a non-GAAP or core basis, loan growth accelerating significantly compared to recent quarters, and revenues from our mortgage department remaining stable despite an industry-wide slowdown in refinancing activity.  Our shareholders continue to reap the benefits from the expansion and integration efforts over the past four years, both in terms of improving levels of profitability and organic growth.  The recently closed acquisition of Randolph Bank & Trust, the branch opening in Murrells Inlet, and the announced branch openings in Charleston and Raleigh are additional steps in our strategic initiative to expand within our existing markets and create meaningful long-term shareholder value."  

Operating Results

Fully taxable-equivalent ("FTE") net interest income for the third quarter of 2013 was $28.5 million, an increase of 1.5% from $28.0 million for the second quarter of 2013, and an increase of 34.9% from $21.1 million for the third quarter of 2012.  FTE net interest margin was 4.26% for the third quarter of 2013, a decrease of 6 basis points from 4.32% for the second quarter of 2013, and an increase of 51 basis points from 3.75% for the third quarter of 2012.   FTE net interest income for the nine months ended September 30, 2013 was $83.9 million, an increase of 38.3% from $60.7 million for the nine months ended September 30, 2012.  FTE net interest margin was 4.26% for the nine months ended September 30, 2013, an increase of 51 basis points from 3.75% for the comparable period of 2012. 

Average interest-earning assets were $2.65 billion for the third quarter of 2013, an increase of 1.8% from $2.60 billion during the second quarter of 2013, and an increase of 18.5% from $2.24 billion for the third quarter of 2012.  The increase from the second quarter of 2013 was primarily due to increased loan, as well as an increase in investment securities purchased with the Company's excess liquidity during the third quarter of 2013.  Average interest-earning assets were $2.63 billion for the nine months ended September 30, 2013, an increase of 22.0% from $2.16 billion for the nine months ended September 30, 2012.  The increase in average interest-earning assets from 2012 is primarily due to interest-earning assets acquired from First Trust and KeySource during the second half of 2012, as well as increased loan production during the first nine months of 2013.

The Company's average yield on interest-earning assets decreased 9 basis points to 5.36% for the third quarter of 2013 from 5.45% for the second quarter of 2013, and increased 17 basis points from 5.19% for the third quarter of 2012.  The decrease from second quarter of 2013 was primarily due to lower interest rates earned on new loan production, as well as a decrease in loan accretion recorded during the third quarter of 2013.  The increase from the third quarter of 2012 was due to increased interest rates earned on portfolio loans, as well as increased level of loan accretion from the acquired loan portfolios.  Loan accretion during the third quarter of 2013 totaled $3.2 million, a decrease of 12.3% from loan accretion of $3.7 million for the second quarter of 2013, and an increase of 200.8% from $1.1 million of accretion recorded in the third quarter of 2012.

The Company's average yield on interest-earning assets was 5.38% for the nine months ended September 30, 2013, an increase of 9 basis points compared to 5.29% for the comparable period of 2012.  The increase from 2012 was due to higher interest rates on portfolio loans, as well as increased level of loan accretion from the acquired loan portfolios.  Loan accretion during the nine months ended September 30, 2013 totaled $10.2 million, an increase of 186.2% from loan accretion of $3.6 million for the nine months ended September 30, 2012.

Average interest-bearing liabilities were $2.38 billion for the third quarter of 2013, an increase of 0.9% from $2.36 billion for the second quarter of 2013, and an increase of 15.0% from $2.07 billion for the third quarter of 2012.  The increase from the second quarter of 2013 was due to increased borrowings during the third quarter of 2013, offset by the continued repayment of higher rate time and transaction deposits and replacement of these deposits at lower rates.  Average interest-bearing liabilities were $2.39 billion for the nine months ended September 30, 2013, an increase of 15.2% from $2.07 billion for the comparable period of 2012.  The increase in average interest-bearing liabilities from 2012 is primarily due to the acquisitions of First Trust and KeySource during the second half of 2012.

The Company's average cost of interest-bearing liabilities was 1.23% for the third quarter of 2013, a slight decrease from 1.25% for the second quarter of 2013, and a decrease of 32 basis points from 1.55% for the third quarter of 2012.  The decrease was due to the Company's continued effort to reduce exposure to higher cost deposit products, as well as lower interest rates paid on borrowings, which was offset by continued increases in cash flow hedging expense.  For the third quarter of 2013, cash flow hedging expenses totaled $2.6 million, compared to $2.3 million for the second quarter of 2013 and $2.0 million for the third quarter of 2012.  Without the cash flow hedging expense, FTE net interest margin for the third quarter of 2013 was 4.65%, compared to 4.68% for the second quarter of 2013 and 4.11% for the third quarter of 2012.  

