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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 0-26290
BNCCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 45-0402816
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
322 East Main 58501
Bismarck, North Dakota (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (701) 250-3040
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant at March 15, 2000 was $10,626,000.
The number of shares of the Registrant's common stock outstanding on March
15, 2000 was 2,399,980.
Documents incorporated by reference. Portions of the Registrant's proxy
statement to be filed with the Securities and Exchange Commission in connection
with the Registrant's 2000 annual meeting of stockholders are incorporated by
reference into Part III hereof.
BNCCORP, INC.
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
Page
PART I
Item 1. Business......................................................... 3
Item 2. Properties....................................................... 9
Item 3. Legal Proceedings................................................ 9
Item 4. Submission of Matters to a Vote of Security Holders.............. 10
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters....................................................... 10
Item 6. Selected Financial Data.......................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................... 12
Item 7a.Quantitative and Qualitative Disclosures about Market Risk....... 33
Item 8. Financial Statements and Supplementary Data...................... 37
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure............................................. 76
PART III
Item 10 Directors and Executive Officers of the Registrant............... 76
Item 11.Executive Compensation........................................... 76
Item 12.Security Ownership of Certain Beneficial Owners and Management... 76
Item 13.Certain Relationships and Related Transactions................... 76
PART IV
Item 14.Exhibits, Financial Statement Schedules and Reports on Form 8-K.. 76
PART I
Item 1. Business
General
BNCCORP, Inc. ("BNCCORP"), a Delaware corporation, is a multibank holding
company registered under the Bank Holding Company Act of 1956 (the "BHCA")
headquartered in Bismarck, North Dakota. BNCCORP (together with its consolidated
subsidiaries, "BNC" or the "Company") provides a broad range of banking and
financial services to small and mid-size businesses, private banking clients and
consumers through its 17 facilities in North Dakota and Minnesota. BNCCORP
operates primarily through its two commercial banking subsidiaries, BNC National
Bank (together with its wholly-owned subsidiaries, BNC Insurance, Inc. and BNC
Asset Management, Inc., "BNC--North Dakota"), which is headquartered in Bismarck
and has 15 additional offices in North Dakota, and BNC National Bank of
Minnesota ("BNC--Minnesota," together with BNC--North Dakota, the "Banks"),
which is located in Minneapolis, Minnesota. On December 31, 1999, the Company
sold its asset-based lending subsidiary, BNC Financial Corporation ("BNC
Financial"). See Note 2 to the Consolidated Financial Statements included under
Item 8 of Part II for further details related to the sale of BNC Financial.
Growth Strategy
BNCCORP was formed in 1987 with the objective of acquiring and improving the
performance of strategically located banks in North Dakota. Since that time, the
banking industry has undergone rapid change. Many non-bank competitors have
entered into the banking business. The proliferation of non-bank competitors has
resulted in the availability of a multitude of financial products and services.
Technological advances have improved delivery systems and given customers
immediate access to these products and services. To remain competitive in this
rapidly changing environment, BNCCORP has expanded its objectives. See
"--Products and Services." The Company is committed to moving into the future as
a full-service provider of financial services including traditional banking,
trust, asset management, brokerage, insurance, financial planning and other
services.
BNC aims to achieve its objectives through expanded product and service
offerings and an emphasis on customer service and local relationship banking
with small and mid-size businesses, private banking clients and consumers.
Management believes that the Company's entrepreneurial approach to banking and
the introduction of new products and services will continue to attract small and
mid-size businesses which often are not of sufficient size to be of interest to
the larger banks in its market areas. See "--Market Areas." Such businesses
frequently have difficulty finding banking services that meet their specific
needs and have sought, and management believes will continue to seek, banking
institutions that are more relationship-oriented.
Acquisitions have played an important role in BNC's growth strategy. The Company
has completed several bank and non-bank acquisitions. The largest of these
acquisitions was the Company's July 1995 acquisition of seven North Dakota
branches, with aggregate deposits of approximately $104.8 million, from First
Bank fsb. See Note 2 to the Consolidated Financial Statements included under
Item 8 of Part II for a summary of mergers and acquisitions consummated during
the three-year period ended December 31, 1999. Management believes that its
increased product and service offerings and acquisitions have generated
significant growth for the Company. BNC's total assets have increased from
$118.0 million at December 31, 1992 to $456.9 million at December 31, 1999. The
Company's goal continues to be the creation of a well-capitalized $500 million
to $1 billion financial services organization focused on local relationship
banking. Efforts are ongoing to ensure that the executive management team and
operating systems are in place to achieve this goal. The Company's management
team combines experienced, conscientious overseers of traditional banking
services with aggressive and innovative marketers and managers of diversified
financial services. BNC will continue to emphasize internally-generated growth.
The Company will also seek growth opportunities through acquisition of financial
services companies or de novo branching in North and South Dakota, Minnesota
and, possibly, Iowa, Nebraska and Wisconsin. The Company expanded its growth
opportunities by opening a branch in Fargo, North Dakota during February 1999.
Segments
The Company has provided disclosure of financial and descriptive information
about reportable operating segments, including revenues from external customers,
a measure of profit or loss and total assets for each of the last three fiscal
years in Note 20 to the Consolidated Financial Statements included under Item 8
of Part II.
Market Areas
BNC's primary market areas are the Bismarck/Mandan and Fargo (North Dakota)
metropolitan areas, the Minneapolis/St.Paul (Minnesota) metropolitan area and
the rural communities surrounding the branch offices of BNC--North Dakota
(Crosby, Ellendale, Garrison, Kenmare, Linton, Stanley and Watford City, North
Dakota). During 1999, BNC--Minnesota continued to generate loan growth in the
Minnesota market area. BNC--North Dakota's Fargo branch also contributed to the
Company's loan growth. As of December 31, 1999, 46 percent of the Company's
loans were to borrowers located in North Dakota and 43 percent were to borrowers
located in Minnesota. The remaining 11 percent represents loans to borrowers in
other states. Other than brokered certificates of deposit and direct
non-brokered certificates of deposit obtained through national deposit networks,
each banking branch draws most of its deposits from its general market area. The
following table presents total deposits and loans originated by segment and at
each of BNC's geographic locations:
December 31, 1999
-----------------------
Year
Opened
or Total Loans
Location Acquired Deposits Originated
----------------------------- ---------- ---------- ----------
(in thousands)
BNC--North Dakota...........
Bismarck................. 1990 $ 125,924 $ 124,852
Crosby................... 1995 18,702 191
Ellendale................ 1995 9,901 758
Fargo.................... 1999 7,939 8,541
Garrison................. 1995 14,292 292
Kenmare.................. 1995 15,900 180
Linton................... 1987 47,379 9,699
Stanley.................. 1995 14,597 502
Watford City............. 1995 11,306 115
BNC--Minnesota.............. 1996 58,771 117,124
BNCCORP (parent company)... 1987 -- 16
---------- ----------
Total ................ $ 324,711 $ 262,270
========== ==========
Products and Services
Loans. The Company's loans, generated by both the North Dakota and Minnesota
segments, primarily consist of commercial and industrial loans, real estate
mortgage loans, real estate construction loans, agricultural loans, consumer
loans and lease financing. In allocating its assets among loans, investments and
other earning assets, BNC attempts to maximize return while managing risk at
acceptable levels. BNC's primary lending focus is on commercial loans and
owner-occupied real estate loans to small and mid-size businesses and
professionals. The Company offers a broad range of commercial and retail lending
services, including commercial revolving lines of credit, residential and
commercial real estate mortgage loans, consumer loans and equipment financing.
For more information on the lending activities of the Company, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Financial Condition--Loan Portfolio" included under Item 7 of Part
II.
Interest rates charged on loans may be fixed or variable and vary with the
degree of risk, loan term, underwriting and servicing costs, loan amount and the
extent of other banking relationships maintained with customers. Rates are
further subject to competitive pressures, the current interest rate environment,
availability of funds and government regulations.
Deposits. Each of BNC's bank branches for both the North Dakota and Minnesota
segments offers the usual and customary range of depository products provided by
commercial banks, including checking, savings and money market deposits and
certificates of deposit. During 1999, the Company introduced its Wealthbuilder
NOW and money market deposit accounts into each of its markets. These are
floating rate accounts indexed to the three-month Treasury Bill. The accounts
have been well-received by the public and have enabled the Company to increase
core deposits significantly. Deposits are insured by the Federal Deposit
Insurance Corporation ("FDIC") up to statutory limits. The Banks also purchase
brokered deposits and obtain direct non-brokered certificates of deposit through
national deposit networks when such transactions are beneficial to the Banks.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Financial Condition--Deposits" included under Item 7 of Part II.
Trust and Financial Services. Since January 1997, BNC--North Dakota's Financial
Services Division has provided a wide array of trust and other financial
services. Such services include employee benefit and personal trust
administration services, financial, tax, business and estate planning, estate
administration, agency accounts, employee benefit plan design and
administration, individual retirement accounts ("IRAs"), including custodial
self-directed IRAs, asset management, tax preparation, accounting and payroll
services.
Brokerage Services. BNC--North Dakota's subsidiary, BNC Asset Management, Inc.,
with offices in Bismarck, North Dakota and Minneapolis, Minnesota, provides
access to trading, investment management of institutional and individual
accounts, company-sponsored mutual funds and investment banking.
Insurance Services. Insurance services are offered through BNC--North Dakota's
subsidiary, BNC Insurance, Inc. Such services include: personal insurance
products such as home, automobile and other vehicle insurance, liability, and
universal and mortgage life insurance; business insurance such as commercial
property and general liability, workers' compensation, business automobile and
excess liability coverage; bonds; life, health and annuities; farm and crop
insurance; and commercial trucking insurance. The broad base of products and
services offered by the Company provides opportunities to solidify customer
relationships by meeting more of the banking and financial needs of the
Company's current customer base. They also present opportunities to establish
new customer relationships in the markets served by BNC.
Distribution Methods
BNC offers its banking and financial products and services through traditional
industry distribution methods including its network of bank, branch and other
offices. In addition, the Company offers 24-hour telephone banking services
through its voice response system, BNC Bankline. The Company also provides cash
management services to its commercial customers through its Xpress Cash
Management system. This system allows customers to process funds transfers,
wires, automated clearing house (ACH) transactions, stop payments and account
history inquiries using their office computers and modems. During 1999,
BNC--North Dakota obtained regulatory approval to operate mobile branches in the
Bismarck and Fargo, North Dakota market areas. Once operational, these branches
are expected to be of great convenience to bank customers. The Company has also
established an internet web site which is currently being used to provide
corporate financial information, current investment news and stock prices. The
Company anticipates that it will begin offering full Internet banking during
2000 in order to provide online banking to customers at any time and from
anywhere.
Risk Management
The uncertainty of whether events, expected or otherwise, will have an adverse
impact on the Company's capital or earnings is an inevitable component of the
business of banking. To ensure that the risks inherent in BNC's business are
identified, measured, controlled and monitored, the Company has established a
management committee composed of senior management from across the organization
(the "Management Committee"). The Management Committee is responsible for
determining the desired risk profile of the Company, allocating resources to the
lines of business, approving major investment programs that are consistent with
strategic priorities and risk appetite and making capital management decisions
to appropriately fund the Company's portfolio of investments. The Management
Committee addresses each of the major risk categories identified by the banking
regulators, if applicable, as well as any additional identified risks inherent
in the Company's business. Such risks include, but are not limited to, credit,
liquidity, interest rate, transaction, compliance, strategic and reputation
risk. In each identified risk area, the Management Committee measures the level
of risk to the Company based on the business it conducts and develops plans to
bring risks within acceptable tolerances. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Financial
Condition--Loan Portfolio and --Liquidity, Market and Credit Risk" included
under Item 7 of Part II and Item 7a of Part II, "Quantitative and Qualitative
Disclosures About Market Risk," for further discussion of credit, liquidity and
interest rate risk.
Competition
The deregulation of the banking industry, the increasing number of state laws
that permit multi-bank holding companies and the increasing availability of
nationwide interstate banking have heightened the level of competition in an
already intensely competitive market. The North Dakota and Minnesota market
areas are highly competitive banking environments. Competition is encountered in
seeking deposits, obtaining loan customers and in providing all of the other
banking and financial products and services offered by BNC. Principal
competitors include multi-regional financial institutions such as Norwest
Corporation, U.S. Bancorp and Community First Bankshares, Inc. as well as large
and small thrifts, independent banks, credit unions and many national and
regional brokerage houses. BNC also competes with other non-bank financial
institutions, including retail stores that maintain their own credit programs
and government agencies that make low cost or guaranteed loans available to
certain borrowers. Some of these competitors have substantially greater
resources and lending limits than BNC, and may offer certain services that BNC
does not provide. In addition, some of the non-bank financial institutions that
compete with BNC are not subject to the extensive federal regulations that
govern BNC. Management believes that many competitors have emphasized retail
banking and financial services, leaving the small and mid-size business market
underserved. This has allowed BNC to compete effectively by emphasizing customer
service, establishing long-term customer relationships and providing services
meeting the needs of such businesses and the individuals associated with them.
The banking and financial services industries are highly competitive, and the
future profitability of the Company will depend on its ability to continue to
compete successfully in its market areas. See "Supervision and
Regulation--Recently Enacted Legislation."
Supervision and Regulation
General. BNCCORP and the Banks are extensively regulated under federal and state
laws and regulations. These laws and regulations are primarily intended to
protect depositors and the federal deposit insurance funds, not investors in the
securities of BNCCORP. The following information briefly summarizes certain
material statutes and regulations affecting BNCCORP and the Banks and is
qualified in its entirety by reference to the particular statutory and
regulatory provisions. Any change in applicable laws, regulations or regulatory
policies may have a material effect on the business, operations and prospects of
BNCCORP and the Banks. The Company is unable to predict the nature or extent of
the effects that fiscal or monetary policies, economic controls or new federal
or state legislation may have on its business and earnings in the future. See
"--Recently Enacted Legisation."
Primary Regulators. BNCCORP is a bank holding company registered under the BHCA,
and is subject to regulation, supervision and examination by the Board of
Governors of the Federal Reserve System ("FRB"). BNCCORP is required to file
periodic reports with the FRB and such other reports as the FRB may require
pursuant to the BHCA. The Banks are national banking associations and are
subject to supervision, regulation and examination by the Office of the
Comptroller of the Currency ("OCC"). Since the deposits of the Banks are insured
by the FDIC, the Banks are also subject to regulation and supervision by the
FDIC. Additionally, the Banks are members of the Federal Reserve System.
Acquisitions and Permissible Activities. As a registered bank holding company,
BNCCORP is restricted in its acquisitions, certain of which are subject to
approval by the FRB. A bank holding company may not acquire, or may be required
to give certain notice regarding acquisitions of, companies considered to engage
in activities other than those determined by the FRB to be closely related to
banking or managing banks.
Transactions with Affiliates. Under Section 23A of the Federal Reserve Act (the
"Act"), certain restrictions are placed on loans and other extensions of credit
by the Banks to BNCCORP who is defined as an "affiliate" of the Banks under the
Act. Section 23B of the Act places standards of fairness and reasonableness on
other of the Banks' transactions with their affiliates.
Anti-Tying Restrictions. Bank holding companies and their affiliates are
prohibited from tying the provision of certain services, such as extensions of
credit, to other services offered by a holding company or its affiliates.
Restrictions on Loans to One Borrower. Under federal law, permissible loans to
one borrower by banks are generally limited to 15 percent of the bank's
unimpaired capital, surplus, undivided profits and credit loss reserves. The
Banks seek participations to accommodate borrowers whose financing needs exceed
their lending limits.
Loans to Executive Officers, Directors and Principal Stockholders. Certain
limitations and reporting requirements are also placed on extensions of credit
by the Banks to principal stockholders of BNCCORP and to directors and certain
executive officers of the Banks (and BNCCORP and its nonbank subsidiaries
provided certain criteria are met) and to "related interests" of such principal
stockholders, directors and officers. In addition, any director or officer of
BNCCORP or the Banks or principal stockholder of BNCCORP may be limited in his
or her ability to obtain credit from financial institutions with which the Banks
maintain correspondent relationships.
Interstate Banking and Branching. Interstate banking and branching provisions of
federal and state laws may place certain limitations on expansion by bank
holding companies or banks.
Capital Adequacy. The capital adequacy of BNCCORP and the Banks is monitored by
the federal regulatory agencies using a combination of risk-based and leverage
ratios. Failure to meet the applicable capital guidelines could subject BNCCORP
or the Banks to supervisory or enforcement actions. In addition, BNCCORP could
be required to guarantee a capital restoration plan of one or more of its Banks,
should such Banks become "undercapitalized" under capital guidelines. See Note
11 to the Consolidated Financial Statements included under Item 8 of Part II for
further discussion regarding the capital status of BNCCORP and its subsidiaries.
Dividend Restrictions. Federal rules also limit a bank's ability to pay
dividends to its parent bank holding company in excess of certain amounts or if
the payment would result in the bank being considered "undercapitalized" under
capital guidelines.
Community Reinvestment Act. Under the Community Reinvestment Act ("CRA"), the
Banks are encouraged to respond to the credit and other needs of the communities
they serve. Bank performance under the CRA is periodically tested and the
federal bank regulatory agencies consider CRA ratings in connection with
acquisitions involving the change in control of a financial institution.
Deposit Insurance. FDIC-insured depository institutions that are members of the
FDIC's Bank Insurance Fund and Savings Association Insurance Fund pay insurance
premiums at rates based on their assessment risk classification, which is
determined in part based on the Bank's capital ratios and in part on factors
that the FDIC deems relevant to determine the risk of loss to the insurance
funds. The Banks also pay additional assessments that are used to pay certain
Financing Corporation obligations issued between 1987 and 1989 to resolve failed
savings and loan associations.
Cross-Guarantee. The Financial Institutions, Reform, Recovery and Enforcement
Act of 1989 provides for cross-guarantees of the liabilities of insured
depository institutions pursuant to which any bank subsidiary of a bank holding
company may be required to reimburse the FDIC for any loss or anticipated loss
to the FDIC that arises from a default of any of such holding company's other
subsidiary banks or assistance provided to such an institution in danger of
default.
Support of Banks. Bank holding companies are also subject to the "source of
strength doctrine" which requires such holding companies to serve as a source of
"financial and managerial" strength for their subsidiary banks.
Conservator and Receivership Powers. Federal banking regulators have broad
authority to place depository institutions into conservatorship or receivership
to include, among other things, appointment of the FDIC as conservator or
receiver of an undercapitalized institution under certain circumstances. If
either of the Banks was placed into conservatorship or receivership, because of
the cross-guarantee provisions of the Federal Deposit Insurance Act, as amended,
BNCCORP, as the sole stockholder of the Bank, would likely lose its investment
in the Bank.
Consumer Laws and Regulations. In addition to the laws and regulations discussed
herein, the Banks are also subject to certain consumer laws and regulations that
are designed to protect customers in transactions with banks. These include, but
are not limited to, the Truth in Lending Act, the Truth in Savings Act, the
Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal
Credit Opportunity Act and the Fair Housing Act. These laws mandate certain
disclosure requirements and regulate the manner in which financial institutions
must deal with customers when taking deposits or making loans to such customers.
Recently Enacted Legislation. In November 1999, President Clinton signed into
law the Gramm-Leach-Bliley Act, wide-reaching legislation which modernizes the
laws governing the financial services industry (the "Financial Modernization
Act"). This comprehensive legislative package contains provisions of benefit to
the banking industry, including language which expands the powers of banks and
bank holding companies to sell any financial product or service, closes the
unitary thrift loophole, reforms the Federal Home Loan Bank ("FHLB") System to
increase community banks' access to loan funding, protects banks from
discriminatory state insurance regulation and establishes a new framework for
the regulation of bank and bank holding company securities brokerage and
underwriting activities. The law also includes new provisions in the privacy
area, restricting the ability of financial institutions to share nonpublic
personal customer information with third parties.
The Company is in the process of reviewing the provisions of the Financial
Modernization Act as well as related implementing regulations as these
regulations are being released by the respective bank regulatory or other
federal agencies. A comprehensive action plan for implementing the new law and
regulations is in the process of being developed. This plan will include such
revisions to BNC's operations, policies and procedures as are deemed appropriate
to ensure compliance with the new legislation and its implementing regulations.
Changing Regulatory Structure. The FRB, OCC and FDIC have extensive authority to
police unsafe or unsound practices and violations of applicable laws and
regulations by depository institutions and their holding companies. The
agencies' authority has been expanded by federal legislation in recent years. In
addition, the North Dakota Department of Banking and Financial Institutions and
the Minnesota Department of Commerce possess significant authority to address
violations of their respective state's banking laws by banks operating in their
respective states by enforcement and other supervisory actions. Additionally,
under the Financial Modernization Act some bank and bank holding company
securities brokerage activities could become regulated by the Securities and
Exchange Commission.
As indicated above, the laws and regulations affecting banks and bank holding
companies have changed significantly in recent years, and there is reason to
expect that changes will continue in the future, although it is difficult to
predict the outcome of these changes.
Monetary Policy. The monetary policy of the FRB has a significant effect on the
operating results of bank holding companies and their subsidiaries. The FRB uses
the various means at its disposal to influence overall growth and distribution
of bank loans, investments and deposits and interest rates charged on loans or
paid on deposits. FRB monetary policies have materially affected the operations
of commercial banks in the past and are expected to continue to do so in the
future. The nature of future monetary policies and the effect of such policies
on the business and earnings of BNCCORP and its subsidiaries cannot be
predicted.
Employees
At December 31, 1999, BNC had 190 employees, including 179 full-time equivalent
employees. None of BNC's employees is covered by a collective bargaining
agreement and management believes that its relationship with its employees is
good.
Item 2. Properties
The principal offices of BNCCORP and BNC--North Dakota are located in BNC's main
office building at 322 East Main Avenue, Bismarck, North Dakota. The building is
owned by BNC--North Dakota. BNC--North Dakota also owns branch offices at 219
South 3rd Street and 807 East Century Avenue and an additional office building
at 116 North 4th Street in Bismarck. It also owns its banking facilities in
Linton, Crosby, Ellendale, Kenmare and Stanley, North Dakota as well as a
temporary facility located on its permanent site in Fargo, North Dakota. The
Company plans to complete construction of a permanent facility in Fargo by May
2000.
BNC--North Dakota's facilities at 100 West Main Street (Mandan), 500 North 9th
Street (Bismarck), Watford City and Garrison, North Dakota and the land at South
3rd Street (Bismarck) are leased. BNC-North Dakota is also leasing a facility at
4656 Amber Valley Parkway in Fargo, pending completion of its permanent facility
to be located at 3137 32nd Avenue SW. The facilities occupied by BNC--Minnesota
and BNC Asset Management, Inc. at 333 South Seventh Street, Minneapolis,
Minnesota are also leased.
All owned and leased properties are considered in good operating condition and,
except for the Fargo location, are believed adequate for the Company's present
and foreseeable future operations. BNC does not anticipate any difficulty in
leasing additional suitable space upon expiration of present lease terms. See
Note 16 to the Consolidated Financial Statements included under Item 8 of part
II for additional information concerning lease and other commitments and
construction of the Fargo facility.
Item 3. Legal Proceedings
The Company's material pending legal actions are discussed in Note 17 to the
Consolidated Financial Statements included under Item 8 of Part II and are
incorporated herein by reference.
The Company is currently not a party to any other material legal proceedings.
Periodically, and in the ordinary course of business, various claims and
lawsuits which are incidental to BNC's business may be brought against or by
BNC, such as claims to enforce liens, condemnation proceedings on properties in
which BNC holds security interests, claims involving the making and servicing of
real property loans and other issues incidental to the Company's business. In
the opinion of management, the resolution of these matters will not have a
material adverse effect on the Company's financial position or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the quarter ended
December 31, 1999.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
BNCCORP's common stock, $.01 par value ("Common Stock"), is traded on the Nasdaq
Stock Market under the symbol "BNCC".
The following table lists the high and low sales prices of the Common Stock for
the periods indicated as reported by the Nasdaq Stock Market. The quotes
represent "inter-dealer" prices without adjustment or mark-ups, mark-downs or
commissions and may not represent actual transactions.
January 1 - Current date For the Years Ended December 31,
------------------------ -----------------------------------
2000 1999 1998
------------------------ ---------------- -----------------
Period High Low High Low High Low
----------- ------------ ------- ------- ------- -------
First Quarter...... $ 7.25 $ 5.81 $ 11.25 $ 8.63 $ 20.50 $ 16.25
Second Quarter..... -- -- $ 9.38 $ 7.63 $ 23.25 $ 16.88
Third Quarter...... -- -- $ 9.00 $ 7.25 $ 19.00 $ 12.88
Fourth Quarter..... -- -- $ 8.25 $ 5.75 $ 13.00 $ 9.00
On March 15, 1999, there were 110 record holders and approximately 1,300
beneficial owners of the Company's Common Stock.
BNCCORP's policy is to retain its earnings to support the growth of its
business. The board of directors of BNCCORP has never declared cash dividends on
its Common Stock and does not plan to do so in the foreseeable future. The
ability of BNCCORP to pay cash dividends largely depends on the amount of cash
dividends paid to it by the Banks. Capital distributions, including dividends,
by the Banks are subject to federal regulatory restrictions tied to each
institution's earnings and capital. See "Supervision and Regulation--Dividend
Restrictions" included under Item 1 of Part I.
Item 6. Selected Financial Data
The selected consolidated financial data presented below under the captions
"Income Statement Data" and "Balance Sheet Data" as of and for the years ended
December 31, 1999, 1998, 1997, 1996 and 1995 are derived from the historical
audited consolidated financial statements of the Company. The Consolidated
Balance Sheets as of December 31, 1999, 1998, 1997 and 1996 and the related
Consolidated Statements of Income, Comprehensive Income, Stockholders' Equity
and Cash Flows for each of the five years in the period ended December 31, 1999
were audited by Arthur Andersen LLP, independent public accountants. The
financial data below should be read in conjunction with and are qualified by the
Consolidated Financial Statements and the notes thereto included under Item 8.
Selected Financial Data (1)
For the Years Ended December 31,
---------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- ---------
(dollars in thousands, except share data)
Income Statement Data:
Total interest income............ $ 28,931 $ 27,801 $ 25,232 $ 20,597 $ 15,289
-------- -------- -------- -------- ---------
Total interest expense........... 16,574 15,152 13,132 10,945 8,583
-------- -------- -------- -------- ---------
Net interest income.............. 12,357 12,649 12,100 9,652 6,706
Provision for credit losses...... 1,138 1,201 2,518 690 168
Noninterest income............... 6,068 4,843 3,928 3,622 3,397
Noninterest expense.............. 18,215 13,379 11,256 10,286 8,094
Income taxes (benefit)........... (399) 1,030 955 1,152 679
-------- -------- -------- --------- ---------
Income (loss) from continuing
operations.................... $ (529) $ 1,882 $ 1,299 $ 1,146 $ 1,162
======== ======== ======== ======== =========
Balance Sheet Data: (at end of
period)
Total assets..................... $456,877 $372,240 $345,630 $283,716 $241,014
Investments and federal funds
sold.......................... 154,492 96,601 94,624 66,391 97,366
Loans............................ 262,051 247,181 220,149 197,435 120,683
Allowance for credit losses...... (2,872) (2,854) (2,919) (1,545) (1,048)
Total deposits................... 324,711 284,499 262,824 239,770 211,048
Short-term borrowings............ 88,700 49,290 46,503 11,437 1,000
Long-term borrowings............. 14,470 9,195 8,285 5,937 3,354
Stockholders' equity............. 23,149 25,255 23,148 21,595 20,628
Book value per common share
outstanding................... $ 9.65(2) $ 10.57(3)$ 9.64(4) $ 8.99(4)$ 8.59(4)
Earnings Performance Data:
Return on average total assets... (.14)% .54% .42% .44% .59%
Return on average stockholders'
equity........................ (2.50)% 8.48% 6.16% 5.52% 8.25%
Net interest margin.............. 3.41% 3.88% 4.27% 4.05% 3.69%
Net interest spread.............. 3.09% 3.43% 3.82% 3.61% 3.26%
Basic earnings (loss) per common
share.........................$ (0.22) $0.79 $0.54 $0.48 $0.63
Diluted earnings (loss) per
common share..................$ (0.22) $0.75 $0.54 $0.48 $0.63
Balance Sheet and Other Key
Ratios:
Nonperforming assets to total
assets........................ 0.63% 1.21% .43% .16% .20%
Nonperforming loans to total
loans......................... 0.63% .97% .68% .15% .40%
Net loan charge-offs to average
loans......................... (.45)% (.54)% (.53)% (.11)% (.03)%
Allowance for credit losses to
total loans................... 1.10% 1.15% 1.33% .78% .87%
Allowance for credit losses
to nonperforming loans........ 273% 119% 195% 540% 218%
Average stockholders' equity to
average total assets.......... 5.41% 6.33% 6.89% 8.05% 7.11%
- -------------------------
(1) From continuing operations for all periods presented.
(2) Based on total common shares outstanding of 2,399,980.
(3) Based on total common shares outstanding of 2,390,184.
(4) Based on total common shares outstanding of 2,402,126
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company's financial performance in 1999 reflected the growing customer
acceptance of BNC's broadened financial services offerings as well as an
expanding deposit base, although the benefits of the deposit growth were more
than offset by changes in market interest rates. Net interest income for the
year ended December 31, 1999, was $12.4 million, as compared with $12.6 and
$12.1 million reported in the previous two years. Noninterest income, largely
from insurance commissions, loan fees and brokerage income, rose sharply to $6.1
million in 1999 from $4.8 and $3.9 million in 1998 and 1997, respectively, due
primarily to the dramatic growth of BNC's insurance and brokerage businesses.
1999 results reflected a one-time $438,000 gain on the sale of the Company's
former asset-based lending subsidiary, as well as $2.3 million in write-downs to
the value of certain nonperforming assets. The Company sold BNC Financial
effective December 31, 1999. The Company recorded 1999 net income of $242,000,
or $0.10 per share on a diluted basis, compared with net income of $2.3 million,
or $0.91 per share (diluted), for 1998 and net income of $1.4 million, or $0.59
per share (diluted), for 1997.
Performance highlights include:
*Deposits increased 14 percent during 1999, to $324.7 million; the growth
was driven by the introduction of the Wealthbuilder family of indexed NOW
and money market accounts and the opening of BNC-North Dakota's Fargo
branch.
*Loans and leases increased 6 percent, to $262.1 million due primarily to
loan growth in the Fargo and Minneapolis markets.
*Total assets increased 15 percent, to $456.9 million.
*Long-term debt was reduced by $24.5 million during the 4th quarter of
1999; the Company used proceeds from the sale of BNC Financial to pay down
long-term debt which had been incurred primarily for purposes of funding
BNC Financial's asset-based loan portfolio.
Results of Operations
Net Interest Income. Net interest income, the difference between total interest
income earned on earning assets and total interest expense paid on
interest-bearing liabilities, is the Company's principal source of earnings. The
amount of net interest income is affected by changes in the volume and mix of
earning assets, the level of rates earned on those assets, the volume and mix of
interest-bearing liabilities and the level of rates paid on those liabilities.
The following table sets forth, for the periods indicated, certain information
relating to BNC's average balance sheets and reflects the yield on average
assets and costs of average liabilities. Such yields and costs are derived by
dividing income and expense by the average balance of assets and liabilities.
All average balances have been derived from monthly averages which are
indicative of daily averages.
Analysis of Average Balances, Interest and Yields/Rates (1)
For the Years ended December 31,
--------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------ ------------------------------- -----------------------------
Interest Average Interest Average Interest Average
Average earned yield Average earned Yield Average earned yield
Balance or or Balance or or Balance or or
paid cost paid Cost paid cost
---------- --------- --------- ---------- ---------- --------- ---------- --------- --------
(dollars in thousands)
Assets
Federal funds sold....... $ 1,818 $ 90 4.95% $ 5,336 $ 289 5.42% $ 5,650 $ 306 5.42%
Taxable investments...... 105,145 6,372 6.06% 87,464 5,269 6.02% 64,803 4,158 6.42%
Tax-exempt investments... 7,788 386 4.96% 1,775 95 5.35% 1,112 71 6.38%
Loans (2)................ 250,158 22,083 8.83% 234,342 22,148 9.45% 214,053 20,697 9.67%
Allowance for credit
losses................ (2,890) -- (2,941) -- (2,205) --
---------- --------- ---------- ---------- ---------- ---------
Total interest-earning
assets (3)....... 362,019 28,931 7.99% 325,976 27,801 8.53% 283,413 25,232 8.90%
Noninterest-earning assets:
Cash and due from
banks.......... 7,704 6,733 6,074
Other.............. 22,584 17,728 16,726
---------- ---------- ----------
Total assets.. $ 392,307 $ 350,437 $ 306,213
========== ========== ==========
Liabilities and Stockholders'
Equity
Deposits:
NOW and money market
accounts......... $ 91,671 3,632 3.96% $ 63,115 2,128 3.37% $ 50,582 1,580 3.12%
Savings............. 6,294 129 2.05% 8,717 197 2.26% 8.904 206 2.31%
Certificates of deposit:
Under $100,000...... 125,470 6,469 5.16% 130,759 7,332 5.61% 127,092 7,110 5.59%
$100,000 and over... 43,140 2,307 5.35% 36,704 2,152 5.86% 41,581 2,386 5.74%
---------- --------- ---------- ---------- ---------- ---------
Total interest-bearing
deposits.............. 266,575 12,537 4.70% 239,295 11,809 4.93% 228,159 11,282 4.94%
Short-term borrowings:
Securities and loans
sold under
agreements to
repurchase and
federal funds
purchased........ 21,685 1,129 5.21% 6,745 348 5.16% 7,262 413 5.69%
FHLB notes payable. 40,308 2,174 5.39% 42,831 2,346 5.48% 15,468 881 5.70%
Long-term borrowings..... 9,872 734 7.44% 8,290 649 7.83% 7,599 556 7.32%
---------- --------- ---------- ---------- ---------- ---------
Total interest-
bearing
liabilities.... 338,440 16,574 4.90% 297,161 15,152 5.10% 258,488 13,132 5.08%
Noninterest-bearing demand
accounts................... 27,094 24,827 20,357
---------- ---------- ----------
Total deposits and
interest-bearing
liabilities........... 365,534 321,988 278,845
Other noninterest-bearing
liabilities................ 5,567 6,264 6,262
---------- ---------- ----------
Total liabilities....... 371,101 328,252 285,107
Stockholders' equity.......... 21,206 22,185 21,106
---------- ---------- ----------
Total liabilities and
stockholders'
equity............... $ 392,307 $ 350,437 $ 306,213
========== ========== ==========
Net interest income.......... $ 12,357 $ 12,649 $ 12,100
========= ========= =========
Net interest spread........... 3.09% 3.43% 3.82%
======== ======== ========
Net interest margin........... 3.41% 3.88% 4.27%
======== ======== ========
Ratio of average
interest-earning assets
to average interest-
bearing liabilities...... 106.97% 109.70% 109.64%
=========== ========== ==========
--------------------
(1) From continuing operations for all periods presented.
(2) Interest income does not include loan origination fees other than those
amortized and included as an adjustment to loan yield as required under
Statement of Financial Accounting Standards No. 91, "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring
Loans and Initial Direct Costs of Leases." Average nonaccrual loans are
included in average loans outstanding.
(3) Yields do not include adjustments for tax-exempt interest because such
interest is not material.
The following table illustrates, for the periods indicated, the dollar amount of
changes in BNC's interest income and interest expense for the major components
of interest-earning assets and interest-bearing liabilities and distinguishes
between the increase related to higher outstanding balances and the volatility
of interest rates. Changes in net interest income due to both volume and rate
have been included in the changes due to rate:
Analysis of Changes in Net Interest Income (1)
For the Years Ended December 31,
----------------------------------------------
1999 Compared to 1998 1998 Compared to 1997
--------------------- ------------------------
Change Due to Change Due to
---------------- ----------------
Volume Rate Total Volume Rate Total
------- ------- ------ ------- ------ -------
(in thousands)
Interest-Earning Assets
Federal funds sold....................$ (190) $ (9) $ (199)$ (17)$ -- $ (17)
Investments........................... 1,424 (30) 1,394 1,496 (361) 1,135
Loans................................. 1,495 (1,560) (65) 1,962 (511) 1,451
------- ------- ------ ------- ------ -------
Total increase (decrease) in
interest income................. 2,729 (1,599) 1,130 3,441 (872) 2,569
------- ------- ------ ------- ------ -------
Interest-Bearing Liabilities
NOW and money market accounts......... 962 542 1,504 392 156 548
Savings............................... (55) (13) (68) (4) (5) (9)
Certificates of Deposit:
Under $100,000..................... (297) (566) (863) 206 16 222
$100,000 and over.................. 377 (222) 155 (280) 46 (234)
Short-term borrowings:
Securities and loans sold under
agreements to repurchase and
federal funds purchased......... 771 10 781 (29) (36) (65)
FHLB notes payable................. (138) (34) (172) 1,558 (93) 1,465
Long-term borrowings.................. 124 (39) 85 50 43 93
------- ------- ------ ------- ------ -------
Total increase (decrease) in
interest expense.............. 1,744 (322) 1,422 1,893 127 2,020
======= ======= ====== ======= ====== =======
Increase (decrease) in net
interest income................ $ 985 $(1,277)$ (292)$1,548 $ (999)$ 549
======= ======= ====== ======= ====== =======
- ----------------------
(1) From continuing operations for all periods presented.
Year ended December 31, 1999 compared to year ended December 31, 1998. Net
interest income decreased $292,000, or 2.3 percent, to $12.4 million as compared
to $12.6 million. Net interest spread and net interest margin declined to 3.09
and 3.41 percent, respectively. The following condensed information summarizes
the major factors combining to create the changes to net interest income, spread
and margin. Lettered explanations following the summary describe causes of the
changes in these major factors.
Net Interest Income Analysis (1)
For the Years
Ended December Change
31,
------------------ ----------------
1999 1998
------- ---------
(amounts in
millions)
Total interest income increased............. $ 28.9 $ 27.8 $ 1.1 4%
Due to:
Increase in average earning assets...... $ 362.0 $ 326.0 $ 36.0 11%
Driven by:
Increase in average loans (a)........... $ 250.2 $ 234.3 $ 15.9 7%
Increase in average investments (b). $ 112.9 $ 89.2 $ 23.7 27%
The increases in average earning assets
volume were offset by:
Decreased yield on earning assets....... 7.99% 8.53% -0.54% -6%
Driven by:
Decreased yield on loans (c)............ 8.83% 9.45% -0.62% -7%
Mix change in earning asset portfolio--
Average loans as a percent of total
interest-earning assets ........... 69% 72% -3.0% -4%
Total interest expense increased............ $ 16.6 $ 15.2 $ 1.4 9%
Due to:
Increase in average interest-bearing
liabilities.......................... $ 338.4 $ 297.2 $ 41.2 14%
Driven by:
Increase in average interest-bearing
deposits (d)......................... $ 266.6 $ 239.3 $ 27.3 11%
Increase in average borrowings (e)...... $ 71.9 $ 57.9 $ 14.0 24%
These increases were somewhat offset by:
Decrease in cost of interest-bearing
deposits (f)......................... 4.70% 4.93% -0.23% -5%
Decrease in cost of borrowings (g)...... 5.62% 5.78% -0.16% -3%
- --------------------
(1) From continuing operations for all periods presented.
(a) Loan growth primarily attributable to increases in loans originated at
BNC-Minnesota and BNC-North Dakota's Fargo location.
(b) The Company has increased its investment securities holdings primarily
through FHLB borrowings.
(c) The decreased loan yield is reflective of the 75 basis point decline in the
prime rate late in 1998 as well as a decrease in loan pricing spread to prime
rate due to competitive pressures in all markets.
(d) Deposit growth primarily attributable to the introduction of the
Wealthbuilder NOW and money market accounts.
(e) Increased FHLB borrowings for the purpose of purchasing investment
securities.
(f) Reduced costs on certificates of deposit ("CDs") caused by the overall
decreased rate environment and related lower CD renewal and offering rates.
These rate reductions were somewhat offset by increased costs in the NOW and
money market deposit category (related to the Wealthbuilder accounts).
(g) Rates are reflective of the overall decreased rate environment.
Net interest income and margin in future periods are expected to be impacted by
several factors. Recent increases in the prime rate will improve interest
income and yields on loans. Additionally, the Company has increased its earning
asset portfolio by purchasing investment securities funded primarily through
FHLB borrowings. While the additional investments will increase interest
income, net interest income and earnings, they can be expected to negatively
impact yield on earning assets and net interest margin because yields on such
investments are typically lower than those achieved in the loan portfolio.
Many factors, including, but not limited to, the competitive environment in the
markets in which the Company operates, the multitude of financial and investment
products available to the public and the monetary policies of the FRB, can
materially impact the Company's operating results. Therefore, management cannot
predict, with any degree of certainty, prospects for net interest income in
future periods. See "Supervision and Regulation Monetary Policy" included under
Item 1 of Part I. See also Item 7a, "Quantitative and Qualitative Disclosures
About Market Risk," for information relating to the impact of fluctuating
interest rates on the Company's net interest income.
Year ended December 31, 1998 compared to year ended December 31, 1997. Net
interest income increased $549,000, or 5 percent, to $12.6 million as compared
to $12.1 million. Net interest spread and net interest margin declined to 3.43
and 3.88 percent, respectively. The following condensed information summarizes
the major factors combining to create the changes to net interest income, spread
and margin. Lettered explanations following the summary describe causes of the
changes in these major factors:
Net Interest Income Analysis (1)
For the Years
Ended December 31, Change
------------------ ----------------
1998 1997
------- ---------
(amounts in
millions)
Total interest income increased............. $ 27.8 $ 25.2 $ 2.6 10%
Due to:
Increase in average earning assets...... $326.0 $ 283.4 $ 42.6 15%
Driven by:
Increase in average loans (a)........... $234.3 $ 214.1 $ 20.2 9%
Increase in average taxable
investments (b).................. $ 87.5 $ 64.8 $ 22.7 35%
The increases in average earning assets
volume were offset by:
Decreased yield on earning assets....... 8.53% 8.90% -0.37% -4%
Driven by:
Decreased yield on loans (c)............ 9.45% 9.67% -0.22% -2%
Decreased yield on taxable
investments (d).................. 6.02% 6.42% -0.40% -6%
Mix change in earning asset portfolio --
Average loans as a percent of total
interest-earning assets (e)........ 72% 76% -4.0% -5%
Total interest expense increased............ $ 15.2 $ 13.1 $ 2.1 16%
Due to:
Increase in average interest-bearing
liabilities.......................... $297.2 $ 258.5 $ 38.7 15%
Increased cost on interest-bearing
liabilities.......................... 5.10% 5.08% 0.02% 0.4%
Driven by:
Increase in average interest-bearing
deposits (f)......................... $239.3 $ 228.2 $ 11.1 5%
Increase in average borrowings (g)...... $ 57.9 $ 30.3 $ 27.6 91%
Mix change in interest-bearing liability
portfolio --
Average borrowings as a percent of
total interest-bearing liabilities(h) 19% 12% 7% 58%
These increases with somewhat offset by:
Decrease in cost of borrowings (i)...... 5.78% 6.10% -0.32% -5%
- --------------------
(1) From continuing operations for all periods presented.
(a) Loan growth primarily attributable to increases in loans originated at
BNC-Minnesota.
(b) Increase in average taxable investments is primarily attributable to the
purchase of $18.8 million of fixed rate mortgage-backed securities late in 1997
as part of an interest rate risk management strategy.
(c) 75 basis point decline in prime rate late in 1998 coupled with decreases in
loan pricing spread to prime rate due to competitive pressures in all markets.
(d) Primarily attributable to the significant decrease in the Treasury yield
curve that occurred during the second half of 1998 and the reinvestment of cash
flows from maturing mortgage-backed securities and other investments at then
current, lower rates.
(e) Average loans increased by 9 percent. However, average taxable investments
increased by $22.7 million, or 35 percent. Late in 1997, the Company purchased
$18.8 million of fixed rate mortgage-backed securities funded with an advance
from the FHLB as part of an interest rate risk management strategy.
(f) Deposit growth from both BNC-North Dakota and BNC-Minnesota, primarily money
market deposit accounts.
(g) The Company relied more heavily on borrowings to fund growth, including
increased FHLB borrowings. The borrowing rates charged by the FHLB were often
cost effective compared to offering top of market rates for time CD's. Increase
also reflects issuance of the Company's 8 5/8 percent Subordinated Notes in May
1997 (outstanding 12 months during 1998 versus 7 months during 1997).
(h) Increased reliance on borrowing caused a higher percentage of the
interest-bearing liabilities portfolio to be comprised of borrowings with
generally higher costs than interest-bearing deposits. However, the borrowing
rates charged by the FHLB were often cost effective compared to offering top of
market rates for time certificates of deposits, although these borrowing rates
are higher than costs of interest-bearing checking and money market accounts.
(i) Lower overall average cost on federal funds purchased and FHLB borrowings
due to 75 basis point decline in federal funds rate late in 1998 along with a
similar decrease in rates at the FHLB.
Provision for Credit Losses. Management determines a provision for credit losses
which it considers sufficient to maintain the Company's allowance for credit
losses at a level considered adequate to provide for an estimate of probable
losses related to specifically identified loans as well as probable losses
inherent in the remaining loan and lease portfolio that have been incurred as of
each balance sheet date. See Note 1 to the Consolidated Financial Statements
included under Item 8 and "--Financial Condition--Loan Portfolio--Allowance for
Credit Losses" for further discussion of the components of the allowance for
credit losses and the Company's methodology for assessing the adequacy of the
allowance.
The provision for credit losses for the year ended December 31, 1999 was $1.1
million as compared to $1.2 million in 1998 and $2.5 million in 1997.
Noninterest Income. The following table presents, for the periods indicated, the
major categories of the Company's noninterest income as well as the amount and
percent of change between each of the periods presented. Related information and
material changes are discussed in lettered explanations following the table:
Noninterest Income (1)
Increase (Decrease)
-------------------------------------
For the Years Ended 1999 - 1998 1998 -1997
December 31,
--------------------------- ----------------- ----------------
1999 1998 1997 $ % $ %
-------- -------- ------- ------- ------- ----- ---------
(in thousands)
Insurance Commissions $2,045 $1,769 $1,694 $ 276 16% (a) $ 75 4%
Fees on loans........ 1,435 1,376 884 59 4% 492 56% (b)
Brokerage income..... 797 53 46 744 1,404% (c) 7 15%
Service charges...... 536 566 471 (30) (5)% 95 20%
Net gain on sales of
securities ........ 198 130 8 68 52% 122 1,525% (d)
Rental income........ 121 43 56 78 181% (13) (23)%
Other................ 936 906 769 30 3% 137 18% (e)
-------- -------- ------- ------- -----
Total noninterest
income............... $6,068 $4,843 $3,928 $1,225 25% 915 23%
======== ======== ======= ======= =====
- --------------------
(1) From continuing operations for all periods presented.
(a) Increased insurance commissions resulted from an increase in the average
number of insurance producers as well as successful efforts to cross-sell
insurance to bank customers.
(b) The increase in loan fees is largely attributable to loans generated and
sold by BNC-Minnesota. Management cannot predict with any degree of certainty
the amount of loans which will be originated and related loan fees which will
be recognized in future periods.
(c) Increase is attributable to the addition of brokerage staff in BNC-North
Dakota's subsidiary, BNC Asset Management, Inc.
(d) Proceeds from securities sold were $58.9 million in 1998 as compared to
$27.2 million in 1997. See Note 4 to the Consolidated Financial Statements
included under Item 8 for further information related to sales of investment
securities.
(e) The increase in other noninterest income in 1998 was attributable to a
combination of factors including increased revenue from trust and other
professional services and increased income from automated teller machines.
Noninterest Expense. The following table presents, for the periods indicated,
the major categories of the Company's noninterest expense as well as the amount
and percent of change between each of the periods presented. Related information
and material changes are discussed in lettered explanations below the table:
Noninterest Expense (1)
Increase (Decrease)
-------------------------------------
For the Years Ended
December 31, 1999 - 1998 1998 - 1997
--------------------------- ------------------ -----------------
1999 1998 1997 $ % $ %
------- -------- -------- ------- -------- ------- ------
(in thousands)
Salaries and employee
benefits............ $ 8,854 $ 7,463 $ 6,184 $ 1,391 19% (a)$ 1,279 21% (a)
Write-down of other real
estate owned and
repossessed assets.... 2,271 2 -- 2,269 (b) 2 --
Depreciation and
amortization........ 1,586 1,498 1,310 88 6% 188 14% (c)
Occupancy.............. 1,248 988 948 260 26% (a) 40 4%
Professional services.. 1,214 766 552 448 58% (d) 214 39% (d)
Office supplies,
telephone and postage. 941 749 647 192 26% (a) 102 16% (a)
Marketing and promotion 621 455 363 166 36% (e) 92 25%
FDIC and other assessments 191 184 171 7 4% 13 8%
Other.................. 1,289 1,274 1,081 15 1% 193 18% (a)
------- -------- ------- -------- -------
Total noninterest
expense............. $ 18,215 $13,379 $11,256 $ 4,836 36% 2,123 19%
======= ======== ======= ======== =======
Efficiency ratio (f)... 98.86% 76.49% 70.23% 22.37% (f) 6.26%
- --------------------
(1) From continuing operations for all periods presented.
(a) Increases represent personnel additions at BNC Asset Management, Inc., BNC
Insurance, Inc. and BNC-North Dakota's Fargo branch as well as related
occupancy, supplies, telephone, postage and other miscellaneous expenses.
(b)Write-downs to estimated net realizability of other real estate owned and
repossessed assets.
(c) Increase in the amount of fixed assets being depreciated including assets
related to BNC Asset Management, Inc. and BNC-North Dakota's Fargo branch.
(d)Increase represents an increase in brokerage costs at BNC Asset Management,
Inc., legal fees related to the proceedings against a former loan officer and
other costs associated with other real estate owned and repossessed assets.
(e) Increased advertising, public relations and promotional expenses, including
fees paid to an investor relations firm engaged late in 1998.
(f) Noninterest expense divided by an amount equal to net interest income plus
noninterest income. Management does not expect this negative trend in efficiency
ratio will continue. Noninterest expense for 1999 included $2.3 million in
write-downs of nonperforming assets. Excluding these write-downs, the efficiency
ratio for 1999 would have been 86.53 percent. Additionally, during the third
quarter of 1999, the Company reorganized. Average full time equivalent employees
for the fourth quarter of 1999 and for the first two months of 2000 were 177 as
compared to 198 for the third quarter of 1999. The year-to-date efficiency ratio
for 2000 through the month of February was 79.01 percent. For the month of
February 2000, the efficiency ratio was 75.41 percent, an improvement over both
the adjusted 1999 and 1998 ratios.
Financial Condition
Investment Securities. BNC's investment policy is designed to enhance net income
and return on equity through prudent management of risk, ensure liquidity for
cash-flow requirements, help manage interest rate risk, ensure collateral is
available for public deposits, advances and repurchase agreements and manage
asset diversification. In managing the portfolio and the composition of the
entire balance sheet, the Company seeks a balance among earnings, credit and
liquidity considerations, with a goal of maximizing the longer-term overall
profitability of the Company.
Investments are centrally managed in order to maximize compliance (federal laws
and regulations place certain restrictions on the amounts and types of
investments BNC may hold) and effectiveness of overall investing activities. The
primary goal of BNC's investment policy is to contribute to the overall
profitability of the Company. The objective is to purchase and own securities
and combinations of securities with good risk/reward characteristics. "Good"
risk/reward securities are those identified through thorough analysis of the
cash flows and potential cash flows as well as market value and potential market
value of the security in question given various interest rate scenarios.
Investment strategies are developed in light of constant view of the Company's
overall asset/liability position. As it relates to investment strategies, the
focus of the Asset/Liability management committee is to determine the impact of
interest-rate changes on both future income and market value of securities in
the portfolio. See Item 7a, "Quantitative and Qualitative Disclosures about
Market Risk," for additional information relating to the impact of fluctuating
interest rates on the Company's net interest income.
The following table presents the composition of the investment portfolio by
major category as of the dates indicated:
Investment Portfolio Composition (1)
December 31,
---------------------------------------------------------------------
1999 1998 1997
--------------------- --------------------- ----------------------
Estimated Estimated Estimated
fair fair fair
Amortized market Amortized market Amortized market
cost value cost value cost value
--------- ---------- --------- --------- --------- -----------
(in thousands)
Available for Sale:
U.S. Treasury securities... $ -- $ -- $ 5,098 $ 5,109 $ 12,489 $ 12,532
U.S. government agency
Mortgage-backed
securities.............. 26,697 26,295 51,194 51,444 32,136 32,236
U.S. government agencies
securities.............. 4,654 4,468 13,096 12,998 20,039 20,006
Collateralized mortgage
obligations............. 97,243 95,038 19,602 19,607 21,291 21,325
State and municipal bonds.. 20,272 19,548 3,355 3,420 1,166 1,289
Equity securities.......... 5,643 5,643 4,024 4,023 7,236 7,236
--------- ---------- --------- --------- --------- -----------
Total investments.......... $154,509 $ 150,992 $ 96,369 $ 96,601 $ 94,357 $ 94,624
========= ========== ========= ========= ========= ===========
- ---------------------
(1) From continuing operations for all periods presented.
The following table presents maturities for all securities available for sale
(other than equity securities) and yields for all securities in the Company's
investment portfolio at December 31, 1999:
Investment Portfolio -- Maturity and Yields
Maturing
---------------------------------------------------------
After 1 but After 5 but
Within 1 within 5 within 10 After 10 Total
year years years years
------------- ------------- ------------- -------------- --------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
(1) (1) (1) (1) (1)
------- ----- ------- ----- ------- ------ ------- ------ ------- ------
Available for Sale:(2) (dollars in thousands)
U.S. government
agency Mortgage-
backed
securities (3)..... $ 973 5.62% $ 1,438 5.79% $ 4,027 6.65% $20,259 6.43% $26.697 6.40%
U.S. government
agencies
Securities......... 290 5.09% -- -- 895 5.82% 3,469 6.04% 4,654 5.94%
Collateralized
mortgage
obligations (3).... -- -- 1,252 6.20% 15,431 6.46% 80,560 6.62% 97,243 6.59%
State and municipal
bonds............. 150 9.98% 1,230 7.20% 354 7.83% 18,538 7.70% 20,272 7.69%
------- ----- ------- ----- ------- ------ ------- ------ ------- ------
Total book value
of investment
securities...... $ 1,413 5.98% $ 3,920 6.36% $20,707 6.49% $122,826 6.74% $148,866 6.69%
======= ===== ======= ===== ======= ====== ======== ===== ======== =====
Unrealized holding
loss on securities
available for
sale.............. (3,517)
Equity securities.... $ 5,643 6.26%
-------- -----
Total investment in
securities
available for
sale............ $150,992 6.83%(4)
======== =====
- --------------------
(1)Yields do not include adjustments for tax-exempt interest because such
interest is not material; yields also do not reflect changes in fair value
that are reflected as a separate component of stockholders' equity (except as
noted in (4) below).
(2) Based on amortized cost/book value.
(3)Maturities of mortgage-backed securities and collateralized mortgage
obligations are based on contractual maturities.
(4)Yield reflects changes in fair value that are reflected as a separate
component of stockholders' equity.
As of December 31, 1999, BNC had $151.0 million of securities in the investment
portfolio as compared to $96.6 and $94.6 million at December 31, 1998 and 1997,
respectively. During 1999, the Company increased its holdings in agency
collateralized mortgage obligations ("CMOs") and municipal bonds by $75.4 and
$16.1 million, respectively. During the year, the Company also reduced the
investment portfolio's allocation to U.S. Treasury securities by $5.1 million,
agency mortgage-backed securities by $25.1 million and government agency
securities by $8.5 million.
The shift between sectors was the result of the investment portfolio management
process and the investment objectives as indicated above. Over the course of
1999, principal cash flows as well as sales proceeds from mortgage-backed
securities were invested in CMOs because they offered a better risk/reward
profile (due to the structure of CMO cash flows) relative to mortgage-backed
securities. New investment purchases were primarily directed toward CMOs as well
due to their risk/reward profile and structure relative to other sectors. In
addition, proceeds from the maturity of U.S. Treasury securities and government
agency securities were reinvested into alternate sectors that offered a better
relative risk/reward profile than U.S. Treasury and government agency
securities. Consistent with the Investment Officer's objective of purchasing and
owning combinations of good risk/reward securities, the level of state and
municipal bonds increased as well. The risk/reward profile of state and
municipal bonds complimented that of the increased portfolio allocation to CMOs.
The resulting allocation among security sectors is more consistent with the
primary goal of the Company's investment policy.
At December 31, 1999, BNC held no securities of any single issuer, other than
the U.S. government agencies securities and agency mortgage-backed securities
and CMOs that exceeded ten percent of stockholders' equity. A significant
portion of the Company's investment securities portfolio (approximately 84
percent at December 31, 1999) was pledged as collateral for public deposits and
borrowings, including borrowings with the FHLB.
Loan Portfolio. The Company's primary source of income is interest earned on
loans. The Company's loan portfolio has grown significantly during the past four
years as a result of BNC's strategy of increasing the amount of high quality
loans outstanding to increase net interest income. Net loans increased $14.9
million, or 6 percent, to $259.2 million at December 31, 1999 as compared to
$244.3 million at December 31, 1998. In 1998, net loans increased $27.1 million,
or 13 percent, as compared to December 31, 1997. The following table presents
the composition of the Company's loan portfolio as of the dates indicated:
Loan Portfolio Composition (1)
December 31,
----------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------------- ----------------- ---------------- ------------------- ----------------
Amount % Amount % Amount % Amount % Amount %
-------- ------- -------- -------- -------- ------- --------- -------- -------- --------
(dollars in thousands)
Commercial and
industrial ...... $111,236 42.9 $107,886 44.2 $ 96,780 44.5 $ 89,065 45.4 $ 41,639 34.8
Real estate
mortgage......... 91,906 35.5 76,692 31.4 56,408 26.0 47,451 24.2 36,606 30.6
Real estate
construction..... 16,026 6.2 20,831 8.5 18,215 8.4 8,806 4.5 5,884 4.9
Agricultural........ 16,679 6.4 19,777 8.1 21,064 9.7 20,673 10.6 18,046 15.1
Consumer............ 15,116 5.8 14,761 6.1 18,726 8.6 18,734 9.6 9,960 8.3
Lease financing..... 11,307 4.4 7,422 3.0 9,211 4.2 12,970 6.6 8,660 7.2
-------- ------- -------- -------- -------- ------- --------- -------- -------- --------
Total face amount
of loans....... 262,270 101.2 247,369 101.3 220,404 101.4 197,699 100.9 120,795 100.9
Unearned income..... (219) (0.1) (188) (0.1) (255) (0.1) (264) (0.1) (112) (0.1)
-------- ------- -------- -------- -------- ------- --------- -------- -------- --------
Loans, net of
unearned income.. 262,051 101.1 247,181 101.2 220,149 101.3 197,435 100.8 120,683 100.8
Less allowance for
credit losses.... (2,872) (1.1) (2,854) (1.2) (2,919) (1.3) (1,545) (0.8) (1,048) (0.8)
-------- ------- -------- -------- -------- ------- --------- -------- -------- --------
Net loans........... $259,179 100.0 $244,327 100.0 $217,230 100.0 $195,890 100.0 $119,635 100.0
======== ======= ======== ======== ======== ======= ========= ======== ======== ========
- -------------------------
(1) From continuing operations for all periods presented.
The following table presents, for the periods indicated, the amount and percent
of change in each category of loans in the Company's loan portfolio. Material
changes are discussed in lettered explanations below the table:
Change in Loan Portfolio Composition (1)
Increase (Decrease)
--------------------------------------------------
1999 - 1998 1998 - 1997
--------------------- ----------------------
$ % $ %
----------- -------- ---------- ---------
(dollars in thousands)
Commercial and industrial.. $ 3,350 3% $ 11,106 11% (a)
Real estate mortgage....... 15,214 20% (b) 20,284 36% (a)
Real estate construction... (4,805) (23)% 2,616 14%
Agricultural............... (3,098) (16)% (1,287) (6)%
Consumer................... 355 2% (3,965) (21)%
Lease financing............ 3,885 52% (1,789) (19)%
----------- ----------
Total face amount of loans. 14,901 6% 26,965 12%
Unearned income............ (31) (16)% 67 26%
----------- ----------
Loans, net of unearned
income.................. 14,870 6% 27,032 12%
Allowance for credit losses (18) (1)% 65 2%
----------- ----------
Net Loans.................. $ 14,852 6% $ 27,097 12%
=========== ==========
- --------------------
(1) From continuing operations for all periods presented.
(a) Increases are primarily attributable to loan volume generated out of the
Minnesota market area.
(b) Increases are attributable to loan volume generated out of both the
Minnesota and North Dakota markets.
While prospects for continued loan growth appear favorable, particularly in the
Minnesota and Fargo markets, management cannot predict with any degree of
certainty the Company's future loan growth potential.
Credit Policy and Approval Procedures. BNC follows a uniform credit policy that
sets forth underwriting and loan administration criteria. The loan policy,
including lending guidelines for the various types of credit offered by the
Company, is established by the Board of Directors (the "Board") based upon the
recommendations of senior lending management and such credit committees as are
established at either the bank or corporate level. The loan policy is reviewed
and reaffirmed by the Board at least annually. Underwriting criteria are based
upon the risks associated with each type of credit offered, the related
borrowers and types of collateral.
The Company delegates lending decision authority among various lending officers
and the credit committees based on the size of the customer's credit
relationship with BNC. All loans and commitments approved in excess of $300,000
are presented to the Board on a monthly basis for summary review. Any exceptions
to loan policies and guidelines are subject to special approval by bank
executive lenders or the credit committees.
Loan Participations. Pursuant to BNC's lending policy, loans may not exceed 85
percent of bank legal lending limits (except to the extent collateralized by
U.S. Treasury securities or bank deposits and, accordingly, excluded from the
bank's legal lending limit). To accommodate customers whose financing needs
exceed lending limits and internal loan restrictions relating primarily to
industry concentration, the Banks sell loan participations to outside
participants without recourse. Loan participations sold on a nonrecourse basis
to outside financial institutions were as follows as of the dates indicated:
Loan Participations Sold (1)
December 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
---------- --------- --------- --------- ---------
(in thousands)
BNC--North Dakota..... $ 67,700 $ 32,300 $ 55,500 $ 54,100 $ 35,000
BNC--Minnesota........ 52,400 24,400 10,300 3,200 --
---------- --------- --------- --------- ---------
Total............... $ 120,100 $ 56,700 $ 65,800 $ 57,300 $ 35,000
========== ========= ========= ========= =========
- ----------------------
(1) From continuing operations for all periods presented.
The Banks generally retain the right to service the loans as well as the right
to receive a portion of the interest income on the loans. The vast majority of
the loans sold by the Banks are commercial lines of credit for which balances
and related payment streams cannot be reasonably estimated in order to determine
the fair value of the servicing rights and/or future interest income retained by
the Banks. See Note 1 to the Consolidated Financial Statements included under
Item 8 for further discussion of accounting policies related to loans.
Management cannot reliably predict BNC's ability to continue to generate or sell
loan participations or the terms of any such sales.
Concentrations of Credit. The Company's credit policies emphasize
diversification of risk among industries, geographic areas and borrowers. For
purposes of the analysis of concentrations of credit as of December 31, 1999,
total outstanding loans as well as all outstanding loan commitments were
included. As of December 31, 1999, the Company identified concentrations of
loans exceeding ten percent of total loans and loan commitments outstanding.
These concentrations were in construction and real estate loans which
represented 11.2 and 15.9 percent, respectively, of total loans and loan
commitments outstanding. Loans and commitments in the construction category were
extended to 76 customers who are located in Minnesota, Iowa and North and South
Dakota and who can be generally categorized as indicated below:
Percent of
total
outstanding
loans and
Number of loan
customers commitments
------------- -------------
General building contractors....... 21 3.1%
Heavy construction, excluding
building........................ 28 6.6%
Special trade contractors.......... 27 1.5%
------------- -------------
Total......................... 76 11.2%
============= =============
The contractors are involved in various aspects of the construction industry
including highway and street construction, water/sewer drilling, plumbing,
heating and air conditioning, commercial painting, electrical, concrete and
excavating and foundation contractors. Loans in this category are secured, in
many cases, by construction equipment.
The real estate loans and commitments were extended to 132 customers who are
diversified across the Company's market areas and who can be generally
categorized as indicated below:
Percent of
total
outstanding
loans and
Number of loan
customers commitments
------------- --------------
Non-residential and apartment
building operators,
developers and lessors of
real property................ 77 11.8%
Real estate holding companies.. 55 4.1%
------------- --------------
Total.......................... 132 15.9%
============= ==============
The Company continually monitors industry and other credit concentrations as
part of its credit risk management strategies. In cases where significant
concentrations exist without sufficient diversification and other mitigating
factors, BNC generally sells loans without recourse to outside financial
institutions.
Agricultural Loans. BNC's agricultural loan portfolio totals approximately $16.7
million, or 6 percent of total loans. Within the portfolio, loans are
diversified by type and include loans to grain and/or livestock producers,
agricultural real estate loans, machinery and equipment and other types of
loans. The majority of the Company's agricultural loans are extended to
borrowers located in North Dakota, and are diversified over several counties.
The Company has been monitoring its agricultural loans closely. As of December
31, 1999, nonperforming agricultural loans totaled $12,000.
Loan Maturities. The following table sets forth the remaining maturities of
loans in each major category of BNC's portfolio as of December 31, 1999. Actual
maturities may differ from the contractual maturities shown below as a result of
renewals and prepayments. Loan renewals are evaluated in the same manner as new
credit applications:
Maturities of Loans (1)
Over 1 Year
Through 5 years Over 5 Years
------------------- -----------------
One year Fixed Floating Fixed Floating
or less Rate Rate Rate Rate Total
--------- -------- --------- -------- -------- ---------
(in thousands)
Commercial and
industrial.......... $ 55,706 $ 18,042 $ 28,861 $ 2,825 $ 5,802 $ 111,236
Real estate mortgage... 7,530 12,316 27,273 25,408 19,379 91,906
Real estate
construction........ 13,767 -- 2,259 -- -- 16,026
Agricultural........... 7,683 3,456 1,330 1,426 2,784 16,679
Consumer............... 7,628 6,496 399 515 78 15,116
Lease financing........ 1,462 9,058 -- 787 -- 11,307
--------- -------- --------- -------- -------- ---------
Total face amount of
loans............... $ 93,776 $ 49,368 $ 60,122 $ 30,961 $28,043 $ 262,270
========= ======== ========= ======== ======== =========
- --------------------
(1) Maturities are based upon contractual maturities. Floating rate loans
include loans that would reprice prior to maturity if base rates change. See
Item 7a, "Quantitative and Qualitative Disclosures about Market Risk," for
further discussion regarding repricing of loans and other assets.
Interest Rate Floors. From time to time the Company may use off-balance-sheet
instruments, principally interest rate floors, to adjust the interest rate
sensitivity of on-balance-sheet items, including loans. See -"Liquidity, Market
and Credit Risk," Item 7a, "Quantitative and Qualitative Disclosures about
Market Risk," and Notes 1 and 13 to the Consolidated Financial Statements
included under Item 8 for further discussion about accounting policies
applicable to derivative financial instruments and currently outstanding
instruments.
Nonperforming Loans and Assets. BNC's lending personnel are responsible for
continuous monitoring of the quality of the loan portfolio. Officer compensation
depends, to a substantial extent, on maintaining loan quality and dealing with
credit issues in a timely and proactive manner. Lenders are not compensated for
growth at the expense of credit quality. Loan officers are responsible for
ongoing and regular review of past due loans in their respective portfolios. The
loan portfolio is also monitored regularly and examined by the Company's loan
review personnel. Loans demonstrating weaknesses are downgraded in a timely
fashion and the Board receives a listing of all such loans on a monthly basis.
The Company also has an annual independent credit review which tests credit
quality, compliance with loan policy and documentation for all loans over
$100,000 and a sampling of smaller loans.
The following table sets forth, as of the dates indicated, the amounts of
nonperforming loans and other assets, the allowance for credit losses and
certain related ratios:
Nonperforming Assets (1)
December 31,
-----------------------------------------------
1999 1998 1997 1996 1995
-------- ------- ------- ------- --------
(dollars in thousands)
Nonperforming loans:
Loans 90 days or more delinquent
and still
accruing interest............. $ 22 $ 307 $ 1,016 $ 129 $ 290
Nonaccrual loans (2) (3)......... 1,620 2,042 376 22 71
Restructured loans (2) (3)....... 16 44 104 136 119
-------- ------- ------- ------- --------
Total nonperforming loans..... 1,658 2,393 1,496 287 480
Other real estate owned and
repossessed assets............ 1,207 2,112 -- 159 --
-------- ------- ------- ------- --------
Total nonperforming assets.. $ 2,865 $ 4,505 $ 1,496 $ 446 $ 480
======== ======= ======= ======= ========
Allowance for credit losses......... $ 2,872 $ 2,854 $ 2,919 $ 1,545 $ 1,048
======== ======= ======= ======= ========
Ratio of total nonperforming loans
to total loans................... .63% .97% .68% .15% .40%
Ratio of total nonperforming assets
to total assets.................. .63% 1.21% .43% .16% .20%
- --------------------
(1) From continuing operations for all periods presented.
(2)If the Company's nonaccrual and restructured loans had been current in
accordance with their original terms, BNC would have recognized additional
interest income of $112,000, $49,000 and $30,000 for the years ended December
31, 1999, 1998 and 1997, respectively.
(3)The interest income on nonaccrual and restructured loans actually included
in the Company's net income was $29,000, $175,000 and $26,000 for the years
ended December 31, 1999, 1998 and 1997, respectively.
Loans 90 days or more delinquent and still accruing interest include loans over
90 days past due which management believes, based on its specific analysis of
the loans, do not present doubt about the collection of interest and principal
in accordance with the loan contract. Loans in this category must be
well-secured and in the process of collection. These loans are monitored closely
by BNC lending and management personnel.
Nonaccrual loans include loans on which the accrual of interest has been
discontinued. Accrual of interest is discontinued when management believes,
after considering economic and business conditions and collection efforts, that
the borrower's financial condition is such that the collection of interest is
doubtful. A delinquent loan is generally placed on nonaccrual status when it
becomes 90 days or more past due unless the loan is well-secured and in the
process of collection. When a loan is placed on nonaccrual status, accrued but
uncollected interest income applicable to the current reporting period is
reversed against interest income of the current period. Accrued but uncollected
interest income applicable to previous reporting periods is charged against the
allowance for credit losses. No additional interest is accrued on the loan
balance until the collection of both principal and interest becomes reasonably
certain. When a problem loan is finally resolved, there may ultimately be an
actual write down or charge-off of the principal balance of the loan which may
necessitate additional charges to earnings.
Restructured loans are those for which concessions, including a reduction of the
interest rate or the deferral of interest or principal, have been granted due to
the borrower's weakened financial condition. Interest on restructured loans is
accrued at the restructured rates when it is anticipated that no loss of its
original principal will occur.
Other real estate owned represents properties acquired through, or in lieu of,
loan foreclosure. Such properties are included in other assets in the balance
sheets. They are initially recorded at fair value at the date of acquisition
establishing a new cost basis. Write-downs to fair value at the time of
acquisition are charged to the allowance for credit losses. After foreclosure,
valuations are periodically performed by management and the real estate is
carried at the lower of carrying amount or fair value less cost to sell.
Write-downs, revenues and expenses incurred subsequent to foreclosure are
charged to operations as recognized / incurred.
Potential Problem Loans. In accordance with accounting standards, the Company
identifies loans considered impaired and the valuation allowance attributable to
these loans. Impaired loans generally include loans on which management
believes, based on current information and events, it is probable that the
Company will not be able to collect all amounts due in accordance with the terms
of the loan agreement and which are analyzed for a specific reserve allowance.
BNC generally considers all loans risk-graded substandard and doubtful as well
as nonaccrual and restructured loans as impaired. Impaired loans at December 31,
1999, not including the past due, nonaccrual and restructured loans reported
above, totaled $4.3 million. A significant portion of these loans are not in
default but may have characteristics such as recent adverse operating cash flows
or general risk characteristics that the loan officer feels might jeopardize the
future timely collection of principal and interest payments. The ultimate
resolution of these credits is subject to changes in economic conditions and
other factors. These loans are closely monitored to ensure that the Company's
position as creditor is protected to the fullest extent possible.
Customer Year 2000 Issues. The Company implemented a Year 2000 due diligence
program relating to its major borrowers and depositors which incorporated
guidelines established by regulatory agencies (the "Program"). Major components
of the Program included assignment of accountability for the various Program
initiatives, establishment of critical Program completion dates, identification
of material borrowers and depositors (hereinafter collectively referred to as
"customers"), a risk assessment of all identified customers and the
establishment of risk controls.
The Company managed the Program with available staff. Therefore, no additional
salary and benefit expenses were incurred in the process of implementing and
administering the Program. Other expenses incurred, such as postage and
materials, were not significant. No material adverse circumstances related to
Year 2000 issues of customers have been identified.
Assessment of customer status with respect to Year 2000 issues, while critical
to the banking industry, is by nature subjective and imprecise. While the
Company has used due diligence in assessing customer status and taking
appropriate actions based on the results of such assessments, there can be no
assurance that each of its customers has been adequately prepared and, as a
result, the potential of an adverse impact on the Company cannot be completely
eliminated. See also "Year 2000 Issue" for further information on the Company's
Year 2000 program.
Allowance for Credit Losses. BNCCORP maintains an allowance for credit losses
sufficient to absorb inherent losses in the loan portfolio. The allowance
represents management's recognition of the risks of extending credit and its
evaluation of the quality of the loan portfolio. The allowance is adjusted
through the provision for credit losses, which is charged to income.
At yearend 1999, the Company's total allowance was $2.9 million which equates to
approximately 1.8 and 2.7 times the average charge-offs for the last three and
five years, respectively, and 2.4 and 3.8 times the average net charge-offs for
the same three- and five-year periods, respectively. Because historical
charge-offs are not necessarily indicative of future charge-off levels, the
Company also gives consideration to other risk indicators when determining the
appropriate allowance level. The Company's charge-off policy is generally
consistent with regulatory standards.
The three components to the allowance for credit losses, the specific allowance,
allocated inherent allowance and unallocated inherent allowance, are discussed
in Note 1 to the Consolidated Financial Statements included under Item 8. A
comprehensive analysis of the adequacy of the allowance for loan losses is
performed by the Company on a quarterly basis. Additionally, peer review of
allowance levels of other financial institutions is conducted on an annual
basis.
Historically, senior lending management in each of BNCCORP's banking
subsidiaries has been responsible for assessing the adequacy of the respective
subsidiary's allowance for credit losses and making provision for credit losses
recommendations to the appropriate board of directors. The Company recently
established an Allowance for Credit Losses Review Committee (the "Review
Committee"), which now has the responsibility of affirming allowance
methodology, performing an annual credit loss migration analysis and assessing
the allowance components in relation to estimated and actual charge-off trends.
The Review Committee is responsible for assessing and reporting on the
appropriateness of the allowance for credit losses as well as recommending
revisions to the Company's methodology for determining the adequacy of the
allowance as they become necessary.
Concentrations of credit risk are discussed under "--Concentrations of Credit."
Concentrations exist in construction and real estate loans. Additionally, a
geographic concentration of credit risk also arises because BNCCORP operates
primarily in the upper midwest with 89 percent of loans outstanding as of
December 31, 1999 having been extended to customers in Minnesota and North
Dakota. Other groups of credit risk may not constitute a significant
concentration, but are analyzed based on other evident risk factors for the
purpose of determining an adequate allowance level.
Nonperforming and potential problem loans are defined and discussed under
"--Nonperforming Loans and Assets" and "--Potential Problem Loans."
Nonperforming loans decreased from $4.5 million at December 31, 1998 to $2.9
million at December 31, 1999. Many of these loans are specifically analyzed for
purposes of determining the adequacy of the allowance for credit losses.
Estimating the risk and amount of loss on any loan is subjective and ultimate
losses may vary from current estimates. Although management believes that the
allowance for credit losses is adequate to cover losses inherent in the loan
portfolio, there can be no assurance that the allowance will prove sufficient to
cover actual credit losses in the future. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the adequacy of the Company's allowance for credit losses. Such agencies may
require BNC to make additional provisions to the allowance based upon their
judgments about information available to them at the time of their examination.
The following table summarizes, for the periods indicated, activity in the
allowance for credit losses, including amounts of loans charged-off, amounts of
recoveries, additions to the allowance charged to operating expense, the ratio
of net charge-offs to average total loans, the ratio of the allowance to total
loans at the end of each period and the ratio of the allowance to nonperforming
loans:
Analysis of Allowance for Credit Losses (1)
For the Years ended December 31,
--------------------------- -------- -------
1999 1998 1997 1996 1995
------- -------- -------- -------- -------
(dollars in thousands)
Balance of allowance for credit
losses, beginning of period ........ $ 2,854 $ 2,919 $ 1,545 $ 1,048 $ 1,021
------- -------- -------- -------- -------
Charge-offs:
Commercial and industrial.......... 1,090 1,316 1,319 104 114
Real estate mortgage............... 10 66 24 -- --
Agricultural....................... 35 -- -- 22 130
Consumer........................... 137 73 107 6 4
Lease financing.................... 18 -- 471 218 --
------- -------- -------- -------- -------
Total charge-offs............... 1,290 1,455 1,921 350 248
------- -------- -------- -------- -------
Recoveries:
Commercial and industrial.......... 86 151 744 5 116
Real estate mortgage............... 1 26 9 6 3
Agricultural....................... -- -- -- 146 84
Consumer........................... 71 12 24 -- 4
Lease financing.................... 12 -- -- -- --
------- -------- -------- -------- -------
Total recoveries................ 170 189 777 157 207
------- -------- -------- -------- -------
Net charge-offs....................... (1,120) (1,266) (1,144) (193) (41)
Provision for credit losses charged
to operations...................... 1,138 1,201 2,518 690 168
Allowance attributable to FMB sale.... -- -- -- -- (100)
------- -------- -------- -------- -------
Balance of allowance for credit
losses, end of period.............. $ 2,872 $ 2,854 $ 2,919 $ 1,545 $ 1,048
======= ======== ======== ======== =======
Ratio of net charge-offs to average
loans.............................. (.45%) (.54%) (.53%) (.11%) (.03%)
======= ======== ======== ======== =======
Average gross loans outstanding
during the period..................$250,158 $234,342 $214,053 $169,264 $117,773
======= ======== ======== ======== =======
Ratio of allowance for credit losses
to total loans..................... 1.10% 1.15% 1.33% .78% .87%
======= ======== ======== ======== =======
Ratio of allowance for credit losses
to nonperforming loans............. 273.00% 119.00% 195.00% 540.00% 218.00%
======= ======== ======== ======== =======
- ----------------------
(1) From continuing operations for all periods presented.
Included in the data above relating exclusively to a former officer are special
provisions of $454,000 and $1.9 million, charge-offs of approximately $639,000
and $1.8 million and recoveries of approximately $153,000 and $690,000 for the
years ended December 31, 1998 and 1997, respectively. The recoveries primarily
represent payments from the Company's fidelity bond carrier. See Note 17 to the
Consolidated Financial Statements included under Item 8 for further discussion
related to proceedings against the loan officer.
The table below presents, for the periods indicated, an allocation of the
allowance for credit losses among the various loan categories and sets forth the
percentage of loans in each category to gross loans. The allocation of the
allowance for credit losses as shown in the table should neither be interpreted
as an indication of future charge-offs, nor as an indication that charge-offs in
future periods will necessarily occur in these amounts or in the indicated
proportions.
Allocation of the Allowance for Loan Losses (1)
December 31,
------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------------ ---------------------- ---------------------- ---------------------- --------------------
Loans in Loans in Loans in Loans in Loans
category as category as category as category as catagory as
Amount a percentage Amount a percentage Amount a percentage Amount a percentage Amount a percentage
of of total of of total of of total of of total of of total
allowance gross loans allowance gross loans allowance gross loans allowance gross loans allowance gross loans
--------- -------------- --------- ------------ --------- ------------- --------- ------------ -------- -----------
(dollars in thousands)
Commercial and
industrial.. $ 1,356 43% $ 931 44% $ 931 44% $ 672 45% $ 355 31%
Real estate
mortgage.... 712 35% 667 31% 441 26% 306 24% 213 30%
Real estate
construction 151 6% 129 8% 311 8% 57 4% 41 5%
Agricultural... 220 6% 252 8% 139 10% 176 11% 318 15%
Consumer....... 138 6% 217 6% 174 8% 97 9% 58 8%
Leasing........ 88 4% 133 3% 136 4% 63 7% 41 4%
Unallocated.... 207 0% 301 0% 787 0% 174 0% 22 7%
--------- -------------- --------- ------------ --------- ------------- --------- ------------ -------- -----------
Total.......... $ 2,872 100% $ 2,854 100% $ 2,919 100% $ 1,545 100% $ 1,048 100%
========= ============== ========= ============ ========= ============= ========= ============ ======== ===========
- ---------------------
(1) From continuing operations for all periods presented.
Deposits. BNC's core deposits consist of noninterest- and interest-bearing
demand deposits, savings deposits, certificates of deposit under $100,000,
certain certificates of deposit of $100,000 and over and public funds. These
deposits, along with other borrowed funds are used by the Company to support its
asset base. See "--Borrowed Funds."
The following table sets forth, for the periods indicated, the distribution of
BNC's average deposit account balances and average cost of funds rates on each
category of deposits. See "Results of Operations--Net Interest Income" for an
explanation of changes in deposit volume and costs during the periods presented:
Average Deposits and Deposit Costs (1)
For the Years Ended December 31,
---------------------------------------------------------------------------
1999 1998 1997
------------------------ ----------------------- --------------------------
Percent Wgtd. Percent Wgtd. Percent Wgtd.
Average of avg. Average of avg. Average of avg.
balance deposits rate balance deposits rate balance deposits rate
------- -------- ------- ------- -------- ------ -------- --------- -------
(dollars in thousands)
Interest-bearing
demand deposits....$ 91,671 31.22% 3.96%$ 63,115 23.90% 3.37% $ 50,582 20.36% 3.12%
Savings deposits...... 6,294 2.14% 2.05% 8,717 3.30% 2.26% 8,904 3.58% 2.31%
Time deposits (CDs):
CDs under $100,000.... 125,470 42.72% 5.16% 130,759 49.50% 5.61% 127,092 51.14% 5.59%
CDs $100,000 and over. 43,140 14.69% 5.35% 36,704 13.90% 5.86% 41,581 16.73% 5.74%
------- -------- -------- ------- -------- --------
Total time deposits... 168,610 57.41% 5.20% 167,463 63.40% 5.66% 168,673 67.87% 5.63%
------- -------- -------- ------- -------- ---------
Total
interest-bearing
deposits........... 266,575 90.77% 4.70% 239,295 90.60% 4.93% 228,159 91.81% 4.94%
Noninterest-bearing
demand deposits....... 27,094 9.23% -- 24,827 9.40% -- 20,357 8.19% --
------- -------- -------- ------- -------- -------
Total deposits........ 293,669 100.0% 4.27%$264,122 100.0% 4.47% $248,516 100.0% 4.54%
======= ======== ======== ======= ======== =======
- ------------------------
(1) From continuing operations for all periods presented.
In recent years, earning asset growth has outpaced core deposit growth resulting
in the use of brokered and out of market certificates of deposit and other
borrowed funds. See "--Borrowed Funds." This trend has been common in the
banking industry because of the proliferation of non-bank competitors and the
multitude of financial and investment products available to customers. As of
December 31, 1999, BNC held a total of $13.4 million of brokered certificates of
deposit. Under current FDIC regulations, only "well capitalized" financial
institutions may fund themselves with brokered deposits without prior approval
of regulators. BNC--North Dakota and BNC--Minnesota were both well capitalized
at December 31, 1999. See Note 11 to the Consolidated Financial Statements
included under Item 8 for a summary of capital status of the Banks.
Time deposits in denominations of $100,000 and more totaled $46.8 million at
December 31, 1999 as compared to $39.2 and $36.3 million at December 31, 1998
and 1997, respectively. The following table sets forth the amount and maturities
of time deposits of $100,000 or more as of December 31, 1999:
Time Deposits of $100,000 and Over
(in thousands)
Maturing in:
3 months or less................... $ 22,368
Over 3 months through 6 months..... 12,710
Over 6 months through 12 months.... 9,844
Over 12 months..................... 1,857
----------
Total........................... $ 46,779
==========
Borrowed Funds. BNC uses short-term borrowings to support its asset base. These
borrowings include federal funds purchased and U.S. Treasury tax and loan note
option accounts, securities sold under agreements to repurchase and FHLB
borrowings. At December 31, 1999, short-term borrowings were $88.7 million, or
20 percent of total liabilities, as compared to $49.3 million, or 13 percent of
total liabilities, at December 31, 1998 and $46.5 million, or 14 percent of
total liabilities, at December 31, 1997. See Note 9 to the Consolidated
Financial Statements included under Item 8 for a listing of borrowings
outstanding at December 31, 1999 and 1998, including interest rates and terms.
The following table provides a summary of the Company's short-term borrowings
and related cost information as of, or for the periods ended, December 31:
Short-Term Borrowings (1)
1999 1998 1997
-------- -------- --------
(dollars in thousands)
Short-term borrowings outstanding at period end...... $ 88,700 $ 49,290 $ 46,503
Weighted average interest rate at period end......... 5.74% 4.99% 5.77%
Maximum month-end balance during the period.......... $ 94,300 $ 58,416 $ 46,503
Average borrowings outstanding for the period........ $ 61,993 $ 49,576 $ 22,730
Weighted average interest rate for the period........ 5.33% 5.44% 5.69%
- ---------------------
(1) From continuing operations for all periods presented.
As of December 31, 1999, the Company's only outstanding long-term debt was its
Subordinated Notes totaling $14.5 million. See Notes 1 and 9 to the Consolidated
Financial Statements included under Item 8 for more details. During February
2000 the Company retired $814,000 of the Subordinated Notes. See Note 22 to the
Consolidated Financial Statements included under Item 8 for a summary of this
transaction.
The Company's decreased usage of long-term borrowings at December 31, 1999 is
attributable to the sale of BNC Financial. BNC Financial's asset-based loan
portfolio was funded primarily with long-term debt.
Capital Resources and Expenditures. BNC's management actively monitors
compliance with bank regulatory capital requirements, including risk-based and
leverage capital measures. Under the risk-based capital method of capital
measurement, the ratio computed is dependent on the amount and composition of
assets recorded on the balance sheet, and the amount and composition of
off-balance sheet items, in addition to the level of capital. Note 11 to the
Consolidated Financial Statements included under Item 8 includes a summary of
the risk-based and leverage capital ratios of BNC and its subsidiary banks as of
December 31, 1999 and 1998. As of each of those dates, BNCCORP and the Banks
exceeded capital adequacy requirements and the Banks were considered "well
capitalized" under prompt corrective action provisions.
The Company is currently in the process of constructing an office building in
Fargo, North Dakota. The total cost to complete the construction and provide
furniture and equipment for the building is estimated at between $4.0 and $4.5
million and has been funded through cash generated from operations. Capital
expenditures for Fargo were approximately $3.6 million during 1999. There were
no other major capital expenditures made during 1999 or 1998.
Liquidity, Market and Credit Risk
The Company's business activities generate, in addition to other risks,
significant liquidity, market and credit risks. Liquidity risk is the
possibility of being unable to meet all present and future financial obligations
in a timely manner. Market risk arises from changes in interest rates, exchange
rates, commodity prices and equity prices and represents the possibility that
changes in future market rates or prices will have a negative impact on the
Company's earnings or value. The Company's principal market risk is interest
rate risk. See Item 7a, "Quantitative and Qualitative Disclosures about Market
Risk." Credit risk is the possibility of loss from the failure of a customer to
perform according to the terms of a contract. BNC is a party to transactions
involving financial instruments that create risks that may or may not be
reflected on a traditional balance sheet. These financial instruments can be
subdivided into three categories:
Cash financial instruments, generally characterized as on-balance-sheet
items, include investments, loans, mortgage-based securities, deposits and
other debt obligations.
Credit-related financial instruments, generally characterized as
off-balance-sheet items, include such instruments as commitments to extend
credit and standby letters of credit.
Derivative financial instruments, also generally characterized as
off-balance-sheet items, include such instruments as interest rate, foreign
exchange, commodity price and equity price contracts, including forwards,
swaps and options.
The Company's risk management policies are intended to monitor and limit
exposure to liquidity, market and credit risks that arise from each of these
financial instruments. See "--Loan Portfolio" for a discussion of the Company's
credit risk management strategies.
Liquidity Risk Management. Liquidity risk management encompasses the Company's
ability to meet all present and future financial obligations in a timely manner.
The objectives of liquidity management policies are to maintain adequate liquid
assets, liability diversification among instruments, maturities and customers
and a presence in both the wholesale purchased funds market and the retail
deposit market.
The Consolidated Statements of Cash Flows in the Consolidated Financial
Statements included under Item 8 present data on cash and cash equivalents
provided by and used in operating, investing and financing activities. In
addition to liquidity from core deposit growth, together with repayments and
maturities of loans and investments, BNC utilizes brokered deposits, sells
securities under agreements to repurchase and borrows overnight federal funds.
The Banks are both members of the FHLB, which affords them the opportunity to
borrow funds in terms ranging from overnight to ten years and beyond. Borrowings
from the FHLB are generally collateralized by the Banks' mortgage loans and
various investment securities. See "--Investment Securities" and Notes 4 and 9
to the Consolidated Financial Statements included under Item 8. The Company has
also obtained funding through long-term borrowings and the issuance of its
Subordinated Notes. See "--Borrowed Funds" and Note 9 to the Consolidated
Financial Statements included under Item 8.
The following table sets forth, for the periods indicated, a summary of the
Company's major sources and (uses) of funds. This summary information is derived
from the Consolidated Statements of Cash Flows included under Item 8:
Major Sources and Uses of Funds (1)
For the Years Ended December 31,
----------------------------------
1999 1998 1997
---------- ---------- ----------
(in thousands)
Proceeds from sales and maturities of
investment secuirities....................... $ 127,403 $ 89,926 $ 39,335
Net increase in deposits....................... 40,212 21,675 23,054
Increase in short-term borrowings.............. 39,410 2,787 35,066
Net increase (decrease) in long-term borrowings (14,520) 8,750 11,151
Purchases of investment securities............ (185,958) (91,981) (74,121)
Net increase in loans.......................... (16,160) (37,131) (34,124)
- ----------------------
(1) From continuing operations for all periods presented.
BNC's liquidity is measured by its ability to raise cash when it needs it at a
reasonable cost and with a minimum of loss. Given the uncertain nature of our
customer's demands as well as the Company's desire to take advantage of earnings
enhancement opportunities, the Company must have adequate sources of on- and
off-balance sheet funds that can be acquired in time of need. Accordingly, in
addition to the liquidity provided by balance sheet cash flows, liquidity is
supplemented with additional sources such as credit lines with the FHLB, credit
lines with correspondent banks for federal funds, wholesale and retail
repurchase agreements, brokered certificates of deposit and direct non-brokered
national certificates of deposit through national deposit networks. BNC's
management measures its liquidity position on a monthly basis. Key factors that
determine the Company's liquidity are the reliability or stability of its
deposit base, the pledged/nonpledged status of its investments and potential
loan demand. BNC's liquidity management system divides the balance sheet into
liquid assets, and short-term liabilities that are assumed to be vulnerable to
non-replacement under abnormally stringent conditions. The excess of liquid
assets over short-term liabilities is measured over a 30-day planning horizon.
Assumptions for short-term liabilities vulnerable to non-replacement under
abnormally stringent conditions are based on a historical analysis of the
month-to-month percentage changes in deposits. The excess of liquid assets over
short-term liabilities and other key factors such as expected loan demand as
well as access to other sources of liquidity such as lines with the FHLB,
federal funds, and those other supplemental sources listed above are tied
together to provide a measure of the Company's liquidity. Management has a
targeted range and manages its operations such that these targets can be
achieved. Management believes that its prudent management policies and
guidelines will ensure adequate levels of liquidity to fund anticipated needs of
on- and off-balance-sheet items. In addition, a contingency funding plan
identifies actions to be taken in response to an adverse liquidity event.
The Company's asset/liability committee implemented a liquidity plan for the
period spanning the Year 2000 date change. The Company did not experience any
liquidity-related problems as a result of the Year 2000 date change.
Year 2000 Issue
The Company implemented a Year 2000 program which included the following phases:
awareness, assessment, renovation, testing / validation and implementation (the
"Y2K Program"). The Y2K Program applied to all IT and non-IT systems, as well as
any providers who service and maintain these systems.
The Company managed the Y2K Program with available staff (other than a few
isolated instances where consultants were engaged for a specific activity).
Therefore, the Company did not incur additional salary and benefits expenses
related to the development and implementation of the Y2K Program.
The Company invested approximately $156,000 in hardware and software (primarily
for the Y2K lab and some non-compliant computers and software which were
replaced). Other Y2K Program costs incurred were approximately $48,000 and
included costs for items such as materials, supplies, postage and rental of a
generator. Management's initial projection for Y2K Program expenses was $200,000
to $400,000. All costs associated with the Y2K Program have been funded through
cash generated from operations.
While the Company has remained in close communication with customers, vendors
and other intermediaries, it has had no control over the remediation efforts of
these third parties with whom it has material business relationships and the
failure of certain of these parties to successfully remediate their Year 2000
issues could potentially have a material adverse affect on the Company. The
Company received initial assurances from certain of these third parties that
their ability to perform their obligations to the Company were not expected to
be materially adversely affected by the Year 2000 problem. The Company also
tested, to the extent possible, systems, software and interfaces through which
business transactions with such third parties are effected. Management is not
aware of any materially adverse circumstances related to the Year 2000
remediation efforts of third parties with whom the Company has material business
relationships.
The Company completed a contingency plan to handle its most reasonably likely
worst case Y2K scenarios. It did not become necessary to implement any portion
of the contingency plan in response to Y2K-related events.
All forecasts, estimates and other statements relating to the Year 2000
readiness of the Company and its customers and business partners have been based
on information and assumptions about future events. Such "forward looking
statements" are subject to various known and unknown risks and uncertainties
that could cause actual events to differ from such statements. These
uncertainties included, but are not limited to, the understanding of the Company
that its core application and other systems are and will continue to be Year
2000 compliant, the ability to identify, repair or replace mission critical
non-IT equipment in a timely fashion, the ability of certain third parties to
ensure their systems are Year 2000 compliant and the ability of the Company to
test interfaces with certain of these third parties, the performance of
telecommunications, data transmission and utilities providers, the failure or
impairment of certain third parties with which the Company transacts business,
systemic occurrences in the banking industry which could impact the Company's
liquidity and undiscovered problems in the Company's Year 2000 testing plans and
processes. While the Company has exercised due diligence in the development of
its Year 2000 plans and has taken appropriate actions based on the best
available information, there can be no assurance that events and circumstances
will transpire as expected and, as a result, the potential of a material adverse
impact on the Company cannot be completely eliminated.
Forward Looking Statements
Statements included in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" which are not historical in
nature are intended to be, and are hereby identified as "forward looking
statements" for purposes of the safe harbor provided by Section 21E of the
Securities Exchange Act of 1934, as amended. The Company cautions readers that
forward looking statements, including without limitation, those relating to the
Company's future business prospects, revenues, working capital, liquidity,
capital needs, interest costs and income, are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
indicated in the forward looking statements due to several important factors.
These factors include, but are not limited to: risks of loans and investments,
including dependence on local economic conditions; competition for the Company's
customers from other providers of financial services; possible adverse effects
of changes in interest rates; risks of unanticipated and still unidentified
consequences related to the impact of the Year 2000 Issue on the Company or its
customers and business partners; risks associated with the Company's acquisition
strategy; and other risks which are difficult to predict and many of which are
beyond the control of the Company.
Effects of Inflation
Unlike most industrial companies, the assets and liabilities of financial
institutions are primarily monetary in nature. Therefore, banking organizations
do not necessarily gain or lose due to the effects of inflation. Changes in
interest rates, which are a major determinant of a financial service
organization's profitability, do not necessarily correspond to changes in the
prices of goods and services. An analysis of a banking organization's asset and
liability structure provides the best indication of how the organization is
positioned to respond to changing interest rates and maintain profitability.
The financial statements and supplementary financial data have been prepared,
primarily, on a historical basis which is mandated by generally accepted
accounting principles. Fluctuations in the relative value of money due to
inflation or recession are generally not considered.
Recent Accounting Pronouncements
Note 1 to the Consolidated Financial Statements included under Item 8 includes
discussions of recent accounting pronouncements applicable to the activities and
financial reporting of BNC.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Market risk arises from changes in interest rates, exchange rates, and commodity
prices and equity prices and represents the possibility that changes in future
market rates or prices will have a negative impact on the Company's earnings or
value. The Company's principal market risk is interest rate risk.
Interest rate risk arises from changes in interest rates. Interest rate risk can
result from: (1) Re-pricing risk - timing differences in the maturity/re-pricing
of assets, liabilities, and off-balance sheet contracts; (2) Options risk - the
effect of embedded options, such as loan prepayments, interest rate caps/floors,
and deposit withdrawals; (3) Basis risk - risk resulting from unexpected changes
in the spread between two or more different rates of similar maturity, and the
resulting impact on the behavior of lending and funding rates; and (4) Yield
curve risk - risk resulting from unexpected changes in the spread between two or
more rates of different maturities from the same type of instrument. The Company
has risk management policies to monitor and limit exposure to interest rate
risk. To date the Company has not conducted trading activities as a means of
managing interest rate risk. BNC's asset/liability management process is
utilized to manage the Company's interest rate risk. The measurement of interest
rate risk associated with financial instruments is meaningful only when all
related and offsetting on- and off-balance-sheet transactions are aggregated,
and the resulting net positions are identified.
Interest rate risk exposure is actively managed with the goal of minimizing the
impact of interest rate volatility on current earnings and on the market value
of equity. In general, the assets and liabilities generated through ordinary
business activities do not naturally create offsetting positions with respect to
repricing or maturity characteristics. Access to the derivatives market can be
an important element in maintaining the Company's interest rate risk position
within policy guidelines. Using off-balance-sheet instruments, principally
interest rate floors and caps, the interest rate sensitivity of specific
on-balance-sheet transactions, as well as pools of assets or liabilities, is
adjusted to maintain the desired interest rate risk profile. See "--Loan
Portfolio-Interest Rate Floors" and Notes 1 and 13 to the Consolidated Financial
Statements included under Item 7 for a summary of the Company's accounting
policies pertaining to such instruments.
The Company's primary tool in measuring and managing interest rate risk is net
interest income simulation. This exercise includes management assumptions
regarding the level of interest rate or balance changes on indeterminate
maturity deposit products (savings, NOW, money market and demand deposits) for a
given level of market rate changes. These assumptions have been developed
through a combination of historical analysis and future expected pricing
behavior. Interest rate caps and floors are included to the extent that they are
exercised in the 12-month simulation period. Additionally, changes in prepayment
behavior of the residential mortgage and mortgage-backed securities portfolios
in each rate environment are captured using industry estimates of prepayment
speeds for various coupon segments of the portfolio. Finally, the impact of
planned growth and anticipated new business activities is factored into the
simulation model.
It is the Company's objective to manage its exposure to interest rate risk,
bearing in mind that the Company will always be in the business of taking on
rate risk and that rate risk immunization is not entirely possible. Also, it is
recognized that as exposure to interest rate risk is reduced, so too may the
overall level of net interest income.
The Company monitors the results of net interest income simulation on a monthly
basis at regularly scheduled Asset/Liability management committee meetings. Each
month net interest income is simulated for the upcoming 12-month horizon in
seven interest scenarios. The scenarios modeled are parallel interest ramps of
+/- 100bp, 200bp, and 300bp along with a rates unchanged scenario. The parallel
movement of interest rates means all projected market interest rates move up or
down by the same amount. A ramp in interest rates means that the projected
change in market interest rates occurs over the 12-month horizon projected. For
example, in the +100bp scenario, the projected prime rate will increase from its
starting point of 8.75 percent to 9.75 percent 12 months later. The prime rate
in this example will increase 1/12th of the overall increase of 100 basis points
each month.
The net interest income simulation results for the 12-month horizon that covers
the calendar year of 2000 is shown below. The growth assumption used for this
simulation was based on the growth projections built into the Company's 2000
budget. The impact of each interest rate scenario on projected net interest
income is displayed before and after the impact of the $25.0 million notional
interest rate floor on the prime rate with an 8.50 percent strike.
Net Interest Income Simulation
(amounts in thousands)
Movement in interest rates -300bp -200bp -100bp Unchanged +100bp +200bp +300bp
------- ------- ------- --------- ------- ------- -------
Projected 12-month net
interest income............ $16,494 $16,305 $16,123 $ 15,943 $15,582 $15,535 $14,905
Dollar change from rates
unchanged scenario......... 551 362 180 - (361) (708) (1,038)
Percentage change from rates
unchanged scenario......... 3.46% 2.27% 1.13% 0.00% -2.26% -4.44% -6.51%
Benefit/(cost) from $25MM
floor (1).................. 188 57 (87) (224) (224) (224) (224)
Total net interest income
impact with floor.......... 16,682 16,362 16,036 15,719 15,358 15,011 14,681
Dollar change from flat w/
floor...................... 963 643 317 - (361) (708) (1,038)
Percentage change from
unchanged w/floor.......... 6.13% 4.09% 2.02% 0.00% -2.30% -4.50% -6.60%
Benefit from amortization of
deferred gain on
sale of interest rate
swaps (2).................. 53 53 53 53 53 53 53
Total net interest income
impact w/floor & swap
gain....................... $16,735 $16,415 $16,089 $ 15,772 $15,441 $15,064 $14,734
Dollar change from flat
w/floor & swap............. $ 963 $ 643 $ 317 - $ (361)$ (708)$(1,038)
Percentage change from flat
w/floor & swap............. 6.11% 4.08% 2.01% 0.00% -2.29% -4.49% -6.58%
POLICY LIMITS................. -9.00% -6.00% -3.00% 0.00% 3.00% 6.00% 9.00%
(1) In September 1998, the Company purchased an interest rate floor. The
notional amount of the floor is $25.0 million with a maturity date of September
29, 2003. The floor's reference rate is the prime rate with a strike of 8.50
percent. The Company paid a premium of $1,120,000 or (4.48% per million). The
premium is being amortized on a straight-line basis over the 5-year term of the
option. See "-Loan Portfolio-Interest Rate Floors" and Note 1 and 13 to the
Consolidated Financial Statements included under Item 7 for further information
on accounting policies related to derivative financial investments.
(2) The swaps were sold in October and November 1997. Gains recognized upon sale
of the swaps are being amortized as a reduction of interest expense over the
remaining lives of the original swap contracts.
The Company's rate sensitivity position over the projected twelve month horizon
is liability sensitive. This is evidenced by the projected decrease of net
interest income in the rising interest rate scenarios, and the increase in net
interest income in falling rate scenarios. The primary reason for this interest
rate risk profile is the growth of the new Wealthbuilder deposit products along
with the continued growth in these products that is projected into 2000, as well
as the growth and mix of components of the asset side of the balance sheet.
The Company's general policy is to limit the percentage change in projected net
interest income to +/- 3%, 6%, and 9% from the rates unchanged scenario for the
+/-100bp, 200bp, and 300bp interest rate ramp scenarios, respectively. The
Company was within its policy limits for each projected scenario in the table
above.
Static gap analysis is another tool which may be used for interest rate risk
measurement. The net differences between the amount of assets, liabilities,
equity and off-balance-sheet instruments repricing within a cumulative calendar
period is typically referred to as the "rate sensitivity position" or "gap
position." The following table sets forth the Company's rate sensitivity
position as of December 31, 1999. Assets and liabilities are classified by the
earliest possible repricing date or maturity, whichever occurs first:
Interest Sensitivity Gap Analysis
Estimated maturity or repricing at December 31,
1999
---------------------------------------------------
0-3 4-12 1-5 Over
months months years 5 Years Total
--------- --------- --------- --------- ----------
(dollars in thousands)
Interest-earning assets:
Cash equivalents.................... $ 5,565 $ -- $ -- $ -- $ 5,565
Federal Funds sold.................. 3,500 -- -- -- 3,500
Investment securities (1)........... 289 1,119 3,886 145,698 150,992
Fixed rate loans (2)................ 5,989 9,596 49,367 30,961 95,913
Floating rate loans (2)............. 147,138 8,868 9,962 389 166,357
--------- --------- --------- --------- ----------
Total interest-earning assets.... $162,481 $ 19,583 $ 63,215 $177,048 $ 422,327
========= ========= ========= ========= ==========
Interest-bearing liabilities:
NOW and money market accounts....... $122,288 $ -- $ -- $ -- $ 122,288
Savings............................. 5,166 -- -- -- 5,166
Time deposits under $100,000........ 40,257 65,323 14,389 711 120,680
Time deposits $100,000 and over..... 22,368 22,554 1,631 226 46,779
Borrowings.......................... 88,700 -- 14,470 -- 103,170
--------- --------- --------- --------- ----------
Total interest-bearing
liabilities................... $278,779 $ 87,877 $ 30,490 $ 937 $ 398,083
========= ========= ========= ========= ==========
Interest rate gap...................... $(116,298) $(68,294) $ 32,725 $176,111 $ 24,244
========= ========= ========= ========= ==========
Cumulative interest rate gap at
December 31, 1999................... $(116,298) $(184,592)$(151,867)$ 24,244
========= ========= ========= =========
Cumulative interest rate gap to
total assets........................ (25.45)% (40.40)% (33.24)% 5.31%
- --------------------
(1) Investment securities are generally reported in the timeframe representing
the earliest of repricing date, call date (for callable securities), estimated
life or maturity date. Estimated lives of mortgage-backed securities and
collateralized mortgage obligations are based on published industry prepayment
estimates for securities with comparable weighted average interest rates and
contractual maturities.
(2) Loans are stated gross of the allowance for credit losses and are placed in
the earliest timeframe in which maturity or repricing may occur.
The table assumes that all savings and interest-bearing demand deposits reprice
in the earliest period presented, however, BNC's management believes a
significant portion of these accounts constitute a core component and are
generally not rate sensitive. Management's position is supported by the fact
that aggressive reductions in interest rates paid on these deposits historically
has not caused notable reductions in balances.
The table does not necessarily indicate the future impact of general interest
rate movements on the Company's net interest income because the repricing of
certain assets and liabilities is discretionary and is subject to competitive
and other pressures. As a result, assets and liabilities indicated as repricing
within the same period may in fact reprice at different times and at different
rate levels.
Static gap analysis does not fully capture the impact of embedded options,
lagged interest rate changes, administered interest rate products, or certain
off-balance-sheet sensitivities to interest rate movements. Therefore, this tool
cannot be used in isolation to determine the level of interest rate risk
exposure in more complex banking institutions.
Since there are limitations inherent in any methodology used to estimate the
exposure to changes in market interest rates, these analyses are not intended to
be a forecast of the actual effect of changes in market interest rates such as
those indicated above on the Company. Further, this analysis is based on the
Company's assets and liabilities as of December 31, 1999 (with forward
adjustments for planned growth and anticipated business activities) and does not
contemplate any actions the Company might undertake in response to changes in
market interest rates.
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements: Page
Report of Independent Public Accountants................................ 41
Consolidated Balance Sheets as of December 31, 1999 and 1998............ 42
Consolidated Statements of Income for the years ended December 31, 1999,
1998 and 1997........................................................ 43
Consolidated Statements of Comprehensive Income (Loss) for the years ended
December 31, 1999, 1998 and 1997..................................... 44
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1999, 1998 and 1997..................................... 45
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997.................................................. 46
Notes to Consolidated Financial Statements.............................. 47
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To BNCCORP, Inc.:
We have audited the accompanying consolidated balance sheets of BNCCORP, Inc. (a
Delaware corporation) and Subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of income, comprehensive income (loss),
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
BNCCORP's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of BNCCORP, Inc. and
Subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
February 8, 2000
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31
(In thousands, except share and per share data)
ASSETS 1999 1998
---------- --------
CASH AND DUE FROM BANKS.................................... $ 12,816 $ 7,475
INTEREST-BEARING DEPOSITS WITH BANKS....................... 5,565 2,809
FEDERAL FUNDS SOLD......................................... 3,500 --
INVESTMENT SECURITIES AVAILABLE FOR SALE................... 150,992 96,601
LOANS AND LEASES, net of unearned income................... 262,051 247,181
ALLOWANCE FOR CREDIT LOSSES................................ (2,872) (2,854)
---------- --------
Net loans and leases.................................... 259,179 244,327
PREMISES, LEASEHOLD IMPROVEMENTS AND
EQUIPMENT, net.......................................... 12,006 8,786
INTEREST RECEIVABLE........................................ 2,613 2,356
OTHER ASSETS............................................... 6,945 5,929
DEFERRED CHARGES AND INTANGIBLE ASSETS, net................ 3,261 3,957
ASSETS OF DISCONTINUED OPERATION........................... -- 24,092
--------- ---------
$ 456,877 $396,332
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS:
Noninterest-bearing..................................... $ 29,798 $ 28,475
Interest-bearing --
Savings, NOW and money market........................ 127,454 89,887
Time deposits $100,000 and over...................... 46,779 39,162
Other time deposits.................................. 120,680 126,975
---------- ---------
Total deposits.......................................... 324,711 284,499
NOTES PAYABLE.............................................. 103,170 58,485
OTHER LIABILITIES.......................................... 5,847 6,362
LIABILITIES OF DISCONTINUED OPERATION..................... -- 21,731
---------- ---------
Total liabilities................................. 433,728 371,077
---------- ---------
COMMITMENTS AND CONTINGENCIES (Notes 16 and 17)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 2,000,000 shares
authorized; no shares issued or outstanding.......... -- --
Common stock, $.01 par value, 10,000,000 shares
authorized; 2,399,980 and 2,390,184 shares issued and
outstanding (excluding 42,880 shares held in treasury)
in 1999 and 1998, respectively....................... 24 24
Capital surplus.......................................... 13,976 13,951
Retained earnings....................................... 11,893 11,651
Treasury stock (42,880 shares).......................... (513) (513)
Accumulated other comprehensive income (loss),
net of income tax effects............................ (2,231) 142
---------- ---------
Total stockholders' equity........................ 23,149 25,255
---------- ---------
$ 456,877 $ 396,332
========== =========
The accompanying notes are an integral part of these consolidated balance
sheets.
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the Years Ended December 31
(In thousands, except per share data)
1999 1998 1997
-------- -------- --------
INTEREST INCOME:
Interest and fees on loans...................... $ 22,083 $ 22,148 $ 20,697
Interest and dividends on investment securities--
Taxable......................................... 6,090 4,977 3,714
Tax-exempt...................................... 386 95 71
Dividends....................................... 263 304 446
Other........................................... 109 277 304
-------- -------- --------
Total interest income..................... 28,931 27,801 25,232
-------- -------- --------
INTEREST EXPENSE:
Interest on deposits............................ 12,537 11,809 11,282
Interest on short-term borrowings............... 3,303 2,694 1,294
Interest on long-term borrowings................ 734 649 556
-------- -------- --------
Total interest expense.................... 16,574 15,152 13,132
-------- -------- --------
Net interest income....................... 12,357 12,649 12,100
PROVISION FOR CREDIT LOSSES........................ 1,138 1,201 2,518
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR
CREDIT LOSSES................................... 11,219 11,448 9,582
-------- -------- --------
NONINTEREST INCOME:
Insurance commissions........................... 2,045 1,769 1,694
Fees on loans................................... 1,435 1,376 884
Brokerage income................................ 797 53 46
Service charges................................. 536 566 471
Net gain on sales of securities................. 198 130 8
Rental income................................... 121 43 56
Other........................................... 936 906 769
-------- -------- --------
Total noninterest income.................. 6,068 4,843 3,928
-------- -------- --------
NONINTEREST EXPENSE:
Salaries and employee benefits.................. 8,854 7,463 6,184
Write-down of other real estate owned and
repossessed assets........................... 2,271 2 --
Depreciation and amortization................... 1,586 1,498 1,310
Occupancy....................................... 1,248 988 948
Professional services........................... 1,214 766 552
Office supplies, telephone and postage.......... 941 749 647
Marketing and promotion......................... 621 455 363
FDIC and other assessments...................... 191 184 171
Other........................................... 1,289 1,274 1,081
-------- -------- --------
Total noninterest expense................. 18,215 13,379 11,256
-------- -------- --------
Income (loss) before income taxes.................. (928) 2,912 2,254
Income taxes....................................... (399) 1,030 955
-------- -------- --------
Income (loss) from continuing operations........... (529) 1,882 1,299
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income, continued
For the Years Ended December 31
(In thousands, except per share data)
1999 1998 1997
-------- -------- --------
Discontinued Operation:
Income from operations of discontinued
asset-based lending subsidiary (less
applicable income taxes of $292, $263 and
$89 for the years ended December 31, 1999,
1998 and 1997, respectively)................. 429 385 127
Gain on disposal of asset-based lending
subsidiary, including operating income
of $50 during phase-out period
(less applicable income taxes of $268)....... 438 -- --
-------- -------- --------
Income before cumulative effect of change in
accounting principle............................ 338 2,267 1,426
Cumulative effect of change in accounting
principle, net of income tax effects............ (96) -- --
-------- -------- --------
NET INCOME......................................... $ 242 $ 2,267 $ 1,426
======== ======== ========
BASIC EARNINGS PER COMMON SHARE:
Income (loss) from continuing operations........... $ (0.22) $ 0.79 $ 0.54
Income from operations of discontinued asset-based
lending subsidiary (less applicable income
taxes).......................................... 0.18 0.16 0.05
Gain on disposal of asset-based lending subsidiary
(less applicable income taxes).................. 0.18 -- --
Cumulative effect of change in accounting
principle, net of income tax effects............ (0.04) -- --
-------- -------- --------
Earnings per share, basic.......................... $ 0.10 $ 0.95 $ 0.59
======== ======== ========
DILUTED EARNINGS PER COMMON SHARE:
Income (loss) from continuing operations........... $ (0.22) $ 0.75 $ 0.54
Income from operations of discontinued asset-based
lending subsidiary (less applicable
income taxes) .................................. 0.18 0.16 0.05
Gain on disposal of asset-based lending subsidiary
(less applicable income taxes).................. 0.18 -- --
Cumulative effect of change in accounting
principle, net of income tax effects............ (0.04) -- --
-------- -------- -------
Earnings per share, diluted........................ $ 0.10 $ 0.91 $ 0.59
========= ======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
For the Years Ended December 31
(In thousands)
1999 1998 1997
--------- --------- ---------
NET INCOME............................ $ 242 $ 2,267 $ 1,426
OTHER COMPREHENSIVE INCOME --
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during the period, net of
income tax effects.............. (2,373) (28) 127
Less: reclassification adjustment
for gains included in net income,
net of income tax effects....... (121) (79) (5)
--------- --------- ---------
OTHER COMPREHENSIVE INCOME (LOSS)..... (2,494) (107) 122
--------- --------- ---------
COMPREHENSIVE INCOME (LOSS)........... $ (2,252) $ 2,160 $ 1,548
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(In thousands, except share data)
Accumulated
Other
Common Stock Capital Retained Treasury Comprehensive
Shares Amount Surplus Earnings Stock Income (Loss) Total
------------------ --------- --------- --------- -------------- --------
BALANCE, December 31, 1996... 2,427,506 $ 24 $ 13,786 $ 7,985 $ (216) $ 43 $ 21,595
Net income................ -- -- -- 1,426 -- -- 1,426
Other comprehensive income-
Change in unrealized
holding gain on
securities available for
sale, net of income tax
effects.................. -- -- -- -- -- 127 127
--------- ------- --------- --------- --------- -------------- --------
BALANCE, December 31, 1997... 2,427,506 24 13,786 9,384 (216) 170 23,148
Net income................ -- -- -- 2,267 -- -- 2,267
Other comprehensive income-
Change in unrealized
holding gain on
securities available for
sale, net of income tax
effects.................. -- -- -- -- -- (28) (28)
Other........................ 5,558 -- 165 -- -- -- 165
Purchase of treasury stock... -- -- -- -- (297) -- (297)
---------- ------- --------- --------- --------- -------------- ---------
BALANCE, December 31, 1998... 2,433,064 24 13,951 11,651 (513) 142 25,255
Net Income................ -- -- -- 242 -- -- 242
Other comprehensive income-
Change in unrealized
holding gain on
securities available for
sale, net of income tax
effects.................. -- -- -- -- -- (2,373) (2,373)
Other........................ 9,796 -- 25 -- -- -- 25
---------- ------- --------- --------- --------- -------------- ---------
BALANCE, December 31, 1999... 2,442,860 $ 24 $ 13,976 $ 11,893 $ (513) $ (2,231) $ 23,149
========== ======= ========= ========= ========= ============== =========
The accompanying notes are an integral part of these consolidated financial
statements.
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31
(In thousands)
1999 1998 1997
--------- ---------- ----------
OPERATING ACTIVITIES:
Net income..............................................$ 242 $ 2,267 $ 1,426
Adjustments to reconcile net income to net cash provided
by operating activities --
Provision for credit losses............................ 1,138 1,290 2,619
Depreciation and amortization.......................... 1,045 901 718
Amortization of intangible assets...................... 541 606 599
Net premium amortization (discount accretion) on 612 172 (131)
investment securities...............................
Proceeds from loans recovered.......................... 170 189 777
Write down of other real estate owned and repossessed 2,271 2 --
assets..............................................
Change in interest receivable and other assets, net.... (796) (3,049) (1,998)
Gain on disposal of asset-based lending subsidiary..... (438) -- --
(Gain) loss on sale of bank premises and equipment..... 10 117 (2)
Net realized gains on sales of investment securities... 198 (130) (8)
Deferred income taxes.................................. (2,503) (190) (367)
Change in other liabilities, net....................... (515) (74) 654
Originations of loans to be sold......................(117,299) (47,412) (58,305)
Proceeds from sale of loans............................117,299 47,412 58,305
-------- --------- ----------
Net cash provided by operating activities........... 1,975 2,101 4,287
-------- --------- ----------
INVESTING ACTIVITIES:
Purchases of investment securities.......................(185,958) (91,981) (74,121)
Proceeds from sales of investment securities.............. 39,732 58,855 27,198
Proceeds from maturities of investment securities......... 87,671 31,071 12,137
Net increase in loans.....................................(16,160) (37,131) (34,124)
Additions to premises, leasehold improvements and
equipment.............................................. (4,396) (1,254) (2,693)
Proceeds from sale of premises and equipment.............. 121 26 82
Disposition of discontinued asset-based lending
subsidiary............................................. 23,373 -- --
-------- --------- ----------
Net cash used in investing activities...............(55,617) (40,414) (71,521)
-------- --------- ----------
FINANCING ACTIVITIES:
Net increase in demand, savings, NOW and money market
accounts............................................... 38,890 16,937 26,724
Net increase (decrease) in time deposits.................. 1,322 4,738 (3,670)
Net increase in short-term borrowings..................... 39,410 2,787 35,066
Repayments of long-term borrowings........................(29,520) (13,492) (23,293)
Proceeds from long-term borrowings........................ 15,000 22,242 34,444
Amortization of discount on subordinated notes............ 92 84 46
Amortization of deferred charges.......................... 20 18 10
Repurchase of stock....................................... -- (297) --
Other, net................................................ 25 165 --
-------- --------- ----------
Net cash provided by financing activities........... 65,239 33,182 69,327
-------- --------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......... 11,597 (5,131) 2,093
CASH AND CASH EQUIVALENTS, beginning of year................. 10,284 15,415 13,322
-------- --------- ----------
CASH AND CASH EQUIVALENTS, end of year.......................$21,881 $ 10,284 $ 15,415
======== ========= ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid.............................................$16,494 $ 14,091 $ 13,689
======== ========= ==========
Income taxes paid.........................................$ 1,107 $ 1,648 $ 1,664
======== ========= ==========
The accompanying notes are an integral part of these consolidated financial
statements.
BNCCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
1. Summary of Significant Accounting Policies
BNCCORP, Inc. ("BNCCORP") is a registered bank holding company incorporated
under the laws of Delaware. It is the parent company of BNC National Bank
(together with its wholly-owned subsidiaries, BNC Insurance, Inc. and BNC Asset
Management, Inc., "BNC-North Dakota") and BNC National Bank of Minnesota
("BNC-Minnesota" and, together with BNC-North Dakota, "the Banks"). Through
these wholly-owned subsidiaries, which operate from seventeen locations in North
Dakota and Minnesota, BNCCORP provides a broad range of banking and financial
services to small and mid-size businesses and individuals. An additional
wholly-owned subsidiary, Bismarck Properties, Inc., is inactive.
The accounting and reporting policies of BNCCORP and its subsidiaries
(collectively, the "Company") conform to generally accepted accounting
principles and general practices within the financial services industry. The
more significant accounting policies are summarized below. On December 31, 1999
the Company sold its asset-based lending subsidiary, BNC Financial Corporation,
which is treated as a discontinued operation.
Business Combinations. Business combinations which have been accounted for under
the purchase method of accounting include the results of operations of the
acquired businesses from the date of acquisition. Net assets of the companies
acquired were recorded at their estimated fair value as of the date of
acquisition. Other business combinations have been accounted for under the
pooling-of-interests method of accounting which requires the assets, liabilities
and stockholders' equity of the merged entity to be retroactively combined with
the Company's respective accounts at recorded value. Prior period financial
statements have been restated to give effect to business combinations accounted
for under this method.
Discontinued Operation. The results of the discontinued operation and any gain
or loss on disposal are reported separately from continuing operations. Prior
period financial statements have been restated to give effect to the
discontinued operation accounted for under this method.
Principles of Consolidation. The accompanying consolidated financial statements
include the accounts of BNCCORP and its wholly-owned subsidiaries. All
significant intercompany transactions and balances have been eliminated in
consolidation.
Cash and Cash Equivalents. For the purpose of presentation in the consolidated
statements of cash flows, the Company considers amounts included in the
consolidated balance sheet captions "cash and due from banks" and
"interest-bearing deposits with banks" to be cash equivalents.
Investment Securities. Investment and mortgage-backed securities which the
Company intends to hold for indefinite periods of time, including securities
that management intends to use as part of its asset/liability management
strategy, or that may be sold in response to changes in interest rates, changes
in prepayment risk, the need to increase regulatory capital or similar factors,
as well as securities on which call options have been written, are classified as
available for sale. Available-for-sale securities are measured at fair value.
Net unrealized gains and losses, net of deferred income taxes, on investments
and mortgage-backed securities available for sale, while included in
comprehensive income (see "Comprehensive Income"), are excluded from earnings
and reported as a separate component of stockholders' equity until realized. All
securities were classified as available for sale as of December 31, 1999 and
1998. Investment and mortgage-backed securities which the Company intends to
hold until maturity are stated at cost, adjusted for amortization of premiums
and accretion of discounts using a method that approximates level yield.
Declines in the fair value of individual available-for-sale or held-to-maturity
securities below their cost which are other than temporary could result in
write-downs of the individual securities to their fair value. Such write-downs,
should they occur, would be included in earnings as realized losses. There were
no such write-downs during 1999, 1998 or 1997.
Securities purchased and sold for purposes of generating profits on short-term
differences in market prices are classified as trading securities. Trading
securities are stated at fair value and adjustments to fair value are reported
in noninterest income. The Company held no securities for trading purposes as of
December 31, 1999 or 1998.
Realized gains and losses on sales of investment securities are computed using
the specific identification method at the time of sale and are recorded in
noninterest income.
Loans and Leases. Loans are stated at their outstanding principal amount net of
unearned income and an allowance for credit losses.
Loans are generally placed on a nonaccrual status for recognition of interest
income when, in the opinion of management, uncertainty exists as to the ultimate
collection of principal or interest. At the time a loan is placed on nonaccrual
status, accrued but uncollected interest income applicable to the current
reporting period is reversed against interest income of the current period.
Accrued but uncollected interest income applicable to previous reporting periods
is charged against the credit loss reserve. While a loan is classified as
nonaccrual, collections are generally applied as a reduction to principal
outstanding.
Allowance for Credit Losses. The Company maintains its allowance for credit
losses at a level considered adequate to provide for an estimate of probable
losses related to specifically identified loans as well as probable losses
inherent in the remaining loan and lease portfolio that have been incurred as of
each balance sheet date. The loan and lease portfolio and other credit exposures
are reviewed regularly to evaluate the adequacy of the allowance for credit
losses. In determining the level of the allowance, the Company evaluates the
allowance necessary for specific nonperforming loans and also estimates losses
inherent in other credit exposures. The resultant three allowance components are
as follows:
Specific Allowance. This component is determined through a loan-by-loan
analysis of nonperforming loans that considers expected future cash flows,
the value of collateral and other factors that may impact the borrower's
ability to pay.
Allocated Inherent Allowance. This component is based on loss factors
assigned to the Company's credit exposures based on internal credit risk
ratings. These loss factors are primarily based on management's judgment
concerning the effect of the business cycle on the creditworthiness of the
Company's borrowers as well as historical charge-off experience.
Unallocated Inherent Allowance. The unallocated portion of the inherent loss
allowance is based on factors that cannot be associated with a specific
credit or loan risk rating categories. These factors include management's
subjective evaluation of local and national economic and business conditions,
portfolio concentrations and changes in the character and size of the loan
portfolio. The unallocated portion of the inherent loss allowance reflects
management's attempt to ensure that the overall allowance appropriately
reflects a margin for the imprecision necessarily inherent in estimates of
expected credit losses.
Continuous credit monitoring processes and the quarterly analysis of specific
and inherent loss components is the principal method relied upon by management
to ensure that changes in estimated credit loss levels are reflected in the
Company's allowance for credit losses on a timely basis. Management also
considers experience of peer institutions and regulatory guidance in addition to
the Company's own experience.
Loans, leases and other extensions of credit deemed uncollectible are charged to
the allowance. Subsequent recoveries, if any, are credited to the allowance.
Actual losses may vary from current estimates and the amount of the provision
may be either greater than or less than actual net charge-offs. The related
provision for credit losses, which is charged to income, is the amount necessary
to adjust the allowance to the level determined appropriate through application
of the above process.
Loan Origination Fees and Costs. Loan origination fees and costs incurred to
extend credit are deferred and amortized over the term of the loan as a yield
adjustment. Loan fees representing adjustments of yield are generally deferred
and amortized into interest income over the term of the loan using the interest
method. Loan commitment fees are generally deferred and amortized into
noninterest income on a straight-line basis over the commitment period.
Mortgage Servicing and Transfers of Financial Assets. The Banks regularly sell
loans to others on a non-recourse basis. Sold loans are not included in the
accompanying balance sheets. The Banks generally retain the right to service the
loans as well as the right to receive a portion of the interest income on the
loans. At December 31, 1999 and 1998, the Banks were servicing loans for the
benefit of others with aggregate unpaid principal balances of $148.7 and $73.8
million, respectively. The vast majority of the loans sold by the Banks are
commercial lines of credit for which balances and related payment streams cannot
be reasonably estimated in order to determine the fair value of the servicing
rights and/or future interest income retained by the Banks.
