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U.S. Securities and Exchange Commission
Washington, D.C. 20549
------
FORM 10-Q
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[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the quarter ended June 30, 2002
[ ] TRANSITION REPORT UNDER 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 (IRS Employer Identification No.)
incorporation or organization)
322 East Main
Bismarck, North Dakota 58501
(Address of principal executive office)
(701) 250-3040
(Registrant's telephone number)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 ___
The number of shares of the registrant's outstanding common stock on August
9, 2002 was 2,697,929.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share and per share data)
ASSETS June 30, December 31,
2002 2001
----------- ------------
(unaudited)
CASH AND DUE FROM BANKS............................. $ 14,931 $ 16,346
INTEREST-BEARING DEPOSITS WITH BANKS................ 354 126
FEDERAL FUNDS SOLD.................................. 5,000 7,500
----------- -----------
Cash and cash equivalents...................... 20,285 23,972
INVESTMENT SECURITIES AVAILABLE FOR SALE............ 207,159 211,801
FEDERAL RESERVE AND FEDERAL HOME LOAN BANK STOCK.... 6,216 7,380
LOANS AND LEASES, net of unearned income............ 328,340 320,791
ALLOWANCE FOR CREDIT LOSSES......................... (4,627) (4,325)
----------- -----------
Net loans and leases............................. 323,713 316,466
PREMISES, LEASEHOLD IMPROVEMENTS AND
EQUIPMENT, net................................... 17,212 15,403
INTEREST RECEIVABLE................................. 2,812 3,008
OTHER ASSETS........................................ 5,350 4,856
GOODWILL............................................ 13,948 437
OTHER INTANGIBLE ASSETS, net........................ 9,406 1,734
----------- -----------
$ 606,101 $ 585,057
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS:
Noninterest-bearing.............................. $ 39,568 $ 43,055
Interest-bearing -
Savings, NOW and money market................. 189,125 170,653
Time deposits $100,000 and over............... 81,343 83,809
Other time deposits........................... 116,565 110,452
----------- -----------
Total deposits................................... 426,601 407,969
SHORT-TERM BORROWINGS............................... 3,377 760
FHLB BORROWINGS..................................... 97,200 117,200
LONG-TERM BORROWINGS................................ 8,543 13
OTHER LIABILITIES................................... 12,467 6,192
----------- -----------
Total liabilities.......................... 548,188 532,134
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN
COMPANY'S SUBORDINATED DEBENTURES................ 22,278 22,244
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value - 2,000,000
shares authorized; 150 shares issued
and outstanding as of June 30, 2002 .......... -- --
Capital surplus preferred stock.................. 1,500 --
Common stock, $.01 par value - 10,000,000 shares
authorized; 2,697,929 and 2,399,170 shares
issued and outstanding (excluding
42,880 shares held in treasury).............. 27 24
Capital surplus - common stock.................. 16,592 14,084
Retained earnings............................... 15,708 15,435
Treasury stock (42,880 shares).................. (513) (513)
Accumulated other comprehensive income,
net of income taxes.......................... 2,321 1,649
----------- -----------
Total stockholders' equity................ 35,635 30,679
----------- -----------
$ 606,101 $ 585,057
============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except per share data)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------- -------------------
2002 2001 2002 2001
-------- --------- -------- ---------
(unaudited) (unaudited)
INTEREST INCOME:
Interest and fees on loans.......... $ 5,445 $ 6,770 $ 10,787 $ 12,888
Interest and dividends on
investment securities -(Y)
Taxable......................... 2,581 3,134 5,039 7,127
Tax-exempt...................... 223 202 440 429
Dividends....................... 55 88 110 223
Other........................... 31 3 45 23
-------- --------- -------- ---------
Total interest income........ 8,335 10,197 16,421 20,690
-------- --------- -------- ---------
INTEREST EXPENSE:
Deposits............................ 2,867 3,953 5,630 8,172
Short-term borrowings............... 10 216 52 311
FHLB borrowings..................... 1,736 1,605 3,177 3,713
Long-term borrowings................ 90 288 92 581
-------- --------- -------- ---------
Total interest expense....... 4,703 6,062 8,951 12,777
-------- --------- -------- ---------
Net interest income.......... 3,632 4,135 7,470 7,913
PROVISION FOR CREDIT LOSSES........... 185 600 402 950
-------- --------- -------- ---------
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES.............. 3,447 3,535 7,068 6,963
-------- --------- -------- ---------
NONINTEREST INCOME:
Insurance commissions............... 2,417 445 2,884 953
Fees on loans....................... 517 529 1,032 693
Net gain on sales of securities..... 366 609 796 1,327
Brokerage income.................... 324 360 724 709
Trust and financial services........ 212 245 431 528
Service charges..................... 197 185 372 352
Rental income....................... 46 27 93 46
Other............................... 95 116 237 235
-------- --------- -------- ---------
Total noninterest income..... 4,174 2,516 6,569 4,843
-------- --------- -------- ---------
NONINTEREST EXPENSE:
Salaries and employee benefits..... 4,054 2,552 6,914 4,901
Occupancy........................... 639 485 1,173 934
Interest on subordinated
debentures....................... 455 233 912 466
Professional services............... 405 346 794 645
Depreciation and amortization....... 391 339 747 667
Office supplies, telephone
and postage...................... 316 272 579 502
Marketing and promotion............. 274 178 440 334
Amortization of intangible assets... 249 122 350 244
FDIC and other assessments.......... 55 49 109 97
Other............................... 689 435 1,222 852
-------- --------- -------- ---------
Total noninterest expense.... 7,527 5,011 13,240 9,642
-------- --------- -------- ---------
Income before income taxes............ 94 1,040 397 2,164
Income tax provision (benefit)........ (8) 353 105 688
-------- --------- -------- ---------
Income before extraordinary item
and cumulative effect of change
in accounting principle.............. 102 687 292 1,476
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations, continued
(In thousands, except per share data)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------- --------------------
2002 2001 2002 2001
--------- --------- --------- ---------
(unaudited) (unaudited)
Extraordinary item - gain on
early extinguishment of
debt, net of income taxes........ $ -- $ 4 $ -- $ 8
Cumulative effect of change in
accounting principle,
net of income taxes.............. -- -- -- (113)
. --------- --------- --------- ---------
NET INCOME ......................... $ 102 $ 691 $ 292 $ 1,371
========= ========= ========= =========
Dividends on preferred stock........ $ (19) -- $ (19) --
--------- --------- --------- ---------
Income available to common
stockholders..................... $ 83 $ 691 $ 273 $ 1,371
========= ========= ========= =========
BASIC EARNINGS PER COMMON SHARE:
Basic earnings per share before
extraordinary item and
cumulative effect of change
in accounting principle.......... $ 0.03 $ 0.29 $ 0.11 $ 0.62
Extraordinary item - gain on
early extinguishment of debt,
net of income taxes.............. -- 0.00 -- 0.00
Cumulative effect of change in
accounting principle, net of
income taxes..................... -- -- -- (0.05)
--------- --------- --------- ---------
Basic earnings per common share..... $ 0.03 $ 0.29 $ 0.11 $ 0.57
========= ========= ========= =========
DILUTED EARNINGS PER COMMON SHARE:
Diluted earnings per share before
extraordinary item and
cumulative effect of change in
accounting principle............. $ 0.03 $ 0.28 $ 0.11 $ 0.61
Extraordinary item - gain on early
extinguishment of debt, net of
income taxes..................... -- 0.00 -- 0.00
Cumulative effect of change in
accounting principle, net of
income taxes..................... -- -- -- (0.05)
Diluted earnings per common share... $ 0.03 $ 0.28 $ 0.11 $ 0.56
========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(In thousands)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
---------------------- ---------------------
2002 2001 2002 2001
---------- ---------- --------- ----------
(unaudited) (unaudited)
NET INCOME........................ $ 102 $ 691 $ 292 $ 1,371
OTHER COMPREHENSIVE INCOME-
Unrealized gains (losses) on
securities:
Unrealized holding gains
(losses) arising during the
period, net of income taxes.. 1,429 (261) 1,209 914
Less: reclassification
adjustment for securities
gains included in net income,
net of income taxes.......... (247) (411) (537) (896)
Net gain (loss) on derivative
instruments designated and
qualifying as cash flow
hedging instruments, net of
income taxes. ................. -- (38) -- 25
---------- ---------- --------- ----------
OTHER COMPREHENSIVE INCOME (LOSS).. 1,182 (710) 672 43
---------- ---------- --------- ----------
COMPREHENSIVE INCOME (LOSS)........ $ 1,284 $ (19) $ 964 $ 1,414
========== ========== ========= ==========
The accompanying notes are an integral part of these consolidated financial
statements.
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
For the Six Months Ended June 30, 2002
(In thousands, except share data)
Capital Capital Accumulated
Preferred Stock Surplus Common Stock Surplus Other
----------------- Preferred ----------------- Common Retained Treasury Comprehensive
Shares Amount Stock Shares Amount Stock Earnings Stock Income Total
-------- -------- --------- --------- ------ ------- -------- -------- ------------- ---------
Balance, December 31, 2001 -- $ -- $ -- 2,442,050 $ 24 $14,084 $15,435 $ (513) $ 1,649 $ 30,679
Net income
(unaudited).............. -- -- -- -- -- -- 292 -- -- 292
Other comprehensive
income - Change in
unrealized holding
gain on securities
available for sale,
net of income taxes
and reclassification
adjustment (unaudited)... -- -- -- -- -- -- -- -- 672 672
Issuance of preferred
stock (unaudited)........ 150 -- 1,500 -- -- -- -- -- -- 1,500
Preferred stock
dividends (unaudited)..... -- -- -- -- -- -- (19) -- -- (19)
Issuance of common stock
(unaudited)............... -- -- -- 297,759 3 2,497 -- -- -- 2,500
Other (unaudited) -- -- -- 1,000 -- 11 -- -- -- 11
-------- -------- --------- --------- ------ ------- -------- -------- ------------- ---------
Balance, June 30, 2002
(unaudited)................ 150 $ $ 1,500 2,740,809 $ 27 $16,592 $ 15,708 $ (513) $ 2,321 $ 35,635
======== ======== ========= ========= ====== ======= ======== ======== ============= =========
The accompanying notes are an integral part of these consolidated financial
statements.
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Six Months Ended June 30
(In thousands)
2002 2001
----------- ----------
(unaudited)
OPERATING ACTIVITIES:
Net Income.......................................... $ 292 $ 1,371
Adjustments to reconcile net income to net
cash provided by operating activities -
Provision for credit losses...................... 402 950
Depreciation and amortization.................... 747 667
Amortization of intangible assets................ 350 244
Net premium amortization on investment
securities..................................... 1,445 935
Proceeds from loans recovered.................... 31 93
Change in interest receivable and other
assets, net.................................... 897 (532)
Change in dividend payable - trust preferred
securities..................................... (9) 42
Net realized gains on sales of investment
securities..................................... (796) (1,327)
Change in other liabilities, net................. 715 4,230
----------- ----------
Net cash provided by operating activities..... 4,074 6,673
----------- ----------
INVESTING ACTIVITIES:
Purchases of investment securities.................. (52,190) (70,234)
Proceeds from sales of investment securities........ 30,104 106,760
Proceeds from maturities of investment
securities........................................ 28,335 34,936
Net increase in loans............................... (7,680) (51,488)
Additions to premises, leasehold improvements
and equipment..................................... (2,144) (1,043)
Proceeds from sale of premises and equipment........ -- 47
Cash paid for acquisition........................... (15,500) --
Originations of loans to be sold.................... (36,717) (47,588)
Proceeds from sale of loans......................... 36,717 47,588
Net cash provided by (used in) investing ----------- ----------
activities................................... (19,075) 18,978
----------- ----------
FINANCING ACTIVITIES:
Net increase (decrease) in demand, savings,
NOW and money market accounts..................... 14,985 (13,660)
Net increase in time deposits....................... 3,647 26,172
Net decrease in short-term and FHLB borrowings...... (17,383) (42,325)
Repayments of long-term borrowings.................. -- (105)
Proceeds from long-term borrowings.................. 8,530 --
Amortization of discount on subordinated
debentures........................................ 43 --
Proceeds from issuance of stock..................... 1,500 --
Payment of preferred stock dividends................ (19) --
Other............................................... 11 40
----------- ----------
Net cash provided by (used in)
financing activities.......................... 11,314 (29,878)
----------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS.............. (3,687) (4,227)
CASH AND CASH EQUIVALENTS, beginning of period......... 23,972 15,583
----------- ----------
CASH AND CASH EQUIVALENTS, end of period............... $ 20,285 $ 11,356
=========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid....................................... $ 9,041 $ 12,943
=========== ==========
Income taxes paid................................... $ -- $ 741
=========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
BNCCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2002
NOTE 1 - BNCCORP, Inc.
BNCCORP, Inc. ("BNCCORP" or the "Company") 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.,
Milne Scali & Company and BNC Asset Management, Inc., the "Bank"). BNCCORP,
through these wholly owned subsidiaries, which operate from twenty-one locations
in North Dakota, Minnesota and Arizona, provides a broad range of banking and
financial services to small and mid-size businesses and individuals.
The consolidated financial statements included herein are for BNCCORP, Inc. and
its subsidiaries. All significant intercompany accounts and transactions have
been eliminated.
NOTE 2 - Basis of Presentation
The accompanying interim consolidated financial statements have been prepared by
BNCCORP, Inc., without audit, in accordance with accounting principles generally
accepted in the United States for interim financial information and pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures made are adequate to make the information
presented not misleading.
The unaudited consolidated financial statements as of June 30, 2002 and for the
three and six-month periods ended June 30, 2002 and 2001 include, in the opinion
of management, all adjustments, consisting solely of normal recurring
adjustments, necessary for a fair presentation of the financial results for the
respective interim periods and are not necessarily indicative of results of
operations to be expected for the entire fiscal year ending December 31, 2002.
The accompanying interim consolidated financial statements have been prepared
under the presumption that users of the interim consolidated financial
information have either read or have access to the audited consolidated
financial statements for the year ended December 31, 2001. Accordingly, footnote
disclosures which would substantially duplicate the disclosures contained in the
December 31, 2001 audited consolidated financial statements have been omitted
from these interim consolidated financial statements. It is suggested that these
interim consolidated financial statements be read in conjunction with the
audited consolidated financial statements for the year ended December 31, 2001
and the notes thereto.
NOTE 3 - Reclassifications
Certain of the 2001 amounts have been reclassified to conform with the 2002
presentations. These reclassifications had no effect on net income or
stockholders' equity.
NOTE 4 - 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 for the three-month periods ended June 30:
Net Earnings
Income Shares Per Share
----------- ------------ -----------
2002
Basic earnings per share:
Net income............................ $ 102,000 2,645,213 $ 0.04
Dividends on preferred stock.......... (19,000) 2,645,213 (0.01)
----------- -----------
Income attributable to common
stockholders........................ $ 83,000 2,645,213 $ 0.03
=========== ===========
Effect of dilutive shares -
Options............................. 24,982
------------
Diluted earnings per share:
Net income............................ $ 102,000 2,670,195 $ 0.04
Dividends on preferred stock.......... (19,000) 2,670,195 (0.01)
----------- -----------
Income attributable to common
stockholders........................ $ 83,000 2,670,195 $ 0.03
=========== ===========
2001
Basic earnings per share:
Income before extraordinary item...... $ 687,000 2,394,330 $ 0.29
Extraordinary item - gain on early
extinguishment of debt, net of
income taxes........................ 4,000 2,394,330 0.00
----------- -----------
Income available to common
stockholders........................ $ 691,000 2,394,330 $ 0.29
=========== ===========
Effect of dilutive shares -
Options............................. 31,939
------------
Diluted earnings per share:
Income before extraordinary item...... $ 687,000 2,426,269 $ 0.28
Extraordinary item - gain on early
extinguishment of debt, net of
income taxes........................ 4,000 2,426,269 0.00
----------- -----------
Income available to common
stockholders........................ $ 691,000 2,426,269 $ 0.28
=========== ===========
The following table shows the amounts used in computing EPS and the effect on
weighted average number of shares of potential dilutive common stock issuances
for the six-month periods ended June 30:
Net Earnings
Income Shares Per Share
----------- ------------ -----------
2002
Basic earnings per share:
Net Income............................ $ 292,000 2,522,871 $ 0.12
Dividends on preferred stock.......... (19,000) 2,522,871 (0.01)
----------- -----------
Income attributable to common
stockholders........................ $ 273,000 2,522,871 $ 0.11
=========== ===========
Effect of dilutive shares -
Options............................. 25,271
------------
Diluted earnings per share:
Net Income............................ $ 292,000 2,548,142 $ 0.12
Dividends on preferred stock.......... (19,000) 2,548,142 (0.01)
----------- -----------
Income attributable to common
stockholders........................ $ 273,000 2,548,142 $ 0.11
=========== ===========
2001
Basic earnings per share:
Income before extraordinary item
and cumulative effect of change
in accounting principle............. $ 1,476,000 2,394,469 $ 0.62
Extraordinary item - gain on early
extinguishment of debt, net of
income taxes........................ 8,000 2,394,469 0.00
Cumulative effect of change in
accounting principle, net of
income taxes........................ (113,000) 2,394,469 (0.05)
----------- -----------
Income available to common
stockholders........................ $ 2,394,469 $ 0.57
1,371,000
=========== ===========
Effect of dilutive shares -
Options............................. 24,400
------------
Diluted earnings per share:
Income before extraordinary item
and cumulative effect of change
in accounting principle............. $ 1,476,000 2,418,869 $ 0.61
Extraordinary item - gain on early
extinguishment of debt, net of
income taxes........................ 8,000 2,418,869 0.00
Cumulative effect of change in
accounting principle, net of
income taxes........................ (113,000) 2,418,869 (0.05)
----------- -----------
Income available to common
stockholders........................ $1,371,000 2,418,869 $ 0.56
=========== ===========
The following number of options, with exercise prices ranging from $8.20 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:
2002 2001
---------- ----------
Quarter ended March 31................... 97,508 101,570
Quarter ended June 30.................... 96,145 97,177
NOTE 5 - Segment Disclosures
BNCCORP segments its operations into two separate business activities, based on
the nature of the products and services for each segment: Banking operations and
insurance operations.
Banking operations provide traditional banking services to individuals and small
and mid-size businesses, such as accepting deposits, consumer and mortgage
banking activities and making commercial loans. The mortgage and commercial
banking activities include the origination and purchase of loans as well as
servicing of commercial loans for other institutions.
Insurance operations provide commercial and personal lines of insurance to
consumers and commercial enterprises.
The accounting policies of the two segments are the same as those described in
the summary of significant accounting policies included in the audited
consolidated financial statements for the year ended December 31, 2001.
The Company's financial information for each segment is derived from the
internal profitability reporting system used by management to monitor and manage
the financial performance of the Company. The operating segments have been
determined by how executive management has organized the Company's business for
making operating decisions and assessing performance.
The following tables present segment profit or loss, assets and a reconciliation
of segment information as of, and for the quarter ended June 30 (in thousands):
2002 2001
------------------------------------------ ----------------------------------------
Banking Insurance Other (a) Totals Banking Insurance Other(a) Totals
-------- --------- --------- ------ ------- --------- -------- ------
Net interest income................$ 3,693 $ 7 $ (537) $3,163 $ 4,346 $ 4 $ (455) 3,895
Other revenue-external
customers........................ 1,745 2,439 935 5,119 2,077 456 1,574 4,107
Depreciation and
amortization..................... 453 183 8 644 416 27 25 468
Equity in the net income
of investees..................... -- -- 430 430 -- -- 1,006 1,006
Other significant noncash
items:
Provision for credit
losses.......................... 185 -- -- 185 600 -- -- 600
Income tax expense (benefit)....... 225 79 (392) (88) 564 (8) (244) 312
Segment profit before
extraordinary item .............. 305 125 3 433 986 20 373 1,379
Extraordinary item - gain
on early extinguishment of
debt, net of income taxes........ -- -- -- -- -- -- 4 4
Segment profit..................... 305 125 3 433 986 20 377 1,383
Segment assets..................... 578,406 27,120 66,796 672,322 543,350 1,840 51,758 596,948
2002 2001
------------------------------------------------- -------------------------------------------------
Reportable Intersegment Consolidated Reportable Intersegment Consolidated
Segments Other(a) Elimination Total Segments Other(a) Elimination Total
---------- ------------ ------------ ------------ ---------- --------- ------------ ------------
Net interest income........ $ 3,700 $ (537) $ 469 $ 3,632 $ 4,350 $ (455) $ 240 $ 4,135
Other revenue-external
customers................ 4,184 935 (945) 4,174 2,533 1,574 (1,591) 2,516
Depreciation and
amortization............. 636 8 (4) 640 443 25 (7) 461
Equity in the net income
of investees............. -- 430 (430) -- -- 1,006 (1,006) --
Other significant noncash
items:
Provision for credit
losses................... 185 -- -- 185 600 -- -- 600
Income tax expense
(benefit)................ 304 (392) 80 (8) 556 (244) 41 353
Segment profit before
extraordinary item ...... 430 3 (331) 102 1,006 373 (692) 687
Extraordinary item - gain
on early extinguishment
of debt, net of income
taxes.................... -- -- -- -- -- 4 -- 4
Segment profit............. 430 3 (331) 102 1,006 377 (692) 691
Segment assets............. 605,526 66,796 (66,221) 606,101 545,190 51,758 (51,126) 545,822
- ----------------------------
(a) The financial information in the "Other" column is for the bank holding
company and BNC Asset Management, Inc.
The following tables present segment profit or loss, assets and a reconciliation
of segment information as of, and for the six months ended June 30 (in
thousands):
2002 2001
------------------------------------------ ----------------------------------------
Banking Insurance Other (a) Totals Banking Insurance Other(a) Totals
-------- --------- --------- ------- -------- --------- -------- -------
Net interest income............... $ 7,504 $ 9 $ (981) $ 6,532 $ 8,313 $ 10 $ (890) $ 7,433
Other revenue-external
customers....................... 3,643 2,929 2,081 8,653 3,922 967 2,964 7,853
Depreciation and amortization..... 885 204 16 1,105 822 52 54 928
Equity in the net income of
investees....................... -- -- 975 975 -- -- 1,995 1,995
Other significant noncash items:
Provision for credit losses..... 402 -- -- 402 950 -- -- 950
Income tax expense (benefit)...... 483 78 (600) (39) 1,046 (10) (576) 460
Segment profit before
extraordinary item and
cumulative effect of change
in accounting principle......... 867 108 106 1,081 1,900 95 491 2,486
Extraordinary item - gain on
early extinguishment of debt,
net of income taxes............. -- -- -- -- -- -- 8 8
Cumulative effect of change in
accounting principle, net of
income taxes.................... -- -- -- -- (113) -- -- (113)
Segment profit.................... 867 108 106 1,081 1,787 95 499 2,381
Segment assets.................... 578,406 27,120 66,796 672,322 543,350 1,840 51,758 596,948
2002 2001
------------------------------------------------- -------------------------------------------------
Reportable Intersegment Consolidated Reportable Intersegment Consolidated
Segments Other (a) Elimination Total Segments Other (a) Elimination Total
---------- ------------ ------------ ------------ ---------- --------- ------------ ------------
Net interest income........ $ 7,513 $ (981) $ 938 $ 7,470 $ 8,323 $ (890) $ 480 $ 7,913
Other revenue-external
customers................ 6,572 2,081 (2,084) 6,569 4,889 2,964 (3,010) 4,843
Depreciation and
amortization............. 1,089 16 (8) 1,097 874 54 (17) 911
Equity in the net income
of investees............. -- 975 (975) -- -- 1,995 (1,995) --
Other significant
noncash items:
Provision for credit
losses................ 402 -- -- 402 950 -- -- 950
Income tax expense
(benefit)............... 561 (600) 144 105 1,036 (576) 228 688
Segment profit (loss)
before extraordinary
item and cumulative
effect of change
in accounting
principle................ 975 106 (789) 292 1,995 491 (1,010) 1,476
Extraordinary item -
gain on early
extinguishment of
debt, net of
income taxes............. -- -- -- -- -- 8 -- 8
Cumulative effect of
change in accounting
principle, net of
income taxes............. -- -- -- -- (113) -- -- (113)
Segment profit............. 975 106 (789) 292 1,882 499 (1,010) 1,371
Segment assets............. 605,526 66,796 (66,221) 606,101 545,190 51,758 (51,126) 545,822
- ------------------------------------
(a) The financial information in the "Other" column is for the bank holding
company and BNC Asset Management, Inc.
NOTE 6 - Retirement of Subordinated Notes
During the first six months of 2001, the Company purchased $82,000 of its 8 5/8
percent subordinated notes due 2004. These notes were purchased at a discount
and the transactions resulted in extraordinary gains of $8,000 (net of income
taxes of $4,000). The notes were purchased using cash generated from the sale of
BNC Financial Corporation, the Company's asset-based lending subsidiary, which
was sold on December 31, 1999, and from the issuance of trust preferred
securities in July 2000.
On August 31, 2001, the Company redeemed all of the remaining notes
($12,869,000) at par plus accrued interest to the date of redemption. The
redemption resulted in an extraordinary loss of $142,000 ($.06 per share), net
of income taxes of $75,000. The notes were redeemed using cash generated from
the issuance of trust preferred securities in July 2001.
NOTE 7- Business Combination
On April 16, 2002, the Company acquired 100 percent of the voting equity
interests of Milne Scali & Company and Related Companies ("Milne Scali") for
297,759 shares of newly issued common stock (valued at $2.5 million and based on
the average closing sales price of the Company's common stock on the Nasdaq
National Market over the thirty trading days immediately preceding the closing
date) and $15.5 million in cash. To effect the transaction, the Company incurred
$8.5 million in long-term debt. Of the total $18.0 million purchase price, $7.2
million was allocated to the net assets acquired (including intangible assets)
and the excess purchase price of approximately $10.8 million over the fair value
of net assets was recorded as goodwill. As part of the transaction, deferred tax
liabilities of $2.3 million were recorded, which also increased goodwill by the
same amount. The Company and Milne Scali may consider making an Internal Revenue
Code Section 338(h)(10) election to step up the basis in the acquired assets.
Should the Company elect the Section 338(h)(10) step up in basis of assets
acquired, these adjustments to goodwill and deferred tax liabilities would be
subject to modification. If the Section 339(h)(10) election is made, all of the
goodwill will be deductible for tax purposes. Additional consideration of up to
$8.5 million is payable to the former shareholders of Milne Scali, subject to
Milne Scali achieving certain financial performance targets. In accordance with
purchase method accounting requirements, such payments would increase the cost
of the transaction in future periods.
Prospectively, the goodwill, all of which is attributable to the Company's
insurance segment, will be evaluated for possible impairment under the
provisions of SFAS No. 142. Other acquired intangible assets related to personal
and commercial insurance lines books of business totaling approximately $8.0
million will be amortized using a method that approximates the anticipated
utilization of the expirations, which will cover a period of 9.8 to 12.5 years.
Milne Scali's results of operations have been included in the Company's
consolidated financial statements since the date of the acquisition.
The following is a condensed balance sheet indicating the amount assigned to
each major asset and liability caption of Milne Scali as of the acquisition date
(amounts are in thousands):
Assets -
Cash........................................ $ 1,536
Accounts receivable......................... 1,305
Fixed assets................................ 412
Intangible assets, books of business........ 8,018
Goodwill.................................... 13,096
Other....................................... 104
----------
Total assets.................................. $ 24,471
==========
Liabilities -
Notes payable............................... $ 1,421
Insurance company payables.................. 1,486
Deferred tax liabilities.................... 2,346
Other....................................... 1,218
----------
Total liabilities............................. 6,471
Stockholders' equity........................ 18,000
----------
Total liabilities and stockholders' equity.... $ 24,471
==========
The following pro forma information has been prepared assuming that the
acquisition of Milne Scali had been consummated at the beginning of the
respective periods. The pro form financial information is not necessarily
indicative of the results of operations as they would have been had the
transaction been affected on the assumed dates (amounts are in thousands):
Six Months Ended Six Months Ended
June 30, 2002 June 30, 2001
---------------- ----------------
(Unaudited) (Unaudited)
Net interest income..................... $ 7,338 $ 7,531
Noninterest income...................... 9,826 9,867
Noninterest expense..................... 16,141 13,483
Income before extraordinary item
and cumulative effect of change in
accounting principle.................. 457 2,016
Net income............................ 457 1,911
---------------- ----------------
Basic earnings per share.............. $ 0.16 $ 0.71
---------------- ----------------
Diluted earnings per share............. $ 0.16 $ 0.70
================ ================
NOTE 8 - Issuance of Noncumulative Preferred Stock
In May 2002, BNCCORP issued 150 shares of its noncumulative preferred stock.
Each share has a preferential noncumulative dividend at an annual rate of 8.00
percent and a preferred liquidation value of $10,000 per share. The
noncumulative preferred stock is not redeemable by the Company and carries no
conversion rights.
NOTE 9 - Goodwill and Other Intangible Assets - Adoption of Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets,
("SFAS 142")
Goodwill, representing the excess of the purchase price over the fair value of
net assets acquired, results from purchase acquisitions made by the Company. On
January 1, 2002, the Company adopted SFAS 142. Under SFAS 142, goodwill
associated with business combinations completed after June 30, 2001 is not
required to be amortized. During the transition period from July 1, 2001 through
December 31, 2001, all of the Company's goodwill associated with business
combinations completed prior to July 1, 2001 was amortized over 15 to 25 year
periods. Effective January 1, 2002, the Company discontinued all goodwill
amortization.
Effective January 1, 2002, goodwill will be assessed at least annually for
impairment at the reporting unit and qualifying subsidiary levels by applying a
fair-value-based test. The Company has $437,000 of unamortized goodwill related
to five separate transactions completed prior to July 1, 2001. Pursuant to SFAS
142, the Company completed its initial goodwill impairment assessment during the
second quarter of 2002 and concluded that goodwill was not impaired as of
January 1, 2002. No subsequent events have occurred that would change the
conclusion reached.
Core deposit intangibles are amortized based on a useful life of 10 years.
Certain identifiable intangible assets that are also included in the caption
"other intangible assets" in the consolidated balance sheets are generally
amortized over a useful life of 10 to 15 years.
Adjusted Earnings - SFAS 142 Transitional Disclosure:
Effective January 1, 2002, the Company discontinued all goodwill amortization.
The following tables reconcile, for the periods presented, income before
extraordinary items and cumulative effect of change in accounting principle, net
income and earnings per share, adjusted to exclude amortization expense
recognized in those periods related to goodwill (amounts are in thousands):
For the three months For the six months
ended June 30, ended June 30,
---------------------- --------------------
2002 2001 2002 2001
---------- ---------- --------- ---------
Reported income before
extraordinary item and
cumulative effect of change
in accounting principle.......... $ 102 $ 687 $ 292 $ 1,476
Add back: goodwill amortization,
net of income taxes.............. -- 14 -- 29
---------- ---------- --------- ---------
Adjusted income before
extraordinary item and
cumulative effect of change
in accounting principle.......... $ 102 $ 701 $ 292 $ 1,505
========== ========== ========= =========
Reported net income........ ....... $ 102 $ 691 $ 292 $ 1,371
Add back: goodwill amortization,
net of income taxes.............. -- 14 -- 29
---------- ---------- --------- ---------
Adjusted net income................ $ 102 $ 705 $ 292 $ 1,400
========== ========== ========= =========
Basic earnings per common share:
Reported net income.............. $ 0.03 $ 0.29 $ 0.11 $ 0.57
Goodwill amortization,
net of income taxes.............. -- 0.01 -- 0.01
---------- ---------- --------- ---------
Adjusted net income................ $ 0.03 $ 0.30 $ 0.11 $ 0.58
---------- ---------- --------- ---------
Diluted earnings per common share:
Reported net income.............. $ 0.03 $ 0.28 $ 0.11 $ 0.56
Goodwill amortization, net
of income taxes.................. -- 0.01 -- 0.01
---------- ---------- --------- ---------
Adjusted net income................ $ 0.03 $ 0.29 $ 0.11 $ 0.57
========== ========== ========= =========
Intangible Assets:
The gross carrying amount of intangible assets and the associated accumulated
amortization at June 30, 2002 is presented in the table below (amounts are in
thousands). Amortization expense for intangible assets was $249,000 for the
quarter ended June 30, 2002 and $350,000 for the six months ended June 30, 2002.
As of June 30, 2002
-----------------------------------------
Gross Net
Carrying Accumulated Carrying
Amount Amortization Amount
---------- -------------- -------------
Intangible assets:
Core deposit intangibles........... $ 3,497 $ 2,409 $ 1,088
Insurance books of business
intangibles...................... 8,018 139 7,879
Other.............................. 874 435 439
---------- -------------- -------------
Total......................... $ 12,389 $ 2,983 $ 9,406
========== ============== =============
One intangible asset included in the "other" category above has a net carrying
value of $271,000 but is not being amortized because it has an indefinite life.
The following table shows the estimated future amortization expense for
amortized intangible assets existing on the Company's books at June 30, 2002
(amounts are in thousands). Projections of amortization expense are based on
existing asset balances as of June 30, 2002. Actual amortization expense may
differ significantly depending upon changes in market conditions:
Insurance
Core Books of
Deposit Business
Intangibles Intangibles Other Total
------------ ------------ ----------- -----------
Six months ended
December 31, 2002..... $ 175 $ 333 $ 24 $ 532
Year ended December 31,
2003.................. 350 665 48 1,063
2004.................. 350 665 48 1,063
2005.................. 233 665 48 946
2006.................. -- 665 -- 665
2007.................. -- 665 -- 665
Goodwill:
At January 1, 2002, the Company had a total of $437,000 of unamortized goodwill
relating to five separate purchase transactions completed prior to July 1, 2001.
As indicated above, pursuant to SFAS 142, the goodwill was assessed for
impairment during the second quarter of 2002. Management concluded that goodwill
was not impaired as of January 1, 2002. No subsequent events have occurred that
would change the conclusion reached.
The following table shows the change in goodwill between January 1, 2002 and
June 30, 2002 (amounts are in thousands):
Balance, January 1, 2002 $ 437
Goodwill attributable to purchase acquisition..... 13,511
----------
Balance, June 30, 2002............................ $ 13,948
==========
NOTE 10 - Derivative Activities
During May and June 2001, the Company purchased interest rate cap contracts with
notional amounts totaling $40,000,000 to mitigate interest rate risk in
rising-rate scenarios. The referenced interest rate is three-month LIBOR with
$20,000,000 of 4.50 percent contracts having three year maturities and
$20,000,000 of 5.50 percent contracts having five year maturities. The total
paid for the contracts was $1,246,000. The contracts are reflected in the
Company's consolidated balance sheet at their current combined fair value of
$447,000. The contracts are not being accounted for as hedges under SFAS 133. As
a result, the impact of marking the contracts to fair value has been, and will
continue to be, included in net interest income. During the three months ended
June 30, 2002 and 2001, the impact of marking the contracts to market was
$(389,000) and $42,000, respectively. During the six months ended June 30, 2002
and 2001, the impact of marking the contracts to market was $(468,000) and
$42,000, respectively.
NOTE 11 - Recently Adopted Accounting Standards
In August 2001, the Financial Accounting Standards Board ("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 adopted SFAS 144 on
January 1, 2002 and the adoption of the statement did not have a material
impact.
NOTE 12 - Subsequent Event
On July 26, 2002, BNC National Bank signed a definitive branch purchase and
assumption agreement (the "Agreement") with Alerus Financial ("Alerus") under
which Alerus has agreed to purchase the assets of BNC National Bank's Fargo,
North Dakota branch office. The transaction includes the purchase of the bank
building along with approximately $25 million in loans as well as the assumption
of approximately $23 million in deposits. The transaction is scheduled to close
on or before September 30, 2002 pending regulatory approval.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Comparison of Financial Condition at June 30, 2002 and December 31, 2001
Assets. Total assets increased $21.0 million, from $585.1 million at December
31, 2001 to $606.1 million at June 30, 2002. The following table presents the
Company's assets by category as of June 30, 2002 and December 31, 2001, as well
as the amount and percent of change between the two dates. Significant changes
are discussed in lettered explanations below the table (amounts are in
thousands):
Change
------------------------
June 30, December 31,
Assets 2002 2001 $ %
- -------------------------- ------------ ------------ ----------- -----------
Cash and due from banks... $ 14,931 $ 16,346 $ (1,415) (8.7)%
Interest-bearing
deposits with banks..... 354 126 228 181.0 %
Federal funds sold........ 5,000 7,500 (2,500) (33.3)%
Investment securities
available for sale...... 207,159 211,801 (4,642) (2.2)%(a)
Federal Reserve and
Federal Home Loan
Bank Stock.............. 6,216 7,380 (1,164) (15.8)%
Loans and leases, net..... 323,713 316,466 7,247 2.3 %(a)
Premises, leasehold
improvements and
equipment, net.......... 17,212 15,403 1,809 11.7 %
Interest receivable....... 2,812 3,008 (196) (6.5)%
Other assets.............. 5,350 4,856 494 10.2 %
Goodwill.................. 13,948 437 13,511 3091.8 %(b)
Other intangible
assets, net.............. 9,406 1,734 7,672 442.4 %(c)
------------ ------------ -----------
Total assets........ $ 606,101 $ 585,057 $ 21,044 3.6 %
============ ============ ===========
- --------------------
(a) The Company implemented a balance sheet leveraging strategy in 1999 and
2000 during which time it increased its earning asset portfolio by
purchasing investment securities funded by FHLB borrowings. This strategy,
combined with market interest rate developments, resulted in a low
loan-to-assets ratio relative to the Company's peers and unrealized gains
in the investment portfolio. During the six months ended June 30, 2002, the
Company continued to shift a portion of its earning asset portfolio from
investment securities to loans in response to loan demand in its markets,
including the Arizona market. Sales of investment securities during the six
months generated realized gains of $366,000. These gains are included in
noninterest income in the Consolidated Statements of Operations.
(b) The increase in goodwill represents the goodwill acquired in the Milne
Scali acquisition, which was completed on April 16, 2002.
(c) The increase in other intangible assets represents intangible assets
acquired in the Milne Scali acquisition which relate to the personal and
commercial insurance lines books of business.
Allowance for Credit Losses. The following table sets forth information
regarding changes in the Company's allowance for credit losses for the three and
six-month periods ended June 30, 2002 (amounts are in thousands):
Three Months Six Months
Ended June 30, Ended June 30,
------------------------- ------------------------
2002 2001 2002 2001
----------- ------------ ----------- -----------
Balance, beginning of
period................... $ 4,486 $ 3,956 $ 4,325 $ 3,588
Provision for credit
losses................... 185 600 402 950
Loans charged off.......... (47) (55) (131) (83)
Loans recovered............ 3 47 31 93
----------- ------------ ----------- -----------
Balance, end of period..... $ 4,627 $ 4,548 $ 4,627 $ 4,548
=========== ============ =========== ===========
Ending loan portfolio ..... $ 328,340 $ 320,377
=========== ============
Allowance for credit
losses as a percentage
of ending loan
portfolio................ 1.41% 1.42%
As of June 30, 2002 the Company's allowance for credit losses was 1.41 percent
of total loans as compared to 1.35 percent at December 31, 2001 and 1.42 percent
at June 30, 2001. Net (charge-offs)/recoveries as a percentage of average loans
for the three and six month periods ended June 30, 2002 and 2001 were as
follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Ratio of net
(charge-offs)/recoveries
to average total loans..... (0.01)% (0.00)% (0.03)% 0.00%
Ratio of net
(charge-offs)/recoveries
to average total loans,
annualized............... (0.05)% (0.01)% (0.06)% 0.01%
The provisions for loan losses for the three and six month periods ended June
30, 2002 were substantially lower than the provisions for the same periods in
2001 due to the fact that loans outstanding increased much more significantly
between December 31, 2000 and June 30, 2001 ($51.5 million) compared to the
increase between December 31, 2001 and June 30, 2002 ($7.5 million).
Additionally, during the first half of 2001, the Company's construction
portfolio had begun to show signs of deterioration. This prompted increased
provisions for loan losses over the course of the first six months of 2001 as
compared to the six-month period ended June 30, 2002.
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.
Qualitative 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.
Estimating the risk and amount of loss on any loan is subjective and actual
losses may vary from current estimates. Additionally, 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.
Although management believes that the allowance for credit losses is adequate to
cover losses in the loan portfolio as well as other credit exposures, there can
be no assurance that the allowance will prove sufficient to cover actual 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 the Company to make
additional provisions to the allowance based upon their judgments about
information available to them at the time of the examination.
Nonperforming Assets. The following table sets forth information concerning the
Company's nonperforming assets as of the dates indicated (amounts are in
thousands):
June 30, December 31,
2002 2001
---------------- ----------------
(Unaudited)
Nonperforming loans:
Loans 90 days or more delinquent and
still accruing interest.................. $ 211 $ 983
Nonaccrual loans.......................... 3,734 3,391
Restructured loans........................ -- 5
---------------- ----------------
Total nonperforming loans.................... 3,945 4,379
Other real estate owned and
repossessed assets........................ 172 70
---------------- ----------------
Total nonperforming assets................... $ 4,117 $ 4,449
================ ================
Allowance for credit losses.................. $ 4,627 $ 4,325
================ ================
Ratio of total nonperforming assets
to total assets........................... 0.68% 0.76%
Ratio of total nonperforming loans to
total loans............................... 1.20% 1.36%
Ratio of allowance for credit losses
to total nonperforming loans.............. 117% 99%
Nonperforming loans consist of loans 90 or more days past due for which the
Company continues to accrue interest, nonaccrual loans and loans on which the
original terms have been restructured.
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. Company lending and management
personnel monitor these loans closely.
Loans over 90 days or more delinquent and still accruing interest decreased
$772,000 between December 31, 2001 and June 30, 2002. This decrease was largely
attributable to a commercial credit relationship totaling $956,000 having been
brought to a current status. This reduction was partially offset by the addition
of some smaller credits to the category between December 31, 2001 and June 30,
2002.
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. Of the $3.7 million of loans in this
category at June 30, 2002, $2.9 million relates to two commercial customers and
loans for one of these customers are partially SBA-guaranteed.
Nonaccrual loans increased $343,000 during the same period. This increase was
primarily attributable to the addition of a commercial relationship that totaled
$658,000 at June 30, 2002. This increase was partially offset by reductions in
other commercial credits due to principle collections, a loan reclassed to other
real estate owned and pay downs due to liquidation of collateral on some loans
in this category at December 31, 2001
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, management periodically performs
valuations 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.
Liabilities. Total liabilities increased $16.1 million, from $532.1 million at
December 31, 2001 to $548.2 million at June 30, 2002. The following table
presents the Company's liabilities by category as of June 30, 2002 and December
31, 2001 as well as the amount and percent of change between the two dates.
Significant changes are discussed in lettered explanations below the table
(amounts are in thousands):
Change
---------------------
June 30, December 31,
Liabilities 2002 2001 $ %
- ------------------------- ------------- ------------- ---------- --------
DEPOSITS:
Noninterest - bearing.... $ 39,568 $ 43,055 $ (3,487) (8.1)%
Interest - bearing(Y)
Savings, NOW and
money market........... 189,125 170,653 18,472 10.8 %(a)
Time deposits $100,000
and over.............. 81,343 83,809 (2,466) (2.9)%
Other time deposits.... 116,565 110,452 6,113 5.5 %(b)
Short-term borrowings.... 3,377 760 2,617 344.3 %
FHLB borrowings.......... 97,200 117,200 (20,000) (17.1)%(c)
Long-term borrowings..... 8,543 13 8,530 -- (d)
Other liabilities........ 12,467 6,192 6,275 101.3% (e)
------------- ------------- ----------
Total liabilities.. $ 548,188 $ 532,134 $ 16,054 3.0%
============= ============= ==========
- -------------------
(a) The increase in savings, NOW and money market accounts is attributable to
continued growth in the Company's Wealthbuilder money market deposit
account primarily in the Minnesota and Arizona markets.
(b) Other time deposits increased during the six months ended June 30, 2002 due
to special CD promotions the Company ran in select markets.
(c) The Company's FHLB borrowings decreased $20.0 million because two $10.0
million advances matured in January 2002.
(d) The Company incurred $8.5 million of long term debt at the time of the
Milne Scali acquisition in April 2002.
(e) The increase in other liabilities includes the $2.3 million of deferred tax
liabilities recorded as part of the Milne Scali purchase transaction, along
with other liabilities of Milne Scali including insurance company payables.
Stockholders' Equity. The Company's equity capital increased $5.0 million
between December 31, 2001 and June 30, 2002. This increase was primarily
attributable to the issuance of $1.5 million of preferred stock, $292,000 of
earnings recorded for the six months ended June 30, 2002, $2.5 million of common
stock issued in the Milne Scali acquisition and a $672,000 increase in the net
unrealized holding gain on securities available for sale.
Capital Adequacy and Expenditures. BNCCORP'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. The following
table includes the risk-based and leverage capital ratios of the Company and its
banking subsidiary as of June 30, 2002:
Tier 1 Total
Risk-Based Risk-Based Tier 1
Ratio Ratio Leverage Ratio
------------- ------------- --------------
BNCCORP, consolidated......... 5.70% 9.55% 4.10%
BNC National Bank............. 9.04% 10.17% 6.49%
As of June 30, 2002, BNCCORP and its subsidiary bank exceeded capital adequacy
requirements and the bank was considered "well capitalized" under prompt
corrective action provisions.
Comparison of Operating Results for the Three and
Six Month Periods Ended June 30, 2002 and 2001
General. Net income for the three month period ended June 30, 2002 was $102,000,
or $0.03 per common share on a diluted basis. For the same quarter of 2001, net
income was $691,000 or $0.28 per share, on a diluted basis. There were no
extraordinary gains or losses in the second quarter of 2002, whereas results for
the year-ago period included a $4,000 extraordinary gain on early extinguishment
of debt. Results for the quarter primarily reflected a decrease in net interest
income, along with higher noninterest expenses associated with the Company's
expanding market presence in Arizona. These factors were partly offset by
increased noninterest income, especially from insurance activities. The Arizona
operations include three banking and loan offices as well as the Milne Scali &
Company insurance agency headquartered in Phoenix and acquired on April 16,
2002. Net interest income was approximately $3.6 million for the three months
ended June 30, 2002, compared with $4.1 million for the second quarter of 2001,
with much of the difference attributable to a $389,000 write-down of interest
rate hedging instruments in the current period. Noninterest income rose to
nearly $4.2 million for the 2002 second quarter, compared with $2.5 million in
the same period in 2001, largely due to a sharp rise in insurance commissions
generated by the Milne Scali acquisition. Noninterest expense was $7.5 million
for the second quarter of 2002, up from $5.0 million for the year-age quarter,
for the reasons discussed above.
For the first half of 2002, net income was approximately $292,000, or $0.11 per
common share on a diluted basis. In the six months of 2001, net income was $1.37
million, or $0.56 per share, including an extraordinary gain on the early
extinguishment of debt of $8,000, and a charge for the cumulative effect of a
change in accounting principle of $113,000 (both net of income taxes).
The returns on average assets and average common stockholders' equity, from
continuing operations, were 0.07 and 1.24 percent, respectively, for the three
months ended June 30, 2002 as compared to 0.49 and 9.10 percent for the same
period one year earlier. The returns on average assets and average common
stockholders' equity, from continuing operations, were 0.10 and 1.83 percent,
respectively, for the six months ended June 30, 2002 as compared to 0.53 and
9.89 percent for the same period one year earlier.
Net Interest Income. Net interest income for the three-month period ended June
30, 2002 decreased $503,000, or 12.2 percent. Net interest margin decreased to
2.72 percent for the quarter ended June 30, 2002 from 3.16 percent for the same
period one year earlier. Net interest income and margin for the three-month
periods ended June 30, 2002 and 2001 were impacted by derivative
contract-related transactions during the periods totaling $(243,000) and
$389,000, respectively. Without these derivative transactions, net interest
income for these periods would have been $4.0 and $3.9 million, respectively, a
3.3 percent improvement in 2002. Net interest margin would have been 3.01
percent for the quarter ended June 30, 2002 compared to 2.97 percent for the
same period in 2001.
Net interest income for the six-month period ended June 30, 2002 decreased
$443,000, or 5.6 percent. Net interest margin decreased to 2.84 percent for the
six months ended June 30, 2002 from 3.03 percent for the same period one year
earlier. Net interest income and margin for the six-month periods ended June 30,
2002 and 2001 were impacted by derivative contract-related transactions during
the periods totaling $(299,000) and $468,000, respectively. Without these
derivative transactions, net interest income for these periods would have been
$7.9 and $7.6 million, respectively, a 4.3 percent improvement in 2002. Net
interest margin would have been 3.02 percent for the six months ended June 30,
2002 compared to 2.92 percent for the same period in 2001.
The following tables present average balances, interest earned or paid,
associated yields on interest-earning assets and costs on interest-bearing
liabilities for the three and six month periods ended June 30, 2002 and 2001, as
well as the changes between the periods presented. Significant factors
contributing to the increase (decrease) in net interest income and net interest
margin are discussed in lettered notes below the tables (amounts are in
thousands):
Three Months Ended June 30,
------------------------------------------------------------
2002 2001 Change
---------------------------- ----------------------------- ------------------------------
Interest Average Interest Average Interest Average
Average earned yield or Average earned yield or Average earned yield or
Balance or paid cost balance or paid cost balance or paid cost
-------- -------- -------- --------- -------- -------- --------- --------- --------
Interest-earning
assets
Federal funds
sold/interest
bearing due from... $ 6,395 $ 31 1.94% $ 260 $ 3 4.63% $ 6,135 $ 28 -2.69%
Investments.......... 211,657 2,859 5.42% 226,755 3,424 6.06% (15,098) (565) -0.64%(a)
Loans................ 322,180 5,445 6.78% 302,626 6,770 8.97% 19,554 (1,325) -2.19%(a)
Allowance for loan
losses............. (4,474) -- ( 3,943) -- (531) --
-------- -------- --------- -------- --------- ---------
Total interest-
earning assets.... $535,758 8,335 6.24% $525,698 10,197 7.78% $ 10,060 (1,862) -1.54%
======== -------- ======== -------- ========= ---------
Interest-bearing
liabilities
NOW & money
market accounts.... $185,354 784 1.70% $153,769 1,270 3.31% $ 31,585 (486) -1.61%(b)
Savings.............. 4,276 9 0.84% 3,692 15 1.63% 584 (6) -0.79%
Certificates of
deposit under
$100,000........... 114,954 1,150 4.01% 103,281 1,455 5.65% 11,673 (305) -1.64%(c)
Certificates of
deposit $100,000
and over........... 81,812 924 4.53% 79,228 1,213 6.14% 2,584 (289) -1.61%(d)
-------- -------- -------- ------- --------- ---------
Interest - bearing
deposits........... $386,396 2,867 2.98% 339,970 3,953 4.66% 46,426 (1,086) -1.68%
Short-term borrowings 1,894 10 1.69% 18,677 216 4.64% (16,783) (206) -2.95%(e)
FHLB borrowings...... 97,200 1,736 7.16% 115,188 1,605 5.59% (17,988) 131 1.57%(e)
Long-term borrowings. 7,115 90 5.13% 12,592 288 9.17% (5,477) (198) -4.04%(f)
-------- -------- -------- ------- --------- ---------
Total borrowings... 106,209 1,836 6.93% 146,457 2,109 5.78% (40,248) (273) 1.15%
-------- -------- -------- ------- --------- ---------
Total
interest-bearing
liabilities....... 492,605 4,703 3.83% $486,427 6,062 5.00% $ 6,178 (1,359) -1.17%
======== -------- ======== ------- ========= ---------
Net interest
income/spread..... $ 3,632 2.41% $ 4,135 2.78% $ (503) -0.37%
======== ======= =========
Net interest margin 2.72% 3.16% -0.44%
Notation:
Noninterest-bearing
deposits............. $ 35,596 -- $ 28,662 -- $ 6,934 --
-------- -------- -------- ------- --------- ---------
Total deposits.... $421,991 $ 2,867 2.73% $368,632 $ 3,953 4.30% $ 53,359 $ (1,086) -1.57%
======== ======== ======== ======= ========= =========
Taxable equivalents:
Total interest-
earning assets.... $535,758 $ 8,450 6.33% $525,698 $10,303 7.86% $ 10,060 $ (1,853) -1.53%
Net interest
income/spread..... -- $ 3,748 2.50% -- $ 4,241 2.86% -- $ (493) -0.36%
Net interest
margin............ -- -- 2.81% -- -- 3.24% -- -- -0.43%
Notation:
Net interest
income/margin
without impact of
derivative
contracts........ -- $ 4,021 3.01% -- $ 3,892 2.97% -- $ 129 0 .04%
Six Months Ended June 30,
------------------------------------------------------------
2002 2001 Change
---------------------------- ----------------------------- ------------------------------
Interest Average Interest Average Interest Average
Average earned yield or Average earned yield or Average earned yield or
Balance or paid cost balance or paid cost balance or paid cost
-------- -------- -------- --------- -------- -------- --------- --------- --------
Interest-earning
assets
Federal funds
sold/interest
bearing due from.... $ 4,109 $ 45 2.21% $ 847 $ 23 5.48% $ 3,262 $ 22 -3.27%
Investments........... 210,952 5,589 5.34% 243,018 7,779 6.46% (32,066) (2,190) -1.12%(a)
Loans................. 320,122 10,787 6.80% 286,196 12,888 9.08% 33,926 (2,101) -2.28%(a)
Allowance for loan
losses............. (4,387) -- ( 3,789) -- (598) --
-------- -------- --------- -------- --------- ---------
Total interest-
earning assets..... $530,796 16,421 6.24% $526,272 20,690 7.93% $ 4,524 (4,269) -1.69%
======== -------- ========= -------- ========= ---------
Interest-bearing
liabilities
NOW & money market
accounts............ $177,445 1,444 1.64% $154,083 2,994 3.92% $ 23,362 (1,550) -2.28%(b)
Savings............... 4,234 17 0.81% 3,570 33 1.86% 664 (16) -1.05%
Certificates of
deposit under
$100,000............ 113,186 2,311 4.12% 100,046 2,872 5.79% 13,140 (561) -1.67%(c)
Certificates of
deposit $100,000
and over............ 81,085 1,858 4.62% 72,562 2,273 6.32% 8,523 (415) -1.70%(d)
-------- -------- --------- -------- --------- --------
Interest - bearing
deposits............ 375,950 5,630 3.02% 330,261 8,172 4.99% 45,689 (2,542) -1.97%
Short-term borrowings. 4,648 52 2.26% 12,467 311 5.03% (7,819) (259) -2.77%(e)
FHLB borrowings....... 98,222 3,177 6.52% 130,041 3,713 5.76% (31,819) (536) 0.76%(e)
Long-term borrowings.. 3,560 92 5.21% 12,614 581 9.29% (9,054) (489) -4.08(f)
-------- -------- --------- -------- --------- --------
Total borrowings.... 106,430 3,321 6.29% 155,122 4,605 5.99% (48,692) (1,284) -0.30%
-------- -------- --------- -------- --------- --------
Total
interest-bearing
liabilities......... $482,380 8,951 3.74% $485,383 12,777 5.31% $ (3,003) (3,826) -1.57%
======== -------- ========= -------- ========= --------
Net interest
income/spread....... $ 7,470 2.50% $ 7,913 2.62% $ (443) -0.12%
======== ======== ========
Net interest margin. 2.84% 3.03% -0.19%
Notation:
Noninterest-bearing
deposits............. $ 34,364 -- $ 30,335 -- $ 4,029 --
-------- -------- --------- -------- --------- --------
Total deposits...... $410,314 $ 5,630 2.77% $360,596 $ 8,172 4.57% $ 49,718 $(2,542) -1.80%
======== ======== ========= ======== ========= ========
Taxable equivalents:
Total interest-
earning assets....... $530,796 $16,649 6.33% $526,272 $20,893 8.01% $ 4,524 $(4,244) -1.68%
Net interest
income/spread....... -- $ 7,699 2.59% -- $ 8,116 2.70% -- $ (417) -0.11%
Net interest margin. -- -- 2.92% -- -- 3.11% -- -- -0.19%
Notation:
Net interest
income/margin
without impact
of derivative
contracts.......... -- $ 7,938 3.02% -- $ 7,614 2.92% -- $ 324 0.10%
- -----------------------------
(a) Investments and Loans - During 2001 and 2002, the Company sold investment
securities and used the proceeds to fund loan growth resulting in lower
average balances of investment securities and higher average balances for
loans. The decreased yields in the investment and loan portfolios reflect
the current rate environment caused by multiple Federal Reserve rate
reductions during 2001. A significant amount of the average loan volume
increase was generated in the Arizona market which the Company entered in
2001.
(b) NOW and Money Market Accounts - Increased average balances of NOW and money
market accounts represents additional growth in the Company's floating-rate
Wealthbuilder deposit products including growth from the Arizona market.
The decreased costs are reflective of the lower rate environment in 2002
compared to 2001.
(c) Certificates of Deposit Under $100,000 - The increase in average CD's under
$100,000 represents growth due to CD specials the Company runs from time to
time in select markets. The lower costs are representative of the lower
rate environment during 2002 compared to 2001 as CD's during 2002 renewed
and opened at lower rates than they did during the periods ended June 30,
2001.
(d) Certificates of Deposit $100,000 and Over - During the six months ended
June 30, 2002, average balances of brokered and national market CD's were
$65.8 million as compared to $54.1 million for the same period one year
earlier. The reduced costs reflect the lower interest rate environment in
2002 compared to 2001.
(e) Short-term and FHLB Borrowings - The decreased volume of short-term and
FHLB borrowings resulted from increases in other funding sources including
NOW and money market deposits, CD's under $100,000 and CD's over $100,000
as well as the decrease in investment securities as investments were sold
to fund loan growth. Additionally, $20.0 million of FHLB advances matured
in January 2002.
(f) Long-term Borrowings - During 2001, the Company redeemed all of its 8 5/8
percent subordinated notes due 2004. During 2002, the Company borrowed $8.5
million as part of the transaction involving the Milne Scali & Company
acquisition. Borrowing costs are reflective of the payoff of the 8 5/8
percent subordinated notes and the lower rate environment in 2002.
Provision for Credit Losses. The provision for credit losses was $185,000 for
the three month period ended June 30, 2002 as compared to $600,000 for the same
period one year earlier. For the six months ended June 30, 2002 and 2001, the
provision for credit losses was $402,000 and $950,000, respectively. See
"Comparison of Financial Condition at June 30, 2002 and December 31, 2001 -
Allowance for Credit Losses" for further information on the allowance for loan
losses and the related provision.
Noninterest Income. The following table presents the major categories of the
Company's noninterest income for the three and six-month periods ended June 30,
2002 and 2001 as well as the amount and percent of change between the periods.
Significant changes are discussed in lettered explanations following the table
(amounts are in thousands):
Three Months Six Months
Noninterest Income Ended June 30, Change Ended June 30, Change
---------------- --------------- ---------------- ----------------
2002 2001 $ % 2002 2001 $ %
-------- ------- ------- ------- ------- ------- ------- --------
Insurance commissions.. $ 2,417 $ 445 $1,972 443.1 % $ 2,884 $ 953 $1,931 202.6 %(a)
Fees on loans.......... 517 529 (12) (2.3)% 1,032 693 339 48.9 %(b)
Net gain on sales of
securities............. 366 609 (243) (39.9)% 796 1,327 (531) (40.0)%(c)
Brokerage income....... 324 360 (36) (10.0)% 724 709 15 2.1 %
Trust and financial
services............... 212 245 (33) (13.5)% 431 528 (97) (18.4)%(d)
Service charges........ 197 185 12 6.5 % 372 352 20 5.7 %
Rental income.......... 46 27 19 70.4 % 93 46 47 102.2 %
Other.................. 95 116 (21) (18.1)% 237 235 2 0.9 %
-------- ------- ------- ------- ------- -------
Total noninterest
income............... $ 4,174 $2,516 $1,658 65.9 % $ 6,569 $ 4,843 $1,726 35.6 %
======== ======= ======= ======= ======= =======
- -----------------
(a) The increase in insurance commission revenue is attributable to the
acquisition of Milne Scali.
(b) Loan fees included in noninterest income may vary depending upon the number
and structure of the loan transactions effected during the period.
(c) The Company sold fewer investment securities over the three and six-month
periods ended June 30, 2002 as compared to the same periods in the prior
year.
(d) Decrease is primarily attributable to a decrease in fee income from the BNC
U.S. Opportunities Fund LLC managed by BNC National Bank's Financial
Services Division.
Noninterest Expense. The following table presents the major categories of the
Company's noninterest expense for the three and six-month periods ended June 30,
2002 and 2001 as well as the amount and percent of change between the periods.
Significant changes are discussed in lettered explanations following the table
(amounts are in thousands):
Three Months Ended Six Months Ended
Noninterest Expense June 30, Change June 30, Change
------------------ ---------------- ------------------ ------------------
2002 2001 $ % 2002 2001 $ %
-------- -------- ------- ------- -------- -------- -------- --------
Salaries and employee
benefits............. $ 4,054 $ 2,552 $ 1,502 58.9% $ 6,914 $ 4,901 $ 2,013 41.1% (a)
Occupancy.............. 639 485 154 31.8% 1,173 934 239 25.6% (b)
Interest on
subordinated
debentures........... 455 233 222 95.3% 912 466 446 95.7% (c)
Professional services.. 405 346 59 17.1% 794 645 149 23.1% (d)
Depreciation
and amortization..... 391 339 52 15.3% 747 667 80 12.0% (e)
Office supplies,
telephone
and postage.......... 316 272 44 16.2% 579 502 77 15.3% (f)
Marketing and
promotion............ 274 178 96 53.9% 440 334 106 31.7% (g)
Amortization of
intangible assets.... 249 122 127 104.1% 350 244 106 43.4% (h)
FDIC and other
assessments.......... 55 49 6 12.2% 109 97 12 12.4%
Other.................. 689 435 254 58.4% 1,222 852 370 43.4% (i)
-------- -------- ------- -------- -------- --------
Total noninterest
expense.............. $ 7,527 $ 5,011 $ 2,516 50.2% $ 13,240 $ 9,642 $ 3,598 37.3%
======== ======== ======= ======== ======== ========
Efficiency ratio..... 96.4% 75.4% 94.3% 75.6%
======== ======== ======== ========
Efficiency ratio,
adjusted (j)......... 86.3% 74.6% 85.0% 73.7%
======== ======== ======== ========
(a) Average full time equivalent employees for the three and six month periods
ended June 30, 2002 were 279 and 245, respectively, as compared to 193 and
191, respectively, for the same periods in 2001. The increase is
attributable to staff additions for the Arizona market and to the
acquisition of Milne Scali, which has approximately 85 employees.
(b) Occupancy expenses have increased due to expenses associated with the
Arizona locations as well as the addition of Milne Scali.
(c) This is the expense associated with the Company's trust preferred
offerings, which closed in July 2000 ($7.5 million fixed at 12.045%) and
July 2001 ($15.0 million adjustable quarterly).
(d) The increase in professional services expenses for the three and six month
periods ended June 30, 2002 is attributable to increases in various items
in this category, including legal fees, software support services and other
consulting services.
(e) The increase in depreciation and amortization is attributable to the
additions of leasehold improvements, furniture and equipment in the Arizona
locations during 2001 along with similar expenses for Milne Scali.
(f) Increases are attributable to Arizona operations as well as the addition of
Milne Scali.
(g) Increases are attributable to promotional activities in various markets.
(h) Increases in amortization of intangible assets are largely attributable to
the amortizable intangible assets acquired in the Milne Scali acquisition.
(i) Increases in other expenses are primarily attributable to increases in
insurance expense, travel, dues and subscriptions, correspondent charges
and other miscellaneous expense items in this category.
(j) Efficiency ratio adjusted for impact of derivative contracts and interest
on subordinated debentures.
Income Tax Expense. The Company recorded an income tax benefit of $8,000 for the
three months ended June 30, 2002. This is compared to a tax provision of
$353,000 for the same period in 2001.
Income tax expense for the six months ended June 30, 2002 decreased $583,000 as
compared to the same period in 2001 due to the decrease in pre-tax income. The
estimated effective tax rates for the six month periods ended June 30, 2002 and
2001 were 26.4 and 31.8 percent, respectively. The decrease in effective tax
rate for 2002 is largely attributable to the percentage of tax-exempt income to
total income.
Earnings per Common Share. See Note 4 to the interim Consolidated Financial
Statements included under Item 1 for a summary of the EPS calculations for the
three and six month periods ended June 30, 2002 and 2001.
Liquidity
Liquidity. 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 interim consolidated financial
statements included under Item 1 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, the Company utilizes brokered deposits,
sells securities under agreements to repurchase and borrows overnight federal
funds. The Company's banking subsidiary is a member of the FHLB, which affords
it the opportunity to borrow funds on terms ranging from overnight to ten years
and beyond. Borrowings from the FHLB are generally collateralized by the bank's
mortgage loans and various investment securities. The Company has also obtained
funding through the issuance of trust preferred securities.
The following table sets forth, for the six months ended June 30, 2002 and 2001,
a summary of the Company's major sources and (uses) of funds. The summary
information is derived from the Consolidated Statements of Cash Flows included
under Item 1 (amounts are in thousands):
Six Months Ended June 30,
-------------------------
Major Sources and Uses of Funds 2002 2001
----------- -----------
Proceeds from sales and maturities of
investment securities.................. $ 58,439 $ 141,696
Net increase in deposits................. 18,632 12,512
Net increase (decrease) in long-term 8,530 (105)
borrowings.............................
Purchases of investment securities....... (52,190) (70,234)
Net increase in goodwill and other $ (21,533) --
intangible assets......................
Net decrease in short-term and FHLB (17,383) (42,325)
borrowings.............................
Net increase in loans.................... (7,680) (51,488)
Given the uncertain nature of customer 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, federal funds lines with correspondent banks, wholesale and
retail repurchase agreements, brokered certificates of deposit and direct
non-brokered national certificates of deposit through national deposit networks.
The Company regularly measures its liquidity position and believes that its
management policies and guidelines will ensure adequate levels of liquidity to
fund anticipated needs of on- and off-balance sheet items. In addition, a
contingency funding plan identifies actions to be taken in response to an
adverse liquidity event.
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 Securities and Exchange Commission ("SEC") 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 Bank regularly sells
loans to others on a non-recourse basis. Sold loans are not included in the
accompanying balance sheets. The Bank generally retains the right to service the
loans as well as the right to receive a portion of the interest income on the
loans. Many of the loans sold by the Bank are commercial lines of credit for
which balances and related payment streams cannot be reasonably estimated in
order to determine the fair value of the servicing rights and/or future interest
income retained by the Bank. Upon sale, any unearned net loan fees or costs are
recognized in income.
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 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 that 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.
Income Taxes. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax basis. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. These calculations are
based on many complex factors including estimates of the timing of reversals of
temporary differences, the interpretation of Federal and state income tax laws,
and a determination of the differences between the tax and the financial
reporting basis of assets and liabilities. Actual results could differ
significantly from the estimates and interpretations used in determining the
current and deferred income tax liabilities.
Forward Looking Statements
Statements included in Item 2, "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 including the effects of such changes on derivative
contracts and associated accounting consequences; 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's business activities generate market and other risks. 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 which 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. BNCCORP's asset/liability management process is utilized to manage
the Company's interest rate risk. The measurement of interest rate risk
associated with financial instruments is meaningful only when all related and
offsetting on- and off-balance-sheet transactions are aggregated, and the
resulting net positions are identified.
Interest rate risk exposure is actively managed with the goal of minimizing the
impact of interest rate volatility on current earnings and on the market value
of equity. In general, the assets and liabilities generated through ordinary
business activities do not naturally create offsetting positions with respect to
repricing or maturity characteristics. Access to the derivatives market can be
an important element in maintaining the Company's interest rate risk position
within policy guidelines. Using off-balance-sheet instruments, principally
interest rate floors and caps, the interest rate sensitivity of specific
on-balance-sheet transactions, as well as pools of assets or liabilities, is
adjusted to maintain the desired interest rate risk profile.
The Company's primary tool in measuring and managing interest rate risk is net
interest income simulation. For purposes of this simulation, projected month-end
balances of the various balance sheet planning accounts are held constant at
their June 30, 2002 levels. Cash flow from a given planning account is
reinvested back into the same planning account so as to keep the month-end
balance constant. The static balance sheet assumption is made so as to project
the interest rate risk to net interest income embedded in the existing balance
sheet. With knowledge of the balance sheet's existing net interest income
profile, more informed strategies and factors may be developed as it relates to
the structure/mix of growth. This is a change from prior period simulations in
which projected net interest income under the various rate scenarios included
assumptions relating to planned growth and anticipated new business activities.
Interest rate caps and floors are included to the extent that they are exercised
in the 12-month simulation period. Additionally, changes in prepayment behavior
of the residential mortgage and mortgage-backed securities portfolios in each
rate environment are captured using industry estimates of prepayment speeds for
various coupon segments of the portfolio.
It is the Company's objective to manage its exposure to interest rate risk,
bearing in mind that the Company will always be in the business of taking on
rate risk and that rate risk immunization is not entirely possible. Also, it is
recognized that as exposure to interest rate risk is reduced, so too may the
overall level of net interest income.
The Company monitors the results of net interest income simulation on a
quarterly basis at regularly scheduled asset/liability management committee
("ALCO") meetings. Each quarter, net interest income is simulated for the
upcoming 12-month horizon in seven interest scenarios. The scenarios generally
modeled are parallel interest ramps of +/- 100bp, 200bp, and 300bp along with a
rates unchanged scenario, however, due to the relative low rates at present, for
purposes of this simulation, a rate -300bp scenario was not run. The parallel
movement of interest rates means all projected market interest rates move up or
down by the same amount. A ramp in interest rates means that the projected
change in market interest rates occurs over the 12-month horizon projected. For
example, in the +100bp scenario, the projected prime rate will increase from its
starting point of 4.75 percent at June 30, 2002 to 5.75 percent 12 months later.
The prime rate in this example will increase 1/12th of the overall increase of
100 basis points each month.
The net interest income simulation results for the twelve month period ending
June 30, 2003 is shown below. The impact of each interest rate scenario on
projected net interest income is displayed before and after factoring in the
estimated impact of the $40.0 million of 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..... $14,123 $15,143 $15,984 $16,740 $17,065 $17,222
Dollar change from
rates unchanged
scenario................ $(1,861) $ (841) -- $ 756 $ 1,081 $ 1,238
Percentage change from
rates unchanged
scenario................ (11.64)% (5.26)% -- 4.73% 6.76% 7.75%
Benefit/(cost) from
interest rate caps (1).. $ (425) $ (371) $ (264) $ (84) $ 187 $ 570
Total net interest income
with caps............... $13,698 $14,772 $15,720 $16,656 $17,252 $17,792
Dollar change from rates
unchanged w/caps........ $(2,022) $ (948) -- $ 936 $ 1,532 $ 2,072
Percentage change from
rates unchanged w/caps.. (12.86)% (6.03)% -- 5.95% 9.75% 13.18%
POLICY LIMITS (decline
limited to)............. 10.00% 5.00% -- 5.00% 10.00% 15.00%
- --------------------------
(1) During May and June 2001, the Company purchased several interest rate caps.
The total notional amount of the caps is $40 million. The reference rate on
the caps is three month LIBOR and the strike prices are 4.50 percent (for
$20 million of caps maturing in 2004) and 5.50 percent (for $20 million of
caps maturing in 2006).
The Company's rate sensitivity position over the projected twelve month horizon,
after factoring in the impact of the interest rate caps, is asset sensitive.
This position 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.
Because one of the objectives of asset/liability management is to manage net
interest income over a one-year planning horizon, expense guidelines are stated
in terms of maximum potential reduction in net interest income resulting from
changes in interest rates over the twelve month period. It is no less important,
however, to give attention to the absolute dollar level of projected net
interest income over the twelve month period.
The Company's general policy is to limit the percentage decrease in projected
net interest income to 5, 10 and 15 percent from the rates unchanged scenario
for the +/-100bp, 200bp, and 300bp interest rate ramp scenarios, respectively.
If the projected dollars of net interest income over the next twelve month
period are in excess of the Board and ALCO established targets, then the above
percentages decline guidelines do not apply. However, if the projected
percentage declines are within the above guidelines but the projected dollars of
net interest income are less than the Board and ALCO established targets, then
the ALCO will consider tactics to increase the projected level of dollars of net
interest income. A targeted level of net interest income is established and
approved by the Board and ALCO. This target is re-evaluated and reset at each
quarterly ALCO meeting.
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 June 30, 2002 (without 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.
Part II - Other Information
Item 2. Changes in Securities and Use of Proceeds
Pursuant to a Stock Purchase Agreement (the "Agreement"), in April 2002,
the Company issued 297,759 shares of its Common Stock to Richard W. Milne, Jr.,
Terrence M. Scali, and the other Sellers named in the Agreement in connection
with the Company's acquisition of Milne & Company Insurance, Inc. The shares of
Common Stock were issued in reliance upon the exemption from registration
provided by Section 4(2) of the Securities Act of 1933, as amended, due to the
private negotiated nature of the acquisition of this closely held company.
On May 3, 2002, the Company issued 150 shares of its noncumulative
preferred stock to Richard W. Milne and Terrence M. Scali. Each share has a
preferential noncumulative dividend at an annual rate of 8.00 percent and a
preferred liquidation value of $10,000 per share. The noncumulative preferred
stock is not redeemable by the Company and carries no conversion rights. The
proceeds of the issuance will be used for general corporate purposes. The shares
of preferred stock were issued in reliance on the exemption provided by Section
4(2) of the Securities Act of 1933, as amended.
Item 4. Submission of Matters to a Vote of Securities Holders
The annual meeting of stockholders of the Company was held on June 19, 2002
(the "Annual Meeting"). Proxies were solicited pursuant to the Securities
Exchange Act of 1934, as amended.
At the Annual meeting, Dr. Denise Forte-Pathroff, M.D., Richard M. Johnsen, Jr.
and Jerry R. Woodcox were elected to serve until the 2005 annual meeting of
stockholders. The number of votes cast for or withheld from each nominee were as
follows:
Name For Withheld
-------------------- ----------- ---------
Forte-Pathroff 2,018,517 211,613
Johnsen 2,018,517 211,613
Woodcox 2,018,517 211,613
With respect to the election of directors, there were no abstentions or
non-votes.
In addition to the directors elected at the Annual Meeting, the terms of the
following directors continued after the Annual Meeting: Gregory K. Cleveