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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, 2000
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 (I.R.S. Employer Identification No.)
of incorporation or organization)
322 East Main 58501
Bismarck, North Dakota (Zip Code)
(Address of principal executive office)
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. [ X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant at March 15, 2001 was $12,195,000.
The number of shares of the Registrant's common stock outstanding on March
15, 2001 was 2,394,330.
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 2001 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, 2000
TABLE OF CONTENTS
Page
PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 9
Item 3. Legal Proceedings........................................... 10
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..................................... 10
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............. 12
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk........................................... 36
Item 8. Financial Statements and Supplementary Data.................. 40
Item 9. Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure...................... 79
PART III
Item 10. Directors and Executive Officers of the Registrant........... 79
Item 11. Executive Compensation....................................... 79
Item 12. Security Ownership of Certain Beneficial
Owners and Management....................................... 79
Item 13. Certain Relationships and Related Transactions............... 79
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K......................................... 79
PART I
Item 1. Business
General
BNCCORP, Inc. ("BNCCORP"), a Delaware corporation, is a bank 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, Minnesota and Arizona. BNCCORP operates
primarily through its commercial banking subsidiary, BNC National Bank (together
with its wholly-owned subsidiaries, BNC Insurance, Inc. and BNC Asset
Management, Inc., "BNC National Bank" or the "Bank"), with 17 offices in
Minnesota, North Dakota and Arizona.
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 products and services.
The Company is committed to acting as a full-service provider of financial
services, including traditional banking, trust, asset management, brokerage,
insurance, financial planning and other services. See "-Products and Services."
BNC aims to achieve its objectives through 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. 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.
BNC's total assets have increased from $118.0 million at December 31, 1992 to
$570.0 million at December 31, 2000. The Company's goal is the creation of a
well-capitalized $1 billion financial services organization focused on local
relationship banking. 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 early 2001, the Bank
expanded its growth opportunities by opening a loan and deposit production
office in Tempe, Arizona.
Market Areas
BNC's primary market areas are the Minneapolis/St. Paul (Minnesota) metropolitan
area, the Bismarck/Mandan and Fargo (North Dakota) metropolitan areas and the
rural communities surrounding the branch offices of the bank (Crosby, Ellendale,
Garrison, Kenmare, Linton, Stanley and Watford City, North Dakota). The recently
opened loan and deposit production office will serve the Tempe/Phoenix/Mesa
(Arizona) metropolitan area. As of December 31, 2000, 47 percent of the
Company's loans were to borrowers located in Minnesota, 33 percent were to
borrowers located in North Dakota and 13 percent were to borrowers located in
South Dakota. The remaining 7 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 net loans outstanding at each of BNC's
locations:
December 31, 2000
---------------------------------
Location Total Net Loans
Deposits Outstanding
- ------------------------------------------ -------------- ----------------
(in thousands)
BNC-National Bank:
Bismarck.............................. $ 161,665 $ 126,647
Crosby................................ 18,929 288
Ellendale............................. 11,684 715
Fargo................................. 29,556 16,710
Garrison.............................. 15,240 331
Kenmare............................... 15,353 189
Linton................................ 43,753 10,160
Minneapolis........................... 38,283 113,341
Stanley............................... 16,023 645
Watford City.......................... 11,978 153
BNCCORP (parent company)................ -- 16
-------------- ----------------
Total ............................. $ 362,464 $ 269,195
============== ================
Products and Services
Loans. The Company's loans 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 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 2000, the Company
continued to increase core deposits largely through the success of its
Wealthbuilder NOW and money market deposit accounts introduced during 1999.
These are floating rate accounts indexed to the three-month Treasury Bill.
Deposits are insured by the Federal Deposit Insurance Corporation ("FDIC") up to
statutory limits. The Bank also purchases brokered deposits and obtains direct
non-brokered certificates of deposit through national deposit networks when such
transactions are beneficial to the Bank. 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. The Bank's Financial Services Division provides 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. The Bank's subsidiary, BNC Asset Management, Inc. ("BNC
AMI"), with offices in Bismarck and Fargo, North Dakota and Minneapolis,
Minnesota, provides trading, investment management of institutional and
individual accounts, company-sponsored mutual funds and investment banking.
Insurance Services. Insurance services are provided through the Bank's
subsidiary, BNC Insurance, Inc. ("BNC Insurance"). These services include
personal insurance products such as home, automobile and other vehicle
insurance; universal and mortgage life insurance; business insurance such as
commercial property and general liability, workers' compensation, business
automobile and excess liability coverage; life, health and annuities; farm and
crop insurance; and commercial trucking insurance.
The variety 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 offices. In addition, the
Company offers 24-hour telephone banking services through its voice response
system, BNC Bankline. The Company also provides internet banking and cash
management services through its internet banking site at www.bncbank.com. This
system allows customers to process account transactions, funds transfers, wires,
automated clearing house (ACH) transactions, stop payments and obtain account
history and other information using their personal computers and modems. A
mobile branch operating in Fargo, North Dakota is also of great convenience to
Bank customers.
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 members (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 and the increasing availability of
nationwide interstate banking have increased the level of competition in the
Company's already intensely competitive market areas. 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 Wells Fargo,
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 Bank 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 Bank 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 Bank. 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 Legislation."
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 Bank is a national banking association and is subject
to supervision, regulation and examination by the Office of the Comptroller of
the Currency ("OCC"). Since the deposits of the Bank are insured by the FDIC,
the Bank is also subject to regulation and supervision by the FDIC.
Additionally, the Bank is a member 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 Bank to BNCCORP who is defined as an "affiliate" of the Bank under the
Act. Section 23B of the Act places standards of fairness and reasonableness on
other of the Bank's transactions with its 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
Bank seeks participations to accommodate borrowers whose financing needs exceed
its lending limits.
Loans to Executive Officers, Directors and Principal Stockholders. Certain
limitations and reporting requirements are also placed on extensions of credit
by the Bank to principal stockholders of BNCCORP and to directors and certain
executive officers of the Bank (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 Bank or principal stockholder of BNCCORP may be limited in his or
her ability to obtain credit from financial institutions with which the Bank
maintains 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 Bank 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 Bank to supervisory or enforcement actions. In addition, BNCCORP could be
required to guarantee a capital restoration plan of the Bank, should the Bank
become "undercapitalized" under capital guidelines. See Note 12 to the
Consolidated Financial Statements included under Item 8 of Part II for further
discussion regarding the capital status of BNCCORP and the Bank.
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
Bank is encouraged to respond to the credit and other needs of the communities
it serves. 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.
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 the
Bank 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.
Bank Secrecy Act. The Bank Secrecy Act requires financial institutions to keep
records and file reports that are determined to have a high degree of usefulness
in criminal, tax and regulatory matters, and to implement counter-money
laundering programs and compliance procedures.
Consumer Laws and Regulations. In addition to the laws and regulations discussed
herein, the Bank is 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, the Home Mortgage Disclosure Act, the Real Estate
Settlement Procedures Act, the Fair Credit Reporting Act, the Flood Disaster
Protection Act, the Fair Housing Act and the Right to Financial Privacy 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.
Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act (the "Financial Modernization
Act") has expanded the powers of banks and bank holding companies to sell any
financial product or service, closed the unitary thrift loophole, reformed the
Federal Home Loan Bank ("FHLB") System to increase community banks' access to
loan funding, protected banks from discriminatory state insurance regulation and
established a new framework for the regulation of bank and bank holding company
securities brokerage and underwriting activities. The Financial Modernization
Act also included new provisions in the privacy area, restricting the ability of
financial institutions to share nonpublic personal customer information with
third parties. Throughout 2000, the Company has been reviewing implementing
regulations and other guidance issued by bank regulatory agencies in response to
the Financial Modernization Act and establishing policies, procedures and
programs required or recommended by such regulations and guidelines.
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, state banking authorities possess significant authority to address
violations of their state's banking laws by banks operating in their respective
states by enforcement and other supervisory actions.
As indicated above, the laws and regulations affecting banks and bank holding
companies are numerous and have changed significantly in recent years. There is
reason to expect that changes will continue in the future, although it is
difficult to predict the outcome of these changes or the impact such changes
will have on BNC.
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, 2000, BNC had 190 employees, including 181 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 are located at 322 East Main Avenue, Bismarck,
North Dakota. The building is owned by BNC National Bank. The principal office
of BNC National Bank is located at 333 South Seventh Street, Minneapolis,
Minnesota. BNC National Bank 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 Crosby, Ellendale,
Fargo, Kenmare, Linton and Stanley, North Dakota.
BNC National Bank's facilities at 100 West Main Street (Mandan), Garrison and
Watford City, North Dakota and the land at South 3rd Street (Bismarck) are
leased. The facilities occupied by BNC National Bank and BNC AMI at 333 South
Seventh Street, Minneapolis, Minnesota, and facilities at 660 South Mill Avenue,
Tempe, Arizona are also leased.
All owned and leased properties are considered in good operating condition and
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 20 to the
Consolidated Financial Statements included under Item 8 of part II for
additional information concerning lease and other commitments.
Item 3. Legal Proceedings
The Company's material pending legal actions are discussed in Note 20 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, 2000.
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.
2001 2000 1999
---------------- ---------------- ----------------
Period High Low High Low High Low
------- ------- ------- ------- ------- -------
First Quarter....... $ 8.56 $ 5.94 $ 7.25 $ 5.81 $ 11.25 $ 8.63
Second Quarter...... -- -- $ 6.94 $ 5.88 $ 9.38 $ 7.63
Third Quarter....... -- -- $ 6.56 $ 5.75 $ 9.00 $ 7.25
Fourth Quarter...... -- -- $ 6.50 $ 5.38 $ 8.25 $ 5.75
On March 15, 2001, there were 97 record holders and approximately 963 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 Bank. Capital distributions, including dividends, by
the Bank are subject to federal regulatory restrictions tied to the bank'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, 2000, 1999, 1998, 1997 and 1996 are derived from the historical
audited consolidated financial statements of the Company. The Consolidated
Balance Sheets as of December 31, 2000, 1999, 1998 and 1997 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, 2000
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,
------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(dollars in thousands, except share and per share data)
Income Statement Data:
Total interest income...........$ 41,763 $ 28,931 $ 27,801 $ 25,232 $ 20,597
Total interest expense.......... 28,117 16,574 15,152 13,132 10,945
---------- ---------- ---------- ---------- ----------
Net interest income............. 13,646 12,357 12,649 12,100 9,652
Provision for credit losses..... 1,202 1,138 1,201 2,518 690
Noninterest income.............. 7,773 6,068 4,843 3,928 3,622
Noninterest expense............. 17,430 18,215 13,379 11,256 10,286
Income taxes (benefit).......... 906 (399) 1,030 955 1,152
---------- ---------- ---------- ---------- ----------
Income (loss) from
continuing operations.........$ 1,881 $ (529) $ 1,882 $ 1,299 $ 1,146
========== ========== ========== ========== ==========
Balance Sheet Data:
(at end of period)
Total assets....................$ 570,016 $ 456,877 $ 372,240 $ 345,630 $ 283,716
Investments and federal
funds sold.................... 263,185 154,492 96,601 94,624 66,391
Loans........................... 268,925 262,051 247,181 220,149 197,435
Allowance for credit losses..... (3,588) (2,872) (2,854) (2,919) (1,545)
Total deposits.................. 362,464 324,711 284,499 262,824 239,770
Short-term borrowings........... 150,428 88,700 49,290 46,503 11,437
Long-term borrowings............ 12,642 14,470 9,195 8,285 5,937
Stockholders' equity............ 29,457 23,149 25,255 23,148 21,595
Book value per common share
outstanding...................$ 12.30 $ 9.65 $ 10.57 $ 9.64 $ 8.99
Earnings Performance Data (1):
Return on average total
assets........................ 0.35% (.13)% .54% .42% .44%
Return on average
stockholders' equity.......... 7.68% (2.13)% 8.48% 6.16% 5.52%
Net interest margin............. 2.72% 3.41% 3.88% 4.27% 4.05%
Net interest spread............. 2.41% 3.09% 3.43% 3.82% 3.61%
Basic earnings (loss) per
common share..................$ 0.78 $ (0.22) $ 0.79 $ 0.54 $ 0.48
Diluted earnings (loss) per
common share..................$ 0.78 $ (0.22) $ 0.75 $ 0.54 $ 0.48
Balance Sheet and Other Key
Ratios (1):
Nonperforming assets to
total assets.................. 0.12% 0.63% 1.21% .43% .16%
Nonperforming loans to total
loans......................... 0.22% 0.63% .97% .68% .15%
Net loan charge-offs to
average loans................. (.19)% (.45)% (.54)% (.53)% (.11)%
Allowance for credit
losses to total loans......... 1.33% 1.10% 1.15% 1.33% .78%
Allowance for credit losses
to nonperforming loans........ 619% 173% 119% 195% 540%
Average stockholders' equity
to average total assets....... 4.56% 6.32% 6.33% 6.89% 8.05%
- -------------------------
(1) From continuing operations for all periods presented.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company's financial performance in 2000 reflected continued growth in
noninterest income, increases in the asset and deposit base and stronger credit
quality. Net interest income for the year ended December 31, 2000, was $13.6
million, as compared with $12.4 and $12.6 million reported in the previous two
years. Noninterest income, largely from insurance commissions, loan fees,
brokerage income and trust and financial services, rose sharply to $7.8 million
in 2000 from $6.1 and $4.8 million in 1999 and 1998, respectively.
The Company recorded 2000 net income of $2.3 million, or $0.96 per share on a
diluted basis, compared with net income of $242,000, or $0.10 per share
(diluted), for 1999 and net income of $2.3 million, or $0.91 per share
(diluted), for 1998.
Performance highlights in the year 2000 included:
* Investment securities increased 74 percent, to $263.2 million
reflecting further implementation of the balance sheet leveraging
strategy initiated late in 1999. Total assets increased 25 percent, to
$570.0 million.
* Loans and leases increased 3 percent, to $268.9 million. While net
loans outstanding did not increase materially, gross loans originated
did as the total loans sold to other financial institutions on a
nonrecourse basis increased $69.7 million, or 58%, to $189.8 million.
* A determined focus by senior management on loan portfolio management
resulted in a dramatic improvement in credit quality.
* Deposits increased 12 percent, to $362.5 million. The deposit growth
was driven by continued success of the Wealthbuilder family of indexed
NOW and money market accounts.
* Noninterest income increased 28 percent to $7.8 million.