Premises, Leasehold Improvements and Equipment. Premises, leasehold improvements
and equipment are reported at cost less accumulated depreciation and
amortization. Depreciation and amortization for financial reporting purposes is
charged to operating expense using the straight-line method over the estimated
useful lives of the assets. Estimated useful lives are up to 40 years for
buildings and three to ten years for furniture and equipment. Leasehold
improvements are amortized over the shorter of the lease term or the estimated
useful life of the improvement. The costs of improvements are capitalized.
Maintenance and repairs, as well as gains and losses on dispositions of premises
and equipment, are included in noninterest expense as incurred.
Other Real Estate Owned and Repossessed Property. Real estate properties and
other assets acquired through, or in lieu of, loan foreclosure are included in
other assets in the balance sheet and are stated at the lower of carrying amount
or fair value less cost to sell. When an asset is acquired, the excess of the
recorded investment in the asset over fair value, if any, is charged to the
allowance for credit losses. Subsequent declines in the estimated fair value,
net operating results and gains and losses on disposition of the asset are
included in other noninterest expenses. The Company's investment in such assets
at December 31, 1999 and 1998 was $1.2 and $2.1 million, respectively.
Deferred Charges and Intangible Assets. Deferred charges and intangible assets
includes premiums paid for deposits assumed, goodwill, debt related costs and
other miscellaneous intangibles. Deposit premiums are being amortized over their
estimated lives of ten years using the straight-line method. Goodwill represents
the aggregate excess of the cost of subsidiaries acquired over the fair value of
their net assets at dates of acquisition and is being amortized over its
estimated useful life of 15 to 25 years using the straight-line method. Debt
related costs represent legal, accounting and other fees and expenses associated
with the issuance of such indebtedness. These costs are being amortized over the
term of the notes using the effective interest rate method. The Company's
intangible assets are monitored to assess recoverability and determine whether
events and circumstances require adjustment to the recorded amounts or
amortization periods. See "Impairment of Long-Lived Assets."
Impairment of Long-Lived Assets. The Company periodically reviews long-lived
assets including property and equipment, certain identifiable intangibles and
goodwill for impairment. If impairment is identified, the assets are written
down to their fair value through a charge to noninterest expense. No such
impairment losses were recorded during 1999, 1998 or 1997.
Securities Sold Under Agreements to Repurchase. From time to time, the Company
enters into sales of securities under agreements to repurchase, generally for
periods of less than 90 days. Fixed coupon agreements are treated as financings,
and the obligations to repurchase securities sold are reflected as a liability
in the balance sheets. The cost of securities underlying the agreements remain
in the asset accounts.
Fair Values of Financial Instruments. The following methods and assumptions were
used by the Company in estimating fair values of financial instruments as
disclosed herein:
Cash and Cash Equivalents, Noninterest-Bearing Deposits and Demand Deposits.
The carrying amounts approximate fair value due to the short maturity of the
instruments. The fair value of deposits with no stated maturity, such as NOW,
savings and money market accounts, is equal to the amount payable on demand
at the reporting date.
Securities. The fair value of the Company's securities equals the quoted
market price.
Loans. Fair values for loans are estimated by discounting future cash flow
payment streams using rates at which current loans to borrowers with similar
credit ratings and similar loan maturities are being made.
Interest-Bearing Deposits. Fair values of interest-bearing deposit
liabilities are estimated by discounting future cash flow payment streams
using rates at which comparable current deposits with comparable maturities
are being issued.
Borrowings. The carrying amount of short-term borrowings approximates fair
value due to the short maturity and the instruments' floating interest rates,
which are tied to market conditions. The fair values of long-term borrowings,
for which the maturity extends beyond one year, are estimated by discounting
future cash flow payment streams using rates at which comparable borrowings
are currently being offered.
Derivative Financial Instruments. As part of managing its interest rate risk,
the Company may, from time to time, use derivative financial instruments such as
interest rate swaps, floors and caps. Such instruments are used to hedge market
values and to alter the cash flow characteristics of certain on-balance sheet
instruments. The derivative instruments used to manage interest rate risk are
linked with a specific asset or liability or a group of related assets or
liabilities at the inception of the derivative contract and have a high degree
of correlation with the associated balance sheet item during the hedge period.
Net interest income or expense on derivative contracts used for interest rate
risk management is accrued. Realized gains and losses on contracts, either
settled or terminated, are deferred and are recorded as either an adjustment to
the carrying value of the related on-balance sheet asset or liability or in
other assets or other liabilities. Deferred amounts are amortized into interest
income or expense over either the remaining original life of the derivative
instrument or the expected life of the associated asset or liability. Unrealized
gains or losses on these contracts are not recognized on the balance sheet. The
Company does not conduct trading activities or hold derivative financial
instruments for speculative purposes.
Trust Fees. Trust fees are recorded on the accrual basis of accounting.
Income Taxes. BNCCORP and its subsidiaries file a consolidated federal income
tax return. State income tax returns are filed separately by each subsidiary. In
accordance with a tax sharing arrangement, BNCCORP collects for or pays to each
of its subsidiaries the tax or tax benefit resulting from its inclusion in the
consolidated federal return.
Deferred income taxes are reported for temporary differences between items of
income or expense reported for financial statement purposes and those reported
for income tax purposes. The differences relate primarily to differences in
accounting for loan losses, depreciation timing differences, unrealized gains
and losses on investment securities, deferred compensation and leases which are
treated as operating leases for tax purposes and capital leases for financial
statement purposes.
Earnings Per Common Share. Basic earnings per share is computed by dividing net
income by the weighted average common shares outstanding during the applicable
period. Diluted earnings per share is computed based on the amount of net income
that would be available for each common share, assuming all dilutive potential
common shares were issued. Such dilutive potential common shares include stock
options and warrants (see Note 19).
Comprehensive Income (Loss). The Company presents a consolidated statement of
comprehensive income (loss) detailing changes in the amounts of items which
bypass the income statement and are reported with a balance in stockholders'
equity.
Segment Disclosures. The Company has provided disclosure of financial and
descriptive information about reportable operating segments in Note 20.
Other Recently Issued Accounting Standards. On January 1, 1999, the Company
adopted Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities" ("SOP 98-5"), which requires costs of start-up activities and
organization costs to be expensed as incurred. SOP 98-5 did not require
restatement of prior period financial statements. The impact of adoption of SOP
98-5 is presented in the consolidated financial statements as a cumulative
effect of change in accounting principle.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
133 requires that changes in the derivative=s fair value be recognized currently
in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate, and assess the effectiveness
of transactions that receive hedge accounting.
SFAS 133 is effective for fiscal years beginning after June 15, 2000 and cannot
be applied retroactively. SFAS 133 must be applied to (a) derivative instruments
and (b) certain derivative instruments embedded in hybrid contracts that were
issued, acquired, or substantively modified after December 31, 1997 (and, at the
Company's election, before January 1, 1998).
The Company plans to adopt SFAS 133 on January 1, 2001 and is currently in the
process of developing applicable policy statements, effecting any necessary
system changes and quantifying the impact of the adoption of SFAS 133 on its
financial statements. Adoption of the accounting standard could increase
volatility in earnings and other comprehensive income.
Regulatory Environment. BNCCORP and its subsidiaries are subject to regulations
of certain state and federal agencies, including periodic examinations by those
regulatory agencies. BNCCORP and its subsidiary banks are also subject to
minimum regulatory capital requirements. At December 31, 1999, capital levels
exceed minimum capital requirements (see Note 11).
Reclassifications. Certain amounts in the financial statements for prior years
have been reclassified to conform with the current year's presentation.
Use of Estimates. The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. The actual results could differ from those
estimates.
2. Acquisitions and Divestitures:
On December 31, 1999, the Company sold its asset-based lending subsidiary, BNC
Financial Corporation ("BNC Financial"), to Associated Banc-Corp of Green Bay,
Wisconsin. The Company received $5.3 million in cash for all of the issued and
outstanding common stock of BNC Financial.
Operating results of BNC Financial for the nine months ended September 30, 1999
are shown separately in the accompanying consolidated statement of income. The
gain on disposal of BNC Financial of $438,000 (pretax gain of $706,000, net of
income tax effects of $268,000) included operating results for the subsidiary
during the phase out period of October 1 through December 31, 1999 and other
adjustments related to the winding down of BNC Financial's operations. The
income statements for the years ended December 31, 1998 and 1997 have been
restated to reflect the operating results of BNC Financial as discontinued.
Net interest income and noninterest income for BNC Financial for the years ended
December 31, 1999, 1998 and 1997 were $1.6 million and $266,000, $1.1 million
and $208,000, and $528,000 and $196,000, respectively. These amounts are not
included in net interest income and noninterest income in the accompanying
consolidated income statements.
The net assets and liabilities of BNC Financial at December 31, 1998 and 1997
have been separately classified in the accompanying consolidated balance sheets.
The following mergers and acquisitions were consummated during the three years
ended December 31, 1999:
In January 1997, BNC-North Dakota acquired the stock of J.D. Meier Insurance
Agency, Inc., Linton, North Dakota ("J.D. Meier") for $34,000. Three executive
officers of the Company owned stock in J.D. Meier.
In August 1997, BNC-North Dakota purchased a management agreement between
Preferred Investment Services, Inc., and Preferred Pension Investors I-87, an
Illinois Partnership (the "Agreement") for $394,000. An executive
officer/director of BNCCORP owned stock in Preferred Investment Services, Inc.
Under the Agreement, BNC-North Dakota, through its trust and financial services
division, provides administrative management services for pension assets.
Goodwill of $394,000 resulting from the transaction is being amortized over 15
years.
On January 1, 1998, the Company acquired Lips & Lahr, Inc. ("Lips & Lahr") in a
business combination accounted for as a pooling of interests. Lips & Lahr, which
engages in the insurance business was merged into J.D. Meier and became a wholly
owned subsidiary of BNC-North Dakota through the exchange of 63,406 shares of
BNCCORP common stock for all of the outstanding stock of Lips & Lahr. The name
of the combined agency was subsequently changed to BNC Insurance, Inc. ("BNC
Insurance"). Under the provisions of the agreement and plan of merger related to
the business combination, former stockholders of Lips & Lahr had the right to
receive additional shares of BNCCORP common stock on the first anniversary of
the initial share distribution date based on a formula relating to final
resolution of contingencies pending at the consummation date.
3. Restrictions on Cash and Due From Banks:
BNCCORP's subsidiary banks are required to maintain reserve balances in cash
with the Federal Reserve Bank. The amount of those reserve balances was $1.5 and
$1.3 million as of December 31, 1999 and 1998, respectively.
4. Debt and Equity Securities:
Debt and equity securities have been classified in the consolidated balance
sheets according to management's intent. The Company had no securities
designated as trading or held-to-maturity in its portfolio at December 31, 1999
or 1998. The carrying amount of securities and their approximate market values
were as follows as of December 31 (in thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ----------- -----------
Available-for-Sale Securities
1999
U.S. government agency mortgage-
backed securities........... $ 26,697 $ 2 $ (404) $ 26,295
U.S. government agencies 4,654 -- (186) 4,468
securities.....................
Collateralized mortgage 97,243 50 (2,255) 95,038
obligations....................
State and municipal bonds...... 20,272 15 (739) 19,548
Equity securities.............. 5,643 -- -- 5,643
---------- ---------- ----------- -----------
$ 154,509 $ 67 $ (3,584) $ 150,992
========== ========== =========== ===========
Available-for-Sale Securities
1998
U.S. Treasury securities....... $ 5,098 $ 11 $ -- $ 5,109
U.S. government agency mortgage-
backed securities........... 51,194 329 (79) 51,444
U.S. government agencies 13,096 5 (103) 12,998
securities.....................
Collateralized mortgage 19,602 127 (122) 19,607
obligations....................
State and municipal bonds...... 3,355 72 (7) 3,420
Equity securities.............. 4,024 -- (1) 4,023
---------- ---------- ---------- ----------
$ 96,369 $ 544 $ (312) $ 96,601
========== ========== ========== ==========
The amortized cost and estimated fair market value of securities available for
sale (other than equity securities) classified according to their contractual
maturities at December 31, 1999, were as follows (in thousands):
Available-for-Sale
Securities
----------------------
Estimated
Amortized Market
Cost Value
---------- -----------
Due in one year or less........... $ 1,413 $ 1,409
Due after one year through five 3,920 3,886
years.............................
Due after five years through ten 20,707 20,452
years.............................
Due after ten years............... 122,826 119,602
---------- -----------
Total.......................... $ 148,866 $ 145,349
========== ===========
Securities carried at approximately $126.5 and $83.8 million at December 31,
1999 and 1998, respectively, were pledged as collateral for public deposits and
borrowings, including borrowings with the Federal Home Loan Bank ("FHLB").
Sales proceeds and gross realized gains and losses on securities available for
sale were as follows for the years ended December 31 (in thousands):
1999 1998 1997
----------- ----------- -----------
Sales proceeds........ $ 39,732 $ 58,855 $ 27,198
Gross realized gains.. $ 239 $ 164 $ 40
Gross realized losses. $ 41 $ 34 $ 32
Income taxes applicable to net gains and losses on securities available for sale
were $75,000, $49,000 and $3,000 for the years ended December 31, 1999, 1998 and
1997, respectively.
5. Loans and Leases:
Composition of Loan and Lease Portfolio. The composition of the loan and lease
portfolio was as follows as of December 31 (in thousands):
1999 1998
---------- -----------
Commercial and industrial..... $ 111,236 $ 107,886
Real estate:
Mortgage................... 91,906 76,692
Construction............... 16,026 20,831
Agricultural.................. 16,679 19,777
Consumer...................... 13,232 14,345
Lease financing............... 11,307 7,422
Other......................... 1,884 416
---------- -----------
Total...................... 262,270 247,369
Less:
Allowance for credit losses (2,872) (2,854)
Unearned income............ (219) (188)
---------- -----------
Net loans and leases.... $ 259,179 $ 244,327
========== ===========
Geographic Location and Types of Loans. Loans were to borrowers located in the
following market areas as of December 31:
1999 1998
-------- -------
North Dakota............ 46% 42%
Minnesota............... 43 49
Other................... 11 9
======== =======
Totals............ 100% 100%
======== =======
Commercial loan borrowers are generally small- and mid-sized corporations,
partnerships and sole proprietors in a wide variety of businesses. Loans to
consumers are both secured and unsecured. Real estate loans are fixed or
variable rate and include both amortizing and revolving line-of-credit loans.
Real estate mortgage loans include various types of loans for which the Company
holds real property as collateral. Of the $91.9 and $76.7 million real estate
mortgages as of December 31, 1999 and 1998, respectively, approximately $38.2
and $35.0 million, respectively, were loans made to commercial customers where
the collateral for the loan is, among other things, the real estate occupied by
the business of the customer. Accordingly, certain loans categorized as real
estate mortgage loans can be characterized as commercial loans that are secured
by real estate. Single- and multi-family residential mortgage loans totaling
$9.6 million at December 31, 1999 and 1998 were pledged as collateral for FHLB
borrowings. Commercial loans totaling $30.9 million at December 31, 1999 were
pledged as collateral for borrowings, including FHLB borrowings.
The Company's credit policies emphasize diversification of risk among
industries, geographic areas and borrowers. The only concentrations of loans
exceeding 10 percent of total loans at December 31, 1999 are construction loans
and real estate loans such as loans to non-residential and apartment building
operators and lessors of real property. Loans within these categories are
diversified across different types of contractors and operators, geographically
dispersed and secured by many different types of real estate and other
collateral.
Impaired Loans. As of December 31, the Company's recorded investment in impaired
loans and the related valuation allowance were as follows (in thousands):
1999 1998
------------------------ -----------------------
Recorded Valuation Recorded Valuation
Investment Allowance Investment Allowance
----------- ----------- ---------- ----------
Impaired loans --
Valuation allowance
required............... $ 5,255 $ 911 $ 8,639 $ 960
No valuation allowance
required.................. 742 -- 624 --
=========== =========== ========== ==========
Total impaired loans... $ 5,997 $ 911 $ 9,263 $ 960
=========== =========== ========== ==========
Impaired loans generally include loans on which management believes, based on
current information and events, it is probable that the Company will not be able
to collect all amounts (i.e., contractual principal and interest) due in
accordance with the terms of the loan agreement and which are analyzed for a
specific reserve allowance. The Company generally considers all loans
risk-graded substandard and doubtful as well as nonaccrual and restructured
loans as impaired loans.
The valuation allowance on impaired loans is included in the allowance for
credit losses noted above.
Interest payments received on impaired loans are recorded as interest income
unless collection of the remaining recorded investment is doubtful at which time
payments received are recorded as reductions of principal. The average recorded
investment in impaired loans and approximate interest income recognized for such
loans were as follows for the years ended December 31 (in thousands):
1999 1998 1997
--------- --------- ---------
Average recorded investment in impaired
loans.............................. $ 8,977 $ 9,542 $ 7,308
========= ========= =========
Interest income recognized on impaired
loans.............................. $ 914 $ 992 $ 747
========= ========= =========
Average recorded investment in impaired
loans as a percentage of average total
loans.............................. 3.6% 4.1% 3.4%
========= ========= =========
Nonaccrual and Restructured Loans. As of December 31, 1999 and 1998, the Company
had $1.6 and $2.0 million, respectively, of nonaccrual loans and $16,000 and
$44,000, respectively, of restructured loans (included as impaired loans above).
The following table indicates the effect on income if interest on such loans
outstanding at year-end had been recognized at original contractual rates during
the year ended December 31 (in thousands):
1999 1998 1997
--------- --------- ---------
Interest income that would have been
recorded.............................. $ 141 $ 224 $ 56
Interest income recorded.............. 29 175 26
========= ========= =========
Effect on interest income............. $ 112 $ 49 $ 30
========= ========= =========
As of December 31, 1999, the Company had no commitments to lend additional funds
to borrowers with loans whose terms have been modified in troubled debt
restructurings.
Allowance for Credit Losses. Transactions in the allowance for credit losses
were as follows for the years ended December 31 (in thousands):
1999 1998 1997
--------- --------- ---------
Balance, beginning of year............. $ 2,854 $ 2,919 $ 1,545
Provision for credit losses......... 1,138 1,201 2,518
Loans charged off................... (1,290) (1,455) (1,921)
Loans recovered..................... 170 189 777
========= ========= =========
Balance, end of year................... $ 2,872 $ 2,854 $ 2,919
========= ========= =========
6. Premises, Leasehold Improvements and Equipment:
Premises, leasehold improvements and equipment consisted of the following at
December 31 (in thousands):
1999 1998
---------- ----------
Land and improvements.......................... $ 1,118 $ 530
Buildings and improvements..................... 7,732 5,046
Leasehold improvements......................... 971 892
Furniture, fixtures and equipment.............. 6,759 5,896
---------- ----------
Total cost.................................. 16,580 12,364
Less accumulated depreciation and amortization. (4,574) (3,578)
---------- ----------
Net premises, leasehold improvements and
equipment................................ 12,006 8,786
========== ==========
Depreciation and amortization expense on premises, leasehold improvements and
equipment charged to continuing operations totaled approximately $1.0 million,
$887,000 and $706,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.
7. Deferred Charges and Intangible Assets:
Deferred charges and intangible assets consisted of the following at December 31
(in thousands):
1999 1998
----------- -----------
Premiums paid for deposits assumed............. $ 4,022 $ 4,022
Goodwill....................................... 1,115 1,115
Covenants not to compete....................... 480 480
Debt related costs............................. 161 161
Other miscellaneous intangibles................ 112 472
----------- -----------
Total costs................................. 5,890 6,250
Less accumulated amortization ................. (2,629) (2,293)
----------- -----------
Net deferred charges and intangible assets.. $ 3,261 $ 3,957
=========== ===========
Amortization expense charged to continuing operations was $541,000, $611,000 and
$585,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
8. Income Taxes:
The provision (benefit) for income taxes consists of the following for the years
ended December 31 (in thousands):
1999 1998 1997
-------- --------- --------
Continuing Operations--
Current................................ $ 726 $ 1,136 $ 1,375
Deferred income taxes from the following
timing differences:
Provision for credit losses....... 117 (80) (550)
Depreciation...................... (66) 46 40
Write-downs of other real estate
owned and repossessed assets..... (829) -- --
Leases............................ (69) (38) 18
Other............................. (278) (34) 72
-------- --------- --------
$ (399) $ 1,030 $ 955
======== ========= ========
1999 1998 1997
-------- --------- --------
Discontinued Operation--
Current................................ $ 410 $ 331 $ 126
Deferred income taxes from the following
timing differences:
Provision for credit losses....... 98 (36) (42)
Depreciation...................... 4 -- 2
Other............................. 48 (32) 3
-------- --------- --------
$ 560 $ 263 $ 89
======== ========= ========
The provision (benefit) for federal income taxes expected at the statutory rate
differs from the actual provision as follows for the years ended December 31 (in
thousands):
1999 1998 1997
-------- --------- --------
Tax at 34% statutory rate................ $ (316) $ 990 $ 766
Increase (decrease) resulting from:
State taxes (net of federal benefit).. (1) 43 154
Tax-exempt interest................... (142) (28) (20)
Other, net............................ 60 25 55
-------- --------- --------
$ (399) $ 1,030 $ 955
======== ========= ========
Temporary differences between the financial statement carrying amounts and tax
bases of assets and liabilities that result in significant portions of the
Company's deferred tax assets and liabilities are as follows as of December 31
(in thousands):
1999 1998
-------- --------
Deferred tax asset:
Loans, primarily due to differences in accounting
for credit losses.............................. $ 1,087 $ 1,165
Unrealized loss on securities available for sale.. 1,288 --
Write-downs of other real estate owned and
repossessed assets................................... 829 --
Net operating loss carry forwards................. 18 18
Other............................................. 420 294
-------- --------
Deferred tax asset.......................... 3,642 1,477
-------- --------
Deferred tax liability:
Unrealized gain on securities available for sale.. -- 90
Leases, primarily due to differences in accounting
for leases..................................... 435 504
Premises and equipment, primarily due to
differences in original cost basis and
depreciation................................... 469 535
Other............................................ 97 210
-------- --------
Deferred tax liability...................... 1,001 1,339
======== ========
Net deferred tax asset...................... $ 2,641 $ 138
======== ========
9. Notes Payable:
The Company's notes payable consist of the following as of December 31 (in
thousands):
1999 1998
-------- ---------
BNCCORP:
Notes payable to Firstar Bank Milwaukee, N.A. ("Firstar") including a term note for
$3.0 million and a revolving line of credit up to $12.0 million, interest payable
quarterly at either the prime rate or 90 day LIBOR rate plus 2.00% at BNCCORP's
option (7.28% at December 31, 1998), secured by stock of subsidiary banks.......... $ -- $ 14,520
8 5/8% Subordinated Notes, due May 31, 2004, interest payable monthly (plus
unamortized discount of $530 and $621 at December 31, 1999 and 1998,
respectively-effective rate 9.61%), unsecured (see below).......................... 14,470 14,379
-------- ---------
Total BNCCORP............................................................ 14,470 28,899
Subsidiaries:
Federal funds purchased and U. S. Treasury tax and loan note option accounts (1)..... 1,700 6,030
Floating rate advances from FHLB, principal due March 2000 and June 2000,
interest payable monthly at 1-month Libor minus .05%, secured by mortgage
loans, government agency mortgage-backed securities and government agency
collateralized mortgage obligations (1)............................................ 22,000 --
Repurchase advances from FHLB, renewable weekly, interest payable at renewal,
rates ranging from 5.00% to 5.95% at December 31, 1999, secured by mortgage
loans, government agency mortgage-backed securities and government agency
collateralized mortgage obligations (1)............................................ 27,000 15,000
Fixed rate advances from FHLB, callable quarterly and annually, principal due
March and July 2000, April 2008 and October 2009, interest payable monthly at
rates ranging from 5.06% to 5.64%, secured by mortgage loans, government agency
mortgage-backed securities and government agency collateralized mortgage
obligations (1).................................................................... 37,500 26,500
Revolving line of credit up to the lesser of $10.0 million or 40% of the unpaid and
outstanding principal amount of certain of BNC Financial's asset-based loans,
payable to Firstar, interest payable quarterly at either the prime rate or 90 day
LIBOR rate plus 2.00% at BNC Financial's option (7.28% at December 31, 1998),
secured by certain assets of BNC Financial......................................... -- 1,700
Other (1)............................................................................ 500 1,807
-------- ---------
Subtotal................................................................. 103,170 79,936
Less: Notes payable related to discontinued operation................................ -- (21,451)
-------- ---------
Total.................................................................... $103,170 $ 58,485
======== =========
- ----------------
(1) The weighted average interest rate on short-term borrowings outstanding as
of December 31, 1999 and 1998 was 5.74% and 4.99%, respectively.
In January 2000, the Company reduced its fixed rate FHLB borrowings by $16.5
million and increased its FHLB repurchase agreements by $43.5 million. Terms and
rates on the new advances are comparable to those indicated above.
The Subordinated Notes, which qualify as Tier 2 capital up to a certain limit
under the Federal Reserve Board's risk-based capital guidelines (76 percent at
December 31, 1999), are considered unsecured general obligations of BNCCORP.
They are redeemable, at the option of BNCCORP, at par plus accrued interest to
the date of redemption, beginning on May 31, 2000. Payment of principal of the
Notes may be accelerated only in the case of certain events relating to
bankruptcy, insolvency or reorganization of BNCCORP. An initial discount of
$750,000 is being amortized to interest expense over the term of the Notes using
the effective interest rate method.
The indenture pursuant to which the Subordinated Notes were issued contains
covenants which, among other matters, restrict or limit the ability of BNCCORP
and its subsidiaries, under certain circumstances, to pay cash dividends, redeem
or repurchase stock or make other capital distributions, or allow liens or other
encumbrances on property owned or acquired. The Company was in compliance with
the indenture covenants as of December 31, 1999 and 1998.
10. Stockholders' Equity:
BNCCORP and its subsidiary banks are subject to certain minimum capital
requirements (see Note 11). In addition, certain regulatory restrictions exist
regarding the ability of the subsidiary banks to transfer funds to BNCCORP in
the form of cash dividends, loans or advances. Approval of the principal
regulator is required for the Banks to pay dividends to BNCCORP in excess of the
subsidiary banks' earnings retained in the current year plus retained net
profits for the preceding two years.
In connection with its initial public offering in 1995, BNCCORP agreed to sell
to the underwriters, for nominal consideration, a warrant to purchase 50,000
shares of common stock (the "Warrant"). The Warrant became exercisable at $12
per share in June 1996 and expires on July 18, 2000. No warrants were exercised
as of December 31, 1999.
11. Regulatory Capital:
BNCCORP and its subsidiary banks are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatoryCand possibly
additional discretionaryCactions by regulators that, if undertaken, could have a
direct material effect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
BNCCORP and its subsidiary banks must meet specific capital guidelines that
involve quantitative measures of their assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices.
Capital amounts and classifications of BNCCORP and its banks are also subject to
qualitative judgments by the regulators about components, risk weightings and
other factors.
Quantitative measures established by the regulations to ensure capital adequacy
require BNCCORP and its banks to maintain minimum amounts and ratios (set forth
in the tables that follow) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes that, as of
December 31, 1999, BNCCORP and its banks met all capital adequacy requirements
to which they are subject.
As of December 31, 1999, the most recent notifications from the Office of the
Comptroller of the Currency categorized BNCCORP's subsidiary banks as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, the banks must maintain minimum total
risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the
table that follows. There are no conditions or events since that notification
that management believes have changed the institutions' categories.
Actual capital amounts and ratios of BNCCORP and its subsidiary banks as of
December 31 are also presented in the tables (dollar amounts in thousands):
To be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------- ------------------ --------------------
Amount Ratio Amount Ratio Amount Ratio
--------- ------- --------- -------- -------- ----------
As of December 31, 1999
Total Capital (to risk-weighted
assets):
Consolidated................ $ 36,050 11.6 % $ 24,855 8.0 % N/A N/A
BNC-North Dakota............ 25,595 10.9 18,715 8.0 $ 23,393 10.0 %
BNC-Minnesota............... 9,987 12.3 6,497 8.0 8,121 10.0
Tier I Capital (to risk-weighted
assets):
Consolidated................ 22,119 7.1 12,428 4.0 N/A N/A
BNC-North Dakota............ 23,726 10.1 9,357 4.0 14,036 6.0
BNC-Minnesota............... 8,984 11.1 3,248 4.0 4,872 6.0
Tier I Capital (to average
assets):
Consolidated................ 22,119 4.8 18,428 4.0 N/A N/A
BNC-North Dakota............ 23,726 6.8 13,874 4.0 17,343 5.0
BNC-Minnesota............... 8,984 8.1 4,442 4.0 5,552 5.0
As of December 31, 1998
Total Capital (to risk-weighted
assets):
Consolidated................ $ 34,680 11.0 % $ 25,216 8.0 % N/A N/A
BNC-North Dakota............ 21,900 10.3 17,091 8.0 $ 21,364 10.0 %
BNC-Minnesota............... 7,433 10.3 5,778 8.0 7,223 10.0
Tier I Capital (to risk-weighted
assets):
Consolidated................ 21,058 6.7 12,608 4.0 N/A N/A
BNC-North Dakota............ 19,859 9.3 8,546 4.0 12,818 6.0
BNC-Minnesota............... 6,621 9.2 2,889 4.0 4,334 6.0
Tier I Capital (to average
assets):
Consolidated................ 21,058 5.5 15,278 4.0 N/A N/A
BNC-North Dakota............ 19,859 6.5 12,242 4.0 15,303 5.0
BNC-Minnesota............... 6,621 9.1 2,913 4.0 3,642 5.0
12. Fair Value of Financial Instruments:
The estimated fair values of the Company's financial instruments are as follows
as of December 31 (in thousands):
1999 1998
---------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
Assets:
Cash, due from banks and federal
funds sold.................... $ 21,881 $ 21,881 $ 10,284 $ 10,284
Investment securities available
for sale...................... 150,992 150,992 96,601 96,601
Loans and leases, net............ 259,179 236,719 244,327 246,392
Loans of discontinued operation,
net.......................... -- -- 23,456 20,398
---------- ---------- --------- ----------
432,052 $ 409,592 374,668 $ 373,675
========== ==========
Other assets..................... 24,825 21,028
Other assets of discontinued
operation.................... -- 636
========== ==========
$ 456,877 $ 396,332
========== ==========
Liabilities:
Deposits, noninterest-bearing.... $ 29,798 $ 29,798 $ 28,475 $ 28,475
Deposits, interest-bearing....... 294,913 289,904 256,024 256,775
Notes payable.................... 103,170 100,926 58,485 69,567
Notes payable of discontinued
operation....................... -- -- 21,451 11,105
---------- ---------- ---------- ----------
427,881 $ 420,628 364,435 $ 365,922
========== ==========
Other liabilities................ 5,847 6,362
Other liabilities of discontinued
operation..................... -- 280
Stockholders/ equity............. 23,149 25,255
========== ==========
$ 456,877 $ 396,332
========== ==========
13. Financial Instruments With Off-Balance-Sheet Risk:
In the normal course of business, the Company uses various off-balance sheet
financial instruments to meet the needs of its customers and to manage its
interest rate risk. These instruments carry varying degrees of credit, interest
rate or liquidity risk.
Commitments to extend credit are legally binding and generally have fixed
expiration dates or other termination clauses. The contractual amount represents
the Company's exposure to credit loss in the event of default by the borrower.
The Company manages this credit risk by using the same credit policies it
applies to loans. Collateral is obtained to secure commitments based on
management's credit assessment of the borrower. The collateral may include
marketable securities, receivables, inventory, equipment and real estate. Since
the Company expects many of the commitments to expire without being drawn, total
commitment amounts do not necessarily represent the Company's future liquidity
requirements related to such commitments.
Standby letters of credit are conditional commitments the Company issues to
guarantee the performance of a customer to a third party. Commercial letters of
credit are issued on behalf of customers to ensure payment or collection in
connection with trade transactions. In the event of a customer's nonperformance,
the Company's credit loss exposure is the same as in any extension of credit, up
to the letter's contractual amount. Management assesses the borrower's credit to
determine the necessary collateral, which may include marketable securities,
real estate, accounts receivable and inventory. Since the conditions requiring
the Company to fund letters of credit may not occur, the Company expects its
liquidity requirements related to such letters of credit to be less than the
total outstanding commitments.
Interest rate swaps are contracts to exchange fixed and floating rate interest
payment obligations based on a notional principal amount. The Company enters
into swaps to hedge its balance sheet against fluctuations in interest rates.
Interest rate caps and floors are also used to minimize the impact of
fluctuating interest rates on earnings. The credit risk related to interest rate
contracts is that counterparties may be unable to meet the contractual terms of
the agreements. This risk is estimated by calculating the present value of the
cost to replace outstanding contracts in a gain position at current market
rates, reported on a net basis by counterparties. The Company manages the credit
risk of its interest rate contracts through bilateral collateral agreements,
credit approvals, limits and monitoring procedures. Additionally, the Company
reduces the assumed counterparty credit risk through master netting agreements
that permit the Company to settle interest rate contracts with the same
counterparty on a net basis.
The contractual or notional amounts of these financial instruments were as
follows as of December 31 (in thousands):
1999 1998
---------- ----------
Commitments to extend credit........ $ 68,932 $ 82,311
Letters of credit................... 2,399 1,840
Interest rate floors................ 25,000 25,000
The $25.0 million prime based interest rate floor was purchased in September
1998. The contract is for a term of five years and is designated as a hedge of
floating rate commercial loans. The strike rate on the floor is 8.50 percent. A
$1.1 million premium paid upon acquisition of the contract is being amortized
over the life of the contract. Market value of the contract, defined as the
contract's current replacement value, was approximately $400,000 at December 31,
1999.
The Company entered into three interest rate swap agreements and closed out
those agreements during 1997. The resulting gains of $430,000 have been
amortized over the life of the contracts. At December 31, 1999 and 1998,
deferred gains of $271,000 and $332,000, respectively, resulting from the sale
of interest rate swap contracts during 1997 were included in the balance sheet
and were being amortized as a reduction of interest expense over the original
lives of the swap contracts.
14. Related-Party Transactions:
The Company has entered into transactions with related parties including the
insurance agency and management agreement purchases discussed in Note 2. In the
opinion of management, such transactions have been fair and reasonable to the
Company and have been entered into under terms and conditions substantially the
same as those offered by the Company to unrelated parties.
In the normal course of business, loans are granted to executive officers,
directors, principal stockholders and to associates of such persons. The
aggregate dollar amount of these loans, exclusive of loans to any such persons
which in the aggregate did not exceed $60,000, were $1.4 million and $969,000 at
December 31, 1999 and 1998, respectively. During 1999, $630,000 of new loans
were made and repayments totaled $245,000. Loans to these parties were made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with unrelated persons and do
not involve more than the normal risk of collectibility.
15. Write Downs of Other Real Estate Owned and Repossessed Assets:
The Company recorded write downs to estimated net realizability of other real
estate owned and repossessed assets of $2.3 million and $2,000 for the years
ended December 31, 1999 and 1998, respectively. The Company's investment in
other real estate owned and repossessed assets of $1.2 million as of December
31, 1999 represents management's current estimate of net realizable value based
upon current outstanding offers received by the Company.
16. Benefit Plans:
BNCCORP has a 401(k) plan covering all employees of BNCCORP and its subsidiaries
who meet specified age and service requirements. Eligible employees may elect to
defer up to 15 percent of compensation each year not to exceed the dollar limit
set by law. At their discretion, BNCCORP and its subsidiaries provide matching
contributions of up to 50 percent of employee deferrals up to a maximum employer
contribution of 5 percent of compensation. The Company made matching
contributions of $171,000, $172,000, and $131,000 in 1999, 1998 and 1997,
respectively. Under the investment options available under the 401(k) plan,
employees may elect to invest their salary deferrals in BNCCORP stock.
17. Commitments and Contingencies:
Employment Agreements and Noncompete Convenants. The Company has entered into
three-year employment agreements with its chief executive officer ("CEO"),
president and chief operating officer ("COO") and the presidents of BNC-North
Dakota's Fargo Branch and BNC-Minnesota (the "Executives"). The Executives will
be paid minimum annual salaries throughout the terms of the agreements and
annual incentive bonuses as may, from time to time, be fixed by the board of
directors. The Executives will also be provided with benefits under any employee
benefit plan maintained by BNCCORP for its employees generally, or for its
senior executive officers in particular, on the same terms as are applicable to
other senior executives of BNCCORP. Under the agreements of the CEO and COO, if
status as employees with BNCCORP is terminated for any reason other than death,
disability, cause, as defined in the agreements, or if they terminate their
employment for good reason, as defined in the agreements, or following a change
in control of the Company, as defined in the agreements, then the CEO and COO
will be paid a lump-sum amount equal to three times their current annual
compensation. Under the agreement with the president of BNC-Minnesota, if status
as an employee with the Company is terminated for any reason other than death,
disability, cause, or if the president terminates his employment for good
reason, except in the event of a change in control of the Company, then he will
be paid a lump-sum amount equal to 1/12th of his current annual compensation
multiplied by the number of partial or full months remaining in the employment
agreement. If status as an employee with the Company is terminated following a
change in control of the Company, then he will be paid a lump-sum amount equal
to three times his current annual compensation.
In conjunction with the business combination with Lips & Lahr, the Company
assumed five-year employment agreements with two officers of Lips & Lahr (the
"Officers"). The agreements, which originally provided for salaries based upon a
percentage of all net annual commissions received by Lips & Lahr on business
written by the Officers, were amended to provide for minimum annual salaries
through the remainder of the contract term which runs through December 31, 2000.
Additionally, the contracts provide for the payment of deferred compensation for
a term of ten years commencing on February 1, 2001 and continuing monthly until
paid in full. Finally, as separate consideration for the release of all present
and future claims to the Officer's book of business at the end of the term of
the employment contract and for other terms of the contract involving
confidentiality, nonpiracy and a restrictive covenant covering a period of five
years after the term of the agreement, the agreements provide for 120 monthly
payments also commencing on February 1, 2001. Both of the Officers resigned and
are now acting as consultants to BNC Insurance pursuant to consulting
agreements. Under these agreements, the Officers' annual salaries are replaced
with annual consulting fees and the Company remains obligated under the deferred
compensation and non-compete provisions of the original employment agreements.
In the business combination with Lips & Lahr, BNC Insurance assumed two
additional non-compete agreements with former officers of Lips & Lahr. Monthly
payments under these agreements, which commenced in 1996, are scheduled to
continue into 2006.
Leases. The Company has entered into operating lease agreements for certain
facilities and equipment used in its operations. Rent expense for the years
ended December 31, 1999, 1998 and 1997, was $467,000, $333,000 and $324,000,
respectively. Minimum annual base lease payments for operating leases with
remaining terms of greater than one year are as follows:
2000............... $ 512,000
2001............... 496,000
2002............... 488,000
2003............... 450,000
2004............... 367,000
Thereafter......... 418,000
Property and Equipment. The Company is in the process of constructing an office
building in Fargo, North Dakota. The total cost to complete the construction and
provide furniture and equipment for the building is estimated at between $4.0
and $4.5 million and has been funded though available cash. The Company
anticipates that excess office space in the new building will be rented out
until such time as the Company's Fargo operations require use of the full
building.
Legal Proceedings. In September 1998, BancInsure, BNC--North Dakota's insurer of
employee fidelity, brought a declaratory judgment action in federal court
against the bank and a former loan officer. The bank has filed proofs of loss
with BancInsure claiming a loss in excess of $2.9 million resulting from the
officer's unauthorized activities while she was a senior loan officer with the
bank. The bank alleged that the officer's unauthorized activities consist of
misrepresentation to management, conflicts of interest and breach of fiduciary
duties to the bank in conjunction with her handling of her loan portfolio.
BancInsure paid the bank the sum of $886,000 under a reservation of rights and
in its lawsuit BancInsure requested that the court determine BancInsure's
obligations to the bank under the fidelity insurance agreement it issued to the
bank. BancInsure also requested that in the event the court determines that it
is obligated to pay the bank under its insuring agreement, that a judgment of
indemnity be entered for that amount against the officer. The bank filed a cross
claim against the officer in the federal action for the losses sustained by the
bank as a result of the officer's unauthorized activities. Prior state actions
were dismissed and all claims will be litigated in federal court. The matter is
set for trial February 28, 2000. The key issues to be determined at the trial
are whether the bank should be required to refund any of the $886,000 received
from BancInsure and/or whether BancInsure should be required to pay additional
amounts to the bank under its insuring agreement. Management does not anticipate
that the court will require the bank to refund any of the amount received from
BancInsure and is uncertain as to how the court will rule on the issue of
BancInsure's further obligations to the bank.
In April 1999, a complaint was filed in federal district court by a former
customer of BNC--North Dakota (the "Plaintiff") against the bank, three of the
bank's officers or employees, a second bank and two former customers of the bank
(the "Customers"). The Plaintiff alleged violation of the federal Racketeer
Influenced and Corrupt Organizations Act ("RICO"), fraud and breach of fiduciary
duty. The Plaintiff alleged that these violations occurred in the course of his
purchase of two businesses from the Customers in 1995. The Plaintiff also
alleged that the same senior loan officer referred to in the legal proceedings
with BancInsure, with the assistance of the Customers and others, misrepresented
the true financial state of the businesses to convince him to purchase these
businesses and thereby keep the bank (and the Customers) from taking a
significant financial loss. On September 22, 1999 the federal district judge
dismissed the federal action based on failure to state a federal claim under the
RICO statute. On September 28, 1999 the Plaintiff refiled the matter in state
district court with essentially the same allegations and against the same
parties. Motions to dismiss have been filed by all defendants and a hearing on
these motions was heard on February 7, 2000. The court has taken the matter
under advisement and the bank is awaiting a decision in the matter. Management
considers this suit a frivolous action without merit and expects the state
district court also to dismiss the action based on failure to state a claim
under the RICO statute.
18. Stock-Based Compensation:
BNCCORP's Stock Incentive Plan (the "Stock Plan") is intended to provide
long-term incentives to its key employees, including officers and directors who
are employees of the Company. The Stock Plan, which is administered by the
compensation committee of the board of directors (the "Committee"), provides for
an authorization of 250,000 shares of common stock for issuance thereunder.
Under the Stock Plan, the Company may grant employees incentive stock options,
nonqualified stock options, restricted stock, stock awards or any combination
thereof. The Committee establishes the exercise price of any stock options
granted under the Stock Plan provided that the exercise price may not be less
than the fair market value of a share of common stock on the date of grant. As
of December 31, 1999, 31,500 restricted shares were outstanding under the Stock
Plan. 20,000 shares of restricted stock vest in 33 1/3 percent increments during
1998, 1999 and 2000. 5,000 shares vest 60 percent in 2002 and an additional 20
percent in each of 2003 and 2004. 5,500 shares vest in 10 percent increments
from 1999 through 2008 and the remaining 1,000 shares vest 30 percent in each of
2000 and 2001 and an additional 40 percent in 2002. The Company records the
compensation expense related to restricted stock over the applicable service
period. A total of 186,700 options had been awarded under the Stock Plan as of
December 31, 1999.
The Company's Nonemployee Director Stock Option Plan (the "Directors' Plan") was
adopted during 1998 and was also administered by the Committee. The Directors'
Plan provided for 650 options to be issued to each nonemployee director of
BNCCORP and its subsidiaries who was serving as a director immediately following
each annual meeting of stockholders. The exercise price of stock options granted
under the Directors' Plan was equal to the fair market value of a share of
common stock on the date of grant. As of December 31, 1999, 4,550 options had
been awarded under the Directors' Plan. The options are exercisable at a price
of $17.75 per share and became fully vested on December 17, 1998. The Directors'
Plan was terminated during 1999.
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for both the Stock Plan and the Directors' Plan.
Accordingly, no compensation cost has been recognized for the options issued
under the plans in 1999, 1998 or 1997. For the restricted stock issued under the
Stock Plan, compensation cost charged to operations was $70,000 and $146,000 in
1999 and 1998, respectively. There was no compensation cost related to
restricted stock charged to operations during 1997. Had compensation cost been
determined on the basis of fair value pursuant to Statement of Financial
Accounting Standards No. 123, net income and earnings per share ("EPS") would
have been reduced as follows:
1999 1998 1997
----------- ------------ -----------
Net Income:
As Reported................ $ 242,000 $ 2,267,000 $1,426,000
Pro Forma.................. 139,000 2,118,000 1,412,000
Basic EPS:
As Reported................ 0.10 0.95 0.59
Pro Forma.................. 0.06 0.85 0.58
Diluted EPS:
As reported................ 0.10 0.91 0.59
Pro Forma.................. 0.06 0.80 0.58
A summary of the status of stock options under the Stock Plan and the Directors'
Plan at December 31, 1999 and 1998 and changes during the years then ended, is
presented in the tables and narrative below:
Stock Plan 1999 1998
--------------------- --------------------
Options Weighted Options Weighted
To Average to Average
Purchase Exercise Purchase Exercise
Shares Price Shares Price
--------- ---------- --------- ---------
Outstanding, beginning of
year.................... 146,210 $ 15.92 27,926 $ 10.00
Granted.................... 14,500 7.17 142,200 17.00
Exercised.................. -- -- 1,935 10.00
Forfeited.................. 42,826 16.29 21,981 15.92
--------- ---------- --------- ---------
Outstanding, end of year... 117,884 $ 14.71 146,210 $ 15.92
========= ========== ========= =========
Exercisable, end of year... 47,384 $ 11.73 18,088 $ 10.00
========= ========== ========= =========
Weighted average fair
value of options:
Granted............... $ 3.18 $ 7.60
========= =========
Exercised............. $ -- $ 4.50
========= =========
Forfeited............. $ 7.29 $ 7.12
========= =========
Directors' Plan 1999 1998
------------------------- -------------------------
Options Weighted Options Weighted
To Average To Average
Purchase Exercise Purchase Exercise
Shares Price Shares Price
----------- ------------ ------------ -----------
Outstanding, beginning of
year.................... 4,550 $ 17.75 -- $ --
Granted.................... -- -- 4,550
17.75
=========== ============ ============ ===========
Outstanding, end of year... 4,550 $ 17.75 4,550 $ 17.75
=========== ============ ============ ===========
Exercisable, end of year... 4,550 $ 17.75 4,550 $ 17.75
============ =========== ============ ============
Weighted average fair value
of options granted...... $ 6.58
============
The fair value of each option granted is estimated on the grant date using the
Black-Scholes option pricing model. The following assumptions were made in
estimating fair value:
Stock Stock Stock Stock Stock Director's
Assumption Plan Plan Plan Plan Plan Plan
12/99 9/99 6/99 1998 1995 1998
Grant Grant Grant Grant Grant Grant
- ------------------ ---------- ---------- ---------- ---------- ---------- ---------
Dividend yield... 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Risk-free
interest rate. 6.55% 6.06% 6.09% 5.63% 6.08% 5.49%
Expected life.... 7 years 7 years 7 years 7 years 7 years 5 years
Expected
volatility.... 27.25% 26.40% 28.08% 29.79% 28.69% 30.39%
Following is a summary of the status of options outstanding under each of the
Company's plans at December 31, 1999:
Outstanding Options Exercisable Options
------------------------------------------ ----------------------
Weighted
Average Exercise Exercise
Number Remaining Price Number Price
Contractual Life
----------- ----------------- --------- ---------- ----------
Stock Plan: 19,384 5.5 years $ 10.00 19,384 $ 10.00
85,000 8.0 years $ 17.00 17,000 $ 17.00
2,500 9.5 years $ 8.75 -- --
5,000 9.75 years $ 7.56 5,000 $ 7.56
6,000 10.0 years $ 5.88 6,000 $ 5.88
Director's Plan: 4,550 8.5 years $ 17.75 4,550 $ 17.75
19. Earnings Per Common Share:
The following table shows the amounts used in computing EPS and the effect on
weighted average number of shares of potential dilutive common stock issuances:
Net
Income Shares Per-Share
(Loss) (Denominator) Amount
(Numerator)
------------ -------------- -----------
1999
Basic earnings per share:
Loss from continuing operations.... $ (529,000) 2,406,618 $ (0.22)
Income from operations of
discontinued asset- based lending
subsidiary...................... 429,000 2,406,618 0.18
Gain on disposal of asset-based
lending subsidiary.............. 438,000 2,406,618 0.18
Cumulative effect of change in
accounting principle, net
of income tax effects........... (96,000) 2,406,618 (0.04)
============ ===========
Income available to common
stockholders.................... $ 242,000 2,406,618 $ 0.10
============ ===========
Effect of dilutive shares --
Options......................... 400
--------------
Diluted earnings per share:
Loss from continuing operations.... $ (529,000) 2,407,018 $ (0.22)
Income from operations of
discontinued asset-based lending
subsidiary...................... 429,000 2,407,018 0.18
Gain on disposal of asset-based
lending subsidiary.............. 438,000 2,407,018 0.18
Cumulative effect of change in
accounting principle, net
of income tax effects........... (96,000) 2,407,018 (0.04)
============ ============== ===========
Income available to common
stockholders.................... $ 242,000 2,407,018 $ 0.10
============ ============== ===========
Net
Income Shares Per-Share
(Loss) (Denominator) Amount
(Numerator)
------------ -------------- -----------
1998
Basic earnings per share:
Income from continuing operations.. $ 1,882,000 2,397,340 $ 0.79
Income from operations of
discontinued asset-based lending
subsidiary...................... 385,000 2,397,340 0.16
============ ===========
Income available to common
stockholders.................... $ 2,267,000 2,397,340 $ 0.95
============ ===========
Effect of dilutive shares --
Options......................... 58,013
Warrants........................ 48,182
--------------
Diluted earnings per share:
Income from continuing operations.. $ 1,882,000 2,503,535 $ 0.75
Income from operations of
discontinued asset-based lending
subsidiary...................... 385,000 2,503,535 0.16
============ ============== ===========
Income available to common
stockholders.................... $ 2,267,000 2,503,535 $ 0.91
============ ============== ===========
1997
Basic earnings per share:
Income from continuing operations.. $ 1,299,000 2,402,126 $ 0.54
Income from operations of
discontinued asset-based lending
subsidiary...................... 127,000 2,402,126 0.05
============ ===========
Income available to common
stockholders.................... $ 1,426,000 2,402,126 $ 0.59
============ ===========
Effect of dilutive shares --
Options......................... 5,831
Warrants........................ 4,791
--------------
Diluted earnings per share:
Income from continuing operations.. $ 1,299,000 2,412,748 $ 0.54
Income from operations of
discontinued asset-based lending
subsidiary...................... 127,000 2,412,748 0.05
============ ============== ===========
Income available to common
stockholders.................... $ 1,426,000 2,412,748 $ 0.59
============ ============== ===========
The following options and warrants, with exercise prices ranging from $5.875 to
$17.75, were outstanding during the periods indicated but were not included in
the computation of diluted EPS because their effects were antidilutive:
3/97 6/97 9/97 12/97 3/98 6/98 9/98 12/98 3/99 6/99 9/99 12/99
- ------ ------ ----- ----- ---- ----- ------- ------- ------- ------- ------- -------
-- 78,617 -- -- -- -- 142,050 178,150 170,134 170,234 170,034 172,434
20. Segment Disclosures:
BNCCORP segments its operations into two separate business activities, based on
the nature of the products and services for each segment: BNC - North Dakota and
BNC - Minnesota.
The operations of BNC - North Dakota provide traditional community banking
services to individuals and small and mid-size businesses, such as accepting
deposits, consumer and mortgage banking activities and making commercial loans.
The mortgage and commercial banking activities include the origination and
purchase of loans as well as servicing of loans to others. In addition to these
banking services, BNC - North Dakota also provides brokerage, trust and other
financial services and sells insurance products.
BNC - Minnesota also provides traditional banking services, but this segment is
identified primarily from its commercial banking activities in Minnesota.
The accounting policies of the two segments are the same as those described in
the summary of significant accounting policies, which conform to generally
accepted accounting principles. The information shown in the following tables
have been restated to give the effect of any business combinations that have
been accounted for under the pooling-of-interests method.
The Company's financial information for each segment is derived from the
internal profitability reporting system used by management to monitor and manage
the financial performance of the company. The operating segments have been
determined by how management has organized the business for making operating
decisions and assessing performance.
The following tables present segment profit or loss, assets and a reconciliation
of segment information as of, and for the periods ended, December 31 (in
thousands):
1999
-----------------------------------------------
BNC-
North BNC- Other
Dakota Minnesota (a) Total
----------- ----------- --------- ----------
Net interest income (loss).. $ 9,540 $ 3,547 $ (730) $ 12,357
Other revenue-external
customers................ 5,035 1,033 -- 6,068
Other revenue-from other
segments................. 282 -- 1,870 2,152
Depreciation and amortization 1,385 135 66 1,586
Equity in the net income of
investees................. -- -- 96 96
Other significant noncash
items:
Provision for credit
losses................ 719 417 18 1,154
Income tax expense (benefit). (211) 245 (433) (399)
Segment profit (loss)from
continuing operations..... (164) 338 (703) (529)
Income from operations of
discontinued asset-based
lending subsidiary........ -- -- 429 429
Gain on disposal of
asset-based lending
subsidiary................ -- -- 438 438
Cumulative effect of change
in accounting principle,
net of income tax effects. (43) (35) (18) (96)
Segment profit.............. (207) 303 146 242
Segment assets.............. 359,944 120,949 40,894 521,787
Expenditures for additions to
assets................... 4,099 324 21 4,444
1999
-------------------------------------------------
Inter-
Reportable Other segment Consolidated
Segments (a) Elimination Total
----------- ----------- ----------- -----------
Net interest income (loss). $ 13,087 $ (730) $ -- $ 12,357
Other revenue-external
customers............... 6,068 -- -- 6,068
Other revenue - from other
segments................. 282 1,870 (2,152) --
Depreciation and
amortization............ 1,520 66 -- 1,586
Equity in the net income
of investees............. -- 96 (96) --
Other significant noncash
items:
Provision for credit
losses............... 1,136 18 (16) 1,138
Income tax expense
(benefit)............... 34 (433) -- (399)
Segment profit (loss) from
continuing operations.... 174 (703) -- (529)
Income from operations of
discontinued asset-based
lending subsidiary....... -- 429 -- 429
Gain on disposal of
asset-based lending
subsidiary............... -- 438 -- 438
Cumulative effect of
change in accounting
principle, net of income
tax effects.............. (78) (18) -- (96)
Segment profit............. 96 146 -- 242
Segment assets............. 480,893 40,894 (64,910) 456,877
Expenditures for additions
to assets................ 4,423 21 -- 4,444
- ---------------
(a) The financial information presented in the "Other" column is for the bank
holding company. This component of the Company is not intended to earn revenue
and does not qualify as an operating segment. The profit presented for the bank
holding company includes the undistributed income from BNCCORP's consolidated
subsidiaries.
1998
------------------------------------------------
BNC-
North BNC- Other
Dakota Minnesota (a) Total
------------ ---------- --------- ----------
Net interest income (loss). $ 9,830 $ 3,422 $ (603) $ 12,649
Other revenue-external
customers............... 3,945 868 30 4,843
Other revenue - from other
segments................. 216 -- 4,423 4,639
Depreciation and
amortization............ 1,303 124 71 1,498
Equity in the net income of
investees................ -- -- 2,612 2,612
Other significant noncash
items:
Provision for
credit losses......... 871 330 -- 1,201
Income tax expense (benefit) 710 661 (341) 1,030
Segment profit (loss) from
continuing operations.... 1,662 950 (730) 1,882
Income from operations of
discontinued asset-based
lending subsidiary....... -- -- 385 385
Segment assets from
continuing operations.... 318,216 74,226 55,334 447,776
Expenditures for additions
to assets................. 877 176 74 1,127
1998
-------------------------------------------------
Inter-
Reportable Other segment Consolidated
Segments (a) Elimination Total
----------- ----------- ---------- -----------
Net interest income (loss). $ 13,252 $ (603) $ -- $ 12,649
Other revenue-external
customers............... 4,813 30 -- 4,843
Other revenue - from other
segments................. 216 4,423 (4,639) 0
Depreciation and
amortization............... 1,427 71 -- 1,498
Equity in the net income
of investees............. -- 2,612 (2,612) 0
Other significant noncash
items:
Provision for credit
losses 1,201 -- -- 1,201
Income tax expense
(benefit)............... 1,371 (341) -- 1,030
Segment profit (loss) from
continuing operations.... 2,612 (730) -- 1,882
Income from operations of
discontinued asset-based
lending subsidiary....... -- 385 -- 385
Segment assets from
continuing operations.... 392,442 55,334 (75,536) 372,240
Expenditures for additions
to assets................ 1,053 74 -- 1,127
- ---------------
(a) The financial information presented in the "Other" column is for the bank
holding company. This component of the Company is not intended to earn revenue
and does not qualify as an operating segment. The profit presented for the bank
holding company includes the undistributed income from BNCCORP's consolidated
subsidiaries.
1997
-----------------------------------------------
BNC-
North BNC- Other
Dakota Minnesota (a) Total
----------- ----------- --------- ----------
Net interest income (loss). $ 10,168 $ 2,388 $ (501) $ 12,055
Other revenue-external
customers.................. 3,469 450 9 3,928
Other revenue-from other
segments................. 155 -- 2,972 3,127
Depreciation and
amortization............ 1,141 111 58 1,310
Equity in the net income
of investees............. -- -- 1,879 1,879
Other significant noncash
items:
Provision for credit
losses 2,260 258 -- 2,518
Income tax expense
(benefit)............... 909 328 (282) 955
Segment profit (loss) from
continuing operations.... 1,405 474 (625) 1,254
Income from operations of
discontinued asset-based
lending subsidiary....... -- -- 127 127
Segment assets from
continuing operations.... 309,946 57,796 45,768 413,510
Expenditures for additions
to assets................ 2,628 46 12 2,686
1997
------------------------------------------------------------
Inter-
Reportable Other segment Consolidated
Segments (a) Elimination Other Total
----------- ----------- ---------- --------- -----------
Net interest income (loss). $ 12,556 $ (501) $ -- $ 45 $ 12,100
Other revenue-external
customers............... 3,919 9 -- -- 3,928
Other revenue - from
other segments.......... 155 2,972 (3,127) -- 0
Depreciation and
amortization............ 1,252 58 -- -- 1,310
Equity in the net income
of investees............ -- 1,879 (1,879) -- 0
Other significant noncash
items:
Provision for credit
losses............... 2,518 -- -- -- 2,518
Income tax expense
(benefit)............... 1,237 (282) -- -- 955
Segment profit (loss)
from continuing
operations.............. 1,879 (625) 45 1,299
Income from operations
of discontinued asset-
based lending subsidiary. -- 127 -- -- 127
Segment assets from
continuing operations... 367,742 45,768 (67,880) -- 345,630
Expenditures for additions
to assets............... 2,674 12 -- -- 2,686
- ---------------
(a) The financial information presented in the "Other" column is for the bank
holding company. This component of the Company is not intended to earn revenue
and does not qualify as an operating segment. The profit presented for the bank
holding company includes the undistributed income from BNCCORP's consolidated
subsidiaries.
21. Condensed Financial InformationCParent Company Only:
Condensed financial information of BNCCORP on a parent company only basis is as
follows:
Parent Company Only
Condensed Balance Sheets
As of December 31
(In thousands, except share and per share data)
1999 1998
---------- ------------
Assets:
Cash and cash equivalents..................... $ 3,832 $ 353
Investment in subsidiaries.................... 33,471 33,151
Loans......................................... 16 341
Receivable from subsidiaries.................. 194 20,106
Deferred changes and intangible assets, net... 298 360
Other......................................... 852 1,023
---------- ------------
$ 38,663 $ 55,334
========== ============
Liabilities and stockholders' equity:
Notes payable................................. $ 14,708 $ 29,148
Accrued expenses and other liabilities........ 806 931
---------- ------------
15,514 30,079
---------- ------------
Preferred stock, $.01 par value, 2,000,000
shares authorized; no shares issued or
outstanding................................ -- --
Common stock, $.01 par value, 10,000,000 shares
authorized; 2,399,980 and 2,390,184 shares
issued and outstanding
(excluding 42,880 shares held in treasury)
in 1999 and 1998, respectively............. 24 24
Capital surplus............................... 13,976 13,951
Retained earnings............................. 11,893 11,651
Treasury stock (42,880 shares)................ (513) (513)
Accumulated other comprehensive income (loss),
net of income tax effects................. (2,231) 142
---------- ------------
Total stockholders' equity................... 23,149 25,255
---------- ------------
$ 38,663 $ 55,334
========== ============
Parent Company Only
Condensed Statements of Income
For the Years Ended December 31
(In thousands)
1999 1998 1997
---------- ---------- ---------
Income:
Management fee income....................... $ 1,606 $ 1,426 $ 965
Interest.................................... 1,757 1,623 847
Other....................................... 9 30 9
---------- ---------- ---------
Total income............................. 3,372 3,079 1,821
---------- ---------- ---------
Expenses:
Interest.................................... 2,486 2,226 1,348
Personnel expense........................... 1,320 1,268 849
Legal and other professional................ 134 188 103
Depreciation and amortization............... 66 71 58
Other....................................... 502 397 370
---------- ---------- ---------
Total expenses........................... 4,508 4,150 2,728
---------- ---------- ---------
Loss before income tax benefit and equity in
undistributed income of subsidiaries........ (1,136) (1,071) (907)
Income tax benefit............................. 433 341 282
---------- ---------- ---------
Loss before equity in undistributed income of
subsidiaries................................ (703) (730) (625)
Equity in undistributed income of subsidiaries. 96 2,612 1,879
---------- ---------- ---------
Income (loss) from continuing operations....... (607) 1,882 1,254
Equity in undistributed income from operations
of discontinued asset-based lending
subsidiary................................. 429 385 127
---------- ---------- ---------
Income (loss) before gain on disposal of
asset-based lending subsidiary............. (178) 2,267 1,381
Gain on disposal of asset-based lending
subsidiary.................................. 438 -- --
---------- ---------- ---------
Income before cumulative effect of change in
accounting principle....................... 260 2,267 1,381
Cumulative effect of change in accounting
principle, net of income tax effects....... (18) -- --
========== ========== =========
Net income............................... $ 242 $ 2,267 $ 1,381
========== ========== =========
Parent Company Only
Condensed Statements of Cash Flows
For the Years Ended December 31
(In thousands)
1999 1998 1997
--------- ---------- ---------
Operating activities:
Net income....................................... $ 242 $ 2,267 $ 1,381
Adjustments to reconcile net income to net cash
provided by (used in) operating activities --
Gain on sale of discontinued operation........ (438) -- --
Depreciation and amortization................. 46 53 48
Equity in undistributed income of subsidiaries (96) (2,612) (1,879)
Equity in undistributed income from operations
of discontinued asset-based lending
subsidiary.................................. (429) (385) (127)
Change in prepaid expenses and other
receivables................................ 19,922 (5,858) (10,174)
Change in accrued expenses and other
liabilities................................ 28 290 456
Other......................................... -- 7 64
--------- ---------- ---------
Net cash provided by (used in) operating
activities.............................. 19,275 (6,238) (10,231)
--------- ---------- ---------
Investing activities:
Disposition of discontinued operation............ 2,100 -- --
Net decrease in loans............................ (325) (158) (46)
Increase in investment in subsidiaries .......... (3,157) (1,307) (641)
Purchases of premises, leasehold improvements and
equipment..................................... (19) (67) (12)
--------- ---------- ---------
Net cash used in investing activities...... (1,401) (1,532) (699)
--------- ---------- ---------
Financing activities:
Repayments of long-term borrowings............... (29,532) (9,785) (21,190)
Proceeds from long-term borrowings............... 15,000 16,870 32,875
Amortization of discount on subordinated notes... 92 84 46
Amortization of deferred charges................. 20 18 10
Purchase of treasury stock....................... -- (297) --
Other, net....................................... 25 165 --
--------- ---------- ---------
Net cash provided by (used in) financing
activities............................... (14,395) 7,055 11,741
--------- ---------- ---------
Net increase (decrease) in cash and cash equivalents 3,479 (715) 811
Cash and cash equivalents, beginning of year........ 353 1,068 257
--------- ---------- ---------
Cash and cash equivalents, end of year.............. $ 3,832 $ 353 $ 1,068
========= ========== =========
Supplemental cash flow information:
Interest paid.................................... $ 2,582 $ 2,187 $ 1,262
========= ========== =========
Income tax payments received from subsidiary
banks, net of income taxes paid............... $ 243 $ 438 $ 322
========= ========== =========
22. Subsequent Event:
During February 2000, the Company retired $814,000 of its 8 5/8% Subordinated
Notes due in 2004. The Company paid a discount to debenture holders, and the
transaction resulted in an extraordinary gain of $121,000 ($.05 per share), net
of income taxes of $63,000. The debentures were retired using cash generated
from the sale of BNC Financial.
23. Quarterly Financial Data (unaudited, in thousands, except earnings per
share):
1999
---------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ---------- ---------- ---------
Interest income...................... $ 6,836 $ 6,717 $ 7,353 $ 8,025
Interest expense..................... 3,794 3,680 4,240 4,860
---------- ---------- ---------- ---------
Net interest income.................. 3,042 3,037 3,113 3,165
Provision for credit losses.......... 213 309 354 262
---------- ---------- ---------- ---------
Net interest income after provision
for credit losses.................. 2,829 2,728 2,759 2,903
Noninterest income................... 1,424 1,567 1,486 1,591
Noninterest expense.................. 3,914 4,009 4,280 6,012
---------- ---------- ---------- ---------
Income (loss) before income taxes.... 339 286 (35) (1,518)
Provision for income taxes........... 122 117 (39) (599)
---------- ---------- ---------- ---------
Income (loss) from continuing
operations........................ 217 169 4 (919)
Discontinued Operation:
Income from operations of
discontinued operation (less
applicable income taxes).......... 139 104 186 --
Gain on disposal of discontinued
operation....................... -- -- -- 438
---------- ---------- ---------- ---------
Income before cumulative effect of
change in accounting principle..... 356 273 190 (481)
Cumulative effect of change in
accounting principle (net of income
tax effects)....................... (96) -- -- --
---------- ---------- ---------- ---------
Net income (loss).................... $ 260 $ 273 $ 190 $ (481)
========== ========== ========== =========
Earnings per common share:
Basic income (loss) from continuing
operations........................ $ 0.09 $ 0.07 $ 0.00 $ (0.38)
Discontinued operation............... 0.06 0.04 0.08 0.18
Cumulative effect of change in
accounting principle............... (0.04) -- -- --
---------- ---------- ---------- ---------
Basic net income (loss).............. $ 0.11 $ 0.11 $ 0.08 $ (0.20)
========== ========== ========== =========
Diluted income (loss) from continuing
operations......................... $ 0.09 $ 0.07 $ 0.00 $ (0.38)
Discontinued operation............... 0.06 0.04 0.08 0.18
Cumulative effect of change in
accounting principle............... (0.04) -- -- --
---------- ---------- ---------- ---------
Diluted net income (loss)............ $ 0.11 $ 0.11 $ 0.08 $ (0.20)
========== ========== ========== =========
Average common shares:
Basic................................ 2,405,891 2,410,980 2,409,654 2,399,980
Diluted.............................. 2,405,891 2,410,999 2,410,035 2,399,980
1998
---------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ---------- ---------- ---------
Interest income...................... $ 6,663 $ 6,933 $ 7,302 $ 6,903
Interest expense..................... 3,610 3,757 3,949 3,836
---------- ---------- ---------- ---------
Net interest income.................. 3,053 3,176 3,353 3,067
Provision for credit losses.......... 80 80 711 330
---------- ---------- ---------- ---------
Net interest income after provision
for credit losses.................. 2,973 3,096 2,642 2,737
Noninterest income................... 1,072 1,264 1,195 1,312
Noninterest expense.................. 3,141 3,197 3,419 3,622
---------- ---------- ---------- ---------
Income before income taxes........... 904 1,163 418 427
Provision for income taxes........... 346 454 175 55
---------- ---------- ---------- ---------
Income from continuing operations.... 558 709 243 372
Discontinued Operation:
Income from operations of
discontinued operation (less
applicable income taxes)....... 132 59 99 95
---------- ---------- ---------- ---------
Net income........................... $ 690 $ 768 $ 342 $ 467
========== ========== ========== =========
Earnings per common share:
Basic income from continuing
operations........................ $ 0.23 $ 0.30 $ 0.10 $ 0.16
Discontinued operation............... 0.06 0.02 0.04 0.04
---------- ---------- ---------- ---------
Basic net income..................... $ 0.29 $ 0.32 $ 0.14 $ 0.20
========== ========== ========== =========
Diluted income from continuing
operations........................ $ 0.22 $ 0.28 $ 0.09 $ 0.16
Discontinued operation............... 0.06 0.02 0.04 0.04
---------- ---------- ---------- ---------
Diluted net income................... $ 0.28 $ 0.30 $ 0.13 $ 0.20
========== ========== ========== =========
Average common shares:
Basic................................ 2,401,584 2,402,838 2,391,939 2,393,152
Diluted.............................. 2,438,422 2,499,920 2,414,170 2,393,941
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers of the Registrant
Information concerning the Company's directors and officers called for by this
item will be included in the Company's definitive Proxy Statement prepared in
connection with the 2000 Annual Meeting of Stockholders and is incorporated
herein by reference.
Item 11. Executive Compensation
Information concerning the compensation of the Company's executives called for
by this item will be included in the Company's definitive Proxy Statement
prepared in connection with the 2000 Annual Meeting of Stockholders and is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners and
management called for by this item will be included in the Company's definitive
Proxy Statement prepared in connection with the 2000 Annual Meeting of
Stockholders and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Information concerning certain relationships and related transactions called for
by this item will be included in the Company's definitive Proxy Statement
prepared in connection with the 2000 Annual Meeting of Stockholders and is
incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Exhibits.
Reference is made to the Exhibit Index beginning on page E-1 hereby. The
Company will furnish to any eligible stockholder, upon written request of
such stockholder, a copy of any exhibit listed upon the payment of a
reasonable fee equal to the Company's expenses in furnishing such exhibit.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended December 31,
1999.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on March 29, 2000.
Name of Issuer
By: /s/ Tracy Scott
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities indicated,
on March 29, 2000.
Chairman of the Board, Chief Executive
/s/ Tracy Scott Officer and Director
(Principal Executive Officer)
President, Chief Operating Officer and
/s/ Gregory K. Cleveland Director
(Principal Financial Officer)
(Principal Accounting Officer)
/s/ Brenda L. Rebel Director
/s/ James D. LaBreche Director
/s/ John A. Hipp, M.D. Director
/s/ Richard M. Johnsen, Jr. Director
/s/ John M. Shaffer Director
/s/ Jerry R. Woodcox Director
/s/ Brad J. Scott Director
EXHIBIT INDEX
- --------------------------------------------------------------------------------
Exhibit
No. Exhibit Description
- --------------------------------------------------------------------------------
2.1 Contract for Sale of Assets dated December 31, 1996 by and between
Gregory K. Cleveland, P.C. and BNC National Bank, incorporated by
reference to Exhibit 2.5 to the Registrant's Form 10-KSB dated as of
March 26, 1997.
2.2 Stock Purchase Agreement dated February 26, 1997 by and between BNC
National Bank and Shareholders of J.D. Meier Insurance Agency,
incorporated by reference to Exhibit 2.6 to the Registrant's Form
10-KSB dated as of March 26, 1997.
2.3 Amended and Restated Agreement and Plan of Merger dated December 19,
1997 among BNCCORP, Inc., J.D. Meier Insurance Agency, Inc. and Lips &
Lahr, Inc., William Wade, Dale Ely, Laif Olson, Richard Lahr and David
Clausnitzer, incorporated by reference to Exhibit 2.7 to the
Registrant's Form 10-KSB dated as of March 25, 1998.
2.4 Stock Purchase Agreement dated as of December 6, 1999, by and
between BNCCORP, Inc. and Associated Banc-Corp, incorporated by
reference to Exhibit 2.1 to the Registrant's Form 8-K dated as of
January 14, 2000.
3.1 Certificate of Incorporation of the Company, incorporated by
reference to Exhibit 3.1 to the Registrant's Registration Statement
on Form SB-2 (Registration No. 33-92369).
3.2 Bylaws of the Company, incorporated by reference to Exhibit 3.2 to the
Registrant's Registration Statement on Form SB-2 (Registration
No. 33-92369).
4.1 Specimen of Common Stock Certificate, incorporated by reference to
Exhibit 4 to Amendment No. 1 to the Registrant's Registration
Statement on Form SB-2 (Registration No. 33-92369).
4.2 Warrant to Subscribe for and Purchase Common Stock of BNCCORP, Inc.
by and between the Company and Dain Bosworth Incorporated,
incorporated by reference to Exhibit 4.2 to the Registrant's Form
10-KSB dated as of March 29, 1996.
4.3 Form of Indenture by and between BNCCORP, Inc. and Firstar Trust
Company, as Trustee, incorporated by reference to Exhibit 4.1 to the
Registrant's Registration Statement on Form SB-2 (Registration No.
333-26703).
10.1 Form of Indemnity Agreement by and between the Company and each of
the Company's Directors, incorporated by reference to Exhibit 10.1
to the Registrant's Registration Statement on Form SB-2
(Registration No. 33-92369).
10.2 Form of Employment Agreement between the Company and each of Tracy
J. Scott and Gregory K. Cleveland, incorporated by reference to
Exhibit 10.2 to the Registrant's Registration Statement on Form SB-2
(Registration No. 33-92369).
10.3 Form of BNCCORP, INC. Stock Incentive Plan, incorporated by
reference to Exhibit 10.3 to the Registrant's Registration Statement
on Form SB-2 (Registration No. 33-92369).
10.4 Form of Stock Option Agreement for the Grant of Non-Qualified Stock
Options Under the BNCCORP, INC. 1995 Stock Incentive Plan dated as of
June 7, 1995, incorporated by reference to Exhibit 10.5 to the
Registrant's Form 10-KSB dated as of March 29, 1996.
10.5 Form of Stock Option Agreement for the Grant of Incentive Stock
Options Under the BNCCORP, Inc. 1995 Stock Incentive Plan dated as
of January 2, 1998 between the Company and each of Tracy J. Scott,
Gregory K. Cleveland and Brad J. Scott, incorporated by reference to
Exhibit 10.15 to the Registrant's Form 10-KSB dated as of March 25,
1998.
10.6 Contract of Sale dated as of August 29, 1997, by and between BNC
National Bank and Preferred Investment Services, Inc., incorporated by
reference to Exhibit 10.16 to the Registrant's Form 10-KSB dated
as of March 25, 1998.
10.7 Assignment Agreement dated as of August 29, 1997, by and between
Preferred Investment Services, Inc. and BNC National Bank,
incorporated by reference to Exhibit 10.17 to the Registrant's Form
10-KSB dated as of March 25, 1998.
10.8 Form of Amended and Restated Employment Agreement Between J.D. Meier
Insurance Agency, Inc. and each of David Clausnitzer, Dale Ely,
Richard Lahr and Laif Olson, dated as of June 30, 1998, incorporated
by reference to Exhibit 10.18 to the Registrant's Form 10-QSB dated as
of August 13, 1998.
10.9 Employment Agreement Among BNCCORP, Inc., BNC National Bank and
David J. Sorum dated as of October 13, 1998, incorporated by
reference to Exhibit 10.23 to the Registrant's Form 10-QSB dated as of
November 13, 1998.
10.10 Employment Agreement Among BNCCORP, Inc., BNC National Bank of
Minnesota and James LaBreche dated as of March 1, 1999, incorporated
by reference to Exhibit 10.25 to the Registrant's Form 10-KSB dated as
of March 29, 1999.
10.11 Form of Restricted Stock Agreement Under the BNCCORP, Inc. 1995
Stock Incentive Plan dated as of October 15, 1998 and March 1, 1999
between BNCCORP, Inc. and David J. Sorum and James D. LaBreche,
incorporated by reference to Exhibit 10.28 to the Registrant's Form
10-KSB dated as of March 29, 1999.
21.1 Subsidiaries of Company.
23.1 Consent of Arthur Andersen LLP
27 Financial Data Schedule