U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
DRAFT 3-26-2002
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, 2001 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 Commission File No. 0-26290
BNCCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 45-0402816
(State or other jurisdiction of I.R.S. Employer Identification No.)
incorporation or organization)
322 East Main 58501
Bismarck, North Dakota (Zip Code)
(Address of principal executive 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
Preferred Stock Purchase Rights
(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, 2002 was $14,594,000.
The number of shares of the Registrant's common stock outstanding on March
15, 2002 was 2,399,170.
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 2002 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, 2001
TABLE OF CONTENTS
Page
PART I
Item 1. Business........................................................ 3
Item 2 Properties...................................................... 9
Item 3. Legal Proceedings............................................... 9
Item 4. Submission of Matters to a Vote of Security Holders............. 10
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters........... 10
Item 6. Selected Financial Data........................................ 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...... 37
Item 8. Financial Statements and Supplementary Data..................... 41
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 18 facilities in North Dakota, Minnesota and Arizona. BNCCORP operates
primarily through its commercial banking subsidiaries, BNC National Bank
(together with its wholly-owned subsidiaries, BNC Insurance, Inc. and BNC Asset
Management, Inc., "BNC-Minnesota") and BNC National Bank of Arizona
("BNC-Arizona"), together with BNC-Minnesota, the "Banks."
Growth Strategy
BNCCORP was initially established in 1987 with the objective of acquiring
strategically located banks primarily 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 as
well as its market areas. 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 emphasizes expanded product and service offerings, 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. Such businesses frequently
have difficulty finding banking services that meet their specific needs and have
sought banking institutions that are more relationship-oriented.
Expansion, mergers and divestitures have played an important role in BNC's
strategy. During the three years ended December 31, 2001, the Company completed
the following transactions: established a new banking subsidiary, BNC-Arizona in
July 2001; merged BNC-North Dakota with and into BNC-Minnesota in November 2000;
and sold its asset-based lending subsidiary, BNC Financial Corporation in
December 1999. See Note 2 to the Consolidated Financial Statements included
under Item 8 of Part II for a summary of these transactions.
Management believes that its increased product and service offerings and
acquisitions have generated significant growth for the Company. BNC's total
assets have increased from $118.0 million at December 31, 1992 to $585.1 million
at December 31, 2001. The Company's goal is the creation of a well-capitalized
$1 billion financial services organization focused on local relationship
banking. Efforts are ongoing to ensure that the executive management team and
operating systems are in place to achieve this goal. BNC will continue to
emphasize internally-generated growth. The Company will also seek growth
opportunities through acquisition of financial services companies or de novo
branching in North and South Dakota, Minnesota, Arizona and, possibly, Iowa,
Nebraska and Wisconsin.
Market Areas
BNC's primary market areas are the Minneapolis/St. Paul (Minnesota) metropolitan
area, the Tempe/Phoenix/ Mesa (Arizona) metropolitan area (where BNC - Arizona
operates from 3 locations in Tempe and Phoenix), the Bismarck/Mandan and Fargo
(North Dakota) metropolitan areas and the rural communities surrounding the
branch offices of BNC - Minnesota (Crosby, Ellendale, Garrison, Kenmare, Linton,
Stanley and Watford City, North Dakota). As of December 31, 2001, 33 percent of
the Company's loans were to borrowers located in Minnesota, 41 percent were to
borrowers located in North Dakota, 8 percent were to borrowers located in South
Dakota, and 16 percent were to borrowers located in Arizona. The remaining 2
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 held and net loans outstanding at each of BNC's locations:
December 31, 2001
-----------------------
Location Total Net Loans
Deposits Outstanding (1)
- ----------------------------- ---------- -----------
(in thousands)
BNC-Minnesota:
Bismarck................. $194,881 $118,973
Crosby................... 18,263 277
Ellendale................ 11,636 655
Fargo.................... 31,815 29,148
Garrison................. 15,570 412
Kenmare.................. 13,955 219
Linton................... 43,966 10,312
Minneapolis.............. 41,218 113,845
Stanley.................. 16,154 832
Watford City............. 11,834 103
BNC-Arizona:
Tempe................... 7,019 37,073
Phoenix................. 1,658 9,453
BNCCORP (parent company)... -- 5
---------- ----------
Total ................ $407,969 $321,307
========== ==========
------------------
(1) Before allowance for credit losses, unearned income and net unamortized
deferred fees and costs.
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 2001, the Company
continued to increase core deposits largely through the continued success of its
Wealthbuilder NOW and money market deposit accounts introduced during 1999.
These are competitively priced floating rate accounts with rates variable at
management's discretion. Deposits are insured by the Federal Deposit Insurance
Corporation ("FDIC") up to statutory limits. The Banks also issue brokered
deposits and obtain direct non-brokered certificates of deposit through national
deposit networks when such transactions are beneficial to the Banks. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Financial Condition-Deposits" included under Item 7 of Part II.
Trust and Financial Services. BNC-Minnesota'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. BNC-Minnesota'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 BNC-Minnesota'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. Mobile
branches operating in Fargo, North Dakota and Tempe, Arizona are 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 "Quantitative and Qualitative Disclosures About Market
Risk," under Item 7a of Part II 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 greater resources and lending limits than BNC,
and may offer certain services that BNC does not provide. In addition, some of
the non-bank financial institutions that compete with BNC are not subject to the
extensive federal regulations that govern BNC. Management believes that many
competitors have emphasized retail banking and financial services, leaving the
small and mid-size business market underserved. This has allowed BNC to compete
effectively by emphasizing customer service, establishing long-term customer
relationships and providing services meeting the needs of such businesses and
the individuals associated with them. The banking and financial services
industries are highly competitive, and the future profitability of the Company
will depend on its ability to continue to compete successfully in its market
areas. See "Supervision and Regulation-Recently Enacted Legislation."
Supervision and Regulation
General. BNCCORP and the Banks are extensively regulated under federal and state
laws and regulations. These laws and regulations are primarily intended to
protect depositors and the federal deposit insurance funds, not investors in the
securities of BNCCORP. The following information briefly summarizes certain
material statutes and regulations affecting BNCCORP and the Banks and is
qualified in its entirety by reference to the particular statutory and
regulatory provisions. Any change in applicable laws, regulations or regulatory
policies may have a material effect on the business, operations and prospects of
BNCCORP and the Banks. The Company is unable to predict the nature or extent of
the effects that fiscal or monetary policies, economic controls or new federal
or state legislation may have on its business and earnings in the future. See
"-Recently Enacted 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 Banks are national banking associations and are
subject to supervision, regulation and examination by the Office of the
Comptroller of the Currency ("OCC"). Since the deposits of the Banks are insured
by the FDIC, the Banks are also subject to regulation and supervision by the
FDIC. Additionally, the Banks are members of the Federal Reserve System.
Acquisitions and Permissible Activities. As a registered bank holding company,
BNCCORP is restricted in its acquisitions, certain of which are subject to
approval by the FRB. A bank holding company may not acquire, or may be required
to give certain notice regarding acquisitions of, companies considered to engage
in activities other than those determined by the FRB to be closely related to
banking or managing banks.
Transactions with Affiliates. Under Section 23A of the Federal Reserve Act (the
"Act"), certain restrictions are placed on loans and other extensions of credit
by the Banks to BNCCORP who is defined as an "affiliate" of the Banks under the
Act. Section 23B of the Act places standards of fairness and reasonableness on
other of the Banks' transactions with 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
Banks seek participations to accommodate borrowers whose financing needs exceed
their lending limits.
Loans to Executive Officers, Directors and Principal Stockholders. Certain
limitations and reporting requirements are also placed on extensions of credit
by the Banks to principal stockholders of BNCCORP and to directors and certain
executive officers of the Banks (and BNCCORP and its nonbank subsidiaries
provided certain criteria are met) and to "related interests" of such principal
stockholders, directors and officers. In addition, any director or officer of
BNCCORP or the Banks or principal stockholder of BNCCORP may be limited in his
or her ability to obtain credit from financial institutions with which the Banks
maintain correspondent relationships.
Interstate Banking and Branching. Interstate banking and branching provisions of
federal and state laws may place certain limitations on expansion by bank
holding companies or banks.
Capital Adequacy. The capital adequacy of BNCCORP and the Banks is monitored by
the federal regulatory agencies using a combination of risk-based and leverage
ratios. Failure to meet the applicable capital guidelines could subject BNCCORP
or the Banks to supervisory or enforcement actions. In addition, BNCCORP could
be required to guarantee a capital restoration plan of the Banks, should the
Banks 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 Banks.
Dividend Restrictions. Federal rules also limit a bank's ability to pay
dividends to its parent bank holding company in excess of certain amounts or if
the payment would result in the bank being considered "undercapitalized" under
capital guidelines.
Community Reinvestment Act. Under the Community Reinvestment Act ("CRA"), the
Banks are encouraged to respond to the credit and other needs of the communities
they serve. Bank performance under the CRA is
periodically tested and the federal bank regulatory agencies consider CRA
ratings in connection with acquisitions involving the change in control of a
financial institution.
Deposit Insurance. FDIC-insured depository institutions that are members of the
FDIC's Bank Insurance Fund and Savings Association Insurance Fund pay insurance
premiums at rates based on their assessment risk classification, which is
determined in part based on the Banks' 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
Banks were 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 Banks, would likely lose its investment
in the Banks.
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 Banks are also subject to certain consumer laws and regulations that
are designed to protect customers in transactions with banks. These include, but
are not limited to, the Truth in Lending Act, the Truth in Savings Act, the
Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal
Credit Opportunity Act, 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 2001, 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, 2001, BNC had 229 employees, including 219 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 occupied by BNC-Arizona
at 640 and 660 South Mill Avenue, Tempe, Arizona, along with 2725 East Camelback
Road, Phoenix, 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 is currently not a party to any 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, based upon the advice of legal counsel, the
resolution of such matters will not have a material adverse effect on the
Company's financial position, results of operations or cash flows.
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, 2001.
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.
2002 2001 2000
----------------- ----------------- ------------------
Period High Low High Low High Low
------- ------- ------- ------- -------- --------
First Quarter...... $8.90 $7.28 $8.56 $5.94 $ 7.25 $5.81
Second Quarter..... -- -- 9.50 7.00 6.94 5.88
Third Quarter...... -- -- 9.41 7.51 6.56 5.75
Fourth Quarter..... -- -- 8.45 7.28 6.50 5.38
On March 15, 2002, there were 92 record holders and 996 beneficial owners of the
Company's Common Stock.
BNCCORP's policy is to retain its earnings to support the growth of its
business. The board of directors of BNCCORP has never declared cash dividends on
its Common Stock and does not plan to do so in the foreseeable future. The
ability of BNCCORP to pay cash dividends largely depends on the amount of cash
dividends paid to it by the Banks. Capital distributions, including dividends,
by the Banks are subject to federal regulatory restrictions tied to the banks'
earnings and capital. Approval of the OCC, the Banks' principal regulator, would
be required for the Banks to pay dividends in excess of the Banks' earnings
retained in the current year plus retained net profits for the preceding two
years. 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, 2001, 2000, 1999, 1998 and 1997 are derived from the historical
audited consolidated financial statements of the Company. The Consolidated
Balance Sheets as of December 31, 2001, 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, 2001 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,
---------------------------------------------------
2001 2000 1999 1998 1997
-------- --------- -------- --------- ---------
(dollars in thousands, except share and per share data)
Income Statement Data:
Total interest income........ $ 39,201 $ 41,763 $28,931 $ 27,801 $ 25,232
Total interest expense....... 23,544 28,117 16,574 15,152 13,132
-------- --------- -------- --------- --------
Net interest income.......... 15,657 13,646 12,357 12,649 12,100
Provision for credit losses.. 1,699 1,202 1,138 1,201 2,518
Noninterest income........... 8,975 7,773 6,068 4,843 3,928
Noninterest expense.......... 20,833 17,430 18,215 13,379 11,256
Provision for (benefit from)
income taxes.............. 608 906 (399) 1,030 955
-------- --------- -------- --------- --------
Income (loss) from
continuing operations........ $ 1,492 $ 1,881 $ (529) $ 1,882 $ 1,299
======== ========== ======== ========= =========
Balance Sheet Data:
(at end of period)
Total assets................. $585,057 $570,016 $456,877 $372,240 $345,630
Investments and federal
funds sold 226,681 263,185 154,492 96,601 94,624
Loans, net of unearned
income................... 320,791 268,925 262,051 247,181 220,149
Allowance for credit losses.. (4,325) (3,588) (2,872) (2,854) (2,919)
Total deposits............... 407,969 362,464 324,711 284,499 262,824
Short-term borrowings........ 117,960 150,428 88,700 49,290 46,503
Long-term borrowings......... 13 12,642 14,470 9,195 8,285
Guaranteed preferred
beneficial interests in
Company's subordinated
debentures................ 22,244 7,606 -- -- --
Stockholders' equity......... 30,679 29,457 23,149 25,255 23,148
Book value per common share
outstanding.............. $ 12.79 $ 12.30 $ 9.65 $ 10.57 $ 9.64
Earnings Performance Data (1):
Return on average total
assets................... 0.22% 0.35% (0.13)% 0.54% 0.42%
Return on average stockholders'
equity.................... 4.04% 7.68% (2.13)% 8.48% 6.16%
Net interest margin.......... 2.95% 2.72% 3.41% 3.88% 4.27%
Net interest spread.......... 2.51% 2.41% 3.09% 3.43% 3.82%
Basic earnings (loss) per
common share.............. $ 0.62 $ 0.78 $ (0.22) $ 0.79 $ 0.54
Diluted earnings (loss) per
common share................. $ 0.62 $ 0.78 $ (0.22) $ 0.75 $ 0.54
Balance Sheet and Other Key
Ratios (1):
Nonperforming assets to total
assets.................... 0.76% 0.12% 0.63% 1.21% 0.43%
Nonperforming loans to total
loans.................... 1.36% 0.22% 0.63% 0.97% 0.68%
Net loan charge-offs to
average loans............ (0.31)% (0.19)% (0.45)% (0.54)% (0.53)%
Allowance for credit losses
to total loans...........
Allowance for credit losses 1.35% 1.33% 1.10% 1.15% 1.33%
to nonperforming loans... 99% 619% 173% 119% 195%
Average stockholders' equity to
average total assets...... 5.42% 4.56% 6.32% 6.33% 6.89%
- -------------------------
(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 2001 reflected continued growth in net
interest income and noninterest income driven by lending opportunities in new
and existing markets and a strategic shift of the earning asset mix from
investment securities to loans. The Company saw continued progress in the growth
of its Wealthbuilder family of NOW and money market deposit products. The
average balance of NOW and money market deposits increased $22.7 million or 17
percent to $159.2 million for 2001 from an average of $136.5 million for 2000.
Net interest income for the year ended December 31, 2001, was $15.7 million, as
compared with $13.6 million and $12.4 million reported in the previous two
years. Noninterest income rose to $9.0 million in 2001 from $7.8 million and
$6.1 million in 2000 and 1999, respectively. In the process of shifting the
earning asset mix to loans from investment securities, in addition to adjusting
the investment portfolio's risk/reward profile in response to the dramatic shift
in interest rates during the year, net realized gains on sales of securities
increased by $1.1 million to $1.4 million in 2001. The increase in net realized
gains on sales of securities accounted for 93 percent of the increase in
noninterest income as insurance commissions, loan fees, brokerage income and
trust and financial services, remained relatively steady in the face of the
challenging national economic environment. Noninterest expense rose to $20.8
million in 2001 from $17.4 million in 2000 reflecting higher salaries and
employee benefits, occupancy, and marketing expense primarily associated with
the Company's establishment of a banking subsidiary in Arizona. In addition,
noninterest expense increased due to the expense associated with the Company's
issuances of trust preferred securities in 2000 and 2001.
The Company recorded 2001 net income of $1.2 million, or $0.51 per share on a
diluted basis, compared to net income of $2.3 million, or $0.96 per share on a
diluted basis for 2000, and net income of $242,000, or $0.10 per share on a
diluted basis for 1999. Income from continuing operations for 2001 was $1.5
million or $0.62 per share on a diluted basis. This compares to $1.9 million, or
$0.78 per share on a diluted basis for 2000 and a loss from continuing
operations of $529,000 or $0.22 per share on a diluted basis in 1999.
Performance highlights in the year 2001 included:
* Loans and leases increased 19 percent, to $320.8 million. In addition
to the 19 percent increase in net loans outstanding, gross loans
originated continued to increase as the total loans sold to other
financial institutions on a nonrecourse basis increased $19.8 million,
or 9%, to $235.8 million.
