BNC Bancorp Announces Increase in Earnings for Second Quarter 2013

HIGH POINT, N.C., July 25, 2013 /PRNewswire/ -- BNC Bancorp (NASDAQ: BNCN) ("Company"), parent company for Bank of North Carolina ("Bank"), today reported financial results for the quarter ended June 30, 2013.

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For the quarter ended June 30, 2013, net income totaled $4.7 million, an increase of $2.4 million, or 103.7%, compared to net income of $2.3 million for the second quarter of 2012.  Net income available to common shareholders for the quarter ended June 30, 2013 was $4.1 million, or $0.16 per diluted share, an increase of $2.4 million, or 144.7%, compared to net income available to common shareholders of $1.7 million, or $0.13 per diluted share, for the second quarter of 2012.  Included in the financial results for the second quarter of 2012 was $7.7 million of bargain purchase gain the Company recorded on the acquisition of Carolina Federal Savings Bank ("Carolina Federal").

For the six months ended June 30, 2013, net income totaled $8.9 million, an increase of $4.9 million, or 122.8%, when compared to net income of $4.0 million for the six months ended June 30, 2012.  Net income available to common shareholders for the six months ended June 30, 2013 was $7.9 million, or $0.30 per diluted share, an increase of $5.1 million, or 180.2%, compared to net income available to common shareholders of $2.8 million, or $0.24 per diluted share, for the six months ended June 30, 2012.  As stated above, the financial results for the six months ended June 30, 2012 include $7.7 million of bargain purchase gain the Company recorded on the acquisition of Carolina Federal.

Average common shares outstanding increased significantly from June 30, 2012 as a result of the $72.5 million capital raise in the second quarter of 2012 and the acquisitions of both KeySource Financial ("KeySource") and First Trust Bank ("First Trust") during the second half of 2012.  For the quarters ended June 30, 2013 and 2012, average fully-diluted shares outstanding were 26.5 million and 13.6 million, respectively. 

Total assets at June 30, 2013 were $2.93 billion, an increase of $486.8 million, or 19.9%, compared to total assets of $2.44 billion at June 30, 2012.  The increase was due to continued growth in our North Carolina franchise, along with the acquisition and integration of First Trust, KeySource, and, to a lesser extent, two branches that were acquired from The Bank of Hampton Roads ("BHR") during the second half of 2012.

Total assets at June 30, 2013 decreased by $154.2 million, or 5.0%, as compared to total assets of $3.08 billion at December 31, 2012.  As part of the KeySource and First Trust acquisitions, management's intention was to utilize excess liquidity and the acquired securities portfolios to repay wholesale and non-core deposits as they matured.  The Company has been successful at reducing this inefficient component of the acquired balance sheets, and thus has experienced a decline in total assets during the first half of 2013.  This deleveraging has helped the Company execute on its strategic initiative to improve capital ratios and net interest margin.  

Highlights for Quarter Ended June 30, 2013:

• Announced agreement to acquire Randolph Bank and Trust Company ("Randolph"), a commercial bank with $302 million in assets serving small businesses and professionals in the Piedmont-Triad area of North Carolina;
• Redemption of all Series A Preferred Stock with non-dilutive term loan;
• Richard D. Callicutt II was named President and Chief Executive Officer, upon the planned retirement of founding President and CEO, W. Swope Montgomery, Jr.;
• Diluted earnings per share of $0.16, an increase of 23.1% compared to the second quarter of 2012;
• Net income available to common shareholders of $4.1 million, an increase of 144.7% compared to the second quarter of 2012;
• Fully taxable-equivalent net interest margin increased to 4.32%, compared to 3.71% for the second quarter of 2012;
• Fully taxable-equivalent net interest margin, before hedging costs, increased to 4.68%, compared to 4.08% for the second quarter of 2012; and
• Tangible common equity ratio of 7.69% at June 30, 2013, compared to 3.84% at June 30, 2012.

Richard D. Callicutt II, President and CEO, stated, "First, I want to thank my dear friend and founding CEO, Swope Montgomery, who retired in June, for his leadership of our Company for the past 22 years.  He has slowly given me the reigns over the past ten years as he groomed me for this important transition as his successor.  I am thrilled he will remain involved as our Vice-Chairman, and I look forward to working with him and our Board to take this Company to even greater heights."

"I am pleased to report another strong quarter, with earnings per share of $0.16 on a GAAP basis, and $0.17 on a Non-GAAP or core basis.   We continue to see credit metrics improve, our non-acquired loan portfolio grow at a double-digit rate, our mortgage department remains healthy and growing despite an industry-wide slowdown in refinancing activity, and we remain diligent in our pursuit of integration efficiencies and cost savings associated with our recent completed acquisitions.  The recently announced agreement to acquire Asheboro based Randolph Bank & Trust is another step in our strategic initiative to expand within our existing markets and provide further leverage of our support infrastructure, enhance overall operating efficiency, and create meaningful earnings accretion for our shareholders.  

Our net interest margin, with and without fair value accretion, is up significantly from year ago levels, due to an aggressive re-pricing of deposit accounts and a more efficient earning asset base.  With the Charlotte and Triangle real estate markets recovering more rapidly than anticipated, the resolutions of purchase credit impaired loans above carrying value is continuing to result in elevated fair value accretion, adding further to net interest margin. 

Also, during the quarter we closed on a $30.0 million term loan at the holding company level and used the proceeds to redeem $31.3 million of Series A preferred stock.  This transaction had minimal impact on Bank-level capital ratios, and will save the Company approximately $1.0 million after-tax annually from current levels," said Rick Callicutt.

Operating Results

Fully taxable-equivalent ("FTE") net interest income for the second quarter of 2013 was $28.0 million, an increase of $500,000, or 2.1%, from $27.5 million for the first quarter of 2013, and an increase of $8.4 million, or 42.8%, from $19.6 million for the second quarter of 2012.  FTE net interest margin was 4.32% for the second quarter of 2013, an increase of 12 basis points from 4.20% for the first quarter of 2013, and an increase of 61 basis points from 3.71% for the second quarter of 2012. 

FTE net interest income for the six months ended June 30, 2013 was $55.5 million, an increase of $15.9 million, or 40.1%, from $39.6 million for the six months ended June 30, 2012.  FTE net interest margin was 4.26% for the first six months of 2013, an increase of 51 basis points from 3.75% for the comparable period of 2012. 

Average interest-earning assets were $2.60 billion for the second quarter of 2013, a decrease of $46.0 million, or 1.7%, from $2.65 billion during the first quarter of 2013, and an increase of $479.3 million, or 22.6%, from $2.12 billion for the second quarter of 2012.  The decrease from the first quarter of 2013 was a continued reduction in interest-earning balances at other financial institutions, as the Company continued repaid wholesale and certain high cost deposits as they mature.  Average interest-earning assets were $2.63 billion for the six months ended June 30, 2013, an increase of $505.5 million, or 23.8%, from $2.12 billion for the six months ended June 30, 2012.  The increase in average interest-earning assets from 2012 is primarily due to the interest-earning assets acquired from First Trust, KeySource and, to a lesser extent, BHR during the second half of 2012.

The Company's average yield on interest-earning assets increased 12 basis points from 5.33% for the first quarter of 2013 to 5.45% for the second quarter of 2013, and increased 19 basis points from 5.26% for the second quarter of 2012.  The increase from first quarter of 2013 was due to a significant reduction of interest-bearing deposits with other institutions, consistent with the Company's strategy for deleveraging the balance sheet.  The increase from the second quarter of 2012 was due to increased volume of portfolio loans, primarily obtained from the acquisitions of First Trust, KeySource and Carolina Federal, as well as increased level of accretion of yield and fair value discounts on the acquired loan portfolios.  Loan accretion during the second quarter of 2013 totaled $3.7 million, an increase from loan accretion of $3.3 million for the first quarter of 2013, and an increase of $2.7 million, or 256.4%, from $1.0 million of accretion recorded in the second quarter of 2012.

The Company's average yield on interest-earning assets was 5.39% for the six months ended June 30, 2013, compared to 5.34% for the comparable period of 2012.  The increase from 2012 was due to increased volume of portfolio loans, primarily obtained from the acquisitions of First Trust, KeySource and Carolina Federal, as well as increased level of accretion of yield and fair value discounts on the acquired loan portfolios.  Loan accretion during the six months ended June 30, 2013 totaled $7.0 million, an increase of $4.5 million, or 179.9%, from loan accretion of $2.5 million for the six months ended June 30, 2012.

Average interest-bearing liabilities were $2.36 billion for the second quarter of 2013, a decrease of $53.8 million, or 2.2%, from $2.41 billion for the first quarter of 2013, and an increase of $316.6 million, or 15.5%, from $2.04 billion for the second quarter of 2012.  The decrease from the first quarter of 2013 was due to the continued repayment of higher rate time and transaction deposits and replacement of these deposits at lower rates, offset by increased borrowings entered into during the second quarter of 2013.  Average interest-bearing liabilities were $2.39 billion for the six months ended June 30, 2013, an increase of $317.1 million, or 15.3%, 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, KeySource, and BHR during the second half of 2012.

