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| FNBN > SEC Filings for FNBN > Form 10-Q on 6-Nov-2009 | All Recent SEC Filings |
6-Nov-2009
Quarterly Report
The following presents management's discussion and analysis of the financial condition, changes in financial condition and results of operations of FNB United Corp. ("FNB United") and its wholly owned subsidiary, CommunityONE Bank, National Association (the "Bank"). FNB United and its subsidiary are collectively referred to as the "Company." This discussion should be read in conjunction with the financial statements and related notes included elsewhere in the quarterly report. This discussion may contain forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those anticipated in forward-looking statements as a result of various factors. The following discussion is intended to assist in understanding the financial condition and results of operations of the Company.
Executive Overview
Description of Operations
FNB United is a bank holding company with a full-service subsidiary bank, CommunityONE Bank, National Association, which offers a complete line of consumer, mortgage and business banking services, including loan, deposit, cash management, investment management and trust services, to individual and business customers. The Bank has offices in Alamance, Alexander, Ashe, Catawba, Chatham, Gaston, Guilford, Iredell, Mecklenburg, Montgomery, Moore, Orange, Randolph, Richmond, Rowan, Scotland, Watauga and Wilkes counties in North Carolina.
Additionally, the Bank has a mortgage banking subsidiary, Dover Mortgage Company, which originates, underwrites and closes loans for sale into the secondary market. Dover has a retail origination network based in Charlotte and conducts wholesale operations in North Carolina, South Carolina, Georgia, Maine, Maryland, Mississippi, Tennessee, and Virginia.
Executive Summary
The Company's total assets at September 30, 2009, were $2.2 billion, an increase of 7%, or $149.5 million from year-end 2008. Investments grew $121.4 million, or 52%, reflecting the Company's leveraging strategy to offset the earnings dilution resulting from participation in the Capital Purchase Program. Loans held for sale increased $16.4 million, or 45%, due to refinancing of residential mortgages. Gross loans held for investment totaled $1.6 billion at September 30, 2009, essentially flat from the prior year end.
Total deposits grew $207.0 million, to $1.7 billion in 2009, representing an 14% increase due primarily to increased consumer use of deposit account products in the current economic environment and an increase in the general consumer rate of savings. Borrowings decreased $31.6 million or 9%, during the first nine months of 2009, compared to the period ended December 31, 2008. Total shareholders' equity decreased $19.3 million from the December 31, 2008 level, primarily as a result of $52.4 million goodwill impairment charge.
The Company experienced a net loss of $75.7 million in the first nine months of 2009 compared to net income of $0.8 million for the same period in 2008 and is primarily the result of a $24.8 million increase in the provision for loan losses and a $52.4 million goodwill impairment charge. These losses were partially offset by a net income tax benefit of $6.8 million. The Bank established a $6.0 million valuation reserve on deferred tax asset in the third quarter 2009. FDIC insurance expense increased $2.7 million over the prior year as a result of a FDIC special assessment imposed as part of the Deposit Insurance Fund restoration plan and increase in the Bank's deposit base.
Noninterest income increased 3% to $16.1 million for the first nine months in 2009, compared to $15.7 million for the same period in 2008. Income from mortgage loan income increased by $4.7 million attributable to sizable increases in 2009 production driven by refinancing activity. These increases were partially offset by a $5.0 million OTTI charge on an investment security owned by the Bank that the Bank deemed would be unlikely to recover its investments. Excluding the OTTI charge, noninterest income increased $5.4 million or 34%.
Noninterest expense for year-to-date 2009 was $51.1 million, excluding the 2009 goodwill impairment charge of $52.4 million, compared to $46.5 million in 2008, which also excludes a 2008 goodwill impairment charge of $1.8 million. This 10% growth can be attributed to a $2.7 million FDIC insurance expense increase over the prior year as a result of a FDIC special assessment imposed as part of the Deposit Insurance Fund restoration plan and because of the increase in the Bank's deposit base. Also, personnel expense decreased $1.4 million due to a downsizing of staff
resulting from an efficiency study in 2008. Included in other expense are additional OREO write-downs of $1.0 million.
Financial highlights are presented in the accompanying table.
Selected Financial Data
As of and As of and
For the Three Months For the Nine Months
(dollars in thousands, except per share
data) Ended September 30, Ended September 30,
2009 2008 2009 2008
Income Statement Data
Net interest income $ 16,417 $ 14,930 $ 45,796 $ 45,981
Provision for loan losses 17,500 9,370 37,084 12,267
Noninterest income 4,960 6,434 16,095 15,692
Noninterest expense 71,553 15,275 103,517 48,291
Net (loss)/income (67,491 ) (1,711 ) (73,660 ) 752
Preferred stock dividends (813 ) - (2,055 ) -
Net (loss)/income to common shareholders (68,304 ) (1,711 ) (75,715 ) 752
Period End Balances
Assets $ 2,193,906 $ 2,070,037 $ 2,193,906 $ 2,070,037
Loans held for sale 52,520 20,261 52,520 20,261
Loans held for investment (1) 1,576,530 1,589,064 1,576,530 1,589,064
Allowance for loan losses 42,349 26,750 42,349 26,750
Goodwill - 108,395 - 108,395
Deposits 1,721,742 1,518,594 1,721,742 1,518,594
Borrowings 334,122 323,641 334,122 323,641
Shareholders' equity 128,603 211,416 128,603 211,416
Average Balances
Assets $ 2,214,489 $ 2,066,499 $ 2,165,506 $ 2,023,483
Loans held for sale 67,987 21,053 58,255 19,858
Loans held for investment (1) 1,590,193 1,586,046 1,586,984 1,544,140
Allowance for loan losses 37,197 19,082 36,981 18,404
Goodwill 51,824 108,393 52,203 109,632
Deposits 1,655,009 1,488,510 1,610,441 1,475,133
Borrowings 352,366 342,464 354,115 312,290
Shareholders' equity 193,666 215,721 187,370 216,953
Per Common Share Data
Net (loss)/income per common share:
Basic $ (5.98 ) $ (0.15 ) $ (6.63 ) $ 0.07
Diluted (2) (5.98 ) (0.15 ) (6.63 ) 0.07
Cash dividends declared - 0.10 0.05 0.35
Book value 6.71 18.51 6.71 18.51
Tangible book value 6.26 8.50 6.26 8.50
Performance Ratios
Return on average assets (12.09 ) % (0.33 ) % (4.55 ) % 0.05 %
Return on average tangible assets (12.41 ) (0.35 ) (4.67 ) 0.05
Return on average equity (3) (138.26 ) (3.16 ) (52.56 ) 0.46
Return on average tangible equity (196.10 ) (6.72 ) (75.95 ) 0.99
Net interest margin (tax equivalent) 3.25 3.32 3.14 3.51
Dividend payout on common shares (4) N/A 66.80 N/A 531.65
Asset Quality Ratios
Allowance for loan losses to period end
loans held for investment 2.69 % 1.68 % 2.69 % 1.68 %
Nonperforming loans to period end
allowance for loan losses 363.40 152.46 363.40 152.46
Net chargeoffs (annualized) to average
loans held for investment 2.99 0.37 2.48 0.25
Nonperforming assets to period end loans
held for investment and foreclosed
property (5) 11.15 2.97 11.15 2.97
Capital and Liquidity Ratios
Average equity to average assets 8.75 % 10.44 % 8.65 % 10.72 %
Leverage capital 6.49 6.73 6.49 6.73
Tier 1 risk based capital 7.83 7.21 7.83 7.21
Total risk based capital 11.52 10.50 11.52 10.50
Average loans to average deposits 100.19 107.97 102.16 106.02
Average loans to average deposits and
borrowings 82.60 87.77 83.75 87.50
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(1) Loans held for investment, net of unearned income, before allowance for loan
losses.
(2) Assumes the exercise of outstanding dilutive options to acquire common
stock. See Note 15 to FNB United's consolidated financial statements included in
the annual report on Form 10-K.
(3) Net (loss) income to common shareholders, which excludes preferred stock
dividends, divided by average realized common equity which excludes accumulated
other comprehensive income (loss).
(4) Not applicable to 2009 due to net loss.
(5) Nonperforming loans and nonperforming assets include loans past due 90 days
or more that are still accruing interest.
Application of Critical Accounting Policies
FNB United's accounting policies are in accordance with accounting principles generally accepted in the United States and with general practice within the banking industry and are fundamental to understanding management's discussion and analysis of results of operations and financial condition. FNB United's significant accounting policies are discussed in detail in Note 1 of the Consolidated Financial Statements contained in the Annual Report on Form 10-K for the year ended December 31, 2008.
Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses. Actual results could differ from those estimates.
Allowance for Loan Losses
The allowance for loan losses, which is utilized to absorb actual losses in the loan portfolio, is maintained at a level consistent with management's best estimate of probable loan losses incurred as of the balance sheet date. FNB United's allowance for loan losses is also analyzed quarterly by management. This analysis includes a methodology that separates the total loan portfolio into comparable loan classifications for purposes of evaluating risk. The required allowance is calculated by applying a risk adjusted reserve requirement to the dollar volume of loans within a comparable group. Major loan portfolio subgroups include: risk graded commercial loans, mortgage loans, home equity loans, retail loans and retail credit lines. Management also analyzes the loan portfolio on an ongoing basis to evaluate current risk levels, and risk grades are adjusted accordingly. While management uses the best information available to make evaluations, future adjustments may be necessary, if economic or other conditions differ substantially from the assumptions used. See additional discussion under "Asset Quality."
Goodwill
FNB United has procedures to test goodwill for impairment on an annual basis or more frequently if necessary. The testing procedures evaluate possible impairment based on the following:
If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired and no second step is required. If not, a second test is required to measure the amount of goodwill impairment. The second test of the overall goodwill impairment compares the implied fair value of the reporting unit goodwill with the carrying amount of the goodwill. The impairment loss is equal to the excess of carrying value of goodwill over its implied fair value.
For the year ended December 31, 2008, the Company recorded impairment charges of $57.8 million to write down a portion of goodwill, leaving approximately $52.4 million in goodwill carried as an asset on the Company's consolidated balance sheet as of year-end 2008.
The deteriorating economic conditions witnessed in 2008 and 2009 have significantly affected the banking industry in general and the Company's financial results in particular during fiscal year 2009. For the first nine months of 2009, the Company's earnings have been negatively affected by continued low short-term interest rates, an increase in credit losses in the Bank's loan portfolio, recognition of declines in the fair value of certain securities, and elevated levels of FDIC premiums. Due to the ongoing uncertainty in the general economy and the market, which may continue to negatively impact the Company's performance and its stock price, the Company has evaluated during 2009 its remaining goodwill for impairment.
As disclosed in the Company's report on Form 10-Q for the quarter ended June 30, 2009, the Company determined that it did not meet the first step goodwill test at the second quarter end. The first step test was performed by averaging the net present value of projected earnings per share, the net present value of earnings per share, with consideration of both internal and analyst estimates of projections of earnings per share, and the current stock price multiplied by the estimated current control premium. The resulting average value was lower than the Company's book value per share, indicating possible goodwill impairment.
Upon determining that the potential for goodwill impairment existed, a second step analysis was performed. In the second step test, the book value of the Company was compared to the aggregate fair values of the Company's individual assets, liabilities and identified intangibles. The analysis was completed in the third quarter and showed that the carrying value of the Company's goodwill exceeded its fair value and resulted in a third quarter noncash
charge of $52.4 million, eliminating the remaining goodwill on the Company's consolidated balance sheet. This charge had no effect on the Company's liquidity, regulatory capital, or daily operations and was recorded as a component of noninterest expense on the consolidated statement of operations.