* Expansion into the Tempe/Phoenix, Arizona marketplace though the
establishment of a banking subsidiary, BNC-Arizona.
* Issuance of $15.0 million in floating rate trust preferred securities
and retirement of the remaining $12.6 million of the Company's 8 5/8
percent subordinated notes due May 31, 2004. See Note 9 "Notes
Payable" and Note 10 "Guaranteed Preferred Beneficial Interests in
Company's Subordinated Debentures" under Item 8 for further
information related to the Company's trust preferred securities.
* Investment securities decreased 17 percent to $219.2 million from
$263.2 million the prior year reflecting a strategic shift in the
earning asset mix from investment securities to loan opportunities
arising from the Company's new and existing markets.
* Deposits increased 12.6 percent, to $408 million. The deposit growth
was driven by continued success of the Wealthbuilder family of NOW and
money market accounts.
* Noninterest income increased 15.5 percent to $9.0 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,
-----------------------------------------------------------------
2001 2000 1999
--------------------- --------------------- ---------------------
Interest Average Interest Average Interest Average
Average earned yield of 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........ $ 1,830 $ 51 2.79% $ 5,660 $ 242 4.28% $ 1,818 $ 90 4.95%
Taxable investments........ 206,572 12,716 6.16% 225,559 16,054 7.12% 105,145 6,372 6.06%
Tax-exempt investments...... 16,453 829 5.04% 17,624 940 5.33% 7,788 386 4.96%
Loans (2)................... 309,661 25,605 8.27% 255,798 24,527 9.59% 250,158 22,083 8.83%
Allowance for credit losses. (4,153) -- (3,405) -- (2,890) --
-------- -------- -------- -------- ------- --------
Total interest-earning 530,363 39,201 7.39% 501,236 41,763 8.33% 362,019 28,931 7.99%
assets (3)...............
Noninterest-earning assets:
Cash and due from banks.. 11,997 8,939 7,704
Other.................... 25,712 27,579 22,584
-------- -------- --------
Total assets........ $568,072 $537,754 $392,307
======== ======== ========
Liabilities and Stockholders'
Equity
Deposits:
NOW and money market
accounts............... $159,198 $ 4,987 3.13% $136,450 7,341 5.38% $ 91,671 3,632 3.96%
Savings................... 3,813 57 1.49% 4,097 86 2.10% 6,294 129 2.05%
Certificates of deposit:
Under $100,000............ 104,802 5,631 5.37% 108,170 6,033 5.58% 125,470 6,469 5.16%
$100,000 and over......... 77,140 4,447 5.76% 54,177 3,406 6.29% 43,140 2,307 5.35%
-------- -------- -------- -------- -------- ---------
Total interest-bearing 344,953 15,122 4.38% 302,894 16,866 5.57% 266,575 12,537 4.70%
deposits....................
Short-term borrowings:
Securities and loans sold
under agreements to
repurchase and federal
funds purchased......... 10,206 449 4.40% 97,682 6,326 6.48% 21,685 1,129 5.21%
FHLB notes payable........ 118,705 7,178 6.05% 60,561 3,673 6.07% 40,308 2,174 5.39%
Long-term borrowings........ 8,378 777 9.27% 13,497 1,252 9.28% 9,872 734 7.44%
-------- -------- -------- ------- -------- -------- ---------
Total interest
bearing labilities... 482,242 23,526 4.88% 474,634 28,117 5.92% 338,440 16,574 4.90%
Noninterest-bearing demand
accounts.................. 32,152 28,656 27,094
------- ------- --------
Total deposits and
interest-bearing
liabilities......... 514,394 503,290 365,534
Other noninterest-bearing
liabilities................ 8,766 6,850 5,567
------- ------- --------
Total liabilities.... 523,160 510,140 371,101
Subordinated debentures....... 13,542 3,108 --
Stockholders' equity.......... 31,370 24,506 21,206
------- ------- --------
Total liabilities and
stockholders' equity $568,072 $537,754 $392,307
======== ======== ========
Net interest income........... $15,675 $13,646 $12,357
======= ====== =======
Net interest spread........... 2.51% 2.41% 3.09%
====== ====== ======
Net interest margin........... 2.95% 2.72% 3.41%
====== ====== ======
Ratio of average interest-
earning assets to average
interest-bearing
liabilities............... 109.98% 105.60% 106.97%
======== ======= =======
--------------------
(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,
------------------------------------------------
2001 Compared to 2000 2000 Compared to 1999
------------------ --------------
Change Due to Change Due to
----------------- --------------
Volume Rate Total Volume Rate Total
--------- ------- ------ ------ ------ --------
(in thousands)
Interest-Earning Assets
Federal funds sold/interest-
bearing due from.......... $ (164) $ (27) $ (191) $ 190 $ (38) $ 152
Investments.................. (1,409) (2,040) (3,449) 7,794 2,442 10,236
Loans........................ 5,165 (4,087) 1,078 498 1,946 2,444
-------- ------- -------- ----- ------- -------
Total increase (decrease)
in interest income......... 3,592 (6,154) (2,562) 8,482 4,350 12,832
-------- ------- -------- ----- ------- -------
Interest-Bearing Liabilities
NOW and money market accounts 1,224 (3,578) (2,354) 1,774 1,935 3,709
Savings...................... (6) (23) (29) (45) 2 (43)
Certificates of Deposit:
Under $100,000............. (188) (214) (402) (892) 456 (436)
$100,000 and over.......... 1,444 (403) 1,041 590 509 1,099
Short-term borrowings:
Securities and loans sold
under agreements to
repurchase and federal
funds purchased....... (5,665) (212) (5,877) 3,957 1,240 5,197
FHLB notes payable......... 3,526 (21) 3,505 1,092 407 1,499
Long-term borrowings......... (475) -- (475) 270 248 518
-------- ------- -------- ----- ------- -------
Total increase (decrease) in
interest expense............. (140) (4,451) (4,591) 6,746 4,797 11,543
======== ======= ======= ====== ======= =======
Increase (decrease) in net
interest income
income.......................$ 3,732 $(1,703) $2,029 $1,736 $ (447) $ 1,289
======== ======= ======= ====== ======= =======
(1) From continuing operations for all periods presented.
Year ended December 31, 2001 compared to year ended December 31, 2000. Net
interest income increased $2.0 million, or 14.7 percent, to $15.6 million as
compared to $13.6 million. Net interest spread and net interest margin increased
to 2.51 and 2.95 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 - 2001 vs. 2000 (1)
For the Years
Ended December 31, Change
31,
------------------ --------------
2001 2000
------- ---------
(amounts in millions)
Total interest income decreased............. $ 39.2 $ 41.8 $ (2.6) (6)%
Due to:
Increase in average earning assets...... $530.4 $ 501.2 $ 29.2 6%
Driven by:
Decrease in average investments (a)..... $223.0 $ 243.2 $ (8)%
Increase in average loans (b)........... $309.7 $ 255.8 $ 53.9 21
The increases in average earning assets
volume were
offset by:
Decreased yield on earning assets....... 7.39% 8.33% (0.94)% (11)%
Driven by:
Decreased yield on loans (c)............ 8.27% 9.59% (1.32)% (14)%
Decreased yield on investments (d)...... 6.07% 6.99% (0.92)% (13)%
These decreases were somewhat offset by:
Mix change in earning asset portfolio -
Average loans as a percent of total
interest-earning assets (e)........... 58% 51% 7% 14%
Total interest expense decreased............ $ 23.5 $ 28.1 $ (4.6) (16)%
Due to:
Increase in average interest-bearing
liabilities............................. $ 482.2 $ 474.6 $ 7.6 2%
Driven by:
Increase in average interest-bearing
deposits (f)............................ $ 345.0 $ 302.9 $ 42.1 14%
Decrease in average borrowings (g)...... $ 137.3 $ 171.7 $(34.3) (20)%
These increases in average interest-
bearing liabilities were offset by:
Decrease in cost of interest-bearing 4.38% 5.57% (1.19)% (21)%
deposits (h)............................
Decrease in cost of borrowings (i)...... 6.12% 6.55% (0.43)% (7)%
- --------------------
(1) From continuing operations for all periods presented.
(a) Reflecting strategic shift in earning asset mix from investment securities
to loans arising from lending opportunities in the Minnesota, North Dakota
and Arizona markets.
(b) Loan growth is attributable to increases in loans originated in the
Minnesota, North Dakota and Arizona markets.
(c) The decreased loan yield is reflective of a 475bp decrease in the prime
rate over the course of 2001 as monetary policy eased in response to
weakening national economic conditions.
(d) The decreased investment yield reflects the lower rate environment in 2001
as well as the reduction in the size of investment portfolio in order to
shift the earning asset mix toward loans.
(e) The decrease in investment securities noted in (a) along with the increase
in average loans noted in (b) caused this change in the mix of the earning
asset portfolio.
(f) Deposit growth is primarily attributable to the continued success of the
Wealthbuilder family of NOW and money market accounts in addition to
increased use of direct non-brokered "National" certificates of deposit
obtained via posting rates on national networks. "National" certificates of
deposit were $34.0 million as of December 31, 2001 compared to $9 million
on December 31, 2000.
(g) Decreased FHLB borrowings due to greater use of "National" certificates of
deposit as a wholesale funding source in order to maintain borrowing
capacity at the FHLB, support the earning asset base, and take advantage of
favorable costs of "National" certificates of deposits relative to FHLB
borrowings. In addition, the Company redeemed the remaining $12.6 million
of its 8 5/8 percent subordinated notes due May 31, 2004 through the
exercise of its call option.
(h) Decreased cost of interest-bearing deposits is reflective of the rise in
volume of Wealthbuilder NOW and money market accounts and the associated
decreases in cost as interest rates declined during 2001. The Wealthbuilder
accounts carry rates that are variable at management's discretion.
Management lowered the rates paid for these deposits in response the
monetary easing that took place during 2001 while maintaining the
competitive nature of the Wealthbuilder products in the Company's various
markets. Additionally, in a lower rate environment, the cost of
certificates of deposit also decreases with renewals and new accounts.
(i) Rates are reflective of the overall decreased rate environment in 2001 as
compared to 2000.
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.
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, 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 Change
31,
------------------ ----------------
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)% (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 5.57% 4.70% 0.87% 19%
deposits (h)............................
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. During 2000 and 1999, the
Wealthbuilder accounts were indexed to and floated 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.
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, 2001 was $1.7
million as compared to $1.2 million in 2000 and $1.1 million in 1999.
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 2001 - 2000 2000 - 1999
December 31,
---------------------------- ----------------- ----------------
2001 2000 1999 $ % $ %
-------- -------- -------- -------- ------- -------- ------
(in thousands)
Fees on loans........ $2,063 $ 1,941 $ 1,435 $ 122 6% (a) $ 506 35% (a)
Insurance commissions 1,891 2,003 2,045 (112) (6)% (b) (42) (2)% (b)
Brokerage income..... 1,407 1,466 797 (59) (4)% (c) 669 84% (c)
Net gain on sales of
securities ........ 1,396 276 198 1,120 406% (d) 78 39%
Trust and financial
services............. 899 1,064 589 (165) (16)% (e) 475 81% (e)
Service charges...... 689 604 536 85 14% (f) 68 13% (f)
Rental income........ 133 56 121 77 138% (65) (54)%
Other................ 497 363 347 134 37% 16 5%
-------- -------- -------- -------- --------
Total noninterest
income............... $8,975 $7,773 $ 6,068 $ 1,202 15% $1,705 28%
======== ======== ======== ======== ========
- --------------------
(1) From continuing operations for all periods presented.
(a) The increase in loan fees for 2001 and 2000 is largely attributable to
loans originated and sold. In 2000, 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.
(b) In 2000, insurance commissions remained relatively stable in spite of a
reduction in the number of insurance agents. In 2001, insurance commissions
experienced a decline in the face of a challenging economic environment.
(c) Increase for 2000 is attributable to the addition of brokerage staff at BNC
AMI and successful efforts to cross-sell brokerage services to bank
customers. In 2001, brokerage income was relatively stable in the face of a
challenging economic environment and a prolonged period of soft conditions
in equity markets.
(d) Net gain on sales of securities increased as a function of selling
investment securities in the process of shifting the earning asset mix from
investment securities to loan opportunities available in new and existing
markets. In addition, given the significant decline in interest rates
during 2001, sales of investment securities were necessary in order to
adjust the forward-looking risk/reward profile of the investment portfolio.
(e) 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 BNC-Minnesota's Financial Services Division. In 2001, the
fees from the BNC U.S. Opportunities Fund, LLC decreased as the fees are a
function of the asset size of the fund. The fund's asset size was
negatively impacted by the overall decline in equity markets.
(f) Service charges increased in 2001 and 2000 as the Company continued to
increase its Wealthbuilder NOW and money market volume along with an
increase in non-interest bearing deposits which are primarily business
deposit relationships that tend to utilize a greater level of fee-based
deposit services.
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, 2001 - 2000 2000 - 1999
--------------------------- ------------------- -----------------
2001 2000 1999 $ % $ %
-------- ------- ------- --------- -------- -------- -------
(in thousands)
Salaries and employee
benefits...............$10,355 $ 8,891 $ 8,854 $ 1,464 16% (a) $ 37 --
Occupancy................. 1,925 1,360 1,248 565 42% (b) 112 9%
Depreciation and
amortization.............. 1,846 1,659 1,586 187 11% 73 5%
Minority interest in
income of subsidiaries... 1,377 399 -- 978 245% (c) 399 -- (c)
Professional services..... 1,349 1,290 1,214 59 5% 76 6%
Office supplies,
telephone and postage 1,001 940 941 61 6% (1) --
Marketing and promotion... 877 597 621 280 47% (d) (24) (4)%
FDIC and other assessments 193 200 191 (7) (4)% 9 5%
Repossessed and impaired
asset expenses/write-offs 141 470 2,271 (329) (70)% (e) (1,801) (79%) (e)
Other..................... 1,769 1,624 1,289 145 9% 335 26% (f)
-------- ------- ------- --------- --------
Total noninterest
expense..................$20,833 $17,430 $18,215 $ 3,403 20% $ (785) (4)%
======== ======= ======= ========= ========
Efficiency ratio (g)...... 84.57% 81.38% 98.86% 3.19% (17.48)%
- --------------------
(1) From continuing operations for all periods presented.
(a) 2001 increase reflects additions to personnel associated with the Company's
establishment of a banking subsidiary in Arizona along with additional
personnel in the Minneapolis market.
(b) Increase in 2001 associated with new facilities due to the establishment of
a banking subsidiary in Arizona, along with recording a full year's
occupancy expense for BNC - Minnesota's Fargo, North Dakota branch.
(c) This is the interest expense associated with the trust preferred securities
issued in July 2000 and the additional interest expense from the floating
rate trust preferred securities issued in July 2001. The increase in 2001
reflects a the full year expense of the July 2000 issue along with five
months of expense on the July 2001 issuance. See Note 10 to the
Consolidated Financial Statements included under Item 8 for further
information related to the Company's trust preferred offerings.
(d) Increased marketing costs reflecting development of the Company's new
markets in Arizona and Fargo, North Dakota.
(e) 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, 2001 and repossessed assets were
valued at $84,000.
(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,
2001, 2000 and 1999, 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, 2001 - 2000 2000 - 1999
---------------------------- ---------------- -----------------
2001 2000 1999 $ % $ %
------- -------- -------- ------ ------ -------- ------
Cash and due from
banks............... $16,346 $ 14,988 $ 12,816 $1,358 9% $ 2,172 17%
Interest-bearing
deposits with banks 126 595 5,565 (469) (79)% (4,970) (89)%
Federal funds sold.. 7,500 -- 3,500 7,500 100% (3,500) (100)%
Investment
securities
available for sale. 219,181 263,185 150,992 (44,004) (17)% (a) 112,193 74% (a)
Loans and leases, net 316,466 265,337 259,179 51,129 19% (b) 6,158 2% (b)
Premises, leasehold
improvements and
equipment, net..... 15,403 14,873 12,006 530 4% 2,867 24%
Interest receivable. 3,008 3,854 2,613 (846) (22)% 1,241 47%
Other assets........ 4,856 4,465 6,945 391 9% (2,480) (36)%
Deferred changes and
intangible assets,
net................ 2,171 2,719 3,261 (548) (20)% (542) (17)%
-------- --------- -------- -------- ---------
Total assets.... $585,057 $570,016 $456,877 $15,041 3% $113,139 25%
======== ========= ======== ======== =========
(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. In 2001, the Company began to strategically shift the larger
earning asset base to loans from investment securities.
