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BNCN > SEC Filings for BNCN > Form 10-Q on 9-Nov-2012All Recent SEC Filings

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Form 10-Q for BNC BANCORP


9-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Quarterly Report on Form 10-Q may contain certain forward-looking statements intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such because the context of the statement will include words such as "believe," "anticipate," "expect," "estimates," "should" or words of similar meaning. Similarly, statements that describe our future plans, objectives or goals are also forward-looking statements. Readers should not place undue reliance on forward-looking statements as a number of important factors could cause actual results to differ materially from those in the forward-looking statements. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those currently anticipated, including, without limitation, general and local economic conditions; changes in interest rates, deposit flows, loan demand, real estate values and competition; changes in accounting principles, policies or guidelines; changes in legislation or regulation; our ability to integrate and achieve expected synergies from acquisitions; and other competitive, technological, governmental and regulatory factors affecting our operations, pricing, products, and services. The Company cautions that the foregoing list of risks and uncertainties is not exhaustive. The Company undertakes no obligation to update any forward-looking statement, whether written or oral, which may be made from time to time by or on behalf of the Company.

Management's discussion and analysis is intended to assist readers in understanding and evaluating our consolidated financial condition and results of operations. This discussion should be read in conjunction with our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011.

Overview and Executive Summary

BNC Bancorp (the "Company") is a one-bank holding company for Bank of North Carolina ("BNC"). BNC is a full service commercial bank, incorporated under the laws of the State of North Carolina. The Company maintains four wholly-owned special-purpose subsidiary trusts that issue trust preferred securities. Because BNC is our sole banking subsidiary, the majority of our income is derived from BNC operations. Throughout this Quarterly Report, results of operations will relate to BNC's operations, unless a specific reference is made to the Company and its operating results other than through BNC's business and activities. The terms "we" and "ours" will be used throughout this report when discussing our operations except in circumstances where a reference is specific to either the Company and/or BNC.

We are registered with the Board of Governors of the Federal Reserve System (the "Federal Reserve") under the Bank Holding Company Act of 1956, as amended (the "Bank Holding Company Act") and the bank holding company laws of North Carolina. BNC operates under the rules and regulations of and is subject to examination by the FDIC and the North Carolina Office of the Commissioner of Banks, North Carolina Department of Commerce (the "NCOCB"). BNC is also subject to certain regulations of the Federal Reserve governing the reserves to be maintained against deposits and other matters. Our principal executive offices are located at 1226 Eastchester Drive, High Point, North Carolina 27265.

We have experienced steady, primarily organic growth over our twenty-one year history. With numerous banks still in a weakened condition because of the slow rebound of the economy, we decided to expand our franchise through select acquisitions. A summary of the acquisitions we have entered into in 2012 and 2011 is as follows:

Completed Acquisitions

On September 21, 2012, we acquired the deposits and certain other assets of two branches that were owned by The Bank of Hampton Roads, a subsidiary of Hampton Roads Bankshares, Inc, located at Preston Corners in Cary, North Carolina and Meadowmont Village Circle in Chapel Hill, North Carolina.

On September 14, 2012, we acquired KeySource Financial, Inc., a North Carolina corporation serving as a one bank holding company for KeySource Commercial Bank, a North Carolina banking corporation ("KeySource"), with one branch in Durham, North Carolina. The acquisition of KeySource, as well as the acquisition of the Bank of Hampton Roads branches, further increases our presence in the combined Raleigh-Durham Metropolitan Statistical Area, the market with the highest forecasted five-year growth rate in North Carolina.

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On June 8, 2012, we acquired certain assets and liabilities of Carolina Federal Savings Bank ("Carolina Federal") pursuant to a Purchase and Assumption agreement with the FDIC. Under the terms of the agreement, we acquired certain assets and deposits from the FDIC as receiver of Carolina Federal. There was no loss-share arrangement with the FDIC in regards to this transaction.

On December 30, 2011, we acquired Regent Bank of South Carolina ("Regent"), a commercial bank organized under the banking laws of South Carolina. Regent had one branch in Greenville, South Carolina, which now operates under the name BNC Bank, as do our other South Carolina branches. This acquisition gave us an entry into what is known as the Upstate region of South Carolina, located in the commerce-rich I-85 corridor in the northwest corner of South Carolina.