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 primary 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 sheet 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,
-----------------------------------------------------------------------------------
2000 1999 1998
--------------------------- --------------------------- ---------------------------
Interest Average Interest Average Interest Average
Average earned yield or Average earned Yield or Average earned yield or
Balance or paid cost balance or paid Cost Balance or paid cost
--------- -------- -------- --------- -------- -------- --------- -------- --------
(dollars in thousands)
Assets
Federal funds sold/interest-
bearing due from................ $ 5,660 $ 242 4.28% $ 1,818 $ 90 4.95% $ 5,336 $ 289 5.42%
Taxable investments............. 225,559 16,054 7.12% 105,145 6,372 6.06% 87,464 5,269 6.02%
Tax-exempt investments.......... 17,624 940 5.33% 7,788 386 4.96% 1,775 95 5.35%
Loans (2)....................... 255,798 24,527 9.59% 250,158 22,083 8.83% 234,342 22,148 9.45%
Allowance for credit losses..... (3,405) -- (2,890) -- (2,941) --
--------- -------- --------- -------- --------- --------
Total interest-earning
assets (3)................. 501,236 41,763 8.33% 362,019 28,931 7.99% 325,976 27,801 8.53%
Noninterest-earning assets:
Cash and due from banks..... 8,939 7,704 6,733
Other....................... 27,579 22,584 17,728
--------- --------- ---------
Total assets.......... $ 537,754 $ 392,307 $ 350,437
========= ========= =========
Liabilities and Stockholders'
Equity
Deposits:
NOW and money market
accounts.................... $ 136,450 7,341 5.38% $ 91,671 3,632 3.96% $ 63,115 2,128 3.37%
Savings....................... 4,097 86 2.10% 6,294 129 2.05% 8,717 197 2.26%
Certificates of deposit:
Under $100,000................ 108,170 6,033 5.58% 125,470 6,469 5.16% 130,759 7,332 5.61%
$100,000 and over............. 54,177 3,406 6.29% 43,140 2,307 5.35% 36,704 2,152 5.86%
--------- -------- --------- -------- --------- --------
Total interest-bearing
deposits...................... 302,894 16,866 5.57% 266,575 12,537 4.70% 239,295 11,809 4.93%
Short-term borrowings:
Securities and loans
sold under agreements
to repurchase and
federal funds purchased..... 97,682 6,326 6.48% 21,685 1,129 5.21% 6,745 348 5.16%
FHLB notes payable............ 60,561 3,673 6.07% 40,308 2,174 5.39% 42,831 2,346 5.48%
Long-term borrowings.............. 13,497 1,252 9.28% 9,872 734 7.44% 8,290 649 7.83%
--------- -------- --------- -------- --------- --------
Total interest-
bearing
liabilities......... 474,634 28,117 5.92% 338,440 16,574 4.90% 297,161 15,152 5.10%
Noninterest-bearing demand
accounts........................ 28,656 27,094 24,827
--------- --------- ---------
Total deposits and
interest-bearing
liabilities......... 503,290 365,534 321,988
Other noninterest-bearing
liabilities..................... 6,850 5,567 6,264
--------- --------- ---------
Total liabilities..... 510,140 371,101 328,252
Subordinated debentures........... 3,108 -- --
Stockholders' equity.............. 24,506 21,206 22,185
--------- --------- ---------
Total liabilities
and stockholders'
equity.............. $ 537,754 $ 392,307 $ 350,437
========= ========= =========
Net interest income............... $ 13,646 $ 12,357 $ 12,649
======== ======== ========
Net interest spread............... 2.41% 3.09% 3.43%
========= ======== ========
Net interest margin............... 2.72% 3.41% 3.88%
========= ======== ========
Ratio of average interest-
earning assets to
average interest-
bearing liabilities........... 105.60% 106.97% 109.70%
========= ========= =========
--------------------
(1) From continuing operations for all periods presented.
(2) Average nonaccrual loans are included in average loans outstanding.
(3) Yields do not include adjustments for tax-exempt interest.
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,
-------------------------------------------------
2000 Compared to 1999 1999 Compared to 1998
------------------------ ------------------------
Change Due to Change Due to
--------------- ----------------
Volume Rate Total Volume Rate Total
------- ------- -------- ------- -------- -------
(in thousands)
Interest-Earning Assets
Federal funds sold/interest-
bearing due from............$ (38) $ 190 $ 152 $ (190) $ (9) $ (199)
Investments................... 2,442 7,794 10,236 1,424 (30) 1,394
Loans......................... 1,946 498 2,444 1,495 (1,560) (65)
------- ------- -------- ------- -------- -------
Total increase (decrease)
in interest income....... 4,350 8,482 12,832 2,729 (1,599) 1,130
------- ------- -------- ------- -------- -------
Interest-Bearing Liabilities
NOW and money market
accounts.................... 1,935 1,774 3,709 962 542 1,504
Savings....................... 2 (45) (43) (55) (13) (68)
Certificates of Deposit:
Under $100,000.............. 456 (892) (436) (297) (566) (863)
$100,000 and over........... 509 590 1,099 377 (222) 155
Short-term borrowings:
Securities and loans sold
under agreements to
repurchase and federal
funds purchased........... 1,240 3,957 5,197 771 10 781
FHLB notes payable.......... 407 1,092 1,499 (138) (34) (172)
Long-term borrowings.......... 248 270 518 124 (39) 85
------- ------- -------- ------- -------- -------
Total increase (decrease)
in interest expense......... 4,797 6,746 11,543 1,744 (322) 1,422
======= ======= ======== ======= ======== =======
Increase (decrease) in net
interest income.............$ (447) $ 1,736 $ 1,289 $ 985 $(1,277) $ (292)
======= ======= ======== ======= ======== =======
(1) From continuing operations for all periods presented.
Year ended December 31, 2000 compared to year ended December 31, 1999. Net
interest income increased $1.3 million, or 10.4 percent, to $13.6 million as
compared to $12.4 million. Net interest spread and net interest margin declined
to 2.41 and 2.72 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 - 2000 vs. 1999 (1)
For the Years Ended
December 31, Change
------------------- ----------------
2000 1999
-------- --------
(amounts in millions)
Total interest income
increased.................... $ 41.8 $ 28.9 $ 12.9 45%
Due to:
Increase in average
earning assets............. $ 501.2 $ 362.0 $ 139.2 38%
Driven by:
Increase in average
investments (a).......... $ 243.2 $ 112.9 $ 130.3 115%
Increase in average
loans (b)................ $ 255.8 $ 250.2 $ 5.6 2%
The increases in average
earning assets volume
were coupled with:
Increased yield on
earning assets........... 8.33% 7.99% 0.34% 4%
Driven by:
Increased yield on
loans (c)................ 9.59% 8.83% 0.76% 9%
Increased yield on
investments (d).......... 6.99% 5.98% 1.01% 17%
These increases were
somewhat offset by:
Mix change in earning
asset portfolio -
Average loans as a
percent of total
interest-earning
assets (e)............. 51% 69% (18.0)% (26)%
Total interest expense
increased.................... $ 28.1 $ 16.6 $ 11.5 69%
Due to:
Increase in average
interest-bearing
liabilities.............. $ 474.6 $ 338.4 $ 136.2 40%
Driven by:
Increase in average
interest-bearing
deposits (f)............. $ 302.9 $ 266.6 $ 36.3 14%
Increase in average
borrowings (g)........... $ 171.7 $ 71.9 $ 99.8 139%
These increases were
coupled with:
Increase in cost of
interest-bearing
deposits (h)........... 5.57% 4.70% 0.87% 19%
Increase in cost of
borrowings (i)........... 6.55% 5.62% 0.93% 17%
- --------------------
(1) From continuing operations for all periods presented.
(a) Reflecting further implementation of the balance sheet leveraging
strategy initiated late in 1999, the Company purchased investment
securities and funded them with FHLB borrowings.
(b) Loan growth is attributable to increases in loans originated in both
the Minnesota and North Dakota markets.
(c) The improved loan yield is reflective of prime rate increases in 2000
offset by some decreases in loan pricing spread to prime rate due to
competitive pressures in all markets.
(d) The improved investment yield reflects the higher rate environment in
2000 as well as the mix of investment types in the Company's
investment portfolio.
(e) The increase in investment securities noted in (a) caused this change
in the mix of the earning asset portfolio. While such a mix change has
a negative effect on yield on earning assets (because investments
typically yield less than loans), the strategy is accretive to
earnings.
(f) Deposit growth is primarily attributable to the continued success of
the Wealthbuilder family of NOW and money market accounts.
(g) Increased FHLB borrowings for the purpose of purchasing investment
securities. See (a) above.
(h) Increased cost of interest-bearing deposits is reflective of the
volume of Wealthbuilder NOW and money market accounts and the
associated increases in cost as interest rates rose during 2000. The
Wealthbuilder accounts are indexed to and float with the 90 day T-bill
rate. Additionally, in a higher rate environment, the cost of
certificates of deposit also increases with renewals and new accounts.
(i) Rates are reflective of the overall increased rate environment in 2000
as compared to 1999.
Net interest income and margin in future periods are expected to be impacted by
several factors. Recent decreases in the prime rate will negatively impact
interest income and yields on loans but will positively impact interest expense
and the cost of deposits and borrowings. Additionally, the Company has increased
its earning asset portfolio by purchasing investment securities funded primarily
through FHLB borrowings. While the additional investments have increased
interest income, net interest income and earnings, they have negatively impacted
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, 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 - 1999 vs. 1998 (1)
For the Years Ended
December 31, Change
------------------- ----------------
2000 1999
-------- --------
(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)% (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
Minneapolis and Fargo locations.
(b) The Company increased its investment securities holdings primarily
through FHLB borrowings with the implementation of the balance sheet
leveraging strategy late in 1999.
(c) The decreased loan yield was 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.
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 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, 2000 was $1.2
million as compared to $1.1 million in 1999 and $1.2 million in 1998.
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 -----------------------------------
December 31, 2000 - 1999 1999 - 1998
-------------------------- ---------------- ----------------
2000 1999 1998 $ % $ %
-------- -------- -------- -------- ------- -------- -------
(in thousands)
Insurance commissions... $ 2,003 $ 2,045 $ 1,769 $ (42) (2)%(a) $ 276 16%(a)
Fees on loans........... 1,941 1,435 1,376 506 35%(b) 59 4%
Brokerage income........ 1,466 797 53 669 84%(c) 744 1,404%(c)
Trust and financial
services.............. 1,064 589 517 475 81%(d) 72 14%
Service charges......... 604 536 566 68 13% (30) (5)%
Net gain on sales of
securities .......... 276 198 130 78 39% 68 52%
Rental income........... 56 121 43 (65) (54)% 78 181%
Other................... 363 347 389 16 5% (42) (11)%
-------- -------- -------- -------- --------
Total noninterest
income................ $ 7,773 $ 6,068 $ 4,843 1,705 28% $ 1,225 25%
======== ======== ======== ======== ========
- --------------------
(1) From continuing operations for all periods presented.
(a) Increased insurance commissions in 1999 resulted from an increase in
the average number of insurance producers as well as successful
efforts to cross-sell insurance to bank customers. In 2000, insurance
commissions remained relatively stable in spite of a reduction in the
number of insurance agents.
(b) The increase in loan fees is largely attributable to loans originated
and sold. BNC AMI also generated some loan fees upon placement of
credit into the secondary market. Management cannot predict with any
degree of certainty the amount of loans which will be originated or
placed and related loan fees which will be recognized in future
periods.
(c) Increases are attributable to the addition of brokerage staff at BNC
AMI and successful efforts to cross-sell brokerage services to bank
customers.
(d) The 2000 increase is attributable to fees associated with the BNC U.S.
Opportunities Fund LLC which was formed on September 1, 1999 and is
managed by the Bank's Financial Services Division.
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, 2000 - 1999 1999 - 1998
----------------------------- ---------------- ----------------
2000 1999 1998 $ % $ %
--------- --------- --------- -------- ------- -------- -------
(in thousands)
Salaries and employee
benefits.............. $ 8,891 $ 8,854 $ 7,463 $ 37 -- $ 1,391 19%(a)
Depreciation and
amortization.......... 1,659 1,586 1,498 73 5% 88 6%
Occupancy............... 1,360 1,248 988 112 9% 260 26%(a)
Professional services... 1,290 1,214 766 76 6% 448 58%(b)
Office supplies,
telephone and
postage............... 940 941 749 (1) -- 192 26%(a)
Marketing and
promotion............. 597 621 455 (24) (4)% 166 36%(c)
Repossessed and
impaired asset
expenses/write-
offs.................. 470 2,271 2 (1,801) (79)%(d) 2,269 -- (d)
Minority interest in
income of
subsidiaries.......... 399 -- -- 399 -- (e) -- --
FDIC and other
assessments........... 200 191 184 9 5% 7 4%
Other................... 1,624 1,289 1,274 335 26%(f) 15 1%
--------- --------- --------- -------- --------
Total noninterest
expense............... $ 17,430 $ 18,215 $ 13,379 $ (785) (4)% $ 4,836 36%
========= ========= ========= ======== ========
Efficiency ratio (g).... 81.38% 98.86% 76.49% (17.48)% 22.37%
- --------------------
(1) From continuing operations for all periods presented.
(a) 1999 increases represent personnel additions at BNC AMI, BNC Insurance
and the Bank's Fargo branch as well as related occupancy, supplies,
telephone, postage and other miscellaneous expenses.
(b) 1999 increase represents an increase in brokerage costs at BNC AMI,
legal fees related to the proceedings against a former loan officer
and other legal costs associated with other real estate owned and
repossessed assets. Professional services expenses in 2000 remained
relatively flat.
(c) 1999 included increased advertising, public relations and promotional
expenses, including fees paid to an investor relations firm engaged
late in 1998.
(d) 1999 included write-downs to estimated net realizability of other real
estate owned and repossessed assets. The Company had no assets
classified as other real estate owned at December 31, 2000 and
repossessed assets were valued at $84,000.
(e) This is the interest expense associated with the trust preferred
securities issued in July 2000. See Note 10 to the Consolidated
Financial Statements included under Item 8 for further information
related to the trust preferred offering.
(f) Increase in 2000 represents a number of immaterial increases in
various miscellaneous expense categories.
(g) Noninterest expense divided by an amount equal to net interest income
plus noninterest income. Noninterest expense for 2000 and 1999
included $470,000 and $2.3 million, respectively, in write-downs of
nonperforming assets. Excluding these write-downs and the interest on
the trust preferred securities, the efficiency ratios for 2000 and
1999 would have been 77.30 and 86.53 percent, respectively.
Financial Condition
Overview. Although subsequent sections of this discussion and analysis of
financial condition address certain aspects of the Company's major assets and
liabilities in significant detail, the following two tables are presented as a
general overview of the financial condition of the Company.