(b) In 2001, the Company increased its net loans and leases by strategically
shifting its earning asset mix toward loans from investment securities. The
increase in net loans and leases reflected commercial real estate and real
estate construction loans arising from opportunities primarily in the
Arizona and Minnesota markets. The 2000 increase is primarily attributable
to an increase in real estate construction loans. Although net loans
outstanding did not increase materially, gross loans originated by the
Company increased significantly in 2000 as the Company 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 $235.8, $216.0, and $148.7 million, respectively, as
of December 31, 2001, 2000 and 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, 2001, 2000 and 1999, 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, 2001 - 2001 2000 - 1999
----------------------------- ----------------- ------------------
2001 2000 1999 $ % $ %
-------- --------- -------- -------- ------- --------- --------
Deposits:
Noninterest-bearing. $ 43,055 $ 31,459 $ 29,798 $11,596 37% (a) $ 1,661 6%
Interest-bearing -
Savings, NOW and
money market..... 170,653 169,425 127,454 1,228 1% 41,971 33% (b)
Time deposits
$100,000 and over 83,809 61,720 46,779 22,089 36% (c) 14,941 32% (c)
Other time deposits 110,452 99,860 120,680 10,592 11% (b) (20,820) (17)% (b)
Short term borrowings 117,960 150,428 88,700 (32,468) (22)% (d) 61,728 70% (d)
Long term borrowings 13 12,642 14,470 (12,629) (100)% (e) (1,828) (13)%
Other liabilities... 6,192 7,419 5,847 (1,227) (17)% 1,572 27%
--------- --------- -------- -------- ---------
Total liabilities 532,134 532,953 433,728 (819) -- 99,255 23%
Guaranteed preferred
beneficial interest
in Company's
subordinated
debentures......... 22,244 7,606 -- 14,638 192% (f) 7,606 -- (f)
Stockholders' equity 30,679 29,457 23,149 1,222 4% (g) 6,308 27% (g)
--------- --------- --------- -------- ---------
Total........... $585,057 $570,016 $456,877 $15,041 3% $113,139 25%
========= ========= ========= ======== =========
(a) Noninterest-bearing deposits can fluctuate significantly on a daily basis
due to transactions associated primarily with commercial customers.
(b) 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. During 2001, the "other time deposits" category increased due to
certain special promotions in select markets.
(c) Brokered deposits totaled $34.4 million at December 31, 2001 compared to
$30.7 and $13.4 million at December 31, 2000 and 1999, respectively.
"National" certificates of deposit increased to $34.0 million at December
31, 2001 compared to $9 million at December 31, 2000 due to greater use of
"National" certificates of deposit as a wholesale funding source in order
to maintain borrowing capacity at the FHLB and take advantage of favorable
costs of "National" certificates of deposits relative to FHLB borrowings.
(d) Increases in short term borrowings for 2000 are attributable to the balance
sheet leveraging strategy. Decrease in 2001 reflects a reduction in FHLB
borrowings resulting from a decrease in the size of the Company's
investment securities portfolio as well as a shift to greater use of
"National" certificates of deposit as a wholesale funding source as
described above.
(e) On August 31, 2001, the Company retired its remaining 8 5/8 percent
subordinated notes due May 31, 2004 through exercise of its call option by
using a portion of the proceeds from the issuance of floating rate trust
preferred securities in July 2001.
(f) Issuance of trust preferred securities in July 2000 and floating rate trust
preferred securities in July 2001. See Note 10 to the Consolidated
Financial Statements included under Item 8 for further information related
to the Company's trust preferred securities.
(g) Increase for 2001 is due to earnings of $1.2 million. Increase for 2000 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 future
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,
--------------------------------------------------------------------
2001 2000 1999
--------------------- --------------------- --------------------
Estimated Estimated Estimated
Amortized fair Amortized fair Amortized fair
cost market cost market cost market
value value value
--------- --------- --------- --------- --------- ---------
(in thousands)
Available for Sale:
U.S. government
agency
mortgage-backed
securities......... $ 42,027 $ 41,946 $ 44,272 $ 44,468 $ 26,697 $ 26,295
U.S. government
agency securities.. 4,396 4,495 4,880 4,890 4,654 4,468
Collateralized
mortgage
obligations........ 135,423 137,268 164,221 165,404 97,243 95,038
State and municipal
bonds 16,952 17,481 20,782 20,905 20,272 19,548
Corporate bonds...... 10,329 10,611 16,968 17,899 -- --
Equity securities.... 7,380 7,380 9,619 9,619 5,643 5,643
--------- --------- --------- --------- --------- ---------
Total investments.... $216,507 $219,181 $260,742 $263,185 $154,509 $150,992
========= ========= ========= ========= ========= =========
(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, 2001:
Investment Portfolio - Maturity and Yields
Maturing
-----------------------------------------------------------
After 1 but After 5 but
Within 1 within 5 within 10 After 10 Total
year years years years
------------- ------------- -------------- ---------------- ---------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
(1) (1) (1) (1) (1)
------ ----- ------ ------ ------- ------ -------- ------ ------- ------
Available for
sale: (2)
===================
U.S. government
agency
mortgage-backed
securities (3).. $ 16 5.86% $ -- -- $ 3,234 6.37% $ 38,777 6.12% $ 42,027 6.13%
U.S. government
agency
securities...... -- -- 927 11.21% -- -- 3,469 6.04% 4,396 7.13%
Collateralized
mortgage
obligations (3). 494 5.83% 4,960 6.53% $24,836 5.34% $105,133 5.42% 135,423 5.45%
State and
municipal bonds... -- -- 15 13.18% 293 7.25% 16,644 7.28% 16,952 7.28%
Corporate bonds... -- -- -- -- 1,000 7.50% 9,329 8.27% 10,329 8.19%
------ ------ ------- ------ -------
Total book value
of investment
securities...... $ 510 5.84% $5,902 7.28% $29,363 5.54% $173,352 5.92% 209,127 5.91%
====== ====== ======= ======== -------
Unrealized
holding gain on
securities
available for
sale................ 2,674
Equity securities..... 7,380 2.58%
-------
Total investment
in securities
available for
sale................ $219,181 5.73% (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, 2001, BNC had $219.2 million of securities in the investment
portfolio as compared to $263.2 and $151.0 million at December 31, 2000 and
1999, respectively. As part of the strategic shift in the earning asset mix from
investment securities to loans, the Company decreased its holdings in
collateralized mortgage obligations, corporate bonds, and state and municipal
bonds by $28.1, $7.3 and $3.4 million respectively. Equity securities decreased
by $2.2 million as the Company was required to hold less stock in the Federal
Home Loan Bank of Des Moines as a result of a decrease in its FHLB borrowings.
In addition, as a result of 475bp of monetary easing over the course of 2001,
the yield curve experienced a significant downward shift and increase in slope
relative to 2000. The ongoing portfolio management process and individual
security risk/reward analysis described above led to the sale of individual
securities whose forward-looking risk/reward profile given various interest rate
scenarios was inferior to other securities available for purchase. The need to
optimize the risk/reward profile of the portfolio as a whole in addition to the
reduction in the portfolio size as more earning assets were shifted to loans
resulted in transactions that generated net realized securities gains of $1.4
million.
During 2000, the Company had increased its holdings in collateralized mortgage
obligations ("CMOs"), U.S. government agency mortgage-backed securities and
corporate bonds by $70.4, $18.2 and $17.9 million, respectively as part of the
Company's strategy to increase its earning asset portfolio by purchasing
investment securities primarily funded 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, 2001, 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 85 percent at
December 31, 2001) 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 $51.1 million, or 19 percent, to $316.5 million at
December 31, 2001 as compared to $265.3 million at December 31, 2000. In 2000,
net loans increased $6.2 million, or 2.4 percent, as compared to December 31,
1999. The following table presents the composition of the Company's loan
portfolio as of the dates indicated:
Loan Portfolio Composition (1)
December 31,
------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
--------------- ----------------- ---------------- ---------------- ----------------
Amount % Amount % Amount % Amount % Amount %
-------- ------ ------- ------- -------- ------ -------- ------- -------- -------
(dollars in thousands)
Commercial and
industrial ......... $109,143 34.5 $112,407 42.4 $111,236 42.9 $107,886 44.2 $ 96,780 44.5
Real estate mortgage 136,219 43.0 90,622 34.2 91,906 35.5 76,692 31.4 56,408 26.0
Real estate 34,872 11.0 25,301 9.6 16,026 6.2 20,831 8.5 18,215 8.4
construction........
Agricultural........ 19,810 6.3 15,775 5.9 16,679 6.4 19,777 8.1 21,064 9.7
Consumer/other...... 13,685 4.3 14,888 5.6 15,116 5.8 14,761 6.1 18,726 8.6
Lease financing..... 7,578 2.4 10,202 3.8 11,307 4.4 7,422 3.0 9,211 4.2
-------- ------ -------- ------ -------- ----- --------- ------ -------- -----
Total face amount
of loans............ 321,307 101.5 269,195 101.5 262,270 101.2 247,369 101.3 220,404 101.4
Unearned income and
net unamortized
deferred fees and
costs............. (516) (0.1) (270) (0.1) (219) (0.1) (188) (0.1) (255) (0.1)
-------- ------ -------- ------ -------- ----- --------- ------ -------- -----
Loans, net of
unearned income
and unamortized
fees and costs.... 320,791 101.4 268,925 101.4 262,051 101.1 247,181 101.2 220,149 101.3
Less allowance for
credit losses.... (4,325) (1.4) (3,588) (1.4) (2,872) (1.1) (2,854) (1.2) (2,919) (1.3)
-------- ------ -------- ------ -------- ----- --------- ------ -------- -----
Net loans........... $316,466 100.0 $265,337 100.0 $259,179 100.0 $244,327 100.0 $217,230 100.0
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
(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)
-----------------------------------------------
2001 - 2000 2000 - 1999
---------------------- ---------------------
$ % $ %
----------- --------- ---------- ---------
(dollars in thousands)
Commercial and industrial.. $ (3,264) (3)% $ 1,171 1%
Real estate mortgage....... 45,597 50% (a) (1,284) (1)%
Real estate construction... 9,571 38% (b) 9,275 58%
Agricultural............... 4,035 26% (904) (5)%
Consumer/other............. (1,203) (8)% (228) (2)%
Lease financing............. (2,624) (26)% (1,105) (10)%
----------- ----------
Total face amount of loans. 52,112 19% 6,925 3%
Unearned income/unamortized
fees and costs........... (246) (91)% (51) (23)%
----------- ----------
Loans, net of unearned 51,866 19% 6,874 3%
income/unamortized fees
and costs................
Allowance for credit losses (737) (21)% (716) (25)%
----------- ----------
Net Loans.................. $ 51,129 19% (c) $ 6,158 2%(c)
=========== ==========
(1) From continuing operations for all periods presented.
(a) Increase in 2001 is attributable to commercial real estate loan volume
generated out of Minnesota, Arizona, and North Dakota.
(b) Increased originations of commercial real estate construction loans
primarily in the Minnesota and Arizona markets.
(c) Net loans outstanding did not increase significantly in 2000 although the
Company generated and sold a significant volume of loans during the year.
During 2001, the Company increased its net loans $51.1 million or 19
percent as part of a strategic shift in the earning asset mix from
investment securities to loans, primarily commercial real estate loans.
Despite the solid rise in net loans in 2001, the increase in net loans
presented in the above table for the prior 24 months is not reflective of
the business generated by the Company. Loans originated were $533.5 million
at December 31, 2001 compared with $459.0 and $382.4 million at December
31, 2000 and 1999, respectively. Loans are originated and sold primarily
for legal lending limit and industry concentration reasons.
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. Credit committees may be
established at either the Bank or corporate level. The loan policy is reviewed
and reaffirmed by the Board at least annually. Underwriting criteria are based
upon the risks associated with each type of credit offered, the related
borrowers and types of collateral.
The Company delegates lending decision authority among various lending officers
and the credit committees based on the size of the customer's credit
relationship with BNC. All loans and commitments approved in excess of $300,000
are presented to the Board on a monthly basis for summary review. Any exceptions
to loan policies and guidelines, to the extent the credit relationship amount
exceeds individual loan officer lending authorities, are subject to special
approval by the Banks' Chief Credit Officer or the Executive Credit Committee.
Loan Participations. Pursuant to BNC's lending policy, loans may not exceed 85
percent of the Banks' legal lending limits (except to the extent collateralized
by U.S. Treasury securities or Bank deposits and, accordingly, excluded from the
Banks' legal lending limit). To accommodate customers whose financing needs
exceed lending limits and internal loan restrictions relating primarily to
industry concentration, the Banks 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)
2001........... $212,167
2000........... 189,763
1999........... 120,100
1998........... 56,700
1997........... 65,800
(1) From continuing operations for all periods presented.
The Banks generally retain the right to service the loans as well as the right
to receive a portion of the interest income on the loans. Many of the loans sold
by the Banks are commercial lines of credit for which balances and related
payment streams cannot be reasonably estimated in order to determine the fair
value of the servicing rights and/or future interest income retained by the
Banks. See Note 1 to the Consolidated Financial Statements included under Item 8
for further discussion of accounting policies related to loans. Management
cannot reliably predict BNC's ability to continue to generate or sell loan
participations or the terms of any such sales.
Concentrations of Credit. The Company's credit policies emphasize
diversification of risk among industries, geographic areas and borrowers. For
purposes of the analysis of concentrations of credit as of December 31, 2001 the
total outstanding loans as well as all outstanding loan commitments were
included. As of December 31, 2001, 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 25.1, 11.2 and 12.1 percent, respectively, of total loans and loan
commitments outstanding.
The real estate loans and commitments were extended to 136 customers who are
diversified across the Company's market areas and who can be generally
categorized as indicated below:
Percent of
total
Number of outstanding
customers loans and
loan
commitments
------------- --------------
Non-residential and apartment
building operators,
developers and lessors of
real property................ 81 18.8%
Real estate holding companies.. 55 6.3%
------------- --------------
Total..................... 136 25.1%
============= ==============
The lodging loans and commitments were extended to 23 customers whose properties
are located throughout the United States. Loans in this category are made
primarily to borrowers that have seasoned hotel portfolios that are well
diversified by location, property type and chain.
Loans and commitments in the construction category were extended to 76 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
Number of outstanding
customers loans and
loan
commitments
------------- -------------
General building contractors....... 33 8.3%
Heavy construction, excluding
building........................... 18 3.0%
Special trade contractors.......... 25 .8%
------------- -------------
Total......................... 76 12.1%
============= =============
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 $19.8
million, or 6.3 percent of total loans. Within the portfolio, loans are
diversified by type and include loans to grain and/or livestock producers,
agricultural real estate loans, machinery and equipment and other types of
loans. The majority of the Company's agricultural loans are extended to
borrowers located in North Dakota, and are diversified over several counties. As
of December 31, 2001, there were no agricultural loans classified as
nonperforming.
Loan Maturities. The following table sets forth the remaining maturities of
loans in each major category of BNC's portfolio as of December 31, 2001. Actual
maturities may differ from the contractual maturities shown below as a result of
renewals and prepayments. Loan renewals are evaluated in the same manner as new
credit applications:
Maturities of Loans (1)
Over 1 year
through 5 years Over 5 years
------------------- ------------------
One year Fixed Floating Fixed Floating
or less rate rate rate rate Total
-------- -------- --------- --------- -------- ---------
(in thousands)
Commercial and
industrial............$ 43,970 $23,038 $33,692 $ 1,588 $ 6,855 $109,143
Real estate mortgage.... 28,874 23,015 43,979 26,861 13,490 136,219
Real estate construction 20,110 235 14,527 -- -- 34,872
Agricultural............ 11,412 3,559 1,787 1,100 1,952 19,810
Consumer/other.......... 7,156 3,472 2,671 386 -- 13,685
Lease financing......... 328 6,911 -- 339 -- 7,578
-------- -------- --------- --------- -------- ---------
Total face amount of
loans...................$111,850 $60,230 $ 96,656 $ 30,274 $22,297 $321,307
======== ======== ========= ========= ======== =========
- --------------------
(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 Caps and Floors. From time to time the Company may use
off-balance-sheet instruments, principally interest rate caps and 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
regular reviews 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,
-----------------------------------------------
2001 2000 1999 1998 1997
-------- -------- ------- ------- --------
(dollars in thousands)
Nonperforming loans:
Loans 90 days or more delinquent
and still accruing interest.... $ 983 $ 221 $ 22 $ 307 $ 1,016
Nonaccrual loans (2) (3) (4)..... 3,391 343 1,620 2,042 376
Restructured loans (2) (3)....... 5 16 16 44 104
-------- -------- ------- ------- --------
Total nonperforming loans..... 4,379 580 1,658 2,393 1,496
Other real estate owned and
repossessed assets............... 70 84 1,207 2,112 --
-------- -------- ------- ------- --------
Total nonperforming assets.... $ 4,449 $ 664 $2,865 $4,505 $ 1,496
======== ======== ======= ======= ========
Allowance for credit losses......... $ 4,325 $ 3,588 $2,872 $2,854 $ 2,919
======== ======== ======= ======= ========
Ratio of total nonperforming loans 1.36% .22% .63% .97% .68%
to total loans......................
