BNC Bancorp Announces Earnings for Third Quarter 2014

HIGH POINT, N.C., Oct. 17, 2014 /PRNewswire/ -- BNC Bancorp (NASDAQ: BNCN) ("Company"), parent company for Bank of North Carolina ("Bank"), today reported financial results for the three and nine months ended September 30, 2014.

Operating earnings for the quarter ended September 30, 2014 totaled $9.7 million, or $0.33 per diluted share, an increase of 15.4% compared to $8.4 million, or $0.29 per diluted share, for the quarter ended June 30, 2014, and an increase of 91.4% from operating earnings of $5.1 million, or $0.19 per diluted share, for the quarter ended September 30, 2013.  Operating earnings exclude transaction-related expenses, acquisition-related gains, one-time income and expense items, and gain (loss) on sale of investment securities.

Net income for the quarter ended September 30, 2014 was $8.3 million, or $0.28 per diluted share, an increase of 34.8% compared to net income of $6.1 million, or $0.21 per diluted share, for the quarter ended June 30, 2014, and an increase of 64.4% from net income of $5.0 million, or $0.19 per diluted share, for the quarter ended September 30, 2013.  The increase in net income from the second quarter 2014 is primarily due to an increased level of interest earnings assets, a reduction in provision for loan losses and a decrease in transaction-related expenses.

Operating earnings for the nine months ended September 30, 2014 totaled $25.0 million, or $0.87 per diluted share, an increase of 86.5% compared to operating earnings of $13.4 million, or $0.51 per diluted share, for the nine months ended September 30, 2013. 

Net income for the nine months ended September 30, 2014 was $20.9 million, or $0.73 per diluted share, an increase of 61.7% from net income available to common shareholders of $12.9 million, or $0.49 per diluted share, for the nine months ended September 30, 2013.  The increase is primarily due to the significant increase in interest-earning assets and reduced cost for interest-bearing liabilities, which were partially offset by an increase in non-interest expense due to the acquisitions of South Street Financial Corporation ("South Street") and Community First Financial Group, Inc. ("Community First"), respectively, during the nine months ended September 30, 2014.

Total assets at September 30, 2014 were $3.74 billion, an increase of 15.7% as compared to total assets of $3.23 billion at December 31, 2013.

Highlights for Third Quarter 2014:

• Diluted earnings per share of $0.28 for the third quarter of 2014, compared to $0.19 for the third quarter of 2013;
• Operating earnings per diluted share of $0.33 for the third quarter of 2014, compared to $0.19 for the third quarter of 2013;
• Completed issuance of $60.0 million of 5.5% Fixed to Floating Rate Subordinated Notes, due on October 1, 2024;
• Annualized return on average assets of 0.89%, compared to 0.68% for third quarter of 2013;
• Annualized return on tangible common equity ratio of 13.03%, compared to 9.19% for third quarter 2013;
• Annualized operating return on average assets of 1.04%, compared to 0.68% for third quarter of 2013;
• Annualized operating return on tangible common equity ratio of 15.17%, compared to 9.26% for third quarter 2013;
• Non-accrual loans have decreased by 45.3% as compared to September 30, 2013; and
• Ratio of non-performing assets to total assets of 1.99% at September 30, 2014, compared to 3.33% at September 30, 2013.

Richard D. Callicutt II, President and CEO, stated, "We are extremely pleased with the progress achieved during the third quarter, highlighted by a continued increase in our operating earnings and our successful integration efforts at both Home Savings and Harrington banks.   I am also pleased to report that the Harbor National transaction is on target to close in early December, with integration and conversion planning ahead of schedule.  While I am always humbled by the efforts of our internal integration teams, I want to also give a personal thanks to Ron Swanner, Larry Loeser, and Charlie Rivers, the CEO's of Home Savings, Harrington, and Harbor National, respectively.   Their leadership and commitment to a smooth transition through their team's respective move to BNC has been invaluable, and has positively impacted our results. 

Also during the quarter we were able to close a $60 million subordinated debt issuance at favorable terms for our Company.  With the $60 million, we were able to repay a $30 million term loan, downstream $25 million in new Tier 1 capital to the Bank, while increasing Tier 2 capital at the Company by nearly $60 million.   This subordinated debt issuance will provide additional capital to allow our team to pursue growth opportunities that enhance our franchise and continue to drive shareholder value."

Mr. Callicutt, continued, "Despite the economic headwinds, we have been able to position our Company for significant earnings growth in both the near term and the future.  As a result of the greater operating leverage from the Home Savings and Harrington transactions, as well as strong organic growth across our footprint, operating earnings for the quarter of $9.7 million and operating earnings per share of $0.33 were both all-time highs for our Company.  These results produced a healthy operating return on tangible equity of 15.17% and an operating return on average assets of 1.04% for the quarter."       

Operating Results

Fully-taxable equivalent ("FTE") net interest income for the third quarter of 2014 was $38.1 million, an increase of 6.2% from $35.8 million for the second quarter of 2014, and an increase of 33.7% from $28.5 million for the third quarter of 2013.  FTE net interest margin was 4.54% for the third quarter of 2014, which is unchanged from the second quarter of 2014, and an increase of 28 basis points from 4.26% for the third quarter of 2013.  The increase from the third quarter of 2013 was driven by a $2.6 million reduction in interest expense associated with our interest rate hedging instrument, which matured in February 2014.

FTE net interest income for the nine months ended September 30, 2014 was $106.6 million, an increase of 27.0% from $83.9 million for the nine months ended September 30, 2013.  FTE net interest margin was 4.56% for the nine months ended September 30, 2014, an increase of 30 basis points from 4.26% for the comparable period of 2013.  This increase was primarily driven by a $6.9 million reduction in interest expense associated with our interest rate hedging instrument, which matured in February 2014.

Average interest-earning assets were $3.32 billion for the third quarter of 2014, an increase of 5.0% from $3.17 billion for the second quarter of 2014, and an increase of 25.4% from $2.65 billion for the third quarter of 2013.  Average interest-earning assets were $3.12 billion for the nine months ended September 30, 2014, an increase of 18.6% from $2.63 billion for the first nine months of 2013.    

Average interest-bearing liabilities were $2.88 billion for the third quarter of 2014, an increase of 3.8% from $2.78 billion for the second quarter of 2014, and an increase of 21.2% from $2.38 billion for the third quarter of 2013.  Average interest-bearing liabilities were $2.74 billion for the nine months ended September 30, 2014, an increase of 14.9% from $2.39 billion for the nine months ended September 30, 2013. 

The above increases were primarily due to the acquisitions of South Street and Community First during the second quarter of 2014, as well as the acquisition of Randolph Bank & Trust ("Randolph") during the fourth quarter of 2013, as well as organic loan growth across the Company's markets.

The following table is a summary of average yields and costs:

Non-interest income was $6.3 million for the third quarter of 2014, an increase of 8.7% from $5.8 million for the second quarter of 2014, and an increase of 8.3% from $5.8 million for the third quarter of 2013.  Adjusted non-interest income was $6.3 million for the third quarter of 2014, an increase of 7.7% from $5.8 million for the second quarter of 2014, and an increase of 17.0% from $5.3 million for the third quarter of 2013.  Adjusted non-interest income excludes acquisition-related gains, one-time income arising from insurance settlements and gain (loss) on sale of investment securities.  As compared to the second quarter of 2014, non-interest income was positively impacted by an increase in income derived from the sale of SBA loans, an increase in investment brokerage income and an increase in mortgage fees and service charges.  As compared to the third quarter of 2013, non-interest income was positively impacted by an increase in income derived from the sale of SBA loans, investment brokerage income and service charge income.  These increases were partially offset by an 11.6% decrease in mortgage fee income.  

Non-interest income was $17.2 million for the nine months ended September 30, 2014, a decrease of 2.2% from $17.6 million for the comparable period of 2013.  Adjusted non-interest income was $17.0 million for the nine months ended September 30, 2014, an increase of 3.0% from $16.5 million for the nine months ended September 30, 2013.  During the first nine months of 2014, the Company recorded $0.7 million of amortization of the FDIC loss-share receivable due to lower loss projections for the loans covered under loss-share agreements.  Non-interest income was also adversely impacted by a slowdown in mortgage production, as mortgage income decreased by 22.4%.  These declines were primarily offset by an increase in service charge income and a 129.8% increase in income derived from sales of SBA loans.

Non-interest expense was $29.8 million for the three months ended September 30, 2014, a slight increase compared to non-interest expense of $29.5 million for the second quarter of 2014, and an increase of 33.0% from $22.4 million for the third quarter of 2013.  Excluding transaction-related costs, adjusted non-interest expense for the third quarter of 2014 was $27.5 million, an increase of 6.1% from $25.9 million for the second quarter of 2014, and an increase of 25.6% from $21.9 million for the third quarter of 2013.  Transaction-related costs include legal and professional fees, personnel costs, data processing expenses, and other miscellaneous expenses directly attributable to acquisition activity.  The increase from the second quarter of 2014 is primarily due to the full quarter impact of the additional headcount and facilities acquired from South Street and Community First, while the increase from comparable period of 2013 was also due to the acquisition of Randolph during the fourth quarter of 2013.  This increase was partially offset by a decrease of 25.2% and 25.7%, respectively, in professional services expenses as compared to the second quarter of 2014 and third quarter of 2013.

Non-interest expense was $84.1 million for the nine months ended September 30, 2014, an increase of 21.4% from $69.3 million for the nine months ended September 30, 2013.  Excluding transaction-related costs, adjusted non-interest expense for the nine months ended September 30, 2014 was $77.4 million, an increase of 14.8% from $67.4 million for the nine months ended September 30, 2013.  The increase from the comparable period of 2014 is primarily due to the acquisitions of South Street, Community First and Randolph, as well as overall growth.

The following table details the components of non-interest income and non-interest expense:

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

Additional Operating Highlights

Total portfolio loans were $2.76 billion at September 30, 2014, an increase of 21.4% from $2.28 billion at December 31, 2013.  The increase in the acquired loans not covered by loss share is due to the $303 million in loans acquired from South Street and Community First.  Originated loans have increased by $156.8 million, or 8.4%, during the third quarter of 2014.  The Company continues to enjoy success with its home equity line of credit campaign, with approximately $32.3 million of net borrowings during the current quarter, as well as continued growth in commercial real estate and commercial construction loans.

The table below outlines the Company's loan portfolio mix between originated and acquired loans for the past five quarters:

Total deposits at September 30, 2014 were $3.08 billion, an increase of 13.9% from total deposits of $2.71 billion as of December 31, 2013.  Wholesale deposits were 26.1% of total deposits at September 30, 2014, a decrease compared to 32.8% as of December 31, 2013.  Transactional accounts, which are comprised of non-interest bearing and interest-bearing demand accounts, increased 21.8% during 2014 and have increased 34.4% over the past twelve months.  At September 30, 2014, time deposits were 35.9% of total deposits, compared to 40.0% at December 31, 2013. 

The table below outlines the components of deposits for the past five quarters:

Total borrowings at September 30, 2014 were $298.6 million, an increase of 31.5% from total borrowings of $227.1 million as of December 31, 2013.  At September 30, 2014, $171.9 million of these borrowings were classified as short-term, while the remaining $126.7 million were classified as long-term.  As noted above, during the third quarter of 2014 the Company issued $60.0 million of 5.5% Fixed to Floating Rate Subordinated Notes, which are due October 1, 2024 (the "Notes").  The Notes bear interest at an annual fixed rate of 5.5% for the first five years.  From October 1, 2019 to the maturity date, the interest rate will reset quarterly to an annual interest rate equal to the then-current three-month LIBOR plus 359 basis points.  The Company used part of the proceeds of the offering to fund the payment of the outstanding principal balance on its $30.0 million senior unsecured term loan, which occurred on October 1, 2014.  The remainder will be used for general corporate purposes.

Asset Quality

The Company incurred $0.5 million in net charge-off losses, which represented 0.07% of average loans, for the third quarter of 2014, compared to net charge-off losses of $2.5 million, or 0.39% of average loans, for the second quarter of 2014, and net charge-off losses of $2.9 million, or 0.55% of average loans, for the third quarter of 2013.  Net charge-off losses decreased during the third quarter of 2014 due to a number of significant recoveries of previously charged-off loans, primarily for loans not covered under loss-share agreements.

The Company incurred $6.6 million in net charge-off losses, which represented 0.35% of average loans, for the nine months ended September 30, 2014, compared to net charge-off losses of $11.4 million, or 0.75% of average loans, for the nine months ended September 30, 2013. 

During the third quarter of 2014, the Company recorded a provision for loan losses of $1.3 million, a decrease of 39.1% from $2.1 million recorded in the second quarter of 2014, and a decrease of 61.1% from $3.4 million recorded during the third quarter of 2013.  The Company recorded a provision for loan losses of $6.0 million for the nine months ended September 30, 2014, a decrease of 38.4% from $9.8 million recorded during the comparable period of 2013.  The provision for loan losses recorded during 2014 was for loans not covered under loss-share agreements.  

The allowance for loan losses was $30.7 million at September 30, 2014, a decrease of 6.6% from $32.9 million at December 31, 2013.  The components of the allowance for loan loss at September 30, 2014 were as follows:

The following table details our asset quality information for the past five fiscal quarters:

Nonperforming assets, which consist of nonaccrual loans, loans 90 days or more past due and OREO, totaled $74.5 million, or 1.99% of total assets, at September 30, 2014, a decrease from $88.5 million, or 2.74% of total assets, at December 31, 2013.  Nonperforming assets covered by loss-share agreements totaled $23.4 million at September 30, 2014, a decrease of 44.9% from $42.5 million at December 31, 2013. 

Capital Position

At September 30, 2014, shareholders' equity was $330.6 million, an increase of 21.9% from shareholders' equity of $271.3 million as of December 31, 2013.  In addition to net income, the increase in shareholders' equity was due to the issuance of 2.3 million shares of common stock during the second quarter of 2014 related to the acquisitions of South Street and Community First.

All of the Bank's and Company's capital ratios exceed the minimum thresholds established for a well-capitalized bank by regulatory measures.  The issuance of the Notes also served to increase the Company's total capital ratio.

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 $3.74 billion in assets.  Bank of North Carolina provides a complete line of banking and financial services to individuals and businesses through its 47 banking offices in North and South Carolina.  The Bank's 10 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." The Company's website is www.bncbancorp.com.

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.

Forward Looking Statements

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.

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