The Company's average cost of interest-bearing liabilities was 1.24% for the nine months ended September 30, 2013, a decrease of 36 basis points from 1.60% for the comparable period of 2012.  This decrease was primarily due to the Company's decision to reduce exposure to higher cost deposit products and aggressively reduce deposit rates over the past three quarters, as well as reductions in interest rates paid on borrowings. These rate decreases were slightly offset by an increase in cash flow hedging expense, which totaled $7.2 million for the nine months ended September 30, 2013, compared to $5.8 million for the comparable period of 2012.  Without the cash flow hedging expense, FTE net interest margin for the nine months ended September 30, 2013 was 4.54%, compared to 4.11% for the comparable period of 2012.  

Non-interest income was $5.8 million for the third quarter of 2013, an increase of 4.0% compared to $5.6 million for the second quarter of 2013, and an increase of 10.9% from $5.3 million for the third quarter of 2012.  Excluding the insurance settlement, acquisition gains (includes bargain purchase gains and income related to the subsequent settlement of a liability assumed in an acquisition), FDIC-related income and gain (loss) on sale of securities, adjusted non-interest income was $5.2 million for the third quarter of 2013, a decrease of 1.5% from $5.3 million for the second quarter of 2013, and an increase of 34.6% from $3.9 million for the third quarter of 2012.  Despite an increase in mortgage rates which has caused a significant decline in refinance activity, mortgage origination fees remained stable due to mortgage origination activity being heavily weighted to purchase volume in the second and third quarters of 2013.  Other non-interest income was positively impacted by a $479,000 pre-tax gain as a result of an insurance settlement, as well as $508,000 of income related to the recovery of fair value adjustments previously recorded on acquired loans.

For the nine months ended September 30, 2013, non-interest income was $17.6 million, a decrease of 22.5% compared to non-interest income of $22.7 million for the nine months ended September 30, 2012.  Excluding the insurance settlement, acquisition gains, FDIC-related income and gain (loss) on sale of securities, adjusted non-interest income was $16.2 million for the nine months ended September 30, 2013, an increase of 43.1% from $11.3 million for the comparable period of 2012.  The increase was primarily due to increased volume of mortgage originations, as the Company continued to expand commissioned originators across key target markets.

Non-interest expense was $22.4 million for the third quarter of 2013, a decrease of 5.6% compared to non-interest expense of $23.8 million for the second quarter of 2013, and an increase of 10.0% from $20.4 million for the third quarter of 2012.  Excluding transaction-related costs, adjusted non-interest expense for the third quarter of 2013 was $21.9 million, a decrease of 6.7% from $23.5 million for the second quarter of 2013, and an increase of 18.1% from $18.5 million for the third quarter of 2012.  Transaction-related costs include legal and professional fees, personnel costs, data processing expenses, and other miscellaneous expenses directly attributable to the transaction.  The decrease from the second quarter of 2013 was primarily due to a $400,000 decrease in valuation adjustments for other real estate owned ("OREO"), as well as reductions in advertising and business development and other loan and credit collection fees.  The increase from the third quarter of 2012 was primarily due to an increased number of employees and facilities purchased in connection with the acquisitions of First Trust and KeySource during the second half of 2012. 

Non-interest expense was $69.3 million for the first nine months of 2013, an increase of 20.7% from $57.4 million for the first nine months of 2012.  Excluding transaction-related costs, adjusted non-interest expense for the nine months ended September 30, 2013 was $67.4 million, an increase of 25.8% from $53.6 million for the nine months ended September 30, 2012.  The increase from 2012 was primarily due to an increased number of employees and facilities purchased in connection with the acquisitions of First Trust and KeySource during the second half of 2012. 

The following is a summary of transaction-related expenses incurred by transaction:

Additional Operating Highlights

Total portfolio loans increased by 2.5% from June 30, 2013 and 3.2% from December 31, 2012 to $2.10 billion as of September 30, 2013.  The increase has primarily been in commercial real estate and commercial construction loans as the economic outlook in the Company's markets continues to improve.  Loans not recorded at fair value increased 6.9% from June 30, 2013.  Included in the increase in loans not recorded at fair value from June 30, 2013 is $27.8 million of loans that have transferred from another loan category.   Excluding these transfers, loans not recorded at fair value increased 5.2% from June 30, 2013.  The table below outlines the Company's loan portfolio mix between covered and non-covered loans for the past five quarters.  

Total deposits at September 30, 2013 were $2.44 billion, a decrease of 8.3% from total deposits of $2.66 billion as of December 31, 2012.  This decrease was primarily due to the Company's decision to utilize excess liquidity and the acquired securities portfolios to repay wholesale and non-core deposits as they matured, as well as aggressively reducing time deposit rates over the past three fiscal quarters.  Wholesale deposits were 33.8% of total deposits at September 30, 2013, an increase compared to 28.4% as of December 31, 2012.  Transactional accounts, which are comprised of non-interest bearing and interest-bearing demand accounts, increased $196.4 million, or 15.4%, over the past twelve months.  At September 30, 2013, time deposits were 39.6% of total deposits, compared to 43.7% at December 31, 2012. 

Total borrowings at September 30, 2013 were $256.6 million, an increase of 112.8% from total borrowings of $120.6 million as of December 31, 2012.  At September 30, 2013, $143.7 million of these borrowings were short-term, while the remaining $112.9 million were long-term.  The increase in borrowings was primarily due to $109.5 million of additional short-term borrowings from the Federal Home Loan Bank, which were used to repay wholesale and non-core deposits as part of the Company's deleveraging strategy, as well as a $30.0 million term loan obtained from Synovus Bank for the repurchase of Series A preferred stock.  Upon closing of the acquisition of Randolph, the Company utilized $85.0 million of liquid assets to repay the short-term borrowings from the Federal Home Loan Bank. 

Asset Quality

Net loan charge-offs for the third quarter of 2013 were $4.8 million, which included $2.4 million on loans covered under loss-share agreements and $2.4 million on loans not covered under loss-share agreements.  The Company's share of the covered net loan charge-offs was $500,000, with the remainder being reimbursed by the FDIC. Combined with the $2.4 million of non-covered net charge-offs, the Company incurred $2.9 million in net charge-off losses, or 0.55% of average loans, during the third quarter of 2013, compared to $3.9 million, or 0.78% of average loans, for the second quarter of 2013, and $6.9 million, or 1.54% of average loans, for the third quarter of 2012.

Net loan charge-offs for the nine months ended September 30, 2013 were $20.3 million, which included $11.1 million on loans covered under loss-share agreements and $9.2 million on loans not covered under loss-share agreements.  The Company's share of the covered net loan charge-offs for the nine months ended September 30, 2013 was $2.2 million, with the remainder being reimbursed by the FDIC. Combined with the $9.2 million of non-covered net charge-offs, the Company incurred $11.4 million in net charge-off losses, or 0.75% of average loans, during the nine months ended September 30, 2013, compared to $24.9 million, or 1.21% of average loans, for the comparable period of 2012.

During the third quarter of 2013, the Company recorded a provision for loan losses of $3.4 million, an increase of 46.4% from $2.3 million recorded in the second quarter of 2013, and a decrease of 9.7% from $3.7 million recorded during the third quarter of 2012.  Of the $3.4 million in provision expense, $3.1 million related to non-covered loans.  During the three months ended September 30, 2013, the Company recorded a gross provision of $1.2 million for loss-share loans, of which $900,000 was recorded through a FDIC indemnification asset and the remaining $300,000 was recorded through the Company's provision expense. 

During the nine months ended September 30, 2013, the Company recorded a provision for loan losses of $9.8 million, a decrease of 43.4% from $17.2 million recorded in the comparable period of 2012.  Of the $9.8 million in provision expense, $9.1 million related to non-covered loans.  During the nine months ended September 30, 2013, the Company recorded a gross provision of $3.2 million for loss-share loans, of which $2.5 million was recorded through a FDIC indemnification asset and the remaining $700,000 was recorded through the Company's provision expense. 

The allowance for loan losses was $32.4 million at September 30, 2013, a decrease of 19.7% from $40.3 million at December 31, 2012.  Loan loss reserves to total portfolio loans were 1.54% and 1.98% at September 30, 2013 and December 31, 2012, respectively.  The allowance for loan loss allocated to loans not marked to fair value was 1.46% and 1.72% at September 30, 2013 and December 31, 2012, respectively.  The components of the allowance for loan loss as of September 30, 2013 were as follows:

Nonperforming assets, which consist of nonaccrual loans, loans 90 days or more past due and OREO, were 3.33% of total assets at September 30, 2013, compared to 3.93% at December 31, 2012.  Nonperforming assets not covered by loss-share were 1.84% of total assets not covered by loss-share as of September 30, 2013, compared to 1.82% at December 31, 2012.  The covered assets are covered by FDIC loss-share agreements that provide 80% protection on those assets and are being carried at estimated fair value.

Nonaccrual loans not covered by loss-share agreements totaled $21.3 million at September 30, 2013, a decrease of 5.2% from $22.4 million at December 31, 2012.  Excluding loans covered by loss-share agreements, nonperforming loans as a percentage of total loans was 1.12% as of September 30, 2013, as compared to 1.26% as of December 31, 2012. Nonaccrual loans covered by loss-share agreements totaled $29.9 million as of September 30, 2013, a decrease of 36.4% from $47.0 million at December 31, 2012.  The decrease is due to the Company's sustained efforts in resolving acquired nonperforming loans.   