Ratio of total nonperforming assets .76% .12% .63% 1.21% .43%
to total assets
- --------------------
(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 $84,000, $29,000 and $112,000 for the years ended
December 31, 2001, 2000 and 1999, respectively.
(3) The interest income on nonaccrual and restructured loans actually included
in the Company's net income was $3,000, $6,000 and $29,000 for the years
ended December 31, 2001, 2000 and 1999, respectively.
(4) Of the $3.4 million of loans classified as nonaccrual at December 31, 2001,
$3.0 million relates to two commercial customers. Loans for one of these
customers are partially SBA-guaranteed.
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. As noted above, of the $3.4 million
of loans in this category at December 31, 2001, $3.0 million relates to two
commercial customers and loans for one of these customers are partially
SBA-guaranteed.
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,
2001, not including the past due, nonaccrual and restructured loans reported
above, totaled $11.6 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. 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 Reserve. The amount of specific reserves is determined through a
loan-by-loan analysis of problem loans over a minimum size that considers
expected future cash flows, the value of collateral and other factors that
may impact the borrower's ability to make payments when due. Included in
this group are those
nonaccrual or renegotiated loans which meet the criteria as being
"impaired" under the definition in SFAS 114. A loan is impaired when, based
on current information and events, it is probable that a creditor will be
unable to collect all amounts due according to the contractual terms of the
loan agreement. Problem loans also include those credits that have been
internally classified as credits requiring management's attention due to
underlying problems in the borrower's business or collateral concerns.
Ranges of loss are determined based on best- and worst-case scenarios for
each loan.
Reserves for Homogeneous Loan Pools. The Company makes a significant number
of loans and leases which, due to their underlying similar characteristics,
are assessed for loss as "homogeneous" pools. Included in the homogeneous
pools are loans and leases from the retail sector and commercial loans
under a certain size, which have been excluded from the specific reserve
allocation previously discussed. The Company segments the pools by type of
loan or lease and using historical loss information estimates a loss
reserve for each pool.
Special Reserve. The Company's senior lending management also allocates
reserves for special situations, which are unique to the measurement
period. These include environmental factors, such as economic conditions in
certain geographical or industry segments of the portfolio, economic trends
in the retail lending sector and peer-group loss history.
Continuous credit monitoring processes and the analysis of 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.
At year end 2001, the Company's total allowance was $4.3 million which equates
to approximately 3.9 times and 3.2 times the average charge-offs for the last
three and five years respectively, and 5.1 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.
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. However, the Company's
Vice President-Chief Internal Credit Review Manager and Chief Credit Officer now
have the responsibility of affirming the Company's allowance methodology,
performing an annual credit loss migration analysis and assessing the allowance
components in relation to estimated and actual charge-off trends. This analysis
is presented to members of BNCCORP's Credit Loss Review Committee who 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 has operated primarily in the upper midwest with 82 percent of
loans outstanding as of
December 31, 2001 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 increased from $580,000 at December 31, 2000 to $4.4 million at December
31, 2001. Many of these loans are specifically analyzed for purposes of
determining the adequacy of the allowance for credit losses. Of the $4.4 million
of nonperforming loans at December 31, 2001, $3.0 million relates to two
commercial customers.
Estimating the risk and amount of loss on any loan is subjective and ultimate
losses may vary from current estimates. Although management believes that the
allowance for credit losses is adequate to cover probable losses in the loan
portfolio, there can be no assurance that the allowance will prove sufficient to
cover actual credit losses in the future. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the adequacy of the Company's allowance for credit losses. Such agencies may
require BNC to make additional provisions to the allowance based upon their
judgments about information available to them at the time of their examination.
The following table summarizes, for the periods indicated, activity in the
allowance for credit losses, including amounts of loans charged-off, amounts of
recoveries, additions to the allowance charged to operating expense, the ratio
of net charge-offs to average total loans, the ratio of the allowance to total
loans at the end of each period and the ratio of the allowance to nonperforming
loans:
Analysis of Allowance for Credit Losses (1)
For the Years ended December 31,
--------------------------- -------- -------
2001 2000 1999 1998 1997
------- -------- -------- -------- -------
(dollars in thousands)
Balance of allowance for credit
losses, beginning of period...........$ 3,588 $ 2,872 $ 2,854 $ 2,919 $ 1,545
-------- -------- -------- --------- --------
Charge-offs:
Commercial and industrial.......... 542 574 1,090 1,316 1,319
Real estate mortgage............... 99 58 10 66 24
Agricultural....................... -- 16 35 -- --
Consumer/other..................... 213 39 137 73 107
Lease financing.................... 411 68 18 -- 471
-------- -------- -------- --------- --------
Total charge-offs............... 1,265 755 1,290 1,455 1,921
-------- -------- -------- --------- --------
Recoveries:
Commercial and industrial.......... 140 100 86 151 744
Real estate mortgage............... 30 96 1 26 9
Agricultural....................... 1 33 -- -- --
Consumer/other..................... 132 25 71 12 24
Lease financing.................... -- 15 12 -- --
-------- -------- -------- --------- --------
Total recoveries................ 303 269 170 189 777
-------- -------- -------- --------- --------
Net charge-offs....................... (962) (486) (1,120) (1,266) (1,144)
Provision for credit losses charged
to operations....................... 1,699 1,202 1,138 1,201 2,518
-------- -------- -------- --------- --------
Balance of allowance for credit
losses, end of period...............$ 4,325 $ 3,588 $ 2,872 $ 2,854 $ 2,919
======== ======== ======== ======== ========
Ratio of net charge-offs to average
loans.............................. (.31%) (.19%) (.45%) (.54%) (.53%)
======== ======== ======== ======== ========
Average gross loans outstanding
during the period...................$309,661 $255,798 $250,158 $234,342 $214,053
======== ======== ======== ======== ========
Ratio of allowance for credit losses
to total loans...................... 1.35% 1.33% 1.10% 1.15% 1.33%
======== ======== ======== ======== =======
Ratio of allowance for credit losses
to nonperforming loans.............. 99% 619% 173% 119% 195%
======== ======== ======== ======== =======
(1) From continuing operations for all periods presented.
Included in the data above relating exclusively to a former officer are special
provisions of $454,000 and $1.9 million, charge-offs of approximately $639,000
and $1.8 million and recoveries of approximately $153,000 and $690,000 for the
years ended December 31, 1998 and 1997, respectively. The recoveries primarily
represent payments from the Company's fidelity bond carrier.
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,
---------------------------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
----------------------- ----------------------- ---------------------- ---------------------- -----------------------
Loans in Loans in Loans in Loans in Loans in
category as category as category as category as category as
Amount a percentage Amount a percentage Amount a percentage Amount a percentage Amount apercentage
of of total of of total of of total of of total of of total
allowance gross loans allowance gross loans allowance gross loans allowance gross loans allowance gross loans
--------- ------------ --------- ----------- --------- ----------- --------- ----------- --------- -----------
(dollars in thousands)
Commercial and
industrial... $2,586 34% $ 2,066 42% $ 1,356 43% $ 1,155 44% $ 931 44%
Real estate
mortgage...... 1,038 42% 702 34% 712 35% 667 31% 441 26%
Real estate
construction.. 137 11% 112 10% 151 6% 129 8% 311 8%
Agricultural.. 267 6% 342 6% 220 6% 252 8% 139 10%
Consumer/other 118 5% 128 5% 138 6% 217 6% 174 8%
Lease
financing..... 179 2% 145 3% 88 4% 133 3% 136 4%
Unallocated... -- 0% 93 0% 207 0% 301 0% 787 0%
------ ----- -------- ----- ------- ----- -------- ----- -------- -----
Total......... $4,325 100% $ 3,588 100% $ 2,872 100% $ 2,854 100% $ 2,919 100%
====== ===== ======== ===== ======= ===== ======== ===== ======== =====
(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,
----------------------------------------------------------------------
2001 2000 1999
---------------------- ---------------------- ----------------------
Percent Wgtd. Average Percent Wgtd. Percent Wgtd.
Average of avg. of avg. Average of avg.
balance deposits rate balance deposits rate balance deposits rate
------- -------- ----- ------- ------- ----- ------- ------- ------
(dollars in thousands)
Interest-bearing
demand deposits....... $159,198 42.22% 3.13% $135,450 41.15% 5.38% $91,671 31.22% 3.96%
Savings deposits...... 3,813 1.01% 1.49% 4,097 1.24% 2.10% 6,294 2.14% 2.05%
Time deposits (CDs):
CDs under $100,000.... 104,802 27.79% 5.37% 108,170 32.63% 5.58% 125,470 42.72% 5.16%
CDs $100,000 and over. 77,140 20.46% 5.75% 54,177 16.34% 6.29% 43,140 14.69% 5.35%
------- -------- -------- ------- -------- ------
Total time deposits... 181,942 48.25% 5.54% 162,347 48.97% 5.81% 168,610 57.41% 5.20%
------- -------- -------- ------- -------- ------
Total interest-bearing
deposits.............. 344,953 91.48% 4.38% 302,894 91.36% 5.57% 266,575 90.77% 4.70%
Noninterest-bearing
demand deposits..... 32,152 8.52% -- 28,656 8.64% -- 27,094 9.23% --
-------- -------- -------- ------- -------- ------
Total deposits........ $377,105 100.00% 4.01% $331,550 100.0% 5.09% $293,669 100.0% 4.27%
======== ======= ======== ======= ======== ======
(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 well as the need
to utilize such funds in the process of the Company's overall balance sheet
management. At times, access to brokered and out of market deposits is available
at maturities and rates more favorable than those available in the Company's
local markets. As of December 31, 2001, BNC held a total of $34.0 million of
"National" market certificates of deposit and $34.4 million of brokered
certificates of deposit. Under current FDIC regulations, only "well capitalized"
financial institutions may fund themselves with brokered deposits without prior
approval of regulators. BNC - Minnesota and BNC - Arizona were both well
capitalized at December 31, 2001. See Note 12 to the Consolidated Financial
Statements included under Item 8 for a summary of capital status of the Banks.
Time deposits in denominations of $100,000 and more totaled $83.8 million at
December 31, 2001 as compared to $61.7 and $46.8 million at December 31, 2000
and 1999, respectively. The following table sets forth the amount and maturities
of time deposits of $100,000 or more as of December 31, 2001:
Time Deposits of $100,000 and Over
(in thousands)
Maturing in:
3 months or less.................... $ 9,693
Over 3 months through 6 months...... 9,306
Over 6 months through 12 months..... 20,348
Over 12 months...................... 44,462
----------
Total............................ $ 83,809
==========
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, 2001, short-term borrowings were $118.0 million, or
22 percent of total liabilities, as compared to $150.4 million, or 28 percent of
total liabilities, at December 31, 2000 and $88.7 million, or 20 percent of
total liabilities, at December 31, 1999. See Note 9 to the Consolidated
Financial Statements included under Item 8 for a listing of borrowings
outstanding at December 31, 2001 and 2000, 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)
2001 2000 1999
------- -------- --------
(dollars in thousands)
Short-term borrowings outstanding at period end... $117,973 $150,428 $ 88,700
Weighted average interest rate at period end...... 5.01% 6.30% 5.74%
Maximum month-end balance during the period....... $153,759 $197,024 $ 94,300
Average borrowings outstanding for the period..... $128,911 $158,244 $ 61,993
Weighted average interest rate for the period..... 5.92% 6.32% 5.33%
(1) From continuing operations for all periods presented.
As of December 31, 2001, the Company had no outstanding long-term debt. During
2001, the Company purchased and retired $82,000 of its 8 5/8 percent
subordinated notes due May 31, 2004 ("the Notes") at a discount using cash
generated from the sale of BNC Financial. On August 31, 2001, the Company
redeemed the remaining $12.6 million of the Notes at par through exercise of its
call option on the Notes. The remaining $12.6 million of the Notes were redeemed
using a portion of the cash generated from the issuance of trust preferred
securities through the establishment of BNC Statutory Trust II (see Note 10
under Item 8 for further discussion of the Company's trust preferred
securities). The transactions and redemption of the Notes resulted in an
extraordinary loss of $134,000 ($0.06 per diluted share) net of income taxes of
($70,000).
Guaranteed Preferred Beneficial Interests in Company's Subordinated Debentures.
In July 2000, the Company established a special purpose trust for the purpose of
issuing $7.5 million 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 the trust preferred securities.
In July 2001, the Company established an additional special purpose trust for
the purpose of issuing $15.0 million of floating rate trust preferred
securities. The trust preferred securities qualify as Tier 1 capital of the
Company up to certain limits. The Company used $12.6 million of the proceeds
from the special purpose trust established in 2001 to retire its remaining $12.6
million 8 5/8 percent subordinated notes due May 31, 2004. See Note 10 to the
Consolidated Financial Statements included under Item 8 for a complete
description of the trust preferred securities.
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 banks as of
December 31, 2001 and 2000. As of each of those dates, BNC 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 2001, 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, on-balance-sheet items as of January 1,
2001, include such instruments as interest rate, foreign exchange,
commodity price and equity price contracts, including forwards, swaps and
options.
The Company's risk management policies are intended to monitor and limit
exposure to liquidity, market and credit risks that arise from each of these
financial instruments. See "-Loan Portfolio" for a discussion of the Company's
credit risk management strategies.
Liquidity Risk Management. Liquidity risk management encompasses the Company's
ability to meet all present and future financial obligations in a timely manner.
The objectives of liquidity management policies are to maintain adequate liquid
assets, liability diversification among instruments, maturities and customers
and a presence in both the wholesale purchased funds market and the retail
deposit market.
The Consolidated Statements of Cash Flows in the Consolidated Financial
Statements included under Item 8 present data on cash and cash equivalents
provided by and used in operating, investing and financing activities. In
addition to liquidity from core deposit growth, together with repayments and
maturities of loans and investments, BNC utilizes brokered deposits, sells
securities under agreements to repurchase and borrows overnight federal funds.
The Banks are members of the FHLB, which affords them the opportunity to borrow
funds in terms ranging from overnight to ten years and beyond. Borrowings from
the FHLB are generally collateralized by the Banks' mortgage loans and various
investment securities. See "-Investment Securities" and Notes 4 and 9 to the
Consolidated Financial Statements included under Item 8. The Company has also
obtained funding through 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,
---------------------------------
2001 2000 1999
---------- ---------- ---------
(in thousands)
Proceeds from sales and maturities of
investment securities....................... $205,808 $ 72,134 $ 127,403
Net increase in deposits....................... 45,505 37,753 40,212
Proceeds from issuance of subordinated notes... 14,429 7,220 --
Purchases of investment securities............ (162,321) (178,827) (185,958)
Net increase in loans.......................... (53,132) (7,630) (16,160)
Net increase (decrease) in short-term
borrowings................................... (32,467) 61,728 39,410
Net decrease in long-term borrowings........... (13,000) (1,921) (14,520)
(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/non-pledged 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 accounting principles
generally accepted in the United States. Fluctuations in the relative value of
money due to inflation or recession are generally not considered.
Recently Issued Accounting Pronouncements
The Company adopted the Financial Accounting Standards Board's ("FASB's")
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," ("SFAS 133"), as amended, on January 1,
2001. SFAS 133 requires all derivative financial instruments, including certain
derivative instruments embedded in other contracts, be recorded in the
consolidated balance sheet as either an asset or liability measured at its fair
value. The fair value of the Company's derivative financial instruments is
determined based on quoted market prices for comparable transactions, if
available, or a valuation model that calculates the present value of expected
future cash flows. Changes in the fair value of derivative financial instruments
are required to 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 formal documentation designation and
assessment of effectiveness of transactions that receive hedge accounting. See
Note 1 to the Consolidated Financial Statements included under Item 8 for a
summary of the impact of the Company's adoption of SFAS 133.