The following table presents the Company's assets by category as of December 31,
2000, 1999 and 1998, as well as the amount and percent of change between the
dates. Material changes are discussed in lettered notes following the table
(amounts are in thousands):
Assets
Increase (Decrease)
-----------------------------------
As of December 31, 2000 - 1999 1999 - 1998
----------------------------- ---------------- ----------------
2000 1999 1998 $ % $ %
--------- --------- --------- -------- ------- -------- -------
Cash and due from
banks................. $ 14,988 $ 12,816 $ 7,475 $ 2,175 17% $ 5,341 71%
Interest-bearing
deposits with
banks................. 595 5,565 2,809 (4,970) (89)% 2,756 98%
Federal funds sold...... -- 3,500 -- (3,500) (100)% 3,500 --
Investment securities
available for sale.... 263,185 150,992 96,601 112,193 74%(a) 54,391 56%(a)
Loans and leases, net... 265,337 259,179 244,327 6,158 2%(b) 14,852 6%(b)
Premises, leasehold
improvements and
equipment, net........ 14,873 12,006 8,786 2,867 24% 3,220 37%
Interest receivable..... 3,854 2,613 2,356 1,241 47% 257 11%
Other assets............ 4,465 6,945 5,929 (2,480) (36)% 1,016 17%
Deferred charges and
intangible assets,
net................... 2,719 3,261 3,957 (542) (17)% (696) (18)%
Assets of
discontinued
operation............. -- -- 24,092 -- -- (24,092) (100)%(c)
--------- --------- --------- --------- --------
Total assets...... $ 570,016 $ 456,877 $ 396,332 $ 113,139 25% $ 60,545 15%
========= ========= ========= ========= ========
(a) The Company implemented a balance sheet leveraging strategy beginning late
in 1999 whereby the earning asset portfolio was increased through the
purchase of additional investment securities funded primarily by borrowings
from the FHLB.
(b) The 1999 increase is primarily attributable to an increase in real estate
mortgage loans originated in Minnesota and North Dakota. The 2000 increase
is primarily attributable to an increase in real estate construction loans.
Although net loans outstanding have not increased materially, gross loans
originated by the Company have increased significantly as the Company has
originated and sold portions of loans to other lenders on a nonrecourse
basis. Loans may be sold to accommodate customers whose financing needs
exceed legal lending limits and/or internal loan restrictions relating
primarily to industry concentrations. Outstanding balances of loan
participations sold on a nonrecourse basis were $189.8, $120.1 and $56.7
million, respectively, as of December 31, 2000, 1999 and 1998.
(c) Sale of BNC Financial Corporation, BNCCORP's asset-based lending
subsidiary, on December 31, 1999.
The following table presents the Company's liabilities, guaranteed preferred
beneficial interests in subordinated debentures and stockholders' equity by
category as of December 31, 2000, 1999 and 1998, as well as the amount and
percent of change between the dates. Material changes are discussed in lettered
notes following the table (amounts are in thousands):
Liabilities, Subordinated Debentures and Stockholders' Equity
Increase (Decrease)
-----------------------------------
As of December 31, 2000 - 1999 1999 - 1998
----------------------------- ----------------- ----------------
2000 1999 1998 $ % $ %
--------- --------- --------- --------- ------- -------- -------
Deposits:
Noninterest-bearing..... $ 31,459 $ 29,798 $ 28,475 $ 1,661 6% $ 1,323 5%
Interest-bearing -
Savings, NOW and
money market........ 169,425 127,454 89,887 41,971 33%(a) 37,567 42%(a)
Time deposits
$100,000 and over... 61,720 46,779 39,162 14,941 32%(b) 7,617 19%(b)
Other time deposits... 99,860 120,680 126,975 (20,820) (17)%(a) (6,295) (5)%(a)
Short term borrowings... 150,428 88,700 49,290 61,728 70%(c) 39,410 80%(c)
Long term borrowings.... 12,642 14,470 9,195 (1,828) (13)% 5,275 57%
Other liabilities....... 7,419 5,847 6,362 1,572 27% (515) (8)%
Liabilities of
discontinued
operation............. -- -- 21,731 -- -- (21,731) (100)%(d)
--------- --------- --------- --------- --------
Total
liabilities..... 532,953 433,728 371,077 99,255 23% 62,651 17%
--------- --------- --------- --------- --------
Guaranteed preferred
beneficial interests
in Company's
subordinated
debentures............ 7,606 -- -- 7,606 -- (e) -- --
Stockholders' equity.... 29,457 23,149 25,255 6,308 27%(f) (2,106) (8)%
--------- --------- --------- --------- --------
Total............. $ 570,016 $ 456,877 $ 396,332 $ 113,139 25% $ 60,545 15%
========= ========= ========= ========= ========
(a) Increases in the "savings, NOW and money market" category are attributable
to the popularity of the Company's Wealthbuilder deposit products. Success
of these products has also contributed to a decrease in the "other time
deposits" category as some customers have elected to transfer maturing time
deposits to the more liquid and competitively priced Wealthbuilder
products.
(b) Brokered deposits totaled $30.7 million at December 31, 2000 compared to
$13.4 and $5.0 million at December 31, 1999 and 1998, respectively.
(c) Increases in short term borrowings are attributable to the balance sheet
leveraging strategy.
(d) Sale of BNC Financial Corporation on December 31, 1999.
(e) Issuance of trust preferred securities in July 2000. See Note 10 to the
Consolidated Financial Statements included under Item 8 for further
information related to the trust preferred securities.
(f) Increase is attributable to earnings of $2.3 million and unrealized holding
gains on securities available for sale arising during the period of $3.9
million.
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, the Company seeks a balance
among yield and the management of credit and liquidity risks 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,
----------------------------------------------------------------
2000 1999 1998
--------------------- --------------------- --------------------
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
U.S. government
agency mortgage-
backed securities... 44,272 44,468 26,697 26,295 51,194 51,444
U.S. government
agency securities... 4,880 4,890 4,654 4,468 13,096 12,998
Collateralized
mortgage
obligations......... 164,221 165,404 97,243 95,038 19,602 19,607
State and municipal
bonds............... 20,782 20,905 20,272 19,548 3,355 3,420
Corporate bonds....... 16,968 17,899 -- -- -- --
Equity securities..... 9,619 9,619 5,643 5,643 4,024 4,023
---------- ---------- ---------- ---------- --------- ---------
Total investments..... $ 260,742 $ 263,185 $ 154,509 $ 150,992 $ 96,369 $ 96,601
========== ========== ========== ========== ========= =========
(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, 2000:
Investment Portfolio - Maturity and Yields
Maturing
------------------------------------------------------------------------
After 1 but After 5 but
Within 1 Year within 5 years within 10 years After 10 years Total
----------------- ----------------- ----------------- ------------------ ------------------
Amount Yield(1) Amount Yield(1) Amount Yield(1) Amount Yield(1) Amount Yield(1)
-------- -------- -------- -------- -------- -------- --------- -------- --------- --------
Available for sale:(2)
U.S. government agency
mortgage-backed
securities (3)......... $ 44 5.42% $ 977 6.15% $ 5,497 6.46% $ 37,754 7.71% $ 44,272 7.52%
U.S. government agency
securities............. -- -- 1,411 5.78% -- -- 3,469 6.04% 4,880 5.96%
Collateralized mortgage
obligations (3)........ -- -- 2,275 7.11% 48,454 6.86% 113,492 6.85% 164,221 6.86%
State and municipal
bonds.................. 5 14.33% 1,215 8.92% 1,128 7.15% 18,434 7.30% 20,782 7.39%
Corporate bonds.......... -- -- -- -- -- -- 16,968 9.22% 16,968 9.22%
-------- -------- -------- --------- ---------
Total book value of
investment securities.. $ 49 6.32% $ 5,878 7.00% $ 55,079 6.83% $ 190,117 7.26% 251,123 7.16%
======== ======== ======== ========= ---------
Unrealized holding
gain on securities
available for sale..... 2,443
Equity securities........ 9,619 6.94%
---------
Total investment in
securities available
for sale............... $ 263,185 7.09%(4)
=========
- --------------------
(1) Yields include adjustments for tax-exempt income; yields 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, 2000, BNC had $263.2 million of securities in the investment
portfolio as compared to $151.0 and $96.6 million at December 31, 1999 and 1998,
respectively. During 2000, the Company increased its holdings in agency
collateralized mortgage obligations ("CMOs"), U.S. government agency
mortgage-backed securities and corporate bonds by $70.4, $18.2, and $17.9
million, respectively.
The increased volume of these sectors and the portfolio as a whole is part of
the Company's strategy to increase its earning asset portfolio by purchasing
investment securities funded primarily through FHLB borrowings. The portfolio
management process, investment objectives, and risk/reward analysis described
above led the increase in the investment portfolio to be over-weighted toward
CMOs due to their risk/reward characteristics. In addition, over the course of
2000, principal cash flows were primarily reinvested in CMOs because they
offered a better risk/reward profile (due to the structure of the CMO cash
flows) relative to mortgage-backed securities.
At December 31, 2000, BNC held no securities of any single issuer, other than
U.S. government agency 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 82 percent at
December 31, 2000) 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. Net loans increased $6.2 million, or 2.4 percent, to $265.3 million at
December 31, 2000 as compared to $259.2 million at December 31, 1999. In 1999,
net loans increased $14.9 million, or 6 percent, as compared to December 31,
1998. The following table presents the composition of the Company's loan
portfolio as of the dates indicated:
Loan Portfolio Composition (1)
December 31,
-----------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
----------------- ----------------- ----------------- ----------------- -----------------
Amount % Amount % Amount % Amount % Amount %
--------- ------- --------- ------- --------- ------- --------- ------- --------- -------
(dollars in thousands)
Commercial and
industrial ............ $ 112,407 42.4 $ 111,236 42.9 $ 107,886 44.2 $ 96,780 44.5 $ 89,065 45.4
Real estate
mortgage............... 90,622 34.2 91,906 35.5 76,692 31.4 56,408 26.0 47,451 24.2
Real estate
construction........... 25,301 9.6 16,026 6.2 20,831 8.5 18,215 8.4 8,806 4.5
Agricultural............. 15,775 5.9 16,679 6.4 19,777 8.1 21,064 9.7 20,673 10.6
Consumer/other........... 14,888 5.6 15,116 5.8 14,761 6.1 18,726 8.6 18,734 9.6
Lease financing.......... 10,202 3.8 11,307 4.4 7,422 3.0 9,211 4.2 12,970 6.6
--------- ------- --------- ------- --------- ------- --------- ------- --------- -------
Total face amount of
loans.................. 269,195 101.5 262,270 101.2 247,369 101.3 220,404 101.4 197,699 100.9
Unearned income and
net unamortized
deferred fees and
costs.................. (270) (0.1) (219) (0.1) (188) (0.1) (255) (0.1) (264) (0.1)
--------- ------- --------- ------- --------- ------- --------- ------- --------- -------
Loans, net of unearned
income and
unamortized fees
and costs.............. 268,925 101.4 262,051 101.1 247,181 101.2 220,149 101.3 197,435 100.8
Less allowance for
credit losses........... (3,588) (1.4) (2,872) (1.1) (2,854) (1.2) (2,919) (1.3) (1,545) (0.8)
--------- ------- --------- ------- --------- ------- --------- ------- --------- -------
Net loans.................$ 265,337 100.00 $ 259,179 100.0 $ 244,327 100.0 $ 217,230 100.0 $ 195,890 100.0
========= ======= ========= ======= ========= ======= ========= ======= ========= =======
(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)
----------------------------------------
2000 - 1999 1999 - 1998
------------------ ------------------
$ % $ %
--------- ------- --------- -------
(dollars in thousands)
Commercial and industrial.... $ 1,171 1% $ 3,350 3%
Real estate mortgage......... (1,284) (1)% 15,214 20%(a)
Real estate construction..... 9,275 58%(b) (4,805) (23)%
Agricultural................. (904) (5)% (3,098) (16)%
Consumer/other............... (228) (2)% 355 2%
Lease financing.............. (1,105) (10)% 3,885 52%
--------- ---------
Total face amount of loans... 6,925 3% 14,901 6%
Unearned income/unamortized
fees and costs............. (51) (23)% (31) (16)%
--------- ---------
Loans, net of unearned
income/unamortized
fees and costs............. 6,874 3% 14,870 6%
Allowance for credit losses.. (716) (25)% (18) (1)%
--------- ---------
Net Loans.................... $ 6,158 2% $ 14,852 6%(c)
========= =========
(1) From continuing operations for all periods presented.
(a) Increase in 1999 is attributable to loan volume generated out of
Minnesota and North Dakota.
(b) Increased originations of commercial real estate construction loans.
(c) As previously noted, net loans outstanding have not increased
significantly in the last 24 months; however, this is not reflective
of the loans originated by the Company which totaled $459.0 million at
December 31, 2000 compared with $382.4 and $304.1 million at December
31, 1999 and 1998, respectively. Loans are originated and sold for
legal lending limit, concentration and other reasons. See "-Loan
Participations."
While prospects for continued loan growth appear favorable, 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 credit committees. 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, to the extent the credit relationship amount
exceeds individual loan officer lending authorities, 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 Bank sells 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,
----------------------------------------------
(in thousands)
2000................... $ 189,763
1999................... 120,100
1998................... 56,700
1997................... 65,800
1996................... 57,300
(1) From continuing operations for all periods presented.
The Bank generally retains the right to service the loans as well as the right
to receive a portion of the interest income on the loans. Many of the loans sold
by the Bank 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
Bank. 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, 2000 the
total outstanding loans as well as all outstanding loan commitments were
included. As of December 31, 2000, the Company identified three concentrations
of loans exceeding ten percent of total loans and loan commitments outstanding.
These concentrations were in real estate, lodging places and construction, which
represented 20.1, 10.4 and 10.3 percent, respectively, of total loans and loan
commitments outstanding.
The real estate loans and commitments were extended to 112 customers who are
diversified across the Company's market areas and who can be generally
categorized as indicated below:
Percent of
total
outstanding
loans
Number of and loan
customers commitments
----------- -------------
Non-residential and
apartment building
operators, developers
and lessors of real
property................... 58 15.9%
Real estate holding
companies.................. 54 4.2%
----------- -------------
Total.................. 112 20.1%
=========== =============
The lodging loans and commitments were extended to 18 customers whose properties
are located throughout the United States. Loans in this category are made to
borrowers that have seasoned hotel portfolios that are well diversified by
location, property type and flag.
Loans and commitments in the construction category were extended to 56 customers
who are located primarily in Minnesota, Iowa and North and South Dakota and who
can be generally categorized as indicated below:
Percent of
total
outstanding
loans
Number of and loan
customers commitments
----------- -------------
General building
contractors................ 13 2.3%
Heavy construction,
excluding building......... 21 6.7%
Special trade contractors.... 22 1.3%
----------- -------------
Total................... 56 10.3%
=========== =============
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 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 $15.8
million, or 6 percent of total loans at December 31, 2000. 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, 2000, there were no agricultural loans classified as nonperforming.