Troubled debt restructurings ("TDRs") were $19.4 million as of September 30, 2013, of which $3.0 million was covered under loss-share.  Of the $19.4 million of TDRs, $13.7 million are performing under the terms of the restructured agreements, as compared to $44.9 million of TDRs as of December 31, 2012, of which $35.9 million were performing under the terms of the restructured agreements.  The decrease in performing TDRs was primarily due to a significant amount of restructurings that are no longer required to be reported as TDRs due to contractual performance over a passage of time.

OREO at September 30, 2013 totaled $47.7 million, which is a decrease of 8.2% from $51.9 million at December 31, 2012.  At September 30, 2013, the carrying value of OREO covered by loss-share agreements was $18.4 million, a decrease of 20.3% from $23.1 million at December 31, 2012.  OREO not covered by loss-share agreements totaled $29.3 million at September 30, 2013, a slight increase from $28.8 million at December 31, 2012.  Of the $29.3 million in non-covered OREO at September 30, 2013, $3.2 million was acquired from our recent acquisitions.  The Company has sold $6.8 million and $25.1 million of OREO properties during the three and nine months ended September 30, 2013, respectively, which was offset by $8.5 and $22.6 million of additions to OREO.  For the three and nine months ended September 30, 2013, the Company recorded valuation adjustments of $1.1 million and $3.5 million, respectively, an increase from valuation adjustments of $1.6 million and $4.3 million for the three and nine months ended September 30, 2012, respectively. 

Capital Position

On September 30, 2013, shareholders' equity was $257.8 million, a decrease of 8.7% from shareholders' equity of $282.2 million as of December 31, 2012.  In April 2013, the Company closed on a $30.0 million term loan and used the proceeds to redeem the $31.3 million of Series A preferred stock.  As a result of this redemption, the Company recorded $356,000 of additional discount accretion during the second quarter of 2013.  After this redemption and the conversion of 1,804,566 shares of Series B preferred stock to non-voting common stock in February 2013, the Company no longer has any preferred stock issued or outstanding. 

All of the Bank's and Company's capital ratios exceeded the minimum thresholds established for a well-capitalized bank by regulatory measures. 

About BNC Bancorp and Bank of North Carolina

Headquartered in High Point, NC, BNC Bancorp is the parent company of Bank of North Carolina, a commercial bank with approximately $3.20 billion in assets (subsequent to the acquisition of Randolph on October 1, 2013).  Bank of North Carolina provides a complete line of banking and financial services to individuals and businesses through its 39 banking offices in North and South Carolina (including six branches acquired from Randolph).  The Bank's eight locations in South Carolina operate as BNC Bank.  Bank of North Carolina is insured by the FDIC and is an equal housing lender.  BNC Bancorp's stock is traded and quoted in the NASDAQ Capital Market under the symbol "BNCN."

Non-GAAP Financial Measures

This press release contains financial information determined by methods other than in accordance with accounting principles generally accepted in the United States.  BNC Bancorp's management uses these "non-GAAP" measures in their analysis of the Company's performance.  Management believes that these non-GAAP financial measures provide a greater understanding of ongoing operations and enhance comparability of results with prior periods as well as demonstrating the effects of significant gains and charges in the current period. These disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. See the attached tabular disclosures for a reconciliation of these non-GAAP measures to the most directly comparable GAAP measure.

"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995:

Congress passed the Private Securities Litigation Act of 1995 in an effort to encourage corporations to provide information about companies' anticipated future financial performance.  This act provides a safe harbor for such disclosure, which protects the companies from unwarranted litigation if actual results are different from management expectations.   This press release contains forward-looking statements relating to the financial condition, results of operations and business of BNC Bancorp and the Bank.  These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of the management of BNC Bancorp, and the information available to management at the time that this press release was prepared.  Factors that could cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, the following: (i) the economic recovery may face challenges causing its momentum to falter or a further recession; (ii) expected cost savings and other benefits anticipated in connection with our acquisitions may not be fully realized or realized within the expected time frame; (iii) our ability to integrate acquisitions and retain existing customers and attract new ones; and (iv) adverse changes in credit quality trends.  Additional factors affecting BNC Bancorp and the Bank are discussed in BNC Bancorp's filings with the Securities and Exchange Commission (the "SEC"), Annual Report on Form 10-K, its Quarterly Reports on Form 10-Q and its Current Reports on Form 8-K.  Please refer to the Securities and Exchange Commission's website at www.sec.gov where you can review those documents.  BNC Bancorp does not undertake a duty to update any forward-looking statements made in this press release.