On October 14, 2011, in a FDIC-assisted transaction, we acquired certain assets and assumed certain liabilities of Blue Ridge Savings Bank, Inc. ("Blue Ridge") headquartered in Asheville, North Carolina, under agreements, which included loss-share arrangements, which protect BNC from losses on covered loans and other real estate owned up to stated limits. The Blue Ridge acquisition enabled us to expand our franchise into Western North Carolina through six branches located in Western North Carolina.

Pending Transaction

On June 4, 2012, we entered into an Agreement and Plan of Merger with First Trust Bank ("First Trust"), a commercial bank serving small businesses and professionals in the Charlotte Metro area. The Agreement and Plan of Merger provides for First Trust shareholders to receive 0.98 shares of our voting common stock for each share of First Trust common stock, or cash in the amount of $7.25 per share. As a result of the transaction, we will add three new branches in metro Charlotte, as well as approximately $228 million in loans and $374 million in deposits. We expect the merger will close in the fourth quarter of 2012, subject to customary closing conditions, including regulatory approval and approval of First Trust's shareholders.

We provide a wide range of banking services tailored to the particular banking needs of the communities we serve. We are principally engaged in the business of attracting deposits from the general public and using those deposits, together with other funding from our lines of credit, to make primarily consumer and commercial loans. We have pursued a strategy that emphasizes our local affiliations. This business strategy stresses the provision of high quality banking services to individuals and small to medium-sized local businesses. Specifically, we make business loans secured by real estate, personal property and accounts receivable; unsecured business loans; consumer loans, which are secured by consumer products, such as automobiles and boats; unsecured consumer loans; commercial real estate loans; and other loans. We also offer a wide range of banking services, including checking and savings accounts, safe deposit boxes, and other associated services. We have 35 banking offices in North and South Carolina.

Our primary sources of revenue are interest and fee income from our lending and investing activities, primarily consisting of making business loans for small to medium-sized businesses, and, to a lesser extent, from our investment portfolio. In prior years, investments have not been a primary source of income for us.

During the first nine months of 2012, with the impact of the economic slowdown ongoing, management has continued to focus on managing credit quality, maintaining adequate liquidity sources and managing our capital. During the second quarter of 2012, we closed on a $72.5 million institutionally based capital raise that provided enhanced capital levels to continue our strategic and opportunistic expansion plans. During the third quarter of 2012, we also ended our participation in the Treasury's Capital Purchase Program with the auction of our Series A preferred stock to private investors. We also repurchased and cancelled the warrant issued to the Treasury to purchase additional stock. As we are building our franchise throughout the Carolinas, we continue our ongoing efforts of meeting the financial services needs of our customers and communities, especially in this challenging economic environment. We are committed to building long-term value for our shareholders, and in the changing regulatory and economic landscape, core deposit growth will be an even more critical element for finding successful and profitable growth initiatives. We have a retail banking team that oversees product development, sales, training, accountability and consistency, and quality of delivery in each of our offices in our banking regions. Credit costs remain high due to elevated nonperforming asset levels and our continuing efforts to resolve asset quality issues. Weaknesses in residential development and rising unemployment levels in our market areas resulted in higher charge-offs, and a higher allowance for loan losses in 2012 also impacted earnings. We continue to focus on accelerating the sales cycle for other real estate owned ("OREO"), including taking substantial discounts on the larger OREO properties.

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Our senior management continues to work closely with credit administration, third-party credit review specialists, and lending staff to insure that adequate resources are in place to proactively manage through the current slowdown in the real estate markets and overall economy. When a problem is identified, management remains diligent in assessing the situation and moving quickly to minimize losses, while being sensitive to the borrower's effectiveness as an operator, the long-term viability of the business or project, and the borrower's commitment to working with BNC to achieve an acceptable resolution of the credit.

Analysis of Results of Operations

Consolidated net income for the third quarter of 2012 was $1.4 million, a decrease of $1.0 million from the $2.4 million of net income from the comparable period of 2011. Our net income available to common shareholders for the third quarter of 2012 was $788,000, or $0.04 per diluted share, compared to $1.8 million, or $0.18 per diluted share, for the third quarter of 2011. During the three months ended September 30, 2012 and 2011, the Company incurred $1.9 million and $109,000, respectively, of expenses associated with merger and acquisition activities. Excluding these expenses, adjusted net income totaled $2.6 million, a slight increase compared to the $2.5 million exclusive of one-time costs for the quarter ended September 30, 2011.

For the nine months ended September 30, 2012, consolidated net income was $5.4 million, a slight decrease from the $5.5 million from the comparable period of 2011. Net income available to common shareholders for the nine months ended September 30, 2012 was $3.6 million, or $0.25 per diluted share, compared to $3.7 million, or $0.37 per diluted share, for the nine months ended September 30, 2011. During the nine months ended September 30, 2012 and 2011, the Company incurred $3.8 million and $368,000, respectively, of expenses associated with merger and acquisition activities. Excluding these expenses, adjusted net income totaled $7.8 million, an increase of 36% compared to the $5.8 million exclusive of one-time costs for the nine months ended September 30, 2011.

Comparability of earnings per share for both the above periods was impacted due to our second quarter capital raise. For the three and nine months ended September 30, 2012, outstanding average diluted shares increased by 10,356,613 shares and 4,308,956 shares, respectively.

The annualized return on average assets was 0.22% for the third quarter of 2012, compared to 0.44% for the third quarter of 2011. The annualized return on average assets was 0.29% for the nine months ended September 30, 2012, compared to 0.34% for the comparable period of 2011.

Net Interest Income and Net Interest Margin

Like most financial institutions, our primary component of earnings is net interest income. Net interest income is the difference between interest income, principally from loan and investment securities portfolios, and interest expense, principally on customer deposits and borrowings. For internal analytical purposes, management adjusts net interest income to a "fully taxable-equivalent" basis ("(FTE)") using our blended statutory tax rate, as applicable, on tax exempt items. Changes in net interest income result from changes in volume, spread and margin. For this purpose, "volume" refers to the average dollar level of interest-earning assets and interest-bearing liabilities, "spread" refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities, and "margin" refers to net interest income divided by average interest-earning assets and is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities, as well as levels of non-interest bearing liabilities.

Net interest income for the third quarter of 2012 was $19.8 million, an increase of $2.9 million, or 17.1%, from the comparable period last year. For the nine months ended September 30, 2012 our net interest income totaled $56.5 million, an increase of $6.2 million, or 12.3%, from the comparable period in 2011. During the third quarter of 2012, our net interest margin (FTE) decreased by 4 basis points from the third quarter of 2011 to 3.75%. Excluding the costs associated with our interest rate cap, our net interest margin for the third quarter was 4.11%, a decrease of 1 basis point from the comparable period in 2011.

During the third quarter of 2012, the accretion of yield and fair value discounts totaled $1.1 million, an increase of $100,000 from $1.0 million in the third quarter of 2011. Accretion for the nine months ended September 30, 2012 and 2011 was $3.6 million and $3.5 million, respectively.

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During the third quarter of 2012, our average yield on interest-earning assets (FTE) decreased 29 basis points while the cost of average interest-bearing liabilities decreased 18 basis points when compared to the third quarter of 2011. For the nine months ended September 30, 2012, our average yield on interest-earning assets (FTE) decreased 27 basis points while the cost of average interest-bearing liabilities decreased 15 basis points from the comparable period in 2011.

Total interest income (FTE) increased $2.7 million for the third quarter of 2012 when compared to the same quarter of 2011. This increase in interest income (FTE) is primarily driven by increases in our average portfolio loan balances, which have increased $234.4 million for the three months ended September 30, 2012 as compared to the same period in 2011. The increases in average loans are due to the acquisitions of KeySource, Carolina Federal, Regent and Blue Ridge, as well as organic growth in our footprint. Increases in average portfolio loans were offset by a 5 basis point decrease in average interest rates for the quarter ended September 30, 2012, as compared to the third quarter of 2011. Average portfolio loans, as a percentage of average interest-earning assets, decreased to 79.5% for the quarter ended September 30, 2012, compared to 80.7% for the prior year quarter. Average investment securities increased $1.6 million while the average yield on investment securities decreased 50 basis points during the third quarter of 2012, as compared to the third quarter of 2011.

Total interest income (FTE) increased $6.4 million for the nine months ended September 30, 2012 when compared to the comparable period of 2011. This increase in interest income (FTE) is primarily driven by increases in our average portfolio loan balances, which have increased $208.9 million for the nine months ended September 30, 2012 as compared to the same period in 2011. The increases in average loans are due to the acquisitions of KeySource, Carolina Federal, Regent, and Blue Ridge, as well as organic growth in our footprint. Increases in average loans are offset by a 13 basis point decrease in average interest rates during the nine months ended September 30, 2012, as compared to the same period of 2011. Average portfolio loans, as a percentage of total interest-earning assets, increased slightly to 80.5% for the nine months ended September 30, 2012, as compared to the same period in 2011. Average investment securities increased $311,000 while the average yield on investment securities decreased 42 basis points for the nine months ended September 30, 2012 compared to the same period of 2011.

Total interest expense decreased $134,000 for the third quarter of 2012 when compared to the same quarter of 2011. While average time deposits have increased by $66.3 million for the quarter ended September 30, 2012 compared to the same quarter of prior year, the average rates paid on time deposits have decreased by 41 basis points over the same period. The decreases were associated with the repricing of our time deposits at lower interest rates. Our average demand deposits increased by $136.9 million, with rates paid on demand deposits increasing 3 basis points. Interest expense on borrowings decreased $79,000, with lower average outstanding balances being offset by an increase of 38 basis points in the average rate during the comparable periods.

Total interest expense for the nine months ended September 30, 2012 increased $190,000 when compared to the same period of 2011. Rates paid on time deposits decreased by 50 basis points, while average time deposits increased by $99.2 million. The decreases in rates were associated with the repricing of our time deposits at lower interest rates. Our average demand deposits increased by $109.7 million, with rates paid on demand deposits increasing 17 basis points. Interest expense on borrowings decreased modestly, with lower average outstanding balances being offset by an increase of 41 basis points in the average rate during the comparable periods.

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The following tables present the average balances of assets, liabilities and shareholders' equity, interest income (FTE) and interest expense, and average yields and rates by asset and liability component for the periods indicated (dollars in thousands):

                                         Three Months Ended                          Three Months Ended
                                         September 30, 2012                          September 30, 2011
                                 Average                      Average        Average                      Average
                                 balance       Interest        rate          balance       Interest        rate
Interest-earning assets:
Loans and leases               $ 1,778,937     $  24,076          5.38 %   $ 1,544,516     $  21,142          5.43 %
Loans held for sale                 26,187           174          2.64 %         3,194            34          4.22 %
Investment securities,
taxable                            102,924         1,097          4.24 %       115,392         1,389          4.78 %
Investment securities,
tax-exempt*                        233,429         3,749          6.39 %       219,317         3,867          7.00 %
Interest-earning balances
and other                           95,331            67          0.28 %        31,375            25          0.32 %
Total interest-earning
assets                           2,236,808        29,163          5.19 %     1,913,794        26,457          5.48 %
Other assets                       286,479                                     265,426
Total assets                   $ 2,523,287                                 $ 2,179,220
Interest-bearing
liabilities:
Demand deposits                $   933,437         3,486          1.49 %   $   796,581         2,926          1.46 %
Savings deposits                    57,856            76          0.52 %        35,955            41          0.45 %
Time deposits                      955,657         3,711          1.54 %       889,363         4,361          1.95 %
Borrowings                         123,325           790          2.55 %       159,213           869          2.17 %
Total interest-bearing
liabilities                      2,070,275         8,063          1.55 %     1,881,112         8,197          1.73 %
Non-interest-bearing
deposits                           194,006                                     129,390
Other liabilities                   17,965                                       9,792
Shareholders' equity               241,041                                     158,926
Total liabilities and
shareholder's equity           $ 2,523,287                                 $ 2,179,220
Net interest income and
interest rate spread*                          $  21,100          3.64 %                   $  18,260          3.76 %
Net interest margin*                                              3.75 %                                      3.79 %

* Yields on tax-exempt investments have been adjusted to a fully taxable-equivalent basis. The taxable-equivalent adjustment was $1.3 million and $1.4 million for the three months ended September 30, 2012 and 2011, respectively.

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                                          Nine Months Ended                           Nine Months Ended
                                         September 30, 2012                          September 30, 2011
                                 Average                      Average        Average                      Average
                                 balance       Interest        rate          balance       Interest        rate
Interest-earning assets:
Loans and leases               $ 1,738,084     $  69,924          5.37 %   $ 1,529,233     $  62,932          5.50 %
Loans held for sale                 20,286           448          2.95 %         2,507            76          4.05 %
Investment securities,
taxable                            111,571         3,622          4.34 %       119,685         4,353          4.86 %
Investment securities,
tax-exempt*                        225,625        11,332          6.71 %       217,200        11,636          7.16 %
Interest-earning balances
and other                           64,715           158          0.33 %        32,545            86          0.35 %
Total interest-earning
assets                           2,160,281        85,484          5.29 %     1,901,170        79,083          5.56 %
Other assets                       296,697                                     257,072
Total assets                   $ 2,456,978                                 $ 2,158,242
Interest-bearing
liabilities:
Demand deposits                $   912,738        10,533          1.54 %   $   803,052         8,234          1.37 %
Savings deposits                    47,708           172          0.48 %        36,012           117          0.43 %
Time deposits                      986,168        11,573          1.57 %       886,941        13,718          2.07 %
Borrowings                         123,624         2,494          2.69 %       147,058         2,513          2.28 %
Total interest-bearing
liabilities                      2,070,238        24,772          1.60 %     1,873,063        24,582          1.75 %
Non-interest-bearing
deposits                           176,196                                     121,316
Other liabilities                   14,944                                       8,252
Shareholders' equity               195,600                                     155,611
Total liabilities and
shareholder's equity           $ 2,456,978                                 $ 2,158,242
Net interest income and
interest rate spread*                          $  60,712          3.69 %                   $  54,501          3.81 %
Net interest margin*                                              3.75 %                                      3.83 %

* Yields on tax-exempt investments have been adjusted to a fully taxable-equivalent basis. The taxable-equivalent adjustment was $4.2 million for the nine months ended September 30, 2012 and 2011, respectively.

The following table presents certain information regarding changes in our interest income (FTE) and interest expense for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to changes in interest rates and volume (dollars in thousands).

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                                        Three Months Ended                         Nine Months Ended
                                    September 30, 2012 vs. 2011               September 30, 2012 vs. 2011
                                    Increase (decrease) due to                 Increase (decrease) due to
                                Volume           Rate         Total        Volume          Rate        Total
Interest income:
Loans and leases              $    3,129       $    (195 )   $  2,934     $   8,031      $ (1,039 )   $  6,992
Loans held for sale                  199             (59 )        140           435           (63 )        372
Investment securities,
taxable                             (145 )          (147 )       (292 )        (427 )        (304 )       (731 )
Investment securities,
tax-exempt*                          228            (346 )       (118 )         197          (501 )       (304 )
Interest-earning balances
and other                             48              (6 )         42            78            (6 )         72
Total interest income              3,459            (753 )      2,706         8,314        (1,913 )      6,401

Interest expense:
Deposits:
Demand deposits                      498              62          560         1,204         1,095        2,299
Savings deposits                      27               8           35            40            15           55
Time deposits                        282            (932 )       (650 )       1,360        (3,505 )     (2,145 )
Borrowings                          (215 )           136          (79 )        (434 )         415          (19 )
Total interest expense               592            (726 )       (134 )       2,170        (1,980 )        190
Net interest income
increase (decrease)           $    2,867       $     (27 )   $  2,840     $   6,144      $     67     $  6,211

* Yields on tax-exempt investments have been adjusted to a fully taxable-equivalent basis.

Provision for Loan Losses

Provisions for loan losses are charged to income to bring the allowance for loan losses to a level deemed appropriate by management. In evaluating the allowance for loan losses, management considers factors that include growth, composition and industry diversification of the portfolio, historical loan loss experience, current delinquency levels, adverse situations that may affect a borrower's ability to repay, estimated value of any underlying collateral, prevailing economic conditions and other relevant factors.

We recorded a provision for loan losses of $3.7 million in the third quarter of 2012 compared to a provision for loan losses of $3.5 million in the third quarter of 2011. Of the $3.7 million in provision expense, $3.6 million related to legacy non-covered. The total covered loan provision totaled $447,000 for the third quarter of 2012, with $358,000 recorded through an FDIC indemnification asset.

For the nine months ended September 30, 2012, we recorded a provision for loan . . .

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