The Company's average cost of interest-bearing liabilities was 1.25% for the second quarter of 2013, a slight increase from 1.24% for the first quarter of 2013, and a decrease of 35 basis points from 1.60% for the second quarter of 2012.  This increase from first quarter of 2013 was due to increased borrowings that were entered into during the second quarter of 2013, offset by the Company's decision to reduce exposure to higher cost deposit products and aggressively reduce deposit rates.  The Company continued to experience an increase in cash flow hedging expense, which totaled $2.3 million for the second quarter of 2013, compared to $2.2 million for the first quarter of 2013 and $1.9 million for the second quarter of 2012.  Without the cash flow hedging expense, FTE net interest margin for the second quarter of 2013 was 4.68%, compared to 4.54% for the first quarter of 2013 and 4.08% for the second quarter of 2012.  

The Company's average cost of interest-bearing liabilities was 1.24% for the six months ended June 30, 2013, a decrease of 38 basis points from 1.62% 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.  Decreases in the average cost of deposits were slightly offset by an increase in cash flow hedging expense, which totaled $4.5 million for the six months ended June 30, 2013, compared to $3.8 million for the comparable period of 2012.  Without the cash flow hedging expense, FTE net interest margin for the six months ended June 30, 2013 was 4.61%, compared to 4.11% for the comparable period of 2012.  

Non-interest income was $5.6 million for the second quarter of 2013, a decrease of $600,000, or 9.7%, compared to $6.2 million for the first quarter of 2013, and a decrease of $6.1 million, or 52.0%, from $11.7 million for the second quarter of 2012.  Excluding bargain purchase gains on acquisitions, FDIC-related income and gain (loss) on sale of securities, adjusted non-interest income was $5.1 million for the second quarter of 2013, an increase of $170,000, or 3.4%, from $5.0 million for the first quarter of 2013, and an increase of $1.4 million, or 38.5%, from $3.7 million for the second quarter of 2012. 

For the six months ended June 30, 2013, non-interest income was $11.8 million, a decrease of $5.7 million, or 32.5%, compared to non-interest income of $17.5 million for the six months ended June 30, 2012.  Excluding bargain purchase gains on acquisitions, FDIC-related income and gain (loss) on sale of securities, adjusted non-interest income was $10.1 million for the six months ended June 30, 2013, an increase of $3.4 million, 49.8%, from $6.7 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 $23.8 million for the second quarter of 2013, an increase of $700,000, or 2.8%, compared to non-interest expense of $23.1 million for the first quarter of 2013, and an increase of $4.6 million, or 23.9%, from $19.2 million for the second quarter of 2012.  Excluding transaction-related costs, adjusted non-interest expense for the second quarter of 2013 was $23.5 million, an increase of $1.4 million, or 6.2%, from $22.1 million for the first quarter of 2013, and an increase of $5.4 million, or 29.7%, from $18.1 million for the second quarter of 2012.  The increase from the first quarter of 2013 was primarily due to a $750,000 increase in valuation adjustments for other real estate owned ("OREO").  The increase from the second quarter of 2012 was primarily due to an increased number of employees and facilities purchased through the acquisitions of First Trust, KeySource, BHR and Carolina Federal. 

Non-interest expense was $46.9 million for the first six months of 2013, an increase of $9.9 million, or 26.7%, from $37.0 million for the first six months of 2012.  Excluding transaction-related costs, adjusted non-interest expense for the six months ended June 30, 2013 was $45.5 million, an increase of $10.4 million, or 29.9%, from $35.1 million for the six months ended June 30, 2012.  The increase from 2012 was primarily due to an increased number of employees and facilities purchased through the acquisitions of First Trust, KeySource, BHR and Carolina Federal.

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

Additional Operating Highlights

Total portfolio loans increased by $13.7 million, or 0.7%, from December 31, 2012 to $2.05 billion as of 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 June 30, 2013 were $2.43 billion, a decrease of $228.0 million, or 8.6%, 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 deposit rates over the past three fiscal quarters.  Wholesale deposits were 32.4% of total deposits at June 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 $287.9 million, or 25.2%, over the past twelve months.  At June 30, 2013, time deposits were 41.2% of total deposits, compared to 43.7% at December 31, 2012. 

Total borrowings at June 30, 2013 were $227.7 million, an increase of $107.1 million, or 88.9%, from total borrowings of $120.6 million as of December 31, 2012.  At June 30, 2013, $112.1 million of these borrowings were short-term, while the remaining $115.6 million were long-term.  The increase in borrowings was primarily due to $73.4 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 announced acquisition of Randolph Bank & Trust, the Company intends to utilize approximately $100.0 million of liquid assets to repay the short-term borrowings from the Federal Home Loan Bank. 

