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FNBN > SEC Filings for FNBN > Form 10-Q on 6-May-2013All Recent SEC Filings

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Form 10-Q for FNB UNITED CORP.


6-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following presents management's discussion and analysis of the financial condition and results of operations of FNB. Certain reclassifications have been made to prior periods to place them on a basis comparable with the current period presentation. This discussion should be read in conjunction with the financial statements and related notes included elsewhere in this quarterly Report on Form 10-Q. Results of operations for the periods included in this review are not necessarily indicative of results to be obtained during any future period.
Important Note Regarding Forward-Looking Statements This quarterly Report on Form 10-Q contains statements that FNB believes are forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. These statements generally relate to FNB's financial condition, results of operations, plans, objectives, future performance or business. They usually can be identified by the use of forward-looking terminology, such as "believes," "expects," or "are expected to," "plans," "projects," "goals," "estimates," "may," "should," "could," "would," "intends to," "outlook" or "anticipates," or variations of these and similar words, or by discussions of strategies that involve risks and uncertainties. You should not place undue reliance on these statements, as they are subject to risks and uncertainties, including but not limited to, those described in this quarterly Report on Form 10-Q. When considering these forward-looking statements, you should keep in mind these risks and uncertainties, as well as any cautionary statements we may make. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information actually known to us at the time. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
Forward-looking statements contained in this quarterly Report on Form 10-Q are based on current expectations, estimates and projections about FNB's business, management's beliefs and assumptions made by management. These statements are not guarantees of FNB's future performance and involve certain risks, uncertainties and assumptions (called Future Factors), which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in the forward-looking statements. Future factors include, without limitation:
financial resources in the amount, at the times and on the terms required to support our future business;

changes in interest rates, spreads on earning assets and interest-bearing liabilities, the shape of the yield curve and interest rate sensitivity;

a prolonged period of low interest rates;

continued and increased credit losses and material changes in the quality of our loan portfolio;

continued decline in the value of our OREO;

increased competitive pressures in the banking industry or in FNB's markets;

less favorable general economic conditions, either nationally or regionally; resulting in, among other things, a reduced demand for credit or other services;

a slowdown in the housing markets, or an increase in interest rates, either of which may reduce demand for mortgages;

changes in trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve Board;

the outcome of legislation and regulation affecting the financial services industry, including FNB, including the effects resulting from the implementation of the Dodd-Frank Act;

our inability to obtain regulatory approval for the merger of Granite into CommunityOne in a timely manner or at all;

changes in accounting principles and standards;

adverse changes in financial performance or condition of FNB's borrowers, which could affect repayment of such borrowers' outstanding loans;

reducing costs and expenses;

increasing price and product/service competition by competitors;

rapid technological development and changes;

the effect of any mergers, acquisitions or other transactions to which we or our subsidiaries may from time to time be a party;

the inaccuracy of assumptions underlying the establishment of our ALL;

loss of one or more members of executive management;

disruptions in or manipulations of our operating systems due to, among other things, cybersecurity risks or otherwise; and

our success at managing the risks involved in the foregoing.

All forward-looking statements speak only as of the date on which such statements are made, and FNB undertakes no obligation to update any statement, to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.


Table of Contents

Financial highlights are presented in the accompanying table.

Selected Financial Data
(dollars in thousands, except per share data)           As of and for Three Months Ended
                                                     March 31, 2013          March 31, 2012
Income Statement Data
Net interest income                               $         15,173        $          15,180
Provision for loan losses                                      110                    3,067
Noninterest income                                           6,533                    3,826
Noninterest expense                                         24,339                   26,848
Loss from continuing operations, before income
taxes                                                       (2,743 )                (10,909 )
Loss from continuing operations, net of tax                 (4,596 )                (10,832 )
Loss from discontinued operations, net of tax                    -                      (27 )
Net loss                                                    (4,596 )                (10,859 )
Net loss to common shareholders                             (4,596 )                (10,859 )
Period End Balances
Assets                                            $      2,093,311        $       2,387,946
Loans held for sale (1)                                      5,012                    3,938
Loans held for investment (2)                            1,113,765                1,245,759
Allowance for loan losses (1)                               29,641                   39,759
Goodwill                                                     4,205                    4,205
Deposits                                                 1,856,161                2,120,081
Borrowings                                                 122,320                  123,400
Shareholders' equity                                        89,374                  117,974
Average Balances
Assets                                            $      2,107,869        $       2,392,183
Loans held for sale (1)                                      4,616                    5,774
Loans held for investment (2)                            1,142,731                1,218,575
Allowance for loan losses (1)                               29,770                   39,197
Goodwill                                                     4,205                    3,906
Deposits                                                 1,864,961                2,116,085
Borrowings                                                 123,902                  123,422
Shareholders' equity                                        96,566                  127,467
Per Common Share Data
Net loss per common share from continuing
operations - basic and diluted                    $          (0.21 )      $           (0.51 )
Net loss per common share from discontinued
operations - basic and diluted                                   -                        -
Net loss per common share - basic and diluted                (0.21 )                  (0.51 )
Book value (3)                                                4.12                     5.59
Tangible book value (3)                                       3.58                     5.02
Performance Ratios
Return on average assets                                     (0.87 )%                 (1.82 )%
Return on average tangible assets (3)                        (0.88 )                  (1.83 )
Return on average equity (4)                                (19.04 )                 (34.26 )


Table of Contents

Return on average tangible equity (3)                        (21.43 )               (37.81 )
Net interest margin (tax equivalent)                           3.20                   2.82
Core noninterest expense as a percentage of
average assets (3)                                             3.65                   3.06
Asset Quality Ratios
Allowance for loan losses to period end loans
held for investment (1)                                        2.66  %                3.19  %
Nonperforming loans to period end allowance for
loan losses (1)                                              237.86                 264.71
Net annualized charge-offs (recoveries) to
average loans held for investment                             (0.07 )                 0.87
Nonperforming loans to total loans (5)                         6.31                   8.43
Nonperforming assets to total assets (5)                       5.59                   8.78
Capital and Liquidity Ratios
Average equity to average assets                               4.58  %                5.33  %
Leverage capital                                               5.41                   6.22
Tier 1 risk-based capital                                      9.20                  10.53
Total risk-based capital                                      12.49                  12.93
Average loans to average deposits                             61.52                  57.59
Average loans to average deposits and
borrowings                                                    57.69                  54.41

(1) Excludes discontinued operations.
(2) Loans held for investment, net of unearned income, before allowance for loan losses.
(3) Refer to the "Non-GAAP Measures" section in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
(4) Net loss to common shareholders, which excludes preferred stock dividends, divided by average realized common equity which excludes accumulated other comprehensive loss.
(5) Nonperforming loans and nonperforming assets include loans past due 90 days or more that are still accruing interest.


Overview
FNB United Corp., we or us (which also refers to FNB and our subsidiaries on a consolidated basis) ("FNB"), is a bank holding company incorporated in 1984 under the laws of the State of North Carolina. We operate two bank subsidiaries:
CommunityOne Bank, N.A. ("CommunityOne"), a national banking association headquartered in Asheboro, North Carolina and, through Bank of Granite Corporation ("Granite Corp."), Bank of Granite ("Granite"), a state chartered bank headquartered in Granite Falls, North Carolina. On March 1, 2013, we filed an application to merge Granite into CommunityOne. Subject to regulatory approval, we expect to complete the bank merger in the second quarter of 2013. Through our bank subsidiaries, we offer a complete line of consumer, wealth management, mortgage and business banking services, including loan, deposit, cash management, investment management and trust services, to individual and business customers through operations located throughout central, southern and western North Carolina, including the counties of Alamance, Alexander, Ashe, Burke, Caldwell, Catawba, Chatham, Gaston, Guilford, Iredell, Mecklenburg, Montgomery, Moore, Orange, Randolph, Richmond, Rowan, Scotland, Watauga and Wilkes. Management believes that the banks have a relatively stable deposit base and no material amount of deposits is obtained from a single depositor or group of depositors, including federal, state and local governments.
CommunityOne owns two subsidiaries: Dover Mortgage Company ("Dover") and First National Investor Services, Inc. Dover previously engaged in the business of originating, underwriting and closing mortgage loans for sale in the secondary market. Dover ceased operations in the first quarter of 2011 and filed for Chapter 11 bankruptcy on February 15, 2012. First National Investor Services, Inc. holds deeds of trust for CommunityOne. Through Granite Corp., we also own Granite Mortgage, Inc., which ceased mortgage operations in 2009 and filed for Chapter 11 bankruptcy on February 15, 2012. FNB also owns FNB United Statutory Trust I, FNB United Statutory Trust II, and Catawba Valley Capital Trust II, which were formed to facilitate the issuance of trust preferred securities. On October 21, 2011, as part of the recapitalization of FNB, FNB acquired Granite Corp., through the merger of a wholly owned subsidiary of FNB merging into Granite Corp. (the "Merger"). The Merger was part of FNB's recapitalization strategy.
We earn revenue primarily from interest on loans and securities investments, mortgage banking income and fees charged for financial services provided to our customers. Offsetting these revenues are the cost of deposits and other funding sources, provision for loan losses and write-downs in the value, gains and losses on disposition and holding costs associated with our OREO, and other operating costs such as: salaries and employee benefits, occupancy, data processing expenses, merger related expenses and tax expense. Goals for 2013
During the first quarter we made significant progress towards successfully completing our four key 2013 objectives: (1) complete the merger of CommunityOne and Granite during the second quarter of 2013, (2) continue to reduce problem asset levels and improve asset quality, (3) return the company to profitability in the second half of 2013, and (4) continue efforts to restore FNB and its subsidiaries to a satisfactory condition.
On March 1, 2013, we filed an application with the OCC to merge Granite into CommunityOne. Subject to regulatory approval, we expect to complete the merger during the second quarter of 2013. Merger of the two banks will enable us to consolidate overlapping branches and ATM networks, complete the consolidation of operational functions, implement the CommunityOne product set at Granite, and complete the merger-related expense generating activities, all of which we expect to deliver expense synergies in the third quarter of 2013. The bank merger also will allow us to better serve customers throughout our footprint. During the first quarter of 2013, we recorded $1.5 million of merger related expenses.
We continue to focus significant resources on the resolution of nonperforming assets in order to further reduce the level of these assets, and consequently asset quality continued to significantly improve during the first quarter. Non-performing loans declined 11.2%, or $8.9 million. OREO declined 26.3%, or $16.6 million. In total, for the first quarter, non-performing assets were reduced by $25.5 million, while we recorded $0.2 million in net loan recoveries, $0.2 million in net OREO losses and recorded a $0.1 million provision for loan losses.
We also continued to make progress toward returning the Company to profitability in the second half of 2013. Our pre-tax net loss of $2.7 million was the lowest quarterly loss for the company since the second quarter of 2009. Net interest margin increased to 3.20% in the first quarter from 2.96% in the fourth quarter of 2012, as we deployed excess cash positions into the securities portfolio and increased the yield on the portfolio to 2.21% from 1.99% in the fourth quarter of 2012. The cost of deposits fell 10 basis points during the quarter to 0.57%, from 0.67% the previous quarter, as a result of down-pricing and relationship focus strategies. After the completion of the merger of the banks in the second quarter of 2013, we expect to realize additional synergies associated with branch, back office and vendor consolidation.


We also continued our progress to restore FNB and its subsidiaries to a satisfactory condition. In this connection, the FDIC and North Carolina Office of the Commissioner of Banks terminated the August 17, 2009 Cease and Desist Order they had issued against Granite, effective February 27, 2013, and while Granite is continuing to adhere to regulatory requirements relating to, among other things, maintaining minimum capital levels, continuing reduction of classified assets, improving asset quality and enhancing bank operations that continue to warrant improvement, we believe that the regulators' action acknowledges the progress we are making in this regard. CommunityOne is expected to continue to adhere to the policies, procedures and processes it has put in place to comply with the Consent Order that CommunityOne entered into with the Office of the Comptroller of the Currency ("OCC") dated July 22, 2010 (the "CommunityOne Order"); it is our expectation that the bank merger will facilitate that compliance by, among other things, increasing CommunityOne's capital and earnings capacity and reducing operational risk through consolidation of operations, functions and processes.

Results of Operations
Net Interest Income
Our principal source of revenue is net interest income. Net interest income is the difference between interest income earned on interest-earning assets, primarily loans and investment securities, and interest expense paid on interest-bearing deposits and other interest-bearing liabilities. This measure represents the largest component of income for FNB. The net interest margin measures how effectively we manage the difference between the interest income earned on interest-earning assets and the interest expense paid for funds to support those assets. Changes in interest rates earned on interest-earning assets and interest rates paid on interest-bearing liabilities, the rate of growth of the interest-earning assets and interest-bearing liabilities base, the ratio of interest-earning assets to interest-bearing liabilities, and the management of interest rate sensitivity factor into fluctuations within net interest income. An analysis is presented in the Average Balances and Net Interest Income Analysis for the three month periods ended March 31, 2013 and 2012.
Net interest income on a taxable equivalent basis was $15.2 million for the three month period ended March 31, 2013 essentially unchanged from $15.2 million for the same period in 2012. Decreases in interest income as a result of a reduced earning asset base have been offset by decreases in the amount of earning assets represented by low yielding cash invested at low interest rates and decreases in interest-bearing liability levels, improvements in the level of low cost core deposits and rates paid on those liabilities.
Net interest margin (taxable equivalent) improved 38 basis points from 2.82% in the first quarter of 2012 to 3.20% in the first quarter of 2013. The increase was attributable primarily to management's strategy to shift the mix of deposits to lower rate demand, savings and money market deposits. The yield on average earning assets increased by 9 basis points during the first quarter of 2013 to 3.80% from 3.71% in the first quarter of 2012. The increase in average yield was the result of the deployment of excess liquidity out of low yielding balances held at the Federal Reserve into primarily the investment securities portfolio, offset by declines in loan and investment securities portfolio yields. The cost of interest-bearing liabilities declined during the first quarter of 2013 by 29 basis points to 0.68% compared to 0.97% in the first quarter of 2012, primarily as a result of the deposit mix shift, declines in interest rates on all deposit products, and the impact of the accretion of fair value marks at Granite. Importantly, the cost of interest-bearing deposits declined 34 basis points, or 37%, from 0.91% for the first quarter of 2012 to 0.57% for the first quarter of 2013.
The following table summarizes the average balance sheets and net interest income/margin analysis for the three months ended March 31, 2013 and 2012. FNB's interest yield earned on interest-earning assets and interest rate paid on interest-bearing liabilities shown in the table are derived by dividing interest income and expense by the average balances of interest-earning assets or interest-bearing liabilities, respectively.


Table of Contents

Average Balances and Net Interest Income Analysis - First Quarter

                                                            Three Months Ended March 31,
                                                   2013                                      2012
                                                                 Average                                   Average
(dollars in thousands)               Average        Income /     Yield /       Average        Income /     Yield /
                                   Balance (3)       Expense       Rate      Balance (3)       Expense       Rate
Interest-earning assets:
Loans (1)(2)                      $  1,147,347     $  14,833       5.24 %   $  1,224,349     $  17,006       5.59 %
Taxable investment securities          565,225         3,073       2.20          437,861         2,684       2.47
Other earning assets                   218,758           212       0.39          507,754           350       0.28
Assets of discontinued operations            -             -          -              115             -          -
 Total earning assets                1,931,330        18,118       3.80        2,170,079        20,040       3.71

Noninterest-earning assets:
Cash and due from banks                 31,533                                    32,172
Goodwill and core deposit premium       10,798                                    11,960
Other assets, net                      134,208                                   177,944
Assets of discontinued operations            -                                        28
 Total assets                     $  2,107,869                              $  2,392,183

Interest-bearing liabilities:
Interest-bearing demand deposits  $    356,586     $     256       0.29 %   $    347,932     $     386       0.45 %
Savings deposits                        76,822            19       0.10           69,997            26       0.15
Money market deposits                  457,190           246       0.22          433,498           496       0.46
Time deposits                          719,891         1,726       0.97        1,024,156         3,315       1.30
 Total interest-bearing deposits     1,610,489         2,247       0.57        1,875,583         4,223       0.91
Retail repurchase agreements             8,876             4       0.18            8,354             8       0.39
Federal Home Loan Bank advances         58,324           382       2.66           58,366           279       1.92
Other borrowed funds                    56,702           264       1.89           56,702           303       2.15
 Total interest-bearing
liabilities                          1,734,391         2,897       0.68        1,999,005         4,813       0.97

Noninterest-bearing liabilities
and shareholders' equity:
Noninterest-bearing demand
deposits                               254,472                                   240,502
Other liabilities                       22,440                                    24,675
Shareholders' equity                    96,566                                   127,467
Liabilities of discontinued
operations                                   -                                       534
 Total liabilities and
shareholders' equity              $  2,107,869                              $  2,392,183

Net interest income and net yield
on earning assets (4)                              $  15,221       3.20 %                    $  15,227       2.82 %

Interest rate spread (5)                                           3.12 %                                    2.74 %

(1) The fully tax equivalent basis is computed using a federal tax rate of 35%.
(2) Average loan balances include nonaccruing loans and loans held for sale.
(3) Average balances include market adjustments to fair value for securities and loans 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.


Table of Contents

Provision for Loan Losses
The provision for loan loss provides a level of allowance considered appropriate to absorb management's estimate of losses inherent in the loan portfolio. The amount of this charge is affected by several considerations, including management's evaluation of various risk factors in determining the adequacy of the allowance (see additional discussion under "Asset Quality"), actual loan loss experience and changes in the loan portfolio.

During the three month period ended March 31, 2013, the provision for loan losses, excluding discontinued operations, was $110 thousand, compared to $3.1 million in the same period of 2012, as a result of reductions in nonperforming loans and reductions in the levels of commercial real estate loans within the loan portfolio. For the same reasons, FNB has experienced lower net charge-offs and improved classified asset and past due levels compared to 2012. During the three months ended March 31, 2013, recoveries exceeded charge-offs by $0.2 million, or (0.07)% of annualized average loans, improved from net charge-offs of $2.6 million, or 0.87% of annualized average loans, for the same period in 2012.

Noninterest Income

Noninterest income includes mortgage banking income, fees and service charges on deposit accounts, fees from cardholder and merchant services, fees and commissions related to trust and investment services, gains and losses on the sales of securities, and all other types of noninterest revenue.

For the three months ended March 31, 2013, noninterest income was $6.5 million compared to $3.8 million for the same period in 2012, an increase of $2.7 million or 71%, primarily the result of $2.4 million of gains on sales of investment securities in the first quarter of 2013, compared to a $46 thousand loss in the same period in 2012. Core noninterest income, which excludes securities gains and losses and other nonrecurring revenue, was $4.2 million, an increase of $0.3 million from the first quarter of 2012. Mortgage loan income increased $0.7 million as FNB began selling loans to Fannie Mae in June of 2012. Service charge income was $0.4 million lower as compared to the first quarter of 2012 primarily as a result of a one-time 60 day waiver given to customers at CommunityOne as part of the product conversion completed in February of 2013, and the impact of changes to NSF policies and overdraft protection products beginning in the second half of 2012.

                                                      Three months ended
(dollars in thousands)                         March 31, 2013     March 31, 2012
Noninterest Income
  Service charges on deposit accounts         $     1,376        $       1,816
  Mortgage loan income                                744                   36
. . .
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