Loan Maturities. The following table sets forth the remaining maturities of
loans in each major category of BNC's portfolio as of December 31, 2000. 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.... $ 46,126 $ 19,293 $ 37,044 $ 3,829 $ 6,115 $ 112,407
Real estate mortgage......... 9,340 17,896 20,630 29,619 13,137 90,622
Real estate construction..... 7,400 112 16,736 -- 1,053 25,301
Agricultural................. 7,390 3,635 1,659 1,110 1,981 15,775
Consumer/other............... 8,164 4,783 1,349 520 72 14,888
Lease financing.............. 332 9,491 -- 379 -- 10,202
--------- --------- ---------- --------- --------- ----------
Total face amount of loans... $ 78,752 $ 55,210 $ 77,418 $ 35,457 $ 22,358 $ 269,195
========= ========= ========== ========= ========= ==========
- --------------------
(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 14 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 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,
------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(dollars in thousands)
Nonperforming loans:
Loans 90 days or more
delinquent and still
accruing interest........ $ 221 $ 22 $ 307 $ 1,016 $ 129
Nonaccrual loans (2)(3).... 343 1,620 2,042 376 22
Restructured loans (2)(3).. 16 16 44 104 136
-------- -------- -------- -------- --------
Total nonperforming
loans.................. 580 1,658 2,393 1,496 287
Other real estate owned
and repossessed assets... 84 1,207 2,112 -- 159
-------- -------- -------- -------- --------
Total nonperforming
assets................. $ 664 $ 2,865 $ 4,505 $ 1,496 $ 446
======== ======== ======== ======== ========
Allowance for credit
losses..................... $ 3,588 $ 2,872 $ 2,854 $ 2,919 $ 1,545
======== ======== ======== ======== ========
Ratio of total non-
performing loans
to total loans............. .22% .63% .97% .68% .15%
Ratio of total non-
performing assets
to total assets............ .12% .63% 1.21% .43% .16%
- --------------------
(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 $29,000, $112,000 and $49,000 for the years ended
December 31, 2000, 1999 and 1998, respectively.
(3) The interest income on nonaccrual and restructured loans actually included
in the Company's net income was $6,000, $29,000 and $175,000 for the years
ended December 31, 2000, 1999 and 1998, respectively.
The Company achieved significant improvement in the level of nonperforming loans
and assets during 2000. A determined focus by senior management on loan
portfolio management resulted in a dramatic improvement in credit quality.
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 and repossessed assets represents properties and other
assets acquired through, or in lieu of, loan foreclosure. Such properties and
assets 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 or assets are 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,
2000, not including the past due, nonaccrual and restructured loans reported
above, totaled $6.0 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.
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 2000, the Company's total allowance was $3.6 million which equates to
approximately 3.1 times the average charge-offs for the last three and five
years, and 3.8 and 4.3 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 allowance and unallocated 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.
Certain members of the Review Committee are 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 real estate, lodging and construction loans and
commitments. Additionally, a geographic concentration of credit risk also arises
because BNCCORP operates primarily in the upper midwest with 93 percent of loans
outstanding as of December 31, 2000 having been extended to customers in
Minnesota, North Dakota and South 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 $1.7 million at December 31, 1999 to $580,000 at December
31, 2000. 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,
------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
(dollars in thousands)
Balance of allowance for
credit losses, beginning
of period.................. $ 2,872 $ 2,854 $ 2,919 $ 1,545 $ 1,048
--------- --------- --------- --------- ---------
Charge-offs:
Commercial and
industrial............... 574 1,090 1,316 1,319 104
Real estate mortgage....... 58 10 66 24 --
Agricultural............... 16 35 -- -- 22
Consumer/other............. 39 137 73 107 6
Lease financing............ 68 18 -- 471 218
--------- --------- --------- --------- ---------
Total charge-offs........ 755 1,290 1,455 1,921 350
--------- --------- --------- --------- ---------
Recoveries:
Commercial and industrial.. 100 86 151 744 5
Real estate mortgage....... 96 1 26 9 6
Agricultural............... 33 -- -- -- 146
Consumer/other............. 25 71 12 24 --
Lease financing............ 15 12 -- -- --
--------- --------- --------- --------- ---------
Total recoveries......... 269 170 189 777 157
--------- --------- --------- --------- ---------
Net charge-offs............... (486) (1,120) (1,266) (1,144) (193)
Provision for credit losses
charged to operations....... 1,202 1,138 1,201 2,518 690
--------- --------- --------- --------- ---------
Balance of allowance for
credit losses, end of
period..................... $ 3,588 $ 2,872 $ 2,854 $ 2,919 $ 1,545
========= ========= ========= ========= =========
Ratio of net charge-offs
to average loans........... (.19%) (.45%) (.54%) (.53%) (.11%)
========= ========= ========= ========= =========
Average gross loans
outstanding during the
period..................... $ 255,798 $ 250,158 $ 234,342 $ 214,053 $ 169,264
========= ========= ========= ========= =========
Ratio of allowance for
credit losses to total
loans...................... 1.33% 1.10% 1.15% 1.33% .78%
========= ========= ========= ========= =========
Ratio of allowance for
credit losses to
nonperforming loans........ 619% 173% 119% 195% 540%
========= ========= ========= ========= =========
(1) From continuing operations for all periods presented.
Included in the data above, relating to the lending activities of 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 20 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,
-------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------- ------------------- ------------------- ------------------- -------------------
Loans in Loans in Loans in Loans in Loans in
category category category category category
as a as a as a as a as a
Amount percent Amount percent Amount percent Amount percent Amount percent
of of total of of total of of total of of total of of total
allowance loans allowance loans allowance loans allowance loans allowance loans
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
(dollars in thousands)
Commercial and
industrial..... $ 2,066 42% $ 1,356 43% $ 1,155 44% $ 931 44% $ 672 45%
Real estate
mortgage....... 702 34% 712 35% 667 31% 441 26% 306 24%
Real estate
construction... 112 10% 151 6% 129 8% 311 8% 57 4%
Agricultural..... 342 6% 220 6% 252 8% 139 10% 176 11%
Consumer/other... 128 5% 138 6% 217 6% 174 8% 97 9%
Lease financing.. 145 3% 88 4% 133 3% 136 4% 63 7%
Unallocated...... 93 0% 207 0% 301 0% 787 0% 174 0%
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
Total............ $ 3,588 100% $ 2,872 100% $ 2,854 100% $ 2,919 100% $ 1,545 100%
========= ======== ========= ======== ========= ======== ========= ======== ========= ========
(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,
--------------------------------------------------------------------------------------
2000 1999 1998
---------------------------- ---------------------------- ----------------------------
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....... $ 136,450 41.15% 5.38% $ 91,671 31.22% 3.96% $ 63,115 23.90% 3.37%
Savings
deposits....... 4,097 1.24% 2.10% 6,294 2.14% 2.05% 8,717 3.30% 2.26%
Time deposits
(CDs):
CDs under
$100,000....... 108,170 32.63% 5.58% 125,470 42.72% 5.16% 130,759 49.50% 5.61%
CDs $100,000
and over....... 54,177 16.34% 6.29% 43,140 14.69% 5.35% 36,704 13.90% 5.86%
--------- ---------- --------- ---------- --------- ----------
Total time
deposits....... 162,347 48.97% 5.81% 168,610 57.41% 5.20% 167,463 63.40% 5.66%
--------- ---------- --------- ---------- --------- ----------
Total interest-
bearing
deposits....... 302,894 91.36% 5.57% 266,575 90.77% 4.70% 239,295 90.60% 4.93%
Noninterest-
bearing demand
deposits....... 28,656 8.64% -- 27,094 9.23% -- 24,827 9.40% --
--------- ---------- --------- ---------- --------- ----------
Total deposits... $ 331,550 100.0% 5.09% $ 293,669 100.0% 4.27% $ 264,122 100.0% 4.47%
========= ========== ========= ========== ========= ==========
(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,
2000, the Bank held a total of $9.0 million of national market certificates of
deposit and $30.7 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. The Bank
was well capitalized at December 31, 2000. See Note 12 to the Consolidated
Financial Statements included under Item 8 for a summary of capital status of
the Bank.
Time deposits in denominations of $100,000 and more totaled $61.7 million at
December 31, 2000 as compared to $46.8 and $39.2 million at December 31, 1999
and 1998, respectively. The following table sets forth the amount and maturities
of time deposits of $100,000 or more as of December 31, 2000:
Time Deposits of $100,000 and Over
(in thousands)
Maturing in:
3 months or less.................................... $ 5,428
Over 3 months through 6 months...................... 23,533
Over 6 months through 12 months..................... 28,888
Over 12 months...................................... 3,871
---------
Total........................................... $ 61,720
=========
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, 2000, short-term borrowings were $150.4 million, or
28 percent of total liabilities, as compared to $88.7 million, or 20 percent of
total liabilities, at December 31, 1999 and $49.3 million, or 13 percent of
total liabilities, at December 31, 1998. See Note 9 to the Consolidated
Financial Statements included under Item 8 for a listing of borrowings
outstanding at December 31, 2000 and 1999, 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)
2000 1999 1998
---------- ---------- ----------
(dollars in thousands)
Short-term borrowings outstanding
at period end....................... $ 150,428 $ 88,700 $ 49,290
Weighted average interest rate at
period end.......................... 6.30% 5.74% 4.99%
Maximum month-end balance during
the period.......................... $ 197,024 $ 94,300 $ 58,416
Average borrowings outstanding
for the period...................... $ 158,244 $ 61,993 $ 49,576
Weighted average interest rate
for the period...................... 6.32% 5.33% 5.44%
(1) From continuing operations for all periods presented.
As of December 31, 2000, the Company's only outstanding long-term debt was its
Subordinated Notes totaling $12.6 million. See Notes 1 and 9 to the Consolidated
Financial Statements included under Item 8 for more details. During 2000 the
Company retired a total of $2.0 million of the Subordinated Notes. See Note 9 to
the Consolidated Financial Statements included under Item 8 for a summary of
these transactions.
Guaranteed Preferred Beneficial Interests in Company's Subordinated Debentures.
In July 2000, the Company established a special purpose trust for the purpose of
issuing trust preferred securities. The trust preferred securities qualify as
Tier 1 capital of the Company up to certain limits. See Note 10 to the
Consolidated Financial Statements included under Item 8 for a complete
description of this transaction.
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 12 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 bank(s) as
of December 31, 2000 and 1999. 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.
During 2000, the Company completed construction of an office building in Fargo,
North Dakota. The total cost to complete the construction and provide furniture
and equipment for the building was $6.4 million and was funded through cash
generated from operations. There were no other major capital expenditures made
during 2000 or 1999.
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, until January 1, 2001 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 Bank is a member of the FHLB, which affords it the opportunity to borrow
funds in terms ranging from overnight to ten years and beyond. Borrowings from
the FHLB are generally collateralized by the Bank's 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 the issuance of its Subordinated Notes and trust
preferred securities. See "-Borrowed Funds," "Guaranteed Preferred Beneficial
Interests in Company's Subordinated Debentures" and Notes 9 and 10 to the
Consolidated Financial Statements included under Item 8 for further information
on these instruments.
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,
--------------------------------
2000 1999 1998
---------- ---------- ----------
(in thousands)
Proceeds from sales and maturities
of investment securities........... $ 72,134 $ 127,403 $ 89,926
Net increase in short-term
borrowings.......................... 61,728 39,410 2,787
Net increase in deposits............. 37,753 40,212 21,675
Proceeds from issuance of
subordinated notes.................. 7,220 -- --
Purchases of investment
securities......................... (178,827) (185,958) (91,981)
Net increase in loans................ (7,630) (16,160) (37,131)
Net increase (decrease) in
long-term borrowings............... (1,921) (14,520) 8,750
(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
customers' 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 policy
statement identifies actions to be taken in response to an adverse liquidity
event.
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 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 14 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 at December 31, 2000 of 9.00 percent to 10.00 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 2001 is shown below. The growth assumption used for this
simulation was based on the growth projections built into the Company's 2001
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.......... $ 14,920 $ 14,751 $ 14,538 $ 14,282 $ 13,976 $ 13,640 $ 13,294
Dollar change from rates
unchanged scenario....... 638 469 256 -- (306) (642) (988)
Percentage change from
rates unchanged
scenario................. 4.47% 3.28% 1.79% -- (2.14)% (4.50)% (6.92)%
Cost of $25MM floor (1)... (27) (159) (282) (319) (423) (435) (435)
Total net interest
income impact with
floor.................... 14,893 14,592 14,256 13,963 13,553 13,205 12,859
Dollar change from flat
w/floor.................. 930 629 293 -- (410) (758) (1,104)
Percentage change from
unchanged w/floor........ 6.66% 4.50% 2.10% -- (2.94)% (5.43)% (7.91)%
Benefit from amortization
of deferred gain on
sale of interest
rate swap (2)............ 50 50 50 50 50 50 50
Total net interest income
impact w/floor & swap
gain..................... 14,943 14,642 14,306 14,013 13,603 13,255 12,909
Dollar change from flat
w/floor & swap........... 930 629 293 -- (410) (758) (1,104)
Percentage change from
flat w/floor & swap...... 6.64% 4.49% 2.09% -- (2.93)% (5.41)% (7.88)%
POLICY LIMITS +/-.......... 9.00% 6.00% 3.00% -- 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). Through December 31, 2000, the premium was being amortized on
a straight-line basis. On January 1, 2001, the Company adopted Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." See "-Loan Portfolio-Interest Rate
Floors" and Note 1 and 14 to the Consolidated Financial Statements included
under Item 7 for further information on accounting policies related to
derivative financial investments.
(2) The swap was sold in 1997. The gain recognized upon sale of the swap is
being amortized as a reduction of interest expense over the remaining life
of the original swap contract.