Summary
Management believes the accounting estimates related to the allowance for loan
losses and the goodwill impairment test are "critical accounting estimates"
because: (1) the estimates are highly susceptible to change from period to
period as they require management to make assumptions concerning the changes in
the types and volumes of the portfolios and anticipated economic conditions, and
(2) the impact of recognizing an impairment or loan loss could have a material
effect on FNB United's assets reported on the balance sheet as well as its net
earnings.
Results of Operations
Net Interest Income
Net interest income is the difference between interest income, principally from loans and investments, and interest expense, principally on customer deposits. Changes in net interest income result from changes in interest rates and in the volume, or average dollar level, and mix of earning assets and interest-bearing liabilities. An analysis is presented in the Company's average balances and net interest income analysis for the periods ended September 30, 2009 and 2008.
For the three months ended September 30, 2009, net interest income before the provision for loan losses was $16.4 million, an increase of $1.5 million, or 10%, from $14.9 million for the same quarter in 2008. The increase was primarily due to a 100 basis point decrease in the yield on average earning assets, which increased $215.9 million, offset by a 100 basis point decrease in the cost of average interest-bearing liabilities, which increased $180.3 million.
The net interest margin (taxable-equivalent net interest income divided by average earning assets) compressed seven basis points to 3.25% for the three months ended September 30, 2009, compared to 3.32% in the same period in 2008. Also negatively impacting our net interest margin is the increase in nonperforming assets during the three and nine months ended September, 30, 2009 when compared to the same periods in 2008. Nonperforming assets at period end were $178.5 million for the nine months ended September 30, 2009 compared to $47.4 million for the nine months ended September 30, 2008.
For the nine months ended September 30, 2009, net interest income before the provision for loan losses was $45.8 million, a decrease of $0.2 million, from $46.0 million for the same period in 2008. The decrease was primarily due to a $210.0 million increase in average earning asset balances and a $185.0 million increase in interest-bearing liabilities, offset by the 132 basis point decrease in yield on earning assets, combined with a 103 basis point decrease in interest-bearing liabilities.
The net interest margin (taxable-equivalent net interest income divided by average earning assets) compressed 37 basis points to 3.14% for the nine months ended September 30, 2009, compared to 3.51% in the same period in 2008.
The 2009 and 2008 changes in net interest income on a taxable equivalent basis, as measured by volume and rate variances, are analyzed in the table below. Volume refers to the average dollar level of earning assets and interest-bearing liabilities.
Average Balances and Net Interest Income Analysis
Three Months Ended September 30,
2009 2008
(dollars in thousands) Average Average
Average Income / Yield / Average Income / Yield /
Balance (3) Expense Rate Balance (3) Expense Rate
Interest earning
assets:
Loans (1)(2) $ 1,658,180 $ 21,159 5.06 % $ 1,607,099 $ 25,766 6.38 %
Taxable investment
securities 302,680 4,689 6.15 147,688 1,795 4.84
Tax-exempt investment
securities (1) 48,574 865 7.06 49,305 725 5.85
Other earning assets 32,799 115 1.39 22,233 204 3.65
Total earning assets 2,042,233 26,828 5.21 1,826,325 28,490 6.21
Non-earning assets:
Cash and due from
banks 26,497 29,545
Goodwill and core
deposit premium 57,120 114,484
Other assets, net 88,639 96,145
Total assets $ 2,214,489 $ 2,066,499
Interest-bearing
liabilities:
Interest-bearing
demand deposits $ 198,414 $ 603 1.21 % $ 167,326 $ 507 1.21 %
Savings deposits 40,696 27 0.26 40,789 29 0.28
Money market deposits 320,719 1,107 1.37 285,769 1,668 2.32
Time deposits 938,833 6,232 2.63 834,393 7,946 3.79
Retail repurchase
agreements 17,618 30 0.68 37,934 204 2.14
Federal Home Loan Bank
advances 175,360 1,458 3.30 212,970 1,927 3.60
Federal funds
purchased 87,686 56 0.25 19,804 114 2.29
Other borrowed funds 71,702 568 3.14 71,756 860 4.77
Total interest-bearing
liabilities 1,851,028 10,081 2.16 1,670,741 13,255 3.16
Noninterest-bearing liabilities and shareholders'
equity:
Noninterest-bearing
demand deposits 156,347 160,233
Other liabilities 13,448 19,804
Shareholders' equity 193,666 215,721
Total liabilities and
equity $ 2,214,489 $ 2,066,499
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Net interest income and net yield on
earning assets (4) $ 16,747 3.25 % $ 15,235 3.32 % Interest rate spread (5) 3.05 % 3.05 % |
(1) The fully tax equivalent basis is computed using a federal tax rate of 35%.