On June 29, 2001, the FASB issued Statement of Financial Accounting Standards
No. 141, "Business Combinations" and No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 141" and "SFAS 142"). SFAS 141 requires all business combinations
initiated after June 30, 2001 to be accounted for using the purchase method.
Under SFAS 142, goodwill and intangible assets with indefinite lives will no
longer be amortized but are reviewed annually (or more frequently if impairment
indicators arise) for impairment. Separable intangible assets that are not
deemed to have indefinite lives will continue to be amortized over their useful
lives (but with no maximum life). The Company has adopted the provisions of SFAS
142 effective January 1, 2002.
In July 2001, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 102, "Selected Loan Loss Allowance Methodology and
Documentation Issues" ("SAB 102"). SAB 102 expresses the SEC staff's views on
the development, documentation, and application of a systematic methodology as
required by its Financial Reporting Release No. 28 (issued in December 1986) for
determining allowances for loan and lease losses in accordance with generally
accepted accounting principles. In particular, the guidance focuses on the
documentation the staff normally would expect a registrant to prepare and
maintain in support of its allowance for loan losses. Also in July 2001, the
federal banking agencies issued their "Policy Statement on Allowance for Loan
and Lease Losses Methodologies and Documentation for Banks and Savings
Institutions" (the "Policy Statement"). Developed in collaboration with the SEC,
the Policy Statement clarifies the agencies' expectations and provides guidance
regarding methodologies and documentation support for the allowance for loan and
lease losses. SAB 102 and the Policy Statement do not change the guidance in
generally accepted accounting principles and in previous SEC and regulatory
agency statements but, rather, are intended to improve the allowance for loan
and lease losses process and documentation. Therefore, adoption of these two
issuances did not materially impact the Company.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"). SFAS 144 supersedes FASB Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of",
and the accounting and reporting provisions of APB Opinion No. 30, "Reporting
the Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of a segment of a business (as previously
defined in that opinion). SFAS 144 requires that one accounting model be used
for long-lived assets to be disposed of by sale, whether previously held and
used or newly acquired, and broadens the presentation of discontinued operations
to include more disposal transactions than were included under the previous
standards. The Company will adopt SFAS 144 on January 1, 2002; however, adoption
of the statement is not expected to have a material impact.
Critical Accounting Policies
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 Reserve. The amount of specific reserves is determined through a
loan-by-loan analysis of problem loans over a minimum size that considers
expected future cash flows, the value of collateral and other factors that
may impact the borrower's ability to make payments when due. Included in
this group are those nonaccrual or renegotiated loans which meet the
criteria as being "impaired" under the definition in SFAS 114. A loan is
impaired when, based on current information and events, it is probable that
a creditor will be unable to collect all amounts due according to the
contractual terms of the loan agreement. Problem loans also include those
credits that have been internally classified as credits requiring
management's attention due to underlying problems in the borrower's
business or collateral concerns. Ranges of loss are determined based on
best- and worst-case scenarios for each loan.
Reserves for Homogeneous Loan Pools. The Company makes a significant number
of loans and leases which, due to their underlying similar characteristics,
are assessed for loss as "homogeneous" pools. Included in the homogeneous
pools are loans and leases from the retail sector and commercial loans
under a certain size, which have been excluded from the specific reserve
allocation previously discussed. The Company segments the pools by type of
loan or lease and using historical loss information estimates a loss
reserve for each pool.
Special Reserve. The Company's senior lending management also allocates
reserves for special situations, which are unique to the measurement
period. These include environmental factors, such as economic conditions in
certain geographical or industry segments of the portfolio, economic trends
in the retail lending sector and peer-group loss history.
Continuous credit monitoring processes and the analysis of 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.
Mortgage Servicing and Transfers of Financial Assets. The Banks regularly sell
loans to others on a non-recourse basis. Sold loans are not included in the
accompanying balance sheets. The Banks generally retain the right to service the
loans as well as the right to receive a portion of the interest income on the
loans. At December 31, 2001 and 2000, the Banks were servicing loans for the
benefit of others with aggregate unpaid principal balances of $235.8 and $216.0
million, respectively. Many of the loans sold by the Banks are commercial lines
of credit for which balances and related payment streams cannot be reasonably
estimated in order to determine the fair value of the servicing rights and/or
future interest income retained by the Banks. Upon sale, any unearned net loan
fees or costs are recognized in income. Gains on sales of loans were $22,000,
$71,000 and $0 for 2001, 2000 and 1999, respectively, and are included in fees
on loans.
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 SEC, 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.
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. The Company's interest rate risk
exposure is actively managed with the objective of managing the level and
potential volatility of net interest income in addition to the long-term growth
of equity, 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 and 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 derivative instruments, principally interest rate floors and caps, the
interest rate sensitivity of specific transactions, as well as pools of assets
or liabilities, is adjusted to maintain the desired interest rate risk profile.
See "-Loan Portfolio-Interest Rate Caps and Floors" and Notes 1 and 14 to the
Consolidated Financial Statements included under Item 8 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, collateralized mortgage obligations, 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.
The Company monitors the results of net interest income simulation on a
quarterly basis at regularly scheduled Asset/Liability management committee
meetings. Each quarter 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 decrease from its starting point at December 31, 2001
of 4.75 percent to 3.75 percent 12 months later. The prime rate in this example
will decrease 1/12th of the overall decrease of 100 basis points each month.
Given the historically low absolute level of market interest rates as of
December 31, 2001, the declining rate scenario analyses were limited to -100bp
and -200bp for the summary table presented below.
The net interest income simulation results for the 12-month horizon that covers
the calendar year of 2002 is shown below. The growth assumption used for this
simulation was based on the growth projections built into the Company's 2002
budget. The impact of each interest rate scenario on projected net interest
income is displayed before and after the impact of the $20 million cumulative
notional 3-year interest rate cap positions on 3-month LIBOR with a 4.50% strike
and the $20 million cumulative notional 5-year interest rate cap positions on
3-month LIBOR with a 5.50% strike. The impact of the cap positions is calculated
by determining the fair value of the contracts at the end of the 12-month
horizon using an interest rate option valuation model. The change in fair value
plus any expected cash flow in the various rate scenarios is summed to determine
the total net benefit/(cost) of the portfolio of interest rate cap contracts.
See Note 1 "Summary of Significant Accounting Policies" and Note 14 "Financial
Instruments" included under Item 8 for further discussion related to the
Company's interest rate caps.
Net Interest Income Simulation
(amounts in thousands)
Movement in interest rates -200bp -100bp Unchanged +100bp +200bp +300bp
-------- ------- --------- ------- ------- -------
Projected 12-month net
interest income.............$18,446 $18,706 $19,861 $20,423 $20,859 $21,400
Dollar change from rates
unchanged scenario........ (1,415) (1,155) -- 562 998 1,539
Percentage change from rates
unchanged scenario......... (7.13)% (5.82)% -- 2.83% 5.03% 7.75%
Net Benefit/(Cost) of
Cumulative $40MM Caps (1)... (834) (711) (501) (191) 229 774
Total net interest income
impact with caps............ 17,612 17,995 19,360 20,232 21,088 22,174
Dollar change from unchanged
w/caps...................... (1,748) (1,365) -- 872 1,728 2,814
Percentage change from
unchanged w/caps............ (9.03)% (7.05)% -- 4.51% 8.93% 14.54%
(1) In May and June 2001, the Company purchased four interest rate cap
contracts on 3-month LIBOR with strikes at 4.50% each in the amount of $5
million notional with original terms of three years for total notional of
$20 million. The Company also purchased four interest rate cap contracts on
3-month LIBOR with strikes at 5.50% each in the amount of $5 million
notional with original terms of five years for total notional of $20
million. On January 1, 2001, the Company adopted SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities." See "-Loan
Portfolio-Interest Rate Caps and Floors" and Notes 1 and 14 to the
Consolidated Financial Statements included under Item 8 for further
information on accounting policies related to derivative financial
investments and the adoption of SFAS 133.
The Company's rate sensitivity position over the projected twelve-month horizon
is asset sensitive. This is evidenced by the projected increase of net interest
income in the rising interest rate scenarios, and the decrease in net interest
income in falling rate scenarios.
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, 2001.
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,
2001
-------------------------------------------------
0-3 4-12 1-5 Over
months months years 5 Years Total
--------- --------- -------- --------- --------
(dollars in thousands)
Interest-earning assets:
Cash equivalents................ $ 7,626 $ -- $ -- $ -- $ 7,626
Investment securities (1)....... 23,994 29,692 98,847 66,648 219,181
Fixed rate loans (2)............ 9,246 18,316 30,274 118,066
60,230
Floating rate loans (2)......... 200,303 1,099 1,741 98 203,241
-------- --------- -------- --------- --------
Total interest-earning assets. $241,169 $ 49,107 $160,818 $ 97,020 $548,114
========= ========= ======== ========= ========
Interest-bearing liabilities:
NOW and money market accounts... $166,486 $ -- $ -- $166,486 $166,486
Savings......................... 4,167 -- -- -- 4,167
Time deposits under $100,000.... 25,388 47,092 37,493 479 110,452
Time deposits $100,000 and over. 9,693 29,654 44,343 119 83,809
Borrowings...................... 117,973 -- -- -- 117,973
--------- --------- -------- --------- --------
Total interest-bearing
liabilities................... $323,707 $ 76,746 $ 81,836 $ 598 $482,887
========= ========= ========= ======== ========
Interest rate gap................... $(82,538) $(27,639) $ 78,982 $ 96,422 $ 65,227
========= ========= ========= ======== ========
Cumulative interest rate gap at
December 31, 2001................. $(82,538) $(110,177) $(31,195) $ 65,227
========= ========= ======== =========
Cumulative interest rate gap to
total assets........................ (14.11%) (18.83%) (5.33%) 11.15%
- --------------------
(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, 2001 (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................................... 46
Consolidated Balance Sheets as of December 31, 2001 and 2000............... 47
Consolidated Statements of Income for the years ended December 31, 2001,
2000 and 1999.............................................................. 48
Consolidated Statements of Comprehensive Income (Loss) for the years
ended December 31, 2001, 2000 and 1999...................................... 50
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2001, 2000 and 1999............................................ 51
Consolidated Statements of Cash Flows for the years ended December 31,
2001, 2000 and 1999........................................................ 52
Notes to Consolidated Financial Statements................................. 53
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, 2001 and 2000, 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, 2001. These consolidated financial statements are the
responsibility of BNCCORP's management. Our responsibility is to express an
opinion on these consolidated 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, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States.
As explained in Note 1 to the consolidated financial statements, effective
January 1, 2001, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities."
Arthur Andersen LLP
Minneapolis, Minnesota,
February 4, 2002
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31
(In thousands, except share and per share data)
- --------------------------------------------------------------------------------
ASSETS 2001 2000
--------- ---------
CASH AND DUE FROM BANKS................................. $ 16,346 $ 14,988
INTEREST-BEARING DEPOSITS WITH BANKS.................... 126 595
FEDERAL FUNDS SOLD...................................... 7,500 --
----------- -----------
Cash and cash equivalents......................... 23,972 15,583
INVESTMENT SECURITIES AVAILABLE FOR SALE................ 219,181 263,185
LOANS AND LEASES, net of unearned income................ 320,791 268,925
ALLOWANCE FOR CREDIT LOSSES............................. (4,325) (3,588)
----------- -----------
Net loans and leases................................. 316,466 265,337
PREMISES, LEASEHOLD IMPROVEMENTS AND
EQUIPMENT, net....................................... 15,403 14,873
INTEREST RECEIVABLE..................................... 3,008 3,854
OTHER ASSETS............................................ 4,856 4,465
DEFERRED CHARGES AND INTANGIBLE ASSETS, net............. 2,171 2,719
----------- -----------
$585,057 $570,016
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS:
Noninterest-bearing.................................. $ 43,055 $ 31,459
43,055
Interest-bearing -
Savings, NOW and money market..................... 170,653 169,425
Time deposits $100,000 and over................... 83,809 61,720
Other time deposits............................... 110,452 99,860
----------- -----------
Total deposits....................................... 407,969 362,464
NOTES PAYABLE........................................... 117,973 163,070
OTHER LIABILITIES....................................... 6,192 7,419
----------- -----------
Total liabilities.............................. 532,134 532,953
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 14 and 20)
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN
COMPANY'S SUBORDINATED DEBENTURES................... 22,244 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
authorized;
2,399,170 and 2,395,030 shares issued and
outstanding
(excluding 42,880 shares held in treasury)....... 24 24
Capital surplus...................................... 14,084 14,050
Retained earnings.................................... 15,435 14,190
Treasury stock (42,880 shares)....................... (513) (513)
Accumulated other comprehensive income, net of
income taxes...................................... 1,649 1,706
----------- -----------
Total stockholders' equity..................... 30,679 29,457
----------- -----------
$585,057 $ 570,016
=========== ===========
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)
2001 2000 1999
-------- -------- --------
INTEREST INCOME:
Interest and fees on loans.................... $ 25,606 $ 24,527 $22,083
Interest and dividends on investment
securities -
Taxable.................................... 12,354 15,420 6,090
Tax-exempt................................. 829 940 386
Dividends.................................. 362 634 263
Other......................................... 50 242 109
-------- -------- -------
Total interest income................... 39,201 41,763 28,931
-------- -------- --------
INTEREST EXPENSE:
Interest on deposits.......................... 15,141 16,866 12,537
Interest on short-term borrowings............. 7,626 9,999 3,303
Interest on long-term borrowings.............. 777 1,252 734
-------- -------- --------
Total interest expense.................. 23,544 28,117 16,574
-------- -------- --------
Net interest income..................... 15,657 13,646 12,357
PROVISION FOR CREDIT LOSSES...................... 1,699 1,202 1,138
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT
LOSSES.......................................... 13,958 12,444 11,219
-------- -------- --------
NONINTEREST INCOME:
Fees on loans.................................... 2,063 1,941 1,435
Insurance commissions............................ 1,891 2,003 2,045
Brokerage income................................. 1,407 1,466 797
Net gain on sales of securities.................. 1,396 276 198
Trust and financial services..................... 899 1,064 589
Service charges.................................. 689 604 536
Rental income.................................... 133 56 121
Other............................................ 497 363 347
-------- -------- ---------
Total noninterest income.................. 8,975 7,773 6,068
-------- -------- ---------
NONINTEREST EXPENSE:
Salaries and employee benefits................... 10,355 8,891 8,854
Occupancy........................................ 1,925 1,360 1,248
Depreciation and amortization.................... 1,846 1,659 1,586
Minority interest in income of subsidiaries...... 1,377 399 --
Professional services............................ 1,349 1,290 1,214
Office supplies, telephone and postage........... 1,001 940 941
Marketing and promotion.......................... 877 597 621
FDIC and other assessments....................... 193 200 191
Repossessed and impaired asset
expenses/write-offs.............................. 141 470 2,271
Other............................................ 1,769 1,624 1,289
-------- -------- ---------
Total noninterest expense................. 20,833 17,430 18,215
-------- -------- ---------
Income (loss) before income taxes.................. 2,100 2,787 (928)
Provision for (benefit from) income taxes.......... 608 906 (399)
-------- -------- ---------
Income (loss) from continuing operations........... 1,492 1,881 (529)
The accompanying notes are an integral part of these consolidated financial
statements.
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income, continued
For the Years Ended December 31
(In thousands, except per share data)
2001 2000 1999
-------- -------- --------
Discontinued Operation:
Income from operations of discontinued
asset-based lending ubsidiary, net of
income taxes of $292........................... $ -- $ -- $ 429
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 principles...... 1,492 2,040 338
Extraordinary item - gain (loss) on early
extinguishment of debt, net of income taxes
of $(70) and $132............................. (134) 257 --
Cumulative effect of change in accounting
principles, net of income taxes of $(66)and
$(56).......................................... (113) -- (96)
-------- -------- --------
NET INCOME........................................ $ 1,245 $ 2,297 $ 242
======== ======== ========
BASIC EARNINGS PER COMMON SHARE:
Income (loss) from continuing operations.......... $ 0.62 $ 0.78 $(0.22)
Income from operations of discontinued asset-based
lending subsidiary,net of income taxes......... -- -- 0.18
Gain on disposal of asset-based lending
subsidiary, net of income taxes................. -- 0.07 0.18
Extraordinary item - gain (loss) on early
extinguishment of debt, net of income taxes..... (0.05) 0.11 --
Cumulative effect of change in accounting
principles, net of income taxes................. (0.05) -- (0.04)
-------- -------- --------
Earnings per share, basic.......................... $ 0.52 $ 0.96 $ 0.10
======== ======== ========
DILUTED EARNINGS PER COMMON SHARE:
Income (loss) from continuing operations........... $ 0.62 $ 0.78 $(0.22)
Income from operations of discontinued asset-based
lending subsidiary, net of income taxes... -- -- 0.18
Gain on disposal of asset-based lending
subsidiary, net of income taxes.......... -- 0.07 0.18
Extraordinary item - gain (loss) on early
extinguishment of debt, net of income taxes.... (0.06) 0.11 --
Cumulative effect of change in accounting
principles, net of income taxes................ (0.05) -- (0.04)
-------- -------- --------
Earnings per share, diluted........................ $ 0.51 $ 0.96 $ 0.10
======== ======== ========
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)
2001 2000 1999
--------- ---------- ---------
NET INCOME............................ $ 1,245 $ 2,297 $ 242
OTHER COMPREHENSIVE INCOME -
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during the period, net of
income taxes of $283, $2,022, and
$1,377.......................... 885 4,123 (2,252)
Less: reclassification
adjustment for gains included in
net income, net of income taxes (942) (186) (121)
--------- ---------- ---------
OTHER COMPREHENSIVE INCOME (LOSS)..... (57) 3,937 (2,373)
--------- ---------- ---------
COMPREHENSIVE INCOME (LOSS)........... $ 1,188 $ 6,234 $ (2,131)
========= ========== =========
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, 1998.. 2,433,064 $ 24 $ 13,951 $11,651 $ (513) $ 142 $25,255
Net income................ -- -- -- 242 -- -- 242
Change in unrealized
holding gains on
securities available
for sale, net of
income taxes and
reclassification
adjustment............. -- -- -- -- -- (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
Change in unrealized
holding losses on
securities available
for sale, net of
income taxes and
reclassification
adjustment............. -- -- -- -- -- 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
Net income................. -- -- -- 1,245 -- -- 1,245
Change in unrealized
holding gains on
securities available
for sale, net of
income taxes and
reclassification
adjustment............... -- -- -- -- -- (57) (57)
Other...................... 4,140 -- 34 -- -- -- 34
--------- ------- --------- ------- ------- -------- -------
BALANCE, December 31, 2001.. 2,442,050 $ 24 $ 14,084 $15,435 $ (513) $ 1,649 $30,679
========= ======= ========= ======= ======= ======= =======
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)
2001 2000 1999
-------- --------- --------
OPERATING ACTIVITIES:
Net income................................... $ 1,245 $ 2,297 $ 242
Adjustments to reconcile net income to net
cash provided by operating activities -
Provision for credit losses............... 1,699 1,202 1,138
Depreciation and amortization............. 1,364 1,131 1,045
Amortization of intangible assets......... 482 508 541
Net premium amortization on investment
securities............................. 2,144 737 612
Proceeds from loans recovered............. 303 269 170
Write down of other real estate owned and
repossessed assets..................... 49 470 2,271
Change in interest receivable and other
assets, net............................ 541 (1,834) (400)
Gain on disposal of asset-based lending
subsidiary............................. -- (159) (438)
Loss on sale of bank premises and equipment 5 57 10
Net realized gains on sales of investment
securities............................. (1,396) (276) (198)
Deferred income taxes..................... (342) 603 (2,503)
Change in dividend distribution payable... 413 398 --
Change in other liabilities, net.......... (1,233) 1,572 (515)
Originations of loans to be sold.......... (122,180) (130,563) 117,299)
Proceeds from sale of loans............... 122,180 130,563 117,299
-------- --------- --------
Net cash provided by operating
activities..................... 5,265 6,966 1,975
-------- --------- --------
INVESTING ACTIVITIES:
Purchase of investment securities............ (162,321) (178,827) (185,958)
Proceeds from sales of investment securities. 119,394 23,789 39,732
Proceeds from maturities of investment
securities................................ 86,414 48,345 87,671
Net increase in loans........................ (53,132) (7,630) (16,160)
Additions to premises, leasehold improvements
and equipment............................. (1,965) (4,296) (4,396)
Proceeds from sale of premises and equipment. 66 241 121
Disposition of discontinued asset-based lending
subsidiary................................... -- 159 23,373
-------- --------- --------
Net cash used in investing activities (11,544) (118,219) (55,617)
-------- --------- --------
FINANCING ACTIVITIES:
Net increase in demand, savings, NOW and
money market accounts..................... 12,824 43,632 38,890
Net increase (decrease) in time deposits..... 32,681 (5,879) 1,322
Net increase (decrease) in short-term
borrowings................................ (32,467) 61,728 39,410
Repayments of long-term borrowings.......... (13,000) (2,009) (29,520)
Proceeds from long-term borrowings........... -- 88 15,000
Amortization of discount on subordinated
notes..................................... 371 93 92
Amortization of deferred charges............. -- 20 20
Proceeds from issuance of subordinated
debentures................................ 14,429 7,220 --
Amortization of discount on subordinated
debentures............................... (50) (12) --
Other, net................................... (120) 74 25
-------- --------- --------
Net cash provided by financing
activities....................... 14,668 104,955 65,239
-------- --------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................... 8,389 (6,298) 11,597
CASH AND CASH EQUIVALENTS, beginning of year 15,583 21,881 10,284
-------- --------- --------
CASH AND CASH EQUIVALENTS, end of year...... $23,972 $ 15,583 $21,881
======== ========= ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid................................ $24,601 $ 27,431 $16,494
======== ========= ========
Income taxes paid............................ $ 920 $ 541 $ 1,107
======== ========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
BNCCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
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 - Minnesota") and BNC National Bank of Arizona ("BNC -
Arizona" and, together with BNC - Minnesota, "the Banks"). BNCCORP, through
these wholly-owned subsidiaries, which operate from eighteen locations in North
Dakota, Minnesota, and Arizona, provides a broad range of banking and financial
services to small and mid-size businesses and individuals.
On July 9, 2001, BNCCORP established a new banking subsidiary, BNC National Bank
of Arizona, headquartered in Tempe, Arizona. 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 accounting principles generally
accepted in the United States 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 historical 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 are reported as a separate component of
stockholders' equity (see "Comprehensive Income") until realized. All securities
were classified as available for sale as of December 31, 2001 and 2000.
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 2001, 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 Reserve. The amount of specific reserves is determined through a
loan-by-loan analysis of problem loans over a minimum size that considers
expected future cash flows, the value of collateral and other factors that
may impact the borrower's ability to make payments when due. Included in
this group are those nonaccrual or renegotiated loans which meet the
criteria as being "impaired" under the definition in SFAS 114. A loan is
impaired when, based on current information and events, it is probable that
a creditor will be unable to collect all amounts due according to the
contractual terms of the loan agreement. Problem loans also include those
credits that have been internally classified as credits requiring
management's attention due to underlying problems in the borrower's
business or collateral concerns. Ranges of loss are determined based on
best- and worst-case scenarios for each loan.
Reserves for Homogeneous Loan Pools. The Company makes a significant number
of loans and leases which, due to their underlying similar characteristics,
are assessed for loss as "homogeneous" pools. Included in the homogeneous
pools are loans and leases from the retail sector and commercial loans
under a certain size, which have been excluded from the specific reserve
allocation previously discussed. The Company segments the pools by type of
loan or lease and using historical loss information estimates a loss
reserve for each pool.
Special Reserve. The Company's senior lending management also allocates
reserves for special situations, which are unique to the measurement
period. These include environmental factors, such as economic conditions in
certain geographical or industry segments of the portfolio, economic trends
in the retail lending sector and peer-group loss history.
Continuous credit monitoring processes and the analysis of 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 Banks regularly sell
loans to others on a non-recourse basis. Sold loans are not included in the
accompanying balance sheets. The Banks generally retain the right to service the
loans as well as the right to receive a portion of the interest income on the
loans. At December 31, 2001 and 2000, the Banks were servicing loans for the
benefit of others with aggregate unpaid principal balances of $235.8 and $216.0
million, respectively. Many of the loans sold by the Banks are commercial lines
of credit for which balances and related payment streams cannot be reasonably
estimated in order to determine the fair value of the servicing rights and/or
future interest income retained by the Banks. Upon sale, any unearned net loan
fees or costs are recognized in income. Gains on sales of loans were $22,000,
$71,000 and $0 for 2001, 2000 and 1999, respectively, and are included in fees
on loans.
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, 2001 and 2000 was $70,000 and $84,000, respectively.
Deferred Charges and Intangible Assets. Deferred charges and intangible assets
include 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.
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 2001, 2000 or 1999.
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.
Derivative Financial Instruments. The fair value of the Company's
derivatives equals the quoted market price.
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. The Company adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," ("SFAS 133"), as amended, which requires all derivative financial
instruments, including certain derivative instruments embedded in other
contracts, be recorded in the consolidated balance sheet as either an asset or
liability measured at its fair value. The fair value of the Company's derivative
financial instruments is determined based on quoted market prices for comparable
transactions, if available, or a valuation model that calculates the present
value of expected future cash flows.
Changes in the fair value of derivative financial instruments are required to 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 formal documentation designation and assessment of effectiveness of
transactions that receive hedge accounting.
As part of managing its interest rate risk, the Company may enter into
derivative financial instruments such as interest rate swaps, caps and floors.
Interest rate swaps are used to exchange fixed and floating rate interest
payment obligations and caps and floors are used to minimize the impact of
fluctuating interest rates on earnings.
The Company's derivative financial instrument (an interest rate floor contract)
qualified as a cash flow hedge on January 1, 2001, and as a result of the
adoption, the Company recognized its derivative financial instrument on its
balance sheet at its fair value with an offsetting charge to earnings of
$113,000, net of taxes, for the derivative instrument's loss excluded from the
assessment of hedge effectiveness. This amount is presented as the cumulative
effect of a change in accounting principle for the year ended December 31, 2001.
During 2001, the Company recognized in earnings $348,000 for the derivative
instrument's gain and a loss of $(120,000) was reclassified into earnings as a
result of the discontinuance of its cash flow hedge.
The Company entered into additional derivative financial instruments during 2001
to mitigate its interest rate risk, but has not designated these instruments as
cash flow hedges.
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"), 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.
Trust Fees. Trust fees are recorded on the accrual basis of accounting.
Income Taxes. The Company files 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) which is a total of net income and all other
non-owner changes in equity. Non-owner changes are transactions that did not
occur as a result of stockholder action.
Segment Disclosures. 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.
Recently Issued Accounting Pronouncements. 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 for the year ended December 31, 1999.
On June 29, 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, "Business Combinations" and
No. 142, "Goodwill and Other Intangible Assets" ("SFAS 141" and "SFAS 142").
SFAS 141 requires all business combinations initiated after June 30, 2001 to be
accounted for using the purchase method. Under SFAS 142, goodwill and intangible
assets with indefinite lives will no longer be amortized but are reviewed
annually (or more frequently if impairment indicators arise) for impairment.
Separable intangible assets that are not deemed to have indefinite lives will
continue to be amortized over their useful lives (but with no maximum life). The
Company has adopted the provisions of SFAS 142 effective January 1, 2002.
In July 2001, the SEC issued Staff Accounting Bulletin No. 102, "Selected Loan
Loss Allowance Methodology and Documentation Issues" ("SAB 102"). SAB 102
expresses the SEC staff's views on the development, documentation, and
application of a systematic methodology as required by its Financial Reporting
Release No. 28 (issued in December 1986) for determining allowances for loan and
lease losses in accordance with generally accepted accounting principles. In
particular, the guidance focuses on the documentation the staff normally would
expect a registrant to prepare and maintain in support of its allowance for loan
losses. Also in July 2001, the federal banking agencies issued their "Policy
Statement on Allowance for Loan and Lease Losses Methodologies and Documentation
for Banks and Savings Institutions" (the "Policy Statement"). Developed in
collaboration with the SEC, the Policy Statement clarifies the agencies'
expectations and provides guidance regarding methodologies and documentation
support for the allowance for loan and lease losses. SAB 102 and the Policy
Statement do not change the guidance in generally accepted accounting principles
and in previous SEC and regulatory agency statements but, rather, are intended
to improve the allowance for loan and lease losses process and documentation.
Therefore, adoption of these two issuances did not materially impact the
Company.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"). SFAS 144 supersedes FASB Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of",
and the accounting and reporting provisions of APB Opinion No. 30, "Reporting
the Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of a segment of a business (as previously
defined in that opinion). SFAS 144 requires that one accounting model be used
for long-lived assets to be disposed of by sale, whether previously held and
used or newly acquired, and broadens the presentation of discontinued operations
to include more disposal transactions than were included under the previous
standards. BNCCORP will adopt SFAS 144 on January 1, 2002; however, adoption of
the statement is not expected to have a material impact.
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 Banks are also subject to minimum
regulatory capital requirements. At December 31, 2001, 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. Ultimate results could differ
from those estimates.
2. Expansion, Mergers and Divestitures:
The following expansion, mergers and divestitures transpired during the three
years ended December 31, 2001:
On July 9, 2001, the Company established a new banking subsidiary, BNC National
Bank of Arizona headquartered in Tempe, Arizona.
On November 20, 2000, BNC-North Dakota merged with and into BNC-Minnesota and
the name of the combined bank was changed 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.
Net interest income and noninterest income for BNC Financial for the year ended
December 31, 1999 were $1.6 and $1.1 million, respectively. These amounts are
not included in net interest income and noninterest income in the accompanying
consolidated statements of income.
3. Restrictions on Cash and Due From Banks:
The Banks are required to maintain reserve balances with the Federal Reserve
Bank under the Federal Reserve Act and Regulation D. Required reserve balances
were $4.2 and $2.4 million as of December 31, 2001 and 2000, 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, 2001
or 2000. The carrying amount of available-for-sale securities and their
approximate fair values were as follows as of December 31 (in thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- ----------
2001
U.S. government agency mortgage-
backed securities........... $ 42,027 $ 243 $ (324) $ 41,946
U.S. government agency
securities..................... 4,396 99 -- 4,495
Collateralized mortgage
obligations.................... 135,423 2,236 (391) 137,268
State and municipal bonds...... 16,952 649 (120) 17,481
Corporate debt securities...... 10,329 376 (94) 10,611
Equity securities.............. 7,380 -- -- 7,380
----------- ---------- ---------- ----------
$ 216,507 $ 3,603 $ (929) $ 219,181
=========== ========== ========== ==========
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
========== ========== ========== ==========
The amortized cost and estimated fair market value of available-for-sale debt
securities classified according to their contractual maturities at December 31,
2001, were as follows (in thousands):
Estimated
Amortized Fair
Cost Value
---------- -----------
Due in one year or less........... $ 510 $ 517
Due after one year through five
years.......................... 5,902 6,139
Due after five years through ten
years.......................... 29,363 29,931
Due after ten years............... 173,352 175,214
---------- ----------
Total.......................... $ 209,127 $ 211,801
========== ==========
Securities carried at approximately $186.0 and $215.4 million at December 31,
2001 and 2000, 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 available-for-sale
securities were as follows for the years ended December 31 (in thousands):
2001 2000 1999
----------- ------------ -----------
Sales proceeds........ $ 119,394 $ 23,789 $ 39,732
Gross realized gains.. $ 1,530 $ 324 $ 239
Gross realized losses. $ 134 $ 48 $ 41
Income taxes applicable to net gains and losses on securities available for sale
were $405,000, $90,000, and $75,000 for the years ended December 31, 2001, 2000
and 1999, 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):
2001 2000
---------- -----------
Commercial and industrial......... $ 109,143 $ 112,407
Real estate:
Mortgage....................... 136,219 90,622
Construction................... 34,872 25,301
Agricultural...................... 19,810 15,775
Consumer.......................... 12,119 12,016
Lease financing................... 7,578 10,202
Other............................. 1,566 2,872
---------- -----------
Total.......................... 321,307 269,195
Less:
Allowance for credit losses..... (4,325) (3,588)
Unearned income and net
unamortized deferred fees and
costs......................... (516) (270)
---------- -----------
Net loans and leases........ $ 316,466 $ 265,337
========== ===========
Geographic Location and Types of Loans. Loans were to borrowers located in the
following market areas as of December 31:
2001 2000
------- -------
North Dakota............ 41% 47%
Minnesota............... 33 33
Arizona................. 16 --
South Dakota............ 8 13
Other................... 2 7
------- -------
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 $136.2 and $90.6 million of real
estate mortgages as of December 31, 2001 and 2000, respectively, approximately
$54.9 and $44.6 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 $6.6 and $7.0 million at December 31, 2001 and 2000, respectively, were
pledged as collateral for FHLB borrowings. Commercial loans totaling $35.6 and
$17.2 million at December 31, 2001 and 2000, 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, 2001 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):
2001 2000
------------------------ -----------------------
Recorded Valuation Recorded Valuation
Investment Allowance Investment Allowance
----------- ----------- ---------- ----------
Impaired loans -
Valuation allowance
required.................. $ 11,571 $ 769 $ 6,506 $ 1,389
No valuation allowance
required.................. 17 -- 33 --
----------- ----------- ---------- ----------
Total impaired loans... $ 11,588 $ 769 $ 6,539 $ 1,389
=========== =========== ========== ==========
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):
2001 2000 1999
--------- --------- ---------
Average recorded investment in impaired
loans.............................. $ 9,101 $ 7,393 $ 8,977
========= ========= =========
Interest income recognized on impaired
loans.............................. $ 761 $ 791 $ 914
========= ========= =========
Average recorded investment in impaired
loans ss a percentage of average
total loans........................ 2.9% 2.9% 3.6%
========= ========= =========
Nonaccrual and Restructured Loans. As of December 31, 2001 and 2000, the Company
had $3.4 million and $343,000, respectively, of nonaccrual loans and $5,000 and
$16,000, respectively, of restructured loans (included as impaired loans above).