Asset Quality

Net loan charge-offs for the second quarter of 2013 were $7.4 million, which included $4.3 million on loans covered under loss-share agreements and $3.1 million on loans not covered under loss-share agreements.  The Company's share of the covered net loan charge-offs was $851,000, with the remainder being reimbursed by the FDIC. Combined with the $3.1 million of non-covered net charge-offs, the Company incurred $4.0 million in net charge-off losses, or 0.78% of average loans, during the second quarter of 2013, compared to $4.6 million, or 0.92% of average loans, for the first quarter of 2013, and $5.1 million, or 1.17% of average loans, for the second quarter of 2012.

Net loan charge-offs for the six months ended June 30, 2013 were $15.5 million, which included $8.7 million on loans covered under loss-share agreements and $6.8 million on loans not covered under loss-share agreements.  The Company's share of the covered net loan charge-offs for the six months ended June 30, 2013 was $1.8 million, with the remainder being reimbursed by the FDIC. Combined with the $6.8 million of non-covered net charge-offs, the Company incurred $8.6 million in net charge-off losses, or 0.85% of average loans, during the six months ended June 30, 2013, compared to $8.8 million, or 1.03% of average loans, for the comparable period of 2012.

During the second quarter of 2013, the Company recorded a provision for loan losses of $2.3 million, a decrease of $1.8 million, or 44.4%, from $4.1 million recorded in the first quarter of 2013, and a decrease of $6.0 million, or 72.5%, from $8.3 million recorded during the second quarter of 2012.  The entire $2.3 million in provision expense recorded during the second quarter of 2013 related to legacy non-covered loans.    

During the first six months of 2013, the Company recorded a provision for loan losses of $6.4 million, a decrease of $7.1 million, or 52.6%, from $13.5 million recorded in the first six months of 2012.  Of the $6.4 million in provision expense, $6.0 million related to legacy non-covered loans.  During the six months ended June 30, 2013, the Company recorded a gross provision of $2.0 million for loss-share loans, of which $1.6 million was recorded through a FDIC indemnification asset and the remaining $400,000 was recorded through the Company's provision expense. 

The allowance for loan losses was $32.9 million at June 30, 2013, a decrease of $7.4 million, or 18.4%, from $40.3 million at December 31, 2012.  Loan loss reserves to total portfolio loans were 1.60% and 1.98% at June 30, 2013 and December 31, 2012, respectively.  The allowance for loan loss allocated to loans not marked to fair value was 1.53% and 1.72% at June 30, 2013 and December 31, 2012, respectively.  The components of the allowance for loan loss as of June 30, 2013 were as follows:

Nonperforming assets, which consist of nonaccrual loans, loans 90 days or more past due and OREO, were 3.90% of total assets at June 30, 2013, compared to 3.93% at December 31, 2012.  Nonperforming assets not covered by loss-share were 1.94% of total assets not covered by loss-share as of June 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 $22.3 million at June 30, 2013, a slight decrease from $22.4 million at December 31, 2012.  Excluding loans covered by loss-share agreements, nonperforming loans as a percentage of total loans was 1.26% as of June 30, 2013, consistent with the level as of December 31, 2012. Nonaccrual loans covered by loss-share agreements totaled $44.3 million as of June 30, 2013, a decrease 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 $21.3 million as of June 30, 2013, of which $4.2 million was covered under loss-share.  Of the $21.3 million of TDRs, $12.6 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 June 30, 2013 totaled $46.8 million, which is a decrease of $5.1 million from $51.9 million at December 31, 2012.  At June 30, 2013, the carrying value of OREO covered by loss-share agreements was $17.7 million, a decrease of $5.4 million from $23.1 million at December 31, 2012.  OREO not covered by loss-share agreements totaled $29.1 million at June 30, 2013, a slight increase from $28.8 million at December 31, 2012.  Of the $29.1 million in non-covered OREO at June 30, 2013, $2.8 million was acquired from First Trust or KeySource.  The Company has sold $18.4 million of OREO properties during the six months ended June 30, 2013, which was offset by $14.1 million of additions to OREO.  For the three and six months ended June 30, 2013, the Company recorded valuation adjustments of $1.5 million and $2.3 million, respectively, a decrease from valuation adjustments of $2.0 million and $2.7 million for the three and six months ended June 30, 2012, respectively. 

Capital Position

On June 30, 2013, shareholders' equity was $254.4 million, a decrease of $27.8 million, or 9.8%, 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 shares 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 $2.93 billion in assets.  Bank of North Carolina provides a complete line of banking and financial services to individuals and businesses through its 32 banking offices in North and South Carolina.  The Bank's seven 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. 

SOURCE BNC Bancorp