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 Wealthbuilder deposit products along with
the continued growth in these products that is projected into 2001, 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, 2000. 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, 2000
---------------------------------------------------------
0-3 4-12 1-5 Over
months months years 5 Years Total
----------- ----------- ----------- ---------- ----------
(dollars in thousands)
Interest-earning assets:
Cash equivalents......... $ 595 $ -- $ -- $ -- $ 595
Investment
securities (1)......... 5,056 44,089 5,868 208,172 263,185
Fixed rate loans (2)..... 5,149 8,860 55,210 35,457 104,676
Floating rate loans (2).. 18,400 46,343 77,418 22,358 164,519
----------- ----------- ----------- ---------- ----------
Total interest-earning
assets............... $ 29,200 $ 99,292 $ 138,496 $ 265,987 $ 532,975
=========== =========== =========== ========== ==========
Interest-bearing
liabilities:
NOW and money market
accounts............... $ 165,902 $ -- $ -- $ -- $ 165,902
Savings.................. 3,523 -- -- -- 3,523
Time deposits under
$100,000............... 26,746 57,033 15,518 563 99,860
Time deposits $100,000
and over............... 5,428 23,533 32,759 -- 61,720
Borrowings............... 150,490 -- 12,580 -- 163,070
----------- ----------- ----------- ---------- ----------
Total interest-
bearing liabilities.. $ 352,089 $ 80,566 $ 60,857 $ 563 $ 494,075
=========== =========== =========== ========== ==========
Interest rate gap.......... $(322,889) $ 18,726 $ 77,639 $ 265,424 $ 38,900
=========== =========== =========== ========== ==========
Cumulative interest rate
gap at December 31,
2000..................... $(322,889) $(304,163) $(226,524) $ 38,900
=========== =========== =========== ==========
Cumulative interest rate
gap to total assets...... (56.65)% (53.36)% (39.74)% 6.82%
- --------------------
(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, 2000 (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, 2000 and 1999......... 42
Consolidated Statements of Income for the years ended
December 31, 2000, 1999 and 1998................................... 43
Consolidated Statements of Comprehensive Income (Loss)
for the years ended December 31, 2000, 1999 and 1998............... 45
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 2000, 1999 and 1998................... 46
Consolidated Statements of Cash Flows for the years
ended December 31, 2000, 1999 and 1998............................. 47
Notes to Consolidated Financial Statements........................... 48
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, 2000 and 1999, 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, 2000. 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, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
January 25, 2001
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31
(In thousands, except share and per share data)
ASSETS 2000 1999
------------ ------------
CASH AND DUE FROM BANKS........................... $ 14,988 $ 12,816
INTEREST-BEARING DEPOSITS WITH BANKS.............. 595 5,565
FEDERAL FUNDS SOLD................................ -- 3,500
INVESTMENT SECURITIES AVAILABLE FOR SALE.......... 263,185 150,992
LOANS AND LEASES, net of unearned income.......... 268,925 262,051
ALLOWANCE FOR CREDIT LOSSES....................... (3,588) (2,872)
------------ ------------
Net loans and leases......................... 265,337 259,179
PREMISES, LEASEHOLD IMPROVEMENTS AND
EQUIPMENT, net............................... 14,873 12,006
INTEREST RECEIVABLE............................... 3,854 2,613
OTHER ASSETS...................................... 4,465 6,945
DEFERRED CHARGES AND INTANGIBLE ASSETS, net....... 2,719 3,261
------------ ------------
$ 570,016 $ 456,877
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS:
Noninterest-bearing.......................... $ 31,459 $ 29,798
Interest-bearing -
Savings, NOW and money market............ 169,425 127,454
Time deposits $100,000 and over.......... 61,720 46,779
Other time deposits...................... 99,860 120,680
------------ ------------
Total deposits............................... 362,464 324,711
NOTES PAYABLE..................................... 163,070 103,170
OTHER LIABILITIES................................. 7,419 5,847
------------ ------------
Total liabilities................... 532,953 433,728
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 14 and 20)
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN
COMPANY'S SUBORDINATED DEBENTURES............... 7,606 --
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 authoized; 2,395,030 and 2,399,980
shares issued and outstanding (excluding
42,880 shares held in treasury) in
2000 and 1999, respectively................ 24 24
Capital surplus.............................. 14,050 13,976
Retained earnings............................ 14,190 11,893
Treasury stock (42,880 shares)............... (513) (513)
Accumulated other comprehensive income
(loss), net of income taxes................ 1,706 (2,231)
------------ ------------
Total stockholders' equity.......... 29,457 23,149
------------ ------------
$ 570,016 $ 456,877
============ ============
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)
2000 1999 1998
---------- ---------- ----------
INTEREST INCOME:
Interest and fees on loans............ $ 24,527 $ 22,083 $ 22,148
Interest and dividends on
investment securities -
Taxable........................... 15,420 6,090 4,977
Tax-exempt........................ 940 386 95
Dividends......................... 634 263 304
Other................................. 242 109 277
---------- ---------- ----------
Total interest income...... 41,763 28,931 27,801
---------- ---------- ----------
INTEREST EXPENSE:
Interest on deposits.................. 16,866 12,537 11,809
Interest on short-term borrowings..... 9,999 3,303 2,694
Interest on long-term borrowings...... 1,252 734 649
---------- ---------- ----------
Total interest expense..... 28,117 16,574 15,152
---------- ---------- ----------
Net interest income........ 13,646 12,357 12,649
PROVISION FOR CREDIT LOSSES............. 1,202 1,138 1,201
---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES..................... 12,444 11,219 11,448
---------- ---------- ----------
NONINTEREST INCOME:
Insurance commissions................. 2,003 2,045 1,769
Fees on loans......................... 1,941 1,435 1,376
Brokerage income...................... 1,466 797 53
Trust and financial services.......... 1,064 589 517
Service charges....................... 604 536 566
Net gain on sales of securities....... 276 198 130
Rental income......................... 56 121 43
Other................................. 363 347 389
---------- ---------- ----------
Total noninterest income... 7,773 6,068 4,843
---------- ---------- ----------
NONINTEREST EXPENSE:
Salaries and employee benefits........ 8,891 8,854 7,463
Depreciation and amortization......... 1,659 1,586 1,498
Occupancy............................. 1,360 1,248 988
Professional services................. 1,290 1,214 766
Office supplies, telephone
and postage......................... 940 941 749
Marketing and promotion............... 597 621 455
Repossessed and impaired asset
expenses/write-offs................. 470 2,271 2
Minority interest in income of
subsidiaries........................ 399 -- --
FDIC and other assessments............ 200 191 184
Other................................. 1,624 1,289 1,274
---------- ---------- ----------
Total noninterest expense.. 17,430 18,215 13,379
---------- ---------- ----------
Income (loss) before income taxes....... 2,787 (928) 2,912
Income taxes............................ 906 (399) 1,030
---------- ---------- ----------
Income (loss) from continuing
operations............................ 1,881 (529) 1,882
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income, continued
For the Years Ended December 31
(In thousands, except per share data)
2000 1999 1998
---------- ---------- ----------
Discontinued Operation:
Income from operations of
discontinued asset-based lending
subsidiary, net of income taxes
of $292 and $263..................... -- 429 385
Gain on disposal of asset-based
lending subsidiary, net of income
taxes of $82 and $268................ 159 438 --
---------- ---------- ----------
Income before extraordinary item and
cumulative effect of change in
accounting principle................... 2,040 338 2,267
Extraordinary item - gain on
early extinguishment of debt, net
of income taxes of $132................ 257 -- --
Cumulative effect of change in
accounting principle, net of
income taxes........................... -- (96) --
---------- ---------- ----------
NET INCOME............................... $ 2,297 $ 242 $ 2,267
========== ========== ==========
BASIC EARNINGS PER COMMON SHARE:
Income (loss) from continuing
operations............................. $ 0.78 $ (0.22) $ 0.79
Income from operations of
discontinued asset-based lending
subsidiary, net of income taxes........ -- 0.18 0.16
Gain on disposal of asset-based
lending subsidiary, net of income
taxes.................................. 0.07 0.18 --
Extraordinary item - gain on early
extinguishment of debt, net of
income taxes........................... 0.11 -- --
Cumulative effect of change in
accounting principle, net of
income taxes........................... -- (0.04) --
---------- ---------- ----------
Earnings per share, basic................ $ 0.96 $ 0.10 $ 0.95
========== ========== ==========
DILUTED EARNINGS PER COMMON SHARE:
Income (loss) from continuing
operations............................. $ 0.78 $ (0.22) $ 0.75
Income from operations of
discontinued asset-based lending
subsidiary, net of income taxes........ -- 0.18 0.16
Gain on disposal of asset-based
lending subsidiary, net of income
taxes.................................. 0.07 0.18 --
Extraordinary item - gain on early
extinguishment of debt, net of
income taxes........................... 0.11 -- --
Cumulative effect of change in
accounting principle, net of
income taxes........................... -- (0.04) --
---------- ---------- ----------
Earnings per share, diluted.............. $ 0.96 $ 0.10 $ 0.91
========== ========== ==========
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)
2000 1999 1998
---------- ---------- ----------
NET INCOME............................... $ 2,297 $ 242 $ 2,267
OTHER COMPREHENSIVE INCOME -
Unrealized gains (losses)
on securities:
Unrealized holding gains
(losses) arising during
the period, net of income
taxes of $2,022, $1,377 and $7...... 3,937 (2,373) (28)
Less: reclassification
adjustment for gains included
in net income, net of income
taxes............................... (186) (121) (79)
---------- ---------- ----------
OTHER COMPREHENSIVE INCOME (LOSS)........ 3,751 (2,494) (107)
---------- ---------- ----------
COMPREHENSIVE INCOME (LOSS).............. $ 6,048 $ (2,252) $ 2,160
========== ========== ==========
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
Common Shares Other
------------------- Capital Retained Treasury Comprehensive
Shares Amount Surplus Earnings Stock Income (Loss) Total
---------- -------- -------- -------- -------- ------------- --------
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 taxes............. -- -- -- -- -- (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 taxes............. -- -- -- -- -- (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
Net income.................... -- -- -- 2,297 -- -- 2,297
Other comprehensive income-
Change in unrealized
holding loss on securities
available for sale, net
of income taxes............. -- -- -- -- -- 3,937 3,937
Other........................ (4,950) -- 74 -- -- -- 74
----------- ------ -------- -------- -------- ------------- --------
BALANCE, December 31, 2000...... 2,437,910 $ 24 $ 14,050 $ 14,190 $ (513) $ 1,706 $ 29,457
=========== ====== ======== ======== ======== ============= ========
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)
2000 1999 1998
---------- ---------- ----------
OPERATING ACTIVITIES:
Net income............................. $ 2,297 $ 242 $ 2,267
Adjustments to reconcile net income
to net cash provided by operating
activities -
Provision for credit losses........ 1,202 1,138 1,290
Depreciation and amortization...... 1,131 1,045 901
Amortization of intangible assets.. 508 541 606
Net premium amortization on
investment securities............ 737 612 172
Proceeds from loans recovered...... 269 170 189
Write down of other real estate
owned and repossessed assets..... 470 2,271 2
Change in interest receivable
and other assets, net............ (1,843) (400) (3,049)
Gain on disposal of asset-based
lending subsidiary............... (159) (438) --
Loss on sale of bank premises
and equipment.................... 57 10 117
Net realized gains on sales
of investment securities......... (276) (198) (130)
Deferred income taxes.............. 603 (2,503) (190)
Change in dividend distribution
payable.......................... 398 -- --
Change in other liabilities,
net.............................. 1,572 (515) (74)
Originations of loans to be
sold............................. (130,563) (117,299) (47,412)
Proceeds from sale of loans........ 130,563 117,299 47,412
---------- ---------- ----------
Net cash provided by operating
activities..................... 6,966 1,975 2,101
---------- ---------- ----------
INVESTING ACTIVITIES:
Purchases of investment securities..... (178,827) (185,958) (91,981)
Proceeds from sales of investment
securities........................... 23,789 39,732 58,855
Proceeds from maturities of
investment securities................ 48,345 87,671 31,071
Net increase in loans.................. (7,630) (16,160) (37,131)
Additions to premises, leasehold
improvements and equipment........... (4,296) (4,396) (1,254)
Proceeds from sale of premises
and equipment........................ 241 121 26
Disposition of discontinued
asset-based lending subsidiary....... 159 23,373 --
---------- ---------- ----------
Net cash used in investing
activities......................... (118,219) (55,617) (40,414)
---------- ---------- ----------
FINANCING ACTIVITIES:
Net increase in demand, savings,
NOW and money market accounts........ 43,632 38,890 16,937
Net increase (decrease) in
time deposits........................ (5,879) 1,322 4,738
Net increase in short-term
borrowings........................... 61,728 39,410 2,787
Repayments of long-term borrowings..... (2,009) (29,520) (13,492)
Proceeds from long-term borrowings..... 88 15,000 22,242
Amortization of discount on
subordinated notes................... 93 92 84
Amortization of deferred charges....... 20 20 18
Proceeds from issuance of
subordinated debentures.............. 7,220 -- --
Amortization of discount on
subordinated debentures.............. (12) -- --
Repurchase of stock.................... -- -- (297)
Other, net............................. 74 25 165
---------- ---------- ----------
Net cash provided by financing
activities......................... 104,955 65,239 33,182
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS................... (6,298) 11,597 (5,131)
CASH AND CASH EQUIVALENTS,
beginning of year...................... 21,881 10,284 15,415
---------- ---------- ----------
CASH AND CASH EQUIVALENTS,
end of year............................ $ 15,583 $ 21,881 $ 10,284
========== ========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid.......................... $ 27,431 $ 16,494 $ 14,091
========== ========== ==========
Income taxes paid...................... $ 541 $ 1,107 $ 1,648
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
BNCCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000 and 1999
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 National Bank" or "the Bank"). 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.
On November 20, 2000, the Company merged BNC National Bank ("BNC-North Dakota")
with and into BNC National Bank of Minnesota ("BNC-Minnesota") and then changed
the name of the combined bank to BNC National Bank. On December 31, 1999 the
Company sold its asset-based lending subsidiary, BNC Financial Corporation,
which is treated as a discontinued operation.
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.
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," "interest-bearing
deposits with banks" and "federal funds sold" to be cash equivalents.
Investment Securities. Investment and mortgage-backed securities which the
Company intends to hold for indefinite periods of time, 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, 2000 and 1999. 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
2000, 1999 or 1998.
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, 2000 or 1999.
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, net unamortized deferred fees and costs 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 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 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 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 Allowance. The unallocated portion of the 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 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 analysis of specific, allocated
and unallocated 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. Loan
fees not representing adjustments of yield are also included in noninterest
income.
Mortgage Servicing and Transfers of Financial Assets. The Bank regularly sells
loans to others on a non-recourse basis. Sold loans are not included in the
accompanying balance sheets. The Bank generally retains 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, 2000 and 1999, the Bank was servicing loans for the
benefit of others with aggregate unpaid principal balances of $216.0 and $148.7
million, respectively. Many of the loans sold by the Bank 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 Bank.
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 income or 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, 2000 and 1999 was $84,000 and $1.2 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 2000, 1999 or 1998.
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. See "Other Recently Issued Accounting
Standards."
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 credit 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 18).
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. During 2000, the Company merged its two subsidiary banks
which were previously reported as operating segments in accordance with the
Financial Accounting Standards Board's ("FASB's") Statement of Financial
Accounting Standards No. 131. Banking is the primary operational activity of the
Company. There are no other operational segments which are material and are
required to be separately disclosed for financial statement purposes. Therefore,
there are no segment disclosures included in these consolidated financial
statements.
Revenue Recognition. The Company recognizes revenue on an accrual basis for
interest and dividend income on loans, investment securities, federal funds sold
and interest bearing due from accounts. Noninterest income is recognized when it
has been realized or is realizable and has been earned. In accordance with
existing accounting and industry standards, as well as recent guidance issued by
the Securities and Exchange Commission ("SEC") (see "Other Recently Issued
Accounting Standards"), the Company considers revenue to be realized or
realizable and earned when the following criteria have been met: persuasive
evidence of an arrangement exists (generally, there is contractual
documentation); delivery has occurred or services have been rendered; the
seller's price to the buyer is fixed or determinable; and collectibility is
reasonably assured. Additionally, there can be no outstanding contingencies
which could ultimately cause the revenue to be passed back to the payor. In the
isolated instances where these criteria have not been met, receipts are
generally placed in escrow until such time as they can be recognized as revenue.
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 FASB 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.
In June 1999, the FASB issued Statement of Financial Accounting Standards No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133," ("SFAS 137") which delayed the
effective date of SFAS 133 to fiscal years beginning after June 15, 2000. In
June 2000, the FASB issued Statement of Financial Accounting Standards No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities -
An Amendment of FASB Statement No. 133," ("SFAS 138"). The Company adopted SFAS
133, as amended by SFAS 137 and SFAS 138, on January 1, 2001.
From time to time, the Company enters into derivative contracts such as interest
rate swaps, caps and floors. Interest rate swaps are contracts to exchange fixed
and floating rate interest payment obligations based on a notional principal
amount and are used to hedge the Company's 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. If such contracts meet certain
requirements, they may qualify as fair value or cash flow hedges under SFAS 133.
SFAS 133 provides that the gain or loss on a derivative instrument designated
and qualifying as a fair value hedging instrument, as well as the offsetting
loss or gain on the hedged item attributable to the hedged risk, be recognized
currently in earnings in the same accounting period. The standard provides that
the effective portion of the gain or loss on a derivative instrument designated
and qualifying as a cash flow hedging instrument be reported as a component of
other comprehensive income and be classified into earnings in the same period or
periods in which the hedged transaction affects earnings. The remaining gain or
loss on the derivative instrument, if any, must be recognized currently in
earnings.
The Company has established a hedging policy statement which sets forth the
documentation and other requirements necessary to achieve hedge accounting under
SFAS 133. The Company's currently outstanding $25 million prime based interest
rate floor qualifies, and is now classified as, a cash flow hedge. On January 1,
2001, the Company recognized the interest rate floor on its balance sheet at its
then fair value of $436,000. The impact of the adoption of SFAS 133, as amended,
was an after tax charge to earnings of $113,000 and will be presented in the
Company's 2001 consolidated financial statements as the cumulative effect of a
change in accounting principle. In subsequent periods, the Company will apply
the cash flow hedge accounting rules explained above.
The Company has reviewed its other financial instruments and contracts in order
to identify any additional derivatives to be accounted for under SFAS 133, as
amended. Other noted derivatives could be considered clearly and closely related
to their host contracts or were otherwise excluded from derivative accounting
treatment under SFAS 133, as amended. As demonstrated above, the adoption of
SFAS 133 will increase volatility of earnings and other comprehensive income and
may result in changes in certain of the Company's business practices.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements," ("SAB 101"). SAB 101, indicates that if a
transaction is within the scope of specific authoritative literature that
provides revenue recognition guidance, SEC registrants should apply such
literature. In the absence of authoritative literature addressing a specific
arrangement or a specific industry, the registrant should consider the existing
authoritative accounting standards as well as the broad revenue recognition
criteria specified in the FASB's conceptual framework that contain basic
guidelines for revenue recognition. Based on these guidelines, revenue should
not be recognized until it is realized or realizable and earned. BNCCORP adopted
SAB 101 in 2000 with no material impact to the Company.
In March 2000, the FASB issued Interpretation 44, "Accounting for Certain
Transactions Involving Stock Compensation (An Interpretation of APB Opinion No.
25)," ("FIN 44"). Although FIN 44 became effective on July 1, 2000, certain
conclusions in the interpretation cover specific events that occurred after
either December 15, 1998 or January 12, 2000. FIN 44 was issued to address
application questions, and diversity in practice which has developed since the
issuance of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," ("APB 25") in October 1972. FIN 44 clarifies the
application of ABP 25 for only certain issues including, but not limited to, the
definition of "employee" for purposes of applying APB 25, the criteria for
determining whether a plan qualifies as a noncompensatory plan, the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award and the accounting for an exchange of stock compensation awards
in a business combination. The Company has reviewed FIN 44 and determined that
its accounting policies under APB 25 comply with the FASB's conclusions.
In September 2000, the FASB issued Statement of Financial Accounting Standards
No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," ("SFAS 140"). SFAS 140 replaces Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities," ("SFAS 125"). It
revises the standards for accounting for securitizations and other transfers of
financial assets and collateral and requires certain disclosures, but it carries
over most of SFAS 125's provisions without reconsideration. SFAS 140 is
generally effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. The disclosure
requirements are effective for financial statements for fiscal years ending
after December 15, 2000. Since the Company does not enter into securitization
transactions, the securitization disclosure provisions of SFAS 140 are not
applicable. The Company continues to account for other transfers of financial
assets and extinguishments of liabilities in accordance with the provisions of
SFAS 140, most of which are unchanged from SFAS 125.
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 the Bank are also subject to minimum regulatory
capital requirements. At December 31, 2000, capital levels exceed minimum
capital requirements (see Note 12).
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 accounting principles generally accepted in the United States
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. Mergers, Acquisitions and Divestitures:
The following mergers, acquisitions and divestitures were consummated during the
three years ended December 31, 2000:
On November 20, 2000, the Company merged BNC-North Dakota with and into
BNC-Minnesota and changed the name of the combined bank to BNC National Bank.
The transaction was accounted for as a pooling of interests.
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
1999 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 2000
gain on disposal of $159,000 (pretax gain of $241,000, net of income tax effects
of $82,000) resulted from recoveries on a credit charged off in 1999 at the time
of the sale of BNC Financial. The income statement for the year ended December
31, 1998 has 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 and 1998 were $1.6 million and $266,000, and $1.1 million and
$208,000, respectively. These amounts are not included in net interest income
and noninterest income in the accompanying consolidated income statements.
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 Insurance Agency,
Inc., a subsidiary of BNC-North Dakota, 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").
3. Restrictions on Cash and Due From Banks:
The Bank is required to maintain reserve balances with the Federal Reserve Bank.
The amount of those reserve balances was $2.4 and $1.5 million as of December
31, 2000 and 1999, 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, 2000
or 1999. 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
2000
U.S. government agency mortgage-
backed securities....................... $ 44,272 $ 435 $ (239) $ 44,468
U.S. government agency securities......... 4,880 35 (25) 4,890
Collateralized mortgage obligations....... 164,221 1,919 (736) 165,404
State and municipal bonds................. 20,782 385 (262) 20,905
Corporate debt securities................. 16,968 931 -- 17,899
Equity securities......................... 9,619 -- -- 9,619
--------------- -------------- -------------- -------------
$ 260,742 $ 3,705 $ (1,262) $ 263,185
=============== ============== ============== =============
Available-for-Sale Securities
1999
U.S. government agency mortgage-
backed securities....................... $ 26,697 $ 2 $ (404) $ 26,295
U.S. government agency securities......... 4,654 -- (186) 4,468
Collateralized mortgage obligations....... 97,243 50 (2,255) 95,038
State and municipal bonds................. 20,272 15 (739) 19,548
Equity securities......................... 5,643 -- -- 5,643
--------------- -------------- -------------- -------------
$ 154,509 $ 67 $ (3,584) $ 150,992
=============== ============== ============== =============
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, 2000, were as follows (in thousands):
Available-for-Sale Securities
--------------------------------
Estimated
Amortized Market
Cost Value
--------------- ---------------
Due in one year or less................. $ 49 $ 49
Due after one year through five years... 5,878 5,868
Due after five years through ten years.. 55,079 55,456
Due after ten years..................... 190,117 192,193
--------------- ---------------
Total.............................. $ 251,123 $ 253,566
=============== ===============
Securities carried at approximately $215.4 and $126.5 million at December 31,
2000 and 1999, respectively, were pledged as collateral for public and trust
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):
2000 1999 1998
---------- ------------ ------------
Sales proceeds............ $ 23,789 $ 39,732 $ 58,855
Gross realized gains...... $ 324 $ 239 $ 164
Gross realized losses..... $ 48 $ 41 $ 34
Income taxes applicable to net gains and losses on securities available for sale
were $90,000, $75,000 and $49,000 for the years ended December 31, 2000, 1999
and 1998, 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):
2000 1999
--------------- --------------
Commercial and industrial.............. $ 112,407 $ 111,236
Real estate:
Mortgage............................ 90,622 91,906
Construction........................ 25,301 16,026
Agricultural........................... 15,775 16,679
Consumer............................... 12,016 13,232
Lease financing........................ 10,202 11,307
Other.................................. 2,872 1,884
--------------- --------------
Total............................. 269,195 262,270
Less:
Allowance for credit
losses............................. (3,588) (2,872)
Unearned income and net
unamortized deferred fees
and costs......................... (270) (219)
--------------- --------------
Net loans and leases.......... $ 265,337 $ 259,179
=============== ==============
Geographic Location and Types of Loans. Loans were to borrowers located in the
following market areas as of December 31:
2000 1999
---------- ----------
Minnesota.......................... 47% 43%
North Dakota....................... 33 46
South Dakota....................... 13 8
Other.............................. 7 3
---------- ----------
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 $90.6 and $91.9 million real estate
mortgages as of December 31, 2000 and 1999, respectively, approximately $44.6
and $38.2 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
$7.0 and $9.6 million at December 31, 2000 and 1999, respectively, were pledged
as collateral for FHLB borrowings. Commercial loans totaling $17.2 and $30.9
million at December 31, 2000 and 1999, respectively, 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, 2000 are real estate loans,
such as loans to non-residential and apartment building operators and lessors of
real property, and loans related to hotels and other lodging places. Loans
within these categories are diversified across different types of borrowers,
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 was as follows (in thousands):
2000 1999
-------------------- --------------------
Recorded Valuation Recorded Valuation
Investment Allowance Investment Allowance
---------- --------- ---------- ---------
Impaired loans -
Valuation allowance
required................... $ 6,506 $ 1,389 $ 5,255 $ 911
No valuation allowance
required................... 33 -- 742 --
---------- --------- ---------- ---------
Total impaired loans..... $ 6,539 $ 1,389 $ 5,997 $ 911
========== ========= ========== =========
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 Company's allowance
for credit losses.
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):
2000 1999 1998
---------- ---------- ----------
Average recorded investment
in impaired loans................ $ 7,393 $ 8,977 $ 9,542
========== ========== ==========
Interest income recognized
on impaired loans................ $ 791 $ 914 $ 992
========== ========== ==========
Average recorded investment
in impaired loans as a
percentage of average
total loans..................... 2.9% 3.6% 4.1%
========== ========== ==========
Nonaccrual and Restructured Loans. As of December 31, 2000 and 1999, the Company
had $343,000 and $1.6 million, respectively, of nonaccrual loans and $16,000 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):
2000 1999 1998
---------- ---------- ----------
Interest income that would
have been recorded.............. $ 35 $ 141 $ 224
Interest income recorded.......... 6 29 175
---------- ---------- ----------
Effect on interest income......... $ 29 $ 112 $ 49
========== ========== ==========
As of December 31, 2000, 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):
2000 1999 1998
---------- ---------- ----------
Balance, beginning of year........ $ 2,872 $ 2,854 $ 2,919
Provision for credit losses..... 1,202 1,138 1,201
Loans charged off............... (755) (1,290) (1,455)
Loans recovered................. 269 170 189
---------- ---------- ----------
Balance, end of year.............. $ 3,588 $ 2,872 $ 2,854
========== ========== ==========
6. Premises, Leasehold Improvements and Equipment:
Premises, leasehold improvements and equipment consisted of the following at
December 31 (in thousands):
2000 1999
------------ ------------
Land and improvements..................... $ 1,107 $ 1,118
Buildings and improvements................ 10,494 7,732
Leasehold improvements.................... 1,101 971
Furniture, fixtures and equipment......... 7,802 6,759
------------ ------------
Total cost........................... 20,504 16,580
Less accumulated depreciation
and amortization...................... (5,631) (4,574)
------------- ------------
Net premises, leasehold
improvements and equipment......... $ 14,873 $ 12,006
============= ============
Depreciation and amortization expense on premises, leasehold improvements and
equipment charged to continuing operations totaled approximately $1.1 million,
$1.0 million and $887,000 for the years ended December 31, 2000, 1999 and 1998,
respectively.
7. Deferred Charges and Intangible Assets:
Deferred charges and intangible assets consisted of the following at December 31
(in thousands):
2000 1999
------------ ------------
Premiums paid for deposits assumed........ $ 4,022 $ 4,022
Goodwill.................................. 1,115 1,115
Covenants not to compete.................. 480 480
Debt related costs........................ 147 161
Other miscellaneous intangibles........... 112 112
------------ ------------
Total costs.......................... 5,876 5,890
Less accumulated amortization ............ (3,157) (2,629)
------------ ------------
Net deferred charges and
intangible assets.................. $ 2,719 $ 3,261
============ ============
Amortization expense charged to continuing operations was $528,000, $541,000 and
$611,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
8. Deposits:
The scheduled maturities of time deposits as of December 31, 2000 are as follows
(in thousands):
2001............................ $ 141,762
2002............................ 16,191
2003............................ 1,464
2004............................ 1,012
2005............................ 479
Thereafter...................... 672
------------
$ 161,580
============
9. Notes Payable:
The Company's notes payable consist of the following as of December 31 (in
thousands):
2000 1999
---------- ----------
BNCCORP:
8 5/8% Subordinated Notes, due May 31, 2004,
interest payable monthly (plus unamortized
discount of $371 and $530 at December 31,
2000 and 1999, respectively - effective
rate 9.61%), unsecured (see below)................. $ 12,580 $ 14,470
Subsidiaries:
Federal funds purchased and U. S. Treasury tax
and loan note option accounts (1).................. 32,692 1,700
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 6.47% to 6.59% at December 31, 2000,
secured by mortgage loans, government agency
mortgage-backed securities and government
agency collateralized mortgage obligations (1)..... 55,000 27,000
Fixed rate advances from FHLB, callable
quarterly and annually, principal due
in 2009 and 2010, interest payable monthly
at rates ranging from 5.64% to 6.27%,
secured by mortgage loans, government agency
mortgage-backed securities and government
agency collateralized mortgage obligations (1)..... 62,200 37,500
Other (1)............................................ 598 500
---------- ----------
Total............................... $ 163,070 $ 103,170
========== ==========
- ----------------
(1) The weighted average interest rate on short-term borrowings outstanding as
of December 31, 2000 and 1999 was 6.30% and 5.74%, respectively.