The following table indicates the effect on income if interest on such loans
outstanding at year-end had been recognized at original contractual rates during
the year ended December 31 (in thousands):
2001 2000 1999
--------- --------- ---------
Interest income that would have been
recorded........................... $ 87 $ 35 $ 141
Interest income recorded.............. 3 6 29
--------- --------- ---------
Effect on interest income............. $ 84 $ 29 $ 112
========= ========= =========
As of December 31, 2001, 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):
2001 2000 1999
--------- --------- ---------
Balance, beginning of year............. $ 3,588 $ 2,872 $ 2,854
Provision for credit losses........ 1,699 1,202 1,138
Loans charged off.................. (1,265) (755) (1,290)
Loans recovered.................... 303 269 170
--------- --------- ---------
Balance, end of year................... $ 4,325 $ 3,588 $ 2,872
========= ========= =========
6. Premises, Leasehold Improvements and Equipment:
Premises, leasehold improvements and equipment consisted of the following at
December 31 (in thousands):
2001 2000
--------- ----------
Land and improvements.......................... $ 1,168 $ 1,107
Buildings and improvements..................... 10,899 10,494
Leasehold improvements......................... 1,035 1,101
Furniture, fixtures and equipment.............. 8,843 7,802
--------- ----------
Total cost.................................. 21,945 20,504
Less accumulated depreciation and amortization. (6,542) (5,631)
--------- ----------
Net premises, leasehold improvements and
equipment................................. $ 15,403 $ 14,873
========= ==========
Depreciation and amortization expense on premises, leasehold improvements and
equipment charged to continuing operations totaled approximately $1.4, $1.1 and
$1.0 million for the years ended December 31, 2001, 2000 and 1999, respectively.
7. Deferred Charges and Intangible Assets:
Deferred charges and intangible assets consisted of the following at December 31
(in thousands):
2001 2000
---------- -----------
Premiums paid for deposits assumed............. $ 4,022 $ 4,022
Goodwill....................................... 1,115 1,115
Covenants not to compete....................... 480 480
Debt related costs............................. -- 147
Other miscellaneous intangibles................ 112 112
---------- -----------
Total costs................................. 5,729 5,876
Less accumulated amortization ................. (3,558) (3,157)
---------- -----------
Net deferred charges and intangible assets.. $ 2,171 $ 2,719
========== ===========
Amortization expense charged to continuing operations was $482,000, $528,000 and
$541,000 for the years ended December 31, 2001, 2000 and 1999, respectively.
8. Deposits:
The scheduled maturities of time deposits as of December 31, 2001 are as follows
(in thousands):
2002............................. $ 111,827
2003............................. 40,397
2004............................. 33,599
2005............................. 4,790
2006............................. 3,050
Thereafter....................... 598
------------
$ 194,261
============
9. Notes Payable:
The Company's notes payable consisted of the following as of December 31 (in
thousands):
2001 2000
-------- ---------
BNCCORP:
8 5/8% Subordinated Notes, due May 31, 2004,
interest payable monthly (plus unamortized
discount of $0 and $371 at December 31, 2001
and 2000, respectively - effective rate 9.61%),
unsecured (see below)................................. $ -- $12,580
Subsidiaries:
Federal funds purchased and U. S. Treasury tax
and loan note option accounts (1)..................... 447 32,692
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
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 62,200
Fixed rate advances from FHLB, principal due in
2002 through 2005, interest payable monthly at
rates ranging from 2.83% to 5.46%, secured by
mortgaged-backed securities and government agency
collateralized mortgage obligations (1)............... 55,000 --
Other (1)............................................... 326 598
-------- ---------
Total....................................... $163,070 $ 117,973
======== =========
- ----------------
(1) The weighted average interest rate on short-term borrowings outstanding as
of December 31, 2001 and 2000 was 5.01% and 6.30%, respectively.
The 8 5/8 percent Subordinated Notes (the "Notes"), which qualified 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), were considered unsecured
general obligations of BNCCORP. They were redeemable, at the option of BNCCORP,
at par plus accrued interest to the date of redemption. Payment of principal of
the Notes could be accelerated only in the case of certain events relating to
bankruptcy, insolvency or reorganization of BNCCORP. An initial discount of
$750,000 was being amortized to interest expense over the term of the Notes
using the effective interest rate method.
During 2001, the Company purchased and retired $82,000 of the notes at a
discount using cash generated from the sale of BNC Financial. On August 31,
2001, the Company redeemed the remaining $12.6 million of the Notes at par
through exercise of the option of BNCCORP discussed above. The remaining $12.6
million of the Notes were redeemed using a portion of the cash generated from
issuing trust preferred securities through the establishment of BNC Statutory
Trust II (see Note 10). The transactions and redemption of the Notes resulted in
an extraordinary loss of $134,000 ($0.06 per diluted share) net of income taxes
of ($70,000).
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 diluted
share), net of income taxes of $132,000. The Notes were retired using cash
generated from the sale of BNC Financial.
10. Guaranteed Preferred Beneficial Interests in Company's Subordinated
Debentures:
In July 2001, the Company established a special purpose trust, BNC Statutory
Trust II, for the purpose of issuing $15.0 million of floating rate trust
preferred securities. The floating rate trust preferred securities were issued
at an initial rate of 7.29 percent and adjust quarterly to a rate equal to
3-month LIBOR plus 3.58 percent. Prior to July 31, 2011, the rate shall not
exceed 12.5 percent. The proceeds from the issuance, together with the proceeds
of the related issuance of $464,000 of common securities of the trust, were
invested in $15.5 million of junior subordinated deferrable interest debentures
of the Company. The floating rate junior subordinated deferrable interest
debentures were issued at an initial rate of 7.29 percent and adjust quarterly
to a rate equal to 3-month LIBOR plus 3.58 percent. Prior to July 31, 2011, the
rate shall not exceed 12.5 percent. 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 31,
2031, 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 31, 2006, 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
31, 2006, 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.
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 Banks 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 Banks to transfer funds to BNCCORP in the form of
cash dividends. Approval of the Office of the Comptroller of the Currency
("OCC"), the Banks' principal regulator, is required for the Banks to pay
dividends to BNCCORP in excess of the Banks' earnings retained in the current
year plus retained net profits for the preceding two years. At December 31, 2001
approximately $5.9 million of retained earnings were available for bank dividend
declaration without prior regulatory approval.
On May 30, 2001, the Company's Board of Directors adopted a rights plan intended
to protect stockholder interests in the event the Company becomes the subject of
a takeover initiative that the Company's Board of Directors believes could deny
the Company's stockholders the full value of their investment. This plan does
not prohibit the Board from considering any offer that it deems advantageous to
its stockholders. The Company has no knowledge that anyone is considering a
takeover.
The rights were issued to each common stockholder of record on May 30, 2001, and
they will be exercisable only if a person acquires, or announces a tender offer
that would result in ownership of, 15 percent or more of the Company's
outstanding common stock. The rights will expire on May 30, 2011, unless
redeemed or exchanged at an earlier date.
Each right entitles the registered holder to purchase from the Company one
one-hundredth of a share of Series A Participating Cumulative Preferred Stock,
$.01 par value (the "Preferred Stock"), of the Company at a price of $100 per
one one-hundredth of a share, subject to adjustment. Each share of Preferred
Stock will be entitled to a minimum preferential quarterly dividend payment of
$1.00 but will be entitled to an aggregate dividend of 100 times the dividend
declared per share of common stock. In the event of liquidation, the holders of
the Preferred Stock will be entitled to a minimum preferential liquidation
payment of $0.01 per share but will be entitled to an aggregate payment of 100
times the payment made per share of common stock. Each share of Preferred Stock
will have 100 votes, voting together with the common stock. Finally, in the
event of any merger, consolidation or other transaction in which common stock is
exchanged, each share of Preferred Stock will be entitled to receive 100 times
the amount received per share of common stock. Because of the nature of the
Preferred Stock's dividend, liquidation and voting rights, the value of the one
one-hundredth of a share of Preferred Stock purchasable upon exercise of each
right should approximate the value of one share of common stock.
12. Regulatory Capital:
BNCCORP and the Banks 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 results. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, BNCCORP
and the Banks must meet specific capital guidelines that involve quantitative
measures of their assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. Capital amounts and
classifications of BNCCORP and the Banks are also subject to qualitative
judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by the regulations to ensure capital adequacy
require BNCCORP and the Banks to maintain minimum amounts and ratios (set forth
in the tables that follow) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes that, as of
December 31, 2001, BNCCORP and the Banks met all capital adequacy requirements
to which they are subject.
As of December 31, 2001, the most recent notifications from the OCC categorized
the Banks as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the Banks must
maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios
as set forth in the table that follows. There are no conditions or events since
that notification that management believes have changed the institutions'
categories.
Actual capital amounts and ratios of BNCCORP and its subsidiary bank(s) as of
December 31 are also presented in the tables (dollar amounts in thousands):
To be Well
For Capital Capitalized Under
Actual Adequacy Purposes Prompt Corrective
Action Provisions
----------------- ------------------ --------------------
Amount Ratio Amount Ratio Amount Ratio
--------- ------ --------- -------- -------- ----------
As of December 31, 2001
Total Capital (to risk-weighted
assets):
Consolidated................ $ 53,428 12.96% $ 32,969 8.0% N/A N/A
BNC National Bank........... 44,098 11.01 32,053 8.0 $40,067 10.0%
BNC National Bank of Arizona 2,657 22.93 927 8.0 1,159 10.0
Tier I Capital (to risk-
weighted assets):
Consolidated................ 36,536 8.87 16,485 4.0 N/A N/A
BNC National Bank........... 39,916 9.96 16,027 4.0 24,040 6.0
BNC National Bank of Arizona 2,514 21.70 464 4.0 695 6.0
Tier I Capital (to average
assets):
Consolidated................ 36,536 6.33 23,074 4.0 N/A N/A
BNC National Bank........... 39,916 6.96 22,940 4.0 28,675 5.0
BNC National Bank of Arizona 2,514 20.10 500 4.0 625 5.0
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
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):
2001 2000
---------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- --------- ---------
Assets:
Cash, due from banks and
federal funds sold........... $23,972 $ 23,972 $ 15,583 $ 15,583
Investment securities available
for sale..................... 219,181 219,181 263,185 263,185
Loans and leases, net........... 316,466 319,502 265,337 261,103
Derivative financial instruments 915 915 -- --
---------- ---------- ---------- ---------
560,534 $ 563,570 544,105 $539,871
========== =========
Other assets.................... 24,523 25,911
---------- ----------
$ 585,057 $570,016
========== ==========
Liabilities:
Deposits, noninterest-bearing... $ 43,055 $ 43,055 $ 31,459 $ 31,459
Deposits, interest-bearing...... 364,914 367,040 331,005 331,674
Notes payable................... 117,973 118,846 163,070 162,137
Guaranteed preferred beneficial
interests in Company's
subordinated debentures..... 22,244 22,915 7,606 7,347
--------- --------- --------- ----------
548,186 $ 551,856 533,140 $ 532,617
========= ==========
Other liabilities................ 6,192 7,419
Stockholders' equity............. 30,679 29,457
--------- ----------
$585,057 $ 570,016
========= ==========
14. Financial Instruments:
In the normal course of business, the Company uses various 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 used to protect the Company's balance sheet
from unfavorable movements in interest rates while allowing benefit from
favorable movements. 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):
2001 2000
----------- -----------
Commitments to extend credit........ $ 113,333 $ 77,902
Letters of credit................... 739 6,159
Interest rate floors................ -- 25,000
Interest rate caps.................. 40,000 --
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 $1.8 and $1.4 million at December 31, 2001 and 2000, respectively.
During 2001, $1.0 million of new loans were made and repayments totaled
$587,000. The total amount of deposits received from these parties was $1.8 and
$1.6 million at December 31, 2001 and 2000, respectively. 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 collection.
The Federal Reserve Act limits amounts of, and requires collateral on,
extensions of credit by the Banks to BNCCORP, and with certain exceptions, its
non-bank affiliates. There are also restrictions on the amounts of investment by
the Banks in stocks and other subsidiaries of BNCCORP and such affiliates and
restrictions on the acceptance of their securities as collateral for loans by
the Banks. As of December 31, 2001, 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 $40,000, $470,000 and $2.3 million for the years ended December 31, 2001,
2000 and 1999, respectively. The Company's investment in repossessed assets of
$70,000 as of December 31, 2001 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):
2001 2000 1999
-------- -------- --------
Continuing Operations -
Current................................ $ 950 $ 303 $ 726
Deferred income taxes from the following
timing differences:
Provision for credit losses....... (241) (342) 117
Depreciation...................... 74 41 (66)
Write-downs of other real estate
owned and repossessed assets..... -- 829 (829)
Leases............................ 42 (54) (69)
Other............................. (217) 129 (278)
-------- -------- --------
$ 608 $ 906 $ (399)
======== ======== ========
2001 2000 1999
-------- -------- --------
Discontinued Operation -
Current................................ $ -- $ 82 $ 410
Deferred income taxes from the following
timing differences:
Provision for credit losses....... -- -- 98
Depreciation...................... -- -- 4
Other............................. -- -- 48
-------- -------- --------
$ -- $ 82 $ 560
======== ======== ========
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):
2001 2000 1999
-------- --------- --------
Tax at 34% statutory rate................ $ 714 $ 947 $ (316)
Increase (decrease) resulting from:
State taxes (net of federal benefit).. 99 266 (1)
Tax-exempt interest................... (250) (321) (142)
Other, net............................ 45 14 60
-------- --------- --------
$ 608 $ 906 $(399)
======== ========= ========
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):
2001 2000
-------- --------
Deferred tax asset:
Loans, primarily due to differences in accounting
for credit losses............................... $ 1,490 $ 1,429
Difference between book and tax amortization of
branch premium acquisition costs................ 276 233
Other............................................. 392 94
-------- --------
Deferred tax asset.......................... 2,158 1,756
-------- --------
Deferred tax liability:
Unrealized gain on securities available for sale.. 1,016 733
Leases, primarily due to differences in accounting
for leases..................................... 420 381
Premises and equipment, primarily due to
differences in original cost basis and
depreciation................................... 578 510
Other............................................ -- 115
-------- --------
Deferred tax liability...................... 2,014 1,739
-------- --------
Net deferred tax asset...................... $ 144 $ 17
======== ========
18. Earnings Per 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
---------- ------------- ------------
2001
Basic earnings per share:
Income from continuing operations.... $1,492,000 $ 2,395,353 $ 0.62
Extraordinary item - loss on early
extinguishment of debt, net of
income taxes...................... (134,000) 2,395,353 (0.05)
Cumulative effect of change in
accounting principle, net of
income taxes...................... (113,000) 2,395,353 (0.05)
---------- ----------
Income available to common
stockholders $1,245,000 $ 0.52
========== ==========
Effect of dilutive shares -
Options........................... 25,760
-------------
Diluted earnings per share:
Income from continuing operations.... $1,492,000 2,421,113 $ 0.62
Extraordinary item - loss on early
extinguishment of debt, net of
income taxes...................... (134,000) 2,421,113 (0.06)
Cumulative effect of change in
accounting principle, net of income
taxes............................. (113,000) 2,421,113 (0.05)
---------- ----------
Income available to common
stockholders...................... $1,245,000 $ 0.51
========== ==========
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
========== ==========
Net
Income
(Loss) Shares Per-Share
(Numerator) (Denominator) Amount
------------ ------------- ----------
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
============ ============
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:
2001 2000 1999
----------- ----------- -----------
Quarter ended March 31............. 101,570 159,934 170,134
Quarter ended June 30.............. 97,177 152,548 170,234
Quarter ended September 30......... 95,508 114,131 170,034
Quarter ended December 31.......... 95,508 120,512 172,434
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 $207,000, $188,000 and $171,000 in 2001, 2000 and 1999,
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 chairman of the board ("Chairman"),
president and chief executive officer ("CEO") and the executive vice president,
business development of BNC - Minnesota (the "Executives"). The Executives will
be paid minimum annual salaries throughout the terms of the agreements and
annual incentive bonuses as may, from time to time, be fixed by the board of
directors. The Executives will also be provided with benefits under any employee
benefit plan maintained by BNCCORP for its employees generally, or for its
senior executive officers in particular, on the same terms as are applicable to
other senior executives of BNCCORP. Under the agreements of the Chairman and
CEO, 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
Chairman and CEO will be paid a lump-sum amount equal to three times their
current annual compensation. Under the agreement with BNC - Minnesota's
executive vice president, if his status as an employee with the Company is
terminated for any reason other than death, disability, cause, or if he
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 agreements 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 Officers' 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. The deferred compensation payments
have been accrued for as of December 31, 2001. Both of the Officers resigned and
are now acting as consultants to BNC Insurance, Inc. 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, Inc. 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, 2001, 2000 and 1999, was $676,000, $431,000 and $467,000,
respectively, for facilities, and $94,000, $43,000 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:
2002............... $914,000
2003............... 816,000
2004............... 771,000
2005............... 622,000
2006............... 254,000
Thereafter......... --
Legal Proceedings. In the normal course of business the Company may be a party
to certain claims arising in the ordinary course of business. In the opinion of
management, based upon the advice of legal counsel, the outcomes of such claims
are not expected to be material to the Company's financial position, results of
operations or cash flows.