(2) The average loan balances include nonaccruing loans.
(3) The average balances for all years include market adjustments to fair value
for securities and loans available/held for sale.
(4) Net yield on earning assets is computed by dividing net interest income by
average earning assets.
(5) Earning asset yield minus interest bearing liabilities rate.
Average Balances and Net Interest Income Analysis
Nine Months Ended September 30,
2009 2008
(dollars in thousands) Average Average
Average Income / Yield / Average Income / Yield /
Balance (3) Expense Rate Balance (3) Expense Rate
Interest earning
assets:
Loans (1)(2) $ 1,645,239 $ 64,103 5.21 % $ 1,563,998 $ 79,934 6.83 %
Taxable investment
securities 272,778 11,864 5.82 148,744 5,386 4.84
Tax-exempt investment
securities (1) 52,347 2,702 6.90 53,000 2,309 5.82
Other earning assets 25,041 282 1.51 19,698 723 4.90
Total earning assets 1,995,405 78,951 5.29 1,785,440 88,352 6.61
Non-earning assets:
Cash and due from
banks 28,454 30,052
Goodwill and core
deposit premium 57,696 115,901
Other assets, net 83,951 92,090
Total assets $ 2,165,506 $ 2,023,483
Interest-bearing
liabilities:
Interest-bearing
demand deposits $ 191,560 $ 1,572 1.10 % $ 166,429 $ 1,548 1.24 %
Savings deposits 40,085 78 0.26 41,367 87 0.28
Money market deposits 302,829 3,377 1.49 277,844 5,049 2.43
Time deposits 923,817 20,421 2.96 829,496 25,894 4.17
Retail repurchase
agreements 19,633 97 0.66 34,041 616 2.42
Federal Home Loan Bank
advances 192,543 4,534 3.15 194,736 5,440 3.73
Federal funds
purchased 70,237 141 0.27 21,705 412 2.54
Other borrowed funds 71,702 1,881 3.51 61,808 2,364 5.11
Total interest-bearing
liabilities 1,812,406 32,101 2.37 1,627,426 41,410 3.40
Noninterest-bearing liabilities and shareholders'
equity:
Noninterest-bearing
demand deposits 152,150 159,997
Other liabilities 13,580 19,107
Shareholders' equity 187,370 216,953
Total liabilities and
equity $ 2,165,506 $ 2,023,483
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Net interest income and net yield on
earning assets (4) $ 46,850 3.14 % $ 46,942 3.51 % Interest rate spread (5) 2.92 % 3.21 % |
(1) The fully tax equivalent basis is computed using a federal tax rate of 35%.
(2) The average loan balances include nonaccruing loans.
(3) The average balances for all years include market adjustments to fair value
for securities and loans available/held for sale.
(4) Net yield on earning assets is computed by dividing net interest income by
average earning assets.
(5) Earning asset yield minus interest bearing liabilities rate.
Provision for Loan Losses
This provision is the charge against earnings to provide an allowance for probable losses inherent in the loan portfolio. The amount of each year's charge is affected by several considerations including management's evaluation of . . .
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