The 8 5/8 percent Subordinated Notes (the "Notes"), which qualify as Tier 2
capital up to a certain limit under the Federal Reserve Board's risk-based
capital guidelines (60 percent at December 31, 2000), 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. 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.
During the twelve months ended December 31, 2000, the Company retired $2.0
million of the Notes. The Company purchased the Notes at a discount, and the
transactions resulted in extraordinary gains of $257,000 ($.11 per share), net
of income taxes of $132,000. The Notes were retired using cash generated from
the sale of BNC Financial.
The indenture pursuant to which the 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, 2000 and 1999.
10. Guaranteed Preferred Beneficial Interests in Company's Subordinated
Debentures:
In July 2000, the Company established a special purpose trust, BNC Capital Trust
I, for the purpose of issuing $7.5 million of 12.045 percent trust preferred
securities. The proceeds from the issuance, together with the proceeds of the
related issuance of $232,000 of 12.045 percent common securities of the trust,
were invested in $7.7 million of 12.045 percent junior subordinated deferrable
interest debentures of the Company. Concurrent with the issuance of the
preferred securities by the trust, the Company fully and unconditionally
guaranteed all obligations of the special purpose trust related to the trust
preferred securities. The trust preferred securities provide the Company with a
more cost-effective means of obtaining Tier 1 capital for regulatory purposes
than if the Company itself were to issue preferred stock because the Company is
allowed to deduct, for income tax purposes, amounts paid in respect of the
debentures and ultimately distributed to the holders of the trust preferred
securities. The sole assets of the special purpose trust are the debentures. The
Company owns all of the common securities of the trust. The common securities
and debentures, along with the related income effects, are eliminated within the
consolidated financial statements. The preferred securities issued by the trust
rank senior to the common securities. For presentation in the consolidated
balance sheet, the securities are shown net of discount and direct issuance
costs.
The trust preferred securities are subject to mandatory redemption on July 19,
2030, the stated maturity date of the debentures, or upon repayment of the
debentures, or earlier, pursuant to the terms of the trust agreement. On or
after July 19, 2010, the trust preferred securities may be redeemed and the
corresponding debentures may be prepaid at the option of the Company, subject to
Federal Reserve Board approval, at declining redemption prices. Prior to July
19, 2010, the securities may be redeemed at the option of the Company on the
occurrence of certain events that result in a negative tax impact, negative
regulatory impact on the trust preferred securities or negative legal or
regulatory impact on the special purpose trust which would cause it to be deemed
to be an "investment company" for regulatory purposes. In addition, the Company
has the right to defer payment of interest on the debentures and, therefore,
distributions on the trust preferred securities for up to five years.
11. Stockholders' Equity:
BNCCORP and the Bank are subject to certain minimum capital requirements (see
Note 12). BNCCORP is also subject to certain restrictions on the amount of
dividends it may declare without prior regulatory approval in accordance with
the Federal Reserve Act. In addition, certain regulatory restrictions exist
regarding the ability of the Bank to transfer funds to BNCCORP in the form of
cash dividends. Approval of the Office of the Comptroller of the Currency
("OCC"), the Bank's principal regulator, is required for the Bank to pay
dividends to BNCCORP in excess of the Bank's earnings retained in the current
year plus retained net profits for the preceding two years.
12. Regulatory Capital:
BNCCORP and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions 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 the Bank 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 the Bank 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 the Bank 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, 2000, BNCCORP and the Bank met all capital adequacy requirements to
which they are subject.
As of December 31, 2000, the most recent notifications from the OCC categorized
the Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the Bank 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 institution's category.
Actual capital amounts and ratios of BNCCORP and its subsidiary bank(s) as of
December 31 are also presented in the tables (dollar amounts in thousands):
To be Well
Capitalized Under
For Capital Adequacy Prompt Corrective
Actual Purposes Action Provisions
------------------- ------------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
---------- -------- ---------- -------- ---------- -------
As of December 31, 2000
Total Capital (to risk-weighted assets):
Consolidated.......................... $ 43,774 11.97 % $ 29,261 8.0 % N/A N/A
BNC National Bank..................... 39,745 10.92 29,122 8.0 $ 36,403 10.0 %
Tier I Capital (to risk-weighted assets):
Consolidated.......................... 32,638 8.92 14,631 4.0 N/A N/A
BNC National Bank..................... 36,156 9.93 14,561 4.0 21,842 6.0
Tier I Capital (to average assets):
Consolidated.......................... 32,638 5.88 22,195 4.0 N/A N/A
BNC National Bank..................... 36,156 6.53 22,159 4.0 27,699 5.0
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
13. Fair Value of Financial Instruments:
The estimated fair values of the Company's financial instruments are as follows
as of December 31 (in thousands):
2000 1999
-------------------------- --------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------- ----------- -------------- -----------
Assets:
Cash, due from banks and
federal funds sold.............. $ 15,583 $ 15,583 $ 21,881 $ 21,881
Investment securities available
for sale........................ 263,185 263,185 150,992 150,992
Loans and leases, net............. 265,337 261,103 259,179 236,719
-------------- ----------- -------------- -----------
544,105 $ 539,871 432,052 $ 409,592
=========== ===========
Other assets...................... 25,911 24,825
-------------- --------------
$ 570,016 $ 456,877
============== ==============
Liabilities:
Deposits, noninterest-bearing..... $ 31,459 $ 31,459 $ 29,798 $ 29,798
Deposits, interest-bearing........ 331,005 331,674 294,913 289,904
Notes payable..................... 163,070 162,137 103,170 100,926
-------------- ----------- -------------- -----------
525,534 $ 525,270 427,881 $ 420,628
=========== ===========
Other liabilities................. 7,419 5,847
Guaranteed preferred
beneficial interests in
company's subordinated
debentures...................... 7,606 --
Stockholders' equity.............. 29,457 23,149
-------------- --------------
$ 570,016 $ 456,877
============== ==============
14. 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):
2000 1999
-------------- --------------
Commitments to extend credit.... $ 77,902 $ 68,932
Letters of credit............... 6,159 2,399
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 $436,000 at December 31,
2000.
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, 2000 and 1999,
deferred gains of $188,000 and $271,000, 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.
15. Related-Party/Affiliate Transactions:
The Company has entered into transactions with related parties such as opening
deposit accounts for and extending credit to employees of the Company. 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, and deposits are
received from, executive officers, directors, principal stockholders and
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 $804,000 at December 31, 2000 and 1999,
respectively. The December 31, 1999 amount has been revised due to a change in
composition of the group of officers, directors, principal stockholders and
associates. During 2000, $646,000 of new loans were made and repayments totaled
$159,000. The total amount of deposits received from these parties was $1.6
million at December 31, 2000 and 1999. Loans to, and deposits received from,
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.
The Federal Reserve Act limits amounts of, and requires collateral on,
extensions of credit by the Bank to BNCCORP, and with certain exceptions, its
non-bank affiliates. There are also restrictions on the amounts of investment by
the Bank in stocks and other subsidiaries of BNCCORP and such affiliates and
restrictions on the acceptance of their securities as collateral for loans by
the Bank. As of December 31, 2000, BNCCORP and its affiliates were in compliance
with these requirements.
16. Repossessed and Impaired Asset Expenses/Write-Offs:
The Company recorded write downs to estimated net realizability of other real
estate owned and repossessed assets, and related collection and other expenses,
of $470,000, $2.3 million and $2,000 for the years ended December 31, 2000, 1999
and 1998, respectively. The Company's investment in repossessed assets of
$84,000 as of December 31, 2000 represents management's current estimate of net
realizable value based upon current valuation of the assets.
17. Income Taxes:
The provision (benefit) for income taxes consists of the following for the years
ended December 31 (in thousands):
2000 1999 1998
---------- ---------- ----------
Continuing Operations -
Current.............................. $ 303 $ 726 $ 1,136
Deferred income taxes from the
following timing differences:
Provision for credit losses...... (342) 117 (80)
Depreciation..................... 41 (66) 46
Write-downs of other real
estate owned and
repossessed assets............. 829 (829) --
Leases........................... (54) (69) (38)
Other............................ 129 (278) (34)
---------- ---------- ----------
$ 906 $ (399) $ 1,030
========== ========== ==========
2000 1999 1998
---------- ---------- ----------
Discontinued Operation -
Current.............................. $ 82 $ 410 $ 331
Deferred income taxes from the
following timing differences:
Provision for credit losses........ -- 98 (36)
Depreciation....................... -- 4 --
Other.............................. -- 48 (32)
---------- ---------- ----------
$ 82 $ 560 $ 263
========== ========== ==========
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):
2000 1999 1998
---------- ---------- ----------
Tax at 34% statutory rate.............. $ 947 $ (316) $ 990
Increase (decrease) resulting from:
State taxes (net of
federal benefit)................... 266 (1) 43
Tax-exempt interest.................. (321) (142) (28)
Other, net........................... 14 60 25
---------- ---------- ----------
$ 906 $ (399) $ 1,030
========== ========== ==========
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):
2000 1999
---------- ----------
Deferred tax asset:
Loans, primarily due to
differences in accounting
for credit losses.................. $ 1,429 $ 1,087
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
Other................................ 327 420
---------- ----------
Deferred tax asset............. 1,756 3,642
---------- ----------
Deferred tax liability:
Unrealized gain on securities
available for sale................. 733 --
Leases, primarily due to
differences in accounting
for leases......................... 381 435
Premises and equipment,
primarily due to differences
in original cost basis
and depreciation................... 510 469
Other................................ 115 97
---------- ----------
Deferred tax liability............. 1,739 1,001
---------- ----------
Net deferred tax asset............. $ 17 $ 2,641
========== ==========
18. Earnings Per Common Share:
The following table shows the amounts used in computing earnings per share
("EPS") and the effect on weighted average number of shares of potential
dilutive common stock issuances:
Net
Income (Loss) Shares Per-Share
(Numerator) (Denominator) Amount
------------- ------------- ----------
2000
Basic earnings per share:
Income from continuing
operations........................ $ 1,881,000 2,397,356 $ 0.78
Gain on disposal of asset-based
lending subsidiary, net of
income taxes...................... 159,000 2,397,356 0.07
Extraordinary item - gain on
early extinguishment of debt,
net of income taxes............... 257,000 2,397,356 0.11
------------- ----------
Income available to common
stockholders...................... $ 2,297,000 2,397,356 $ 0.96
============= ==========
Effect of dilutive shares -
Options........................... 1,197
-------------
Diluted earnings per share:
Income from continuing
operations........................ $ 1,881,000 2,398,553 $ 0.78
Gain on disposal of asset-based
lending subsidiary, net of
income taxes...................... 159,000 2,398,553 0.07
Extraordinary item - gain on
early extinguishment of debt,
net of income taxes............... 257,000 2,398,553 0.11
------------- ----------
Income available to common
stockholders...................... $ 2,297,000 2,398,553 $ 0.96
============= ==========
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, net of
income taxes...................... 429,000 2,406,618 0.18
Gain on disposal of asset-based
lending subsidiary, net of
income taxes...................... 438,000 2,406,618 0.18
Cumulative effect of change in
accounting principle, net of
income taxes...................... (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, net
of income taxes................... 429,000 2,407,018 0.18
Gain on disposal of asset-based
lending subsidiary, net of
income taxes...................... 438,000 2,407,018 0.18
Cumulative effect of change in
accounting principle, net of
income taxes...................... (96,000) 2,407,018 (0.04)
------------- ----------
Income available to common
stockholders...................... $ 242,000 2,407,018 $ 0.10
============= ==========
Net
Income (Loss) Shares Per-Share
(Numerator) (Denominator) Amount
------------- ------------- ----------
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, net
of income taxes................... 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, net
of income taxes................... 385,000 2,503,535 0.16
------------- ----------
Income available to common
stockholders...................... $ 2,267,000 2,503,535 $ 0.91
============= ===========
The following options and warrants, with exercise prices ranging from $5.88 to
$17.75, were outstanding during the periods indicated but were not included in
the computation of diluted EPS because their exercise prices were higher than
the average price of the Company's common stock for the period:
2000 1999 1998
---------- ---------- ----------
Quarter ended March 31............. 159,934 170,134 --
Quarter ended June 30.............. 152,548 170,234 --
Quarter ended September 30......... 114,131 170,034 142,050
Quarter ended December 31.......... 120,512 172,434 178,150
19. 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 $188,000, $171,000, and $172,000 in 2000, 1999 and 1998,
respectively. Under the investment options available under the 401(k) plan,
employees may elect to invest their salary deferrals in BNCCORP common stock.
20. 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 president of the Bank's
Minnesota office (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 Minnesota office president, if his 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 his
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 ran 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, 2000, 1999 and 1998, was $431,000, $467,000 and $333,000,
respectively, for facilities, and $43,000, $39,000 and $39,000, respectively,
for equipment and other items. Minimum annual base lease payments for operating
leases with remaining terms of greater than one year are as follows:
2001........................ $ 633,000
2002........................ 631,000
2003........................ 575,000
2004........................ 553,000
2005........................ 477,000
Thereafter.................. 237,000
Legal Proceedings. In September 1998, BancInsure, the Bank's employee fidelity
insurer, brought a declaratory judgment action in federal court against the Bank
and a former loan officer. The Bank had claimed a loss in excess of $2.9 million
resulting from the officer's fraudulent activities. BancInsure paid the Bank
$886,000 while reserving its rights. After a trial, the Court ruled that
$405,000 of the $886,000 previously paid to the Bank be repaid to BancInsure.
The Bank has appealed the trial court's finding. The Bank's claims against the
former officer were settled with the former officer agreeing to personally
guaranty $100,000 of a $473,000 note to the Bank and/or BancInsure by a company
owned by the former officer and her husband. In a post judgment proceeding, the
Court found that BancInsure had subrogation rights in approximately $181,000 of
the settlement amount and the Bank is contesting that claim as part of its
appeal. In the opinion of management and outside counsel, settlement of this
litigation will not have a material adverse effect on the financial position or
future operating results of the Company.
In April 1999, a complaint was filed in federal district court by a former
customer of the Bank (the "Plaintiff") against the Bank, three of the Bank's
officers, a second bank and two former customers of the Bank. The Plaintiff
alleged, among other things, violation of the federal Racketeer Influenced and
Corrupt Organizations Act ("RICO"), fraud and breach of fiduciary duty. The case
was dismissed in federal court. The Plaintiff refiled the matter in state
district court and, on March 15, 2000, the court dismissed all RICO claims
against the Bank and all other defendants. The Bank's officers were also totally
dismissed, with prejudice, from the lawsuit. The remaining claims are not of a
material nature. In the opinion of management and outside counsel, settlement of
this litigation will not have a material adverse effect on the financial
position or future operating results of the Company.
21. 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.
Vesting requirements, which may vary, are determined by the Committee, and the
maximum term of options granted is generally ten years.
As of December 31, 2000, 25,173 restricted shares issued under the Stock Plan
were outstanding. 19,173 of the shares were fully vested. 5,000 shares vest 60
percent in 2002 and an additional 20 percent in each of 2003 and 2004, 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. Compensation
cost charged to operations was $74,000, $70,000 and $146,000 in 2000, 1999 and
1998, respectively.
The number and weighted average grant-date fair value of nonvested stock were as
follows for the years ended December 31:
2000 1999 1998
------------- ------------ ------------
Number......................... -- 17,500 5,000
Weighted average
grant-date fair value........ -- $ 10.12 $ 16.88
The Company's Nonemployee Director Stock Option Plan (the "Directors' Plan") was
adopted during 1998, administered by the Committee and terminated during 1999.
The Company applies APB 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 2000, 1999 or 1998. As
of December 31, 2000, 115,533 options had been awarded under the Stock Plan.
1,935 of them had been exercised and 113,598 remained outstanding. 4,550 options
awarded under the Directors' Plan remained outstanding. Had compensation cost
been determined on the basis of fair value pursuant to Statement of Financial
Accounting Standards No. 123, net income and EPS would have been reduced as
follows:
2000 1999 1998
---------- ---------- ----------
Net Income:
As Reported....................... $2,297,000 $ 242,000 $2,267,000
Pro Forma......................... 2,237,000 139,000 2,118,000
Basic EPS:
As Reported....................... 0.96 0.10 0.95
Pro Forma......................... 0.89 0.06 0.85
Diluted EPS:
As reported....................... 0.96 0.10 0.91
Pro Forma......................... 0.89 0.06 0.80
Following is a summary of stock option transactions for the years ended December
31:
2000 1999 1998
------------------- ------------------- -------------------
Options Weighted Options Weighted Options Weighted
To Average to Average to Average
Purchase Exercise Purchase Exercise Purchase Exercise
Shares Price Shares Price Shares Price
---------- -------- ---------- -------- ---------- --------
Outstanding, beginning of year..... 122,434 $ 14.82 150,760 $ 15.98 27,926 $ 10.00
Granted............................ 18,500 6.03 14,500 7.17 146,750 17.02
Exercised.......................... -- -- -- -- (1,935) 10.00
Forfeited.......................... (22,786) 12.80 (42,826) 16.29 (21,981) 15.92
---------- ---------- ----------
Outstanding, end of year........... 118,148 13.84 122,434 14.82 150,760 15.98
========== ========== ==========
Exercisable, end of year........... 62,688 13.11 51,934 12.26 22,638 11.56
========== ========== ==========
Weighted average fair value of
options:
Granted.............. $ 3.05 $ 3.18 $ 7.57
========== ========== ==========
Exercised...................... -- -- $ 4.50
========== ========== ==========
Forfeited...................... $ 5.84 $ 7.29 $ 7.12
========== ========== ==========
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 of options granted for the years ended December 31:
Weighted average - 2000 1999 1998
-------------- -------------- --------------
Dividend yield.............. 0.00% 0.00% 0.00%
Risk-free interest rate..... 6.30% 6.27% 5.63%
Volatility.................. 36.08% 27.16% 29.81%
Expected life............... 7.0 years 7.0 years 6.9 years
Following is a summary of the status of options outstanding at December 31,
2000:
Outstanding Options Exercisable Options
--------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Number Life Price Number Price
---------- --------------- ------------ ---------- ------------
Options with exercise
prices ranging from:
$17.00 to $17.75.......... 76,150 7.0 years $ 17.04 33,190 $ 17.10
$5.88 to $10.00........... 41,998 7.2 years $ 8.01 29,498 $ 8.62
---------- ----------
118,148 62,688
========== ==========
22. Condensed Financial Information-Parent 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 data)
2000 1999
-------------- ---------------
Assets:
Cash and cash equivalents................... $ 8,543 $ 3,832
Investment in subsidiaries.................. 40,611 33,471
Loans....................................... 16 16
Receivable from subsidiaries................ 462 194
Deferred charges and intangible
assets, net............................... 249 298
Other....................................... 732 852
-------------- ---------------
$ 50,613 $ 38,663
============== ===============
Liabilities and stockholders' equity:
Subordinated notes.......................... $ 12,580 $ 14,708
Subordinated debentures..................... 7,451 --
Accrued expenses and other
liabilities............................... 1,125 806
-------------- ---------------
21,156 15,514
-------------- ---------------
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; 2,395,030
and 2,399,980 shares issued and
outstanding (excluding 42,880 shares
held in treasury) in 2000 and 1999,
respectively................................ 24 24
Capital surplus............................... 14,050 13,976
Retained earnings............................. 14,190 11,893
Treasury stock (42,880 shares)................ (513) (513)
Accumulated other comprehensive income
(loss), net of income taxes................. 1,706 (2,231)
-------------- ---------------
Total stockholders' equity............... 29,457 23,149
-------------- ---------------
$ 50,613 $ 38,663
============== ===============
Parent Company Only
Condensed Statements of Income
For the Years Ended December 31
(In thousands)
2000 1999 1998
---------- ---------- ----------
Income:
Management fee income............. $ 1,426 $ 1,606 $ 1,426
Interest.......................... 322 1,757 1,623
Other............................. 53 9 30
---------- ---------- ----------
Total income.................. 1,801 3,372 3,079
---------- ---------- ----------
Expenses:
Interest.......................... 1,677 2,486 2,226
Personnel expense................. 1,162 1,320 1,268
Legal and other professional...... 124 134 188
Depreciation and amortization..... 68 66 71
Other............................. 361 502 397
---------- ---------- ----------
Total expenses................ 3,392 4,508 4,150
---------- ---------- ----------
Loss before income tax benefit
and equity in undistributed
income of subsidiaries............... (1,591) (1,136) (1,071)
Income tax benefit..................... 518 433 341
---------- ---------- ----------
Loss before equity in
undistributed income
of subsidiaries...................... (1,073) (703) (730)
Equity in undistributed
income of subsidiaries............... 2,954 96 2,612
---------- ---------- ----------
Income (loss) from continuing
operations........................... 1,881 (607) 1,882
Equity in undistributed income
from operations of discontinued
asset-based lending subsidiary....... -- 429 385
---------- ---------- ----------
Income (loss) before gain on
disposal of asset-based lending
subsidiary........................... 1,881 (178) 2,267
Gain on disposal of asset-based
lending subsidiary................... 159 438 --
---------- ---------- ----------
Income before extraordinary item
and cumulative effect of change
in accounting principle.............. 2,040 260 2,267
Extraordinary item-gain on
early extinguishment of debt,
net of income taxes.................. 257 -- --
Cumulative effect of change in
accounting principle, net
of income taxes...................... -- (18) --
---------- ---------- ----------
Net income.................... $ 2,297 $ 242 $ 2,267
========== ========== ==========
Parent Company Only
Condensed Statements of Cash Flows
For the Years Ended December 31
(In thousands)
2000 1999 1998
---------- ---------- ----------
Operating activities:
Net income............................. $ 2,297 $ 242 $ 2,267
Adjustments to reconcile net
income to net cash provided
by (used in)operating activities -
Gain on sale of
discontinued operation............. (159) (438) --
Depreciation and amortization........ 48 46 53
Equity in undistributed income
of subsidiaries.................... (2,954) (96) (2,612)
Equity in undistributed income
of subsidiary - BNC
Capital Trust I.................. (12) -- --
Equity in undistributed income
from operations of discontinued
asset-based lending subsidiary..... -- (429) (385)
Change in prepaid expenses and
other receivables.................. 32 19,922 (5,858)
Change in accrued expenses and
other liabilities.................. 98 28 290
Other................................ 14 -- 7
---------- ---------- ----------
Net cash provided by
(used in) operating
activities.................... (636) 19,275 (6,238)
---------- ---------- ----------
Investing activities:
Disposition of discontinued
operation.......................... -- 2,100 --
Net decrease in loans................ -- (325) (158)
Increase in investment in
subsidiaries ...................... (232) (3,157) (1,307)
Additions to premises, leasehold
improvements and equipment, net.... (59) (19) (67)
---------- ----------- ----------
Net cash used in
investing activities...... (291) (1,401) (1,532)
---------- ----------- ----------
Financing activities:
Repayments of long-term
borrowings......................... (2,001) (29,532) (9,785)
Proceeds from long-term
borrowings......................... -- 15,000 16,870
Amortization of discount
on subordinated notes.............. 93 92 84
Amortization of deferred
charges............................ 20 20 18
Proceeds from issuance of
subordinated debentures............ 7,440 -- --
Amortization of discount
on subordinated debentures......... 12 -- --
Purchase of treasury stock........... -- -- (297)
Other, net........................... 74 25 165
---------- ---------- ----------
Net cash provided by
(used in) financing
activities................. 5,638 (14,395) 7,055
---------- ---------- ----------
Net increase (decrease) in
cash and cash equivalents............ 4,711 3,479 (715)
Cash and cash equivalents,
beginning of year.................... 3,832 353 1,068
---------- ---------- ----------
Cash and cash equivalents,
end of year.......................... $ 8,543 $ 3,832 $ 353
========== ========== ==========
Supplemental cash flow
information:
Interest paid..................... $ 1,293 $ 2,582 $ 2,187
========== ========== ==========
Income tax payments received
from subsidiary banks,
net of income taxes paid........ $ 69 $ 243 $ 438
========== ========== ==========
23. Quarterly Financial Data (unaudited, in thousands, except shares and
earnings per share):
2000
-----------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------- -------------- ------------- -------------
Interest income ................ $ 9,183 $ 10,604 $ 10,950 $ 11,026
Interest expense ................ 5,939 7,199 7,482 7,497
------------- -------------- ------------- -------------
Net interest income............... 3,244 3,405 3,468 3,529
Provision for credit losses....... 482 337 107 276
------------- -------------- ------------- -------------
Net interest income after
provision for credit losses..... 2,762 3,068 3,361 3,253
Noninterest income................ 1,763 1,870 1,983 2,157
Noninterest expense............... 3,901 4,112 4,563 4,854
------------- -------------- ------------- -------------
Income before income taxes........ 624 826 781 556
Provision for income taxes........ 191 266 249 200
------------- -------------- ------------- -------------
Income from continuing
operations...................... 433 560 532 356
Discontinued Operation:
Gain on disposal of
discontinued operation,
net of income taxes........... -- 10 -- 149
------------- -------------- ------------- -------------
Income before extraordinary
item............................ 433 570 532 505
Extraordinary item - gain on
early extinguishment of debt,
net of income taxes............. 122 47 65 23
------------- -------------- ------------- -------------
Net income........................ $ 555 $ 617 $ 597 $ 528
============= ============== ============= =============
Earnings per common share:
Basic and diluted income from
continuing operations........... $ 0.18 $ 0.23 $ 0.22 $ 0.15
Gain on disposal of
discontinued operation.......... -- 0.01 -- 0.06
Extraordinary item - gain
on early extinguishment
of debt......................... 0.05 0.02 0.03 0.01
------------- -------------- ------------- -------------
Basic and diluted net income...... $ 0.23 $ 0.26 $ 0.25 $ 0.22
============= ============== ============= =============
Average common shares:
Basic............................. 2,399,980 2,399,436 2,395,030 2,395,030
Diluted........................... 2,400,486 2,399,835 2,395,321 2,395,030
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 1,566 1,486 1,592
Noninterest expense............... 3,914 4,009 4,279 6,013
------------- -------------- ------------- -------------
Income (loss) before
income taxes.................... 339 285 (34) (1,518)
Income tax provision
(benefit)....................... 124 116 (38) (601)
------------- -------------- ------------- -------------
Income (loss) from continuing
operations...................... 215 169 4 (917)
Discontinued Operation:
Income from operations
of discontinued operation,
net of income taxes........... 139 104 186 --
Gain on disposal of
discontinued operation,
net of income taxes........... -- -- -- 438
------------- -------------- ------------- -------------
Income before cumulative
effect of change in accounting
principle....................... 354 273 190 (479)
Cumulative effect of change
in accounting principle, net
of income taxes................. (96) -- -- --
------------- -------------- ------------- -------------
Net income (loss)................. $ 258 $ 273 $ 190 $ (479)
============= ============== ============= =============
Earnings per common share:
Basic and 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) -- -- --
------------- -------------- ------------- -------------
Basic and 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
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 2001 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 2001 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 2001 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 2001 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, 2000.
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 28, 2001.
BNCCORP, Inc.
By: /s/ Tracy Scott
-------------------------
Chairman of the Board
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 28, 2001.
/s/ Tracy Scott Chairman of the Board and Director
- -------------------------------
/s/ Gregory K. Cleveland President, Chief Executive Officer and Director
- ------------------------------- (Principal Executive Officer)
(Principal Financial Officer)
/s/ Brenda L. Rebel Chief Financial Officer and Director
- ------------------------------- (Principal Accounting Officer)
/s/ Denise Forte-Pathroff, M.D. Director
- -------------------------------
/s/ John A. Hipp, M.D. Director
- -------------------------------
/s/ Richard M. Johnsen, Jr. Director
- -------------------------------
/s/ David A. Erickson Director
- -------------------------------
/s/ Jerry R. Woodcox Director
- -------------------------------
/s/ Brad J. Scott Director
- -------------------------------
EXHIBIT INDEX
Exhibit
No. Exhibit Description
- --------------------------------------------------------------------------------
2.1 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 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 Junior Subordinated Indenture between BNCCORP, Inc. and First Union
National Bank as Trustee dated as of July 12, 2000, incorporated by
reference to Exhibit 10.1 to the Registrant's Form 10-Q dated as of August
2, 2000.
Exhibit
No. Exhibit Description
- --------------------------------------------------------------------------------
10.7 Guarantee Agreement between BNCCORP, Inc. as Guarantor and First Union
National Bank as Guarantee Trustee dated as of July 12, 2000 - BNC Capital
Trust I, incorporated by reference to Exhibit 10.2 to the Registrant's Form
10-Q dated as of August 2, 2000.
10.8 Amended and Restated Trust Agreement among BNCCORP, Inc. as Depositor,
First Union National Bank as Property Trustee, First Union Trust Company,
National Association as Delaware Trustee and the Administrative Trustees
dated as of July 12, 2000 - BNC Capital Trust I, incorporated by reference
to the Registrant's Form 10-Q dated as of August 2, 2000.
21.1 Subsidiaries of Company.
23.1 Consent of Arthur Andersen LLP