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, 2001, 24,473 restricted shares issued under the Stock Plan
were outstanding. 19,473 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. The
Company records the compensation expense related to restricted stock over the
applicable service period. Compensation cost charged to operations was $9,000,
$74,000 and $70,000 in 2001, 2000 and 1999, respectively.
The number and weighted average grant-date fair value of nonvested stock were as
follows for the years ended December 31:
2001 2000 1999
-------- ------- ----------
Number................................... -- -- 17,500
Weighted average grant-date fair value... -- -- $10.12
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 2001, 2000 or 1999. As
of December 31, 2001, 210,633 options had been awarded under the Stock Plan.
6,775 of them had been exercised and 203,858 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:
2001 2000 1999
----------- ------------ -----------
Net Income:
As Reported................ $1,245,000 $2,297,000 $ 242,000
Pro Forma.................. 1,145,000 2,237,000 139,000
Basic EPS:
As Reported................ 0.52 0.96 0.10
Pro Forma.................. 0.45 0.89 0.06
Diluted EPS:
As Reported................ 0.51 0.96 0.10
Pro Forma.................. 0.44 0.89 0.06
Following is a summary of stock option transactions for the years ended December
31:
2001 2000 1999
------------------ ------------------- -------------------
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................ 118,148 $13.84 122,434 $ 14.82 150,760 $ 15.98
Granted................ 109,840 6.16 18,500 6.03 14,500 7.17
Exercised.............. (4,840) 5.94 -- -- -- --
Forfeited.............. (14,740) 8.21 (22,786) 12.80 (42,826) 16.29
-------- -------- -------
Outstanding, end of
year............... 208,408 10.37 118,148 13.84 122,434 14.82
======== ======== ========
Exercisable, end of
year............... 106,948 12.88 62,688 13.11 51,934 12.26
======== ======== ========
Weighted average fair
value of options:
Granted............ 2.91 $ 3.05 $ 3.18
======== ======== ========
Exercised.......... $ 2.83 -- --
======== ======= ========
Forfeited.......... $ 3.88 $ 5.84 $ 7.29
======== ======== ========
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 - 2001 2000 1999
---------- ---------- ----------
Dividend yield........... 0.00% 0.00% 0.00%
Risk-free interest rate -
7 year treasury yield... 5.00% 6.30% 6.27%
Volatility............... 35.36% 36.08% 27.16%
Expected life............ 7.0 years 7.0 years 7.0 years
Following is a summary of the status of options outstanding at December 31,
2001:
Outstanding Options Exercisable Options
------------------------------------ --------------------
Weighted Weighted
Weighted Average Average Average
Remaining Exercise Exercise
Number Contractual Life Price Number Price
--------- ---------------- --------- --------- ----------
Options with exercise
prices ranging from:
$17.00 to $17.75 73,410 6.0 years $ 17.05 59,650 $ 17.06
$5.88 to $10.00 134,998 8.2 years $ 6.74 47,298 $ 7.61
-------- --------
208,408 106,948
======== ========
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)
2001 2000
---------- -----------
Assets:
Cash and cash equivalents..................... $ 6,250 $ 8,543
Investment in subsidiaries.................... 46,847 40,611
Loans......................................... 5 16
Receivable from subsidiaries.................. 86 462
Deferred charges and intangible assets, net... 154 249
Other......................................... 782 732
---------- -----------
$ 54,124 $ 50,613
========== ===========
Liabilities and stockholders' equity:
Subordinated notes............................ $ -- $ 12,580
Subordinated debentures....................... 22,398 7,451
Accrued expenses and other liabilities........ 1,047 1,125
---------- -----------
23,445 21,156
---------- -----------
Preferred stock, $.01 par value, 2,000,000
shares authorized; no shares issued or
outstanding................................ -- --
Common stock, $.01 par value, 10,000,000
shares authorized; 2,399,170 and 2,395,030
shares issued and outstanding (excluding
42,880 shares held in treasury)............ 24 24
Capital surplus............................... 14,084 14,050
Retained earnings............................. 15,435 14,190
Treasury stock (42,880 shares)................ (513) (513)
Accumulated other comprehensive income, net of
income taxes.............................. 1,649 1,706
---------- -----------
Total stockholders' equity................... 30,679 29,457
---------- -----------
$ 54,124 $ 50,613
========== ===========
Parent Company Only
Condensed Statements of Income
For the Years Ended December 31
(In thousands)
2001 2000 1999
---------- ---------- ---------
Income:
Management fee income....................... $ 703 $ 1,426 $ 1,606
Interest.................................... 322 322 1,757
Other....................................... 70 53 9
---------- ---------- ---------
Total income............................. 1,095 1,801 3,372
---------- ---------- ---------
Expenses:
Interest.................................... 2,207 1,677 2,486
Personnel expense........................... 512 1,162 1,320
Legal and other professional................ 144 124 134
Depreciation and amortization............... 57 68 66
Other....................................... 307 361 502
---------- ---------- ---------
Total expenses........................... 3,227 3,392 4,508
---------- ---------- ---------
Loss before income tax benefit and equity in
undistributed income of subsidiaries........ (2,132) (1,591) (1,136)
Income tax benefit............................. 691 518 433
---------- ---------- ---------
Loss before equity in undistributed income of (1,441) (1,073) (703)
subsidiaries................................
Equity in undistributed income of subsidiaries. 2,820 2,954 96
---------- ---------- ---------
Income (loss) from continuing operations....... 1,379 1,881 (607)
Equity in undistributed income from operations
of discontinued asset-based lending 429
subsidiary................................. -- --
---------- ---------- ---------
Income (loss) before gain on disposal of
asset-based lending subsidiary............. 1,379 1,881 (178)
Gain on disposal of asset-based lending
subsidiary..................................... -- 159 438
---------- ---------- ---------
Income before extraordinary item and cumulative
effect of change in accounting principle... 1,379 2,040 260
Extraordinary item-gain (loss) on early
extinguishment of debt, net of income taxes (134) 257 --
Cumulative effect of change in accounting
principle, net of income taxes............. -- -- (18)
---------- ---------- ---------
Net income............................... $ 1,245 $ 2,297 $ 242
========== ========== =========
Parent Company Only
Condensed Statements of Cash Flows
For the Years Ended December 31
(In thousands)
2001 2000 1999
--------- ---------- ---------
Operating activities:
Net income.................................... $ 1,245 $ 2,297 $ 242
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.............. 43 48 46
Equity in undistributed income of
subsidiaries........................... (2,820) (2,954) (96)
Equity in undistributed income of
subsidiary - BNC Capital Trust I -
BNC Statutory Trust II............... (7) (12) --
Equity in undistributed income from
operations of discontinued asset-based
lending subsidiary....................... -- -- (429)
Change in prepaid expenses and othe
receivables............................... (104) 32 19,922
Change in accrued expenses and other
liabilities.............................. 332 98 28
Other...................................... 386 14 --
--------- ---------- ---------
Net cash provided by (used in) operating
operating activities................. (925) (636) 19,275
--------- ---------- ---------
Investing activities:
Disposition of discontinued operation......... -- -- 2,100
Net decrease in loans......................... 11 -- (325)
Increase in investment in subsidiaries ....... (3,464) (232) (3,157)
Additions to premises, leasehold improvements
and equipment, net......................... 12 (59) (19)
--------- ---------- ---------
Net cash used in investing activities... (3,441) (291) (1,401)
--------- ---------- ---------
Financing activities:
Repayments of long-term borrowings............ (13,172) (2,001) (29,532)
Proceeds from long-term borrowings............ -- -- 15,000
Amortization of discount on subordinated
notes....................................... 371 93 92
Amortization of deferred charges.............. 14 20 20
Proceeds from issuance of subordinated
debentures 14,893 7,440 --
Amortization of discount on subordinated
debentures.................................... 53 12 --
Other, net.................................... (86) 74 25
--------- ---------- ---------
Net cash provided by (used in)
financing activities.................. 2,073 5,638 (14,395)
--------- ---------- ---------
Net increase (decrease) in cash and cash
equivalents................................... (2,293) 4,711 3,479
Cash and cash equivalents, beginning of year..... 8,543 3,832 353
--------- ---------- ---------
Cash and cash equivalents, end of year........... $ 6,250 $ 8,543 $ 3,832
========= ========== =========
Supplemental cash flow information:
Interest paid................................. $ 2,143 $ 1,293 $ 2,582
======== ========== =========
Income tax payments received from subsidiary
banks, net of income taxes paid............ $ 652 $ 69 $ 243
======== ========== =========
23. Quarterly Financial Data (unaudited, in thousands, except shares and
earnings per share):
2001
--------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ---------- ---------- ---------
Interest income..................... $ 10,493 $ 10,197 $ 9,333 $ 9,178
Interest expense.................... 6,715 6,062 6,278 4,489
---------- ---------- ---------- ---------
Net interest income................. 3,778 4,135 3,055 4,689
Provision for credit losses......... 350 600 500 249
---------- ---------- ---------- ---------
Net interest income after provision 3,428 3,535 2,555 4,440
for credit losses.................
Noninterest income.................. 2,327 2,516 1,863 2,269
Noninterest expense................. 4,631 5,011 5,412 5,779
---------- ---------- ---------- ---------
Income (loss) before income taxes... 1,124 1,040 (994) 930
Provision for (benefit from) income
taxes............................... 335 353 (418) 338
---------- ---------- ---------- ---------
Income (loss) before extraordinary
item and cumulative effect of
change in accounting principle.... 789 687 (576) 592
Extraordinary item - gain (loss) on
on early extinguishment of debt,
net of income taxes............... 4 4 (142) --
Cumulative effect of change in
accounting principle, net of
income taxes...................... (113) -- -- --
---------- ---------- ---------- ---------
Net income (loss)................... $ 680 $ 691 $ (718) $ 592
========== ========== ========== =========
Basic earnings per common share:
Income (loss) before extraordinary
item and cumulative effect of
change in accounting principle.... $ 0.33 $ 0.29 $ (0.24) $ 0.25
Extraordinary item - loss on early
extinguishment of debt, net of
income taxes...................... -- -- (0.06) --
Cumulative effect of change in
accounting principle, net of
income taxes...................... (0.05) -- -- --
---------- ---------- ---------- --------
Basic net income (loss)............ $ 0.28 $ 0.29 $ (0.30) $ 0.25
========== ========== ========== ========
Diluted earnings per common share:
Income (loss) before extraordinary
item and cumulative effect of
change in accounting principle... $ 0.33 $ 0.28 $ (0.24) $ 0.24
Extraordinary item - loss on
early extinguishment of debt,
net of income taxes.............. -- -- (0.06) --
Cumulative effect of change in
accounting principle, net of
income taxes..................... (0.05) -- -- --
---------- ---------- --------- --------
Diluted net income (loss).......... $ 0.28 $ 0.28 $ (0.30) $ 0.24
========== ========== ========= ========
Average common shares:
Basic............................. 2,394,610 2,394,330 2,398,118 2,399,170
Diluted........................... 2,411,482 2,426,269 2,398,118 2,421,819
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
========== ========== ========== =========
Basic and diluted earnings per
common share:
Income from continuing operations.... $ 0.18 $ 0.23 $ 0.22 $ 0.15
Gain on disposal of discontinued
operation, net of income taxes....... -- 0.01 -- 0.06
Extraordinary item - gain on early
extinguishment of debt, net of
income taxes....................... 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
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 2002 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 2002 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 2002 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 2002 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, 2001.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on March 26 , 2002.
BNCCORP, Inc.
By: /s/ Tracy Scott
----------------------------
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated, on March 26 , 2002.
/s/ Tracy Scott Chairman of the Board and Director
- -----------------------------------
Tracy Scott
/s/ Gregory K. Cleveland President, Chief Executive Officer and
- ----------------------------------- Director
Gregory K. Cleveland (Principal Executive Officer)
(Principal Financial Officer)
/s/ Brenda L. Rebel Chief Financial Officer and Director
- ----------------------------------- (Principal Accounting Officer)
Brenda L. Rebel
/s/ Denise Forte-Pathroff, M.D. Director
- -----------------------------------
Denise Forte-Pathroff, M.D.
/s/ John A. Hipp, M.D.
- -----------------------------------
John A. Hipp, M.D. Director
/s/ Richard M. Johnsen, Jr.
- -----------------------------------
Richard M. Johnsen, Jr. Director
/s/ David A. Erickson Director
- -----------------------------------
David A. Erickson
/s/ Jerry R. Woodcox Director
- -----------------------------------
Jerry R. Woodcox
/s/ Brad J. Scott Director
- -----------------------------------
Brad J. Scott
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).
4.3 Rights Agreement, dated as of May 30, 2001, between BNCCORP, Inc. and
American Stock Transfer and Trust Company, as Rights Agent, incorporated
by reference to Exhibit 1 to the Registrant's Form 8-A dated June 5,
2001.
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.
- --------------------------------------------------------------------------------
Exhibit
No.
Exhibit Description
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.
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.
10.9 Indenture between BNCCORP, Inc., as issuer, and State Street Bank and
Trust Company of Connecticut, National Association, as Trustee, Floating
Rate Junior Subordinated Deferrable Interest Debentures Due 2031, dated
July 31, 2001, incorporated by reference to Exhibit 10.1 to the
Registrant's Form 10-Q dated as of August 13, 2001.
10.10 Guarantee Agreement by and between BNCCORP, Inc. and State Street Bank
and Trust Company of Connecticut, National Association, dated July 31,
2001, incorporated by reference to Exhibit 10.2 to the Registrant's Form
10-Q dated as of August 13, 2001.
10.11 Amended and Restated Declaration of Trust by and among State Street Bank
and Trust Company of Connecticut, National Association, as Institutional
Trustee, BNCCORP, Inc., as Sponsor, and Gregory K. Cleveland, Tracy Scott
and Brenda L. Rebel, as Administrators, dated July 31, 2001, incorporated
by reference to Exhibit 10.3 to the Registrant's Form 10-Q dated as of
August 13, 2001.
21.1 Subsidiaries of Company.
23.1 Consent of Arthur Andersen LLP
99.1 Representations of Arthur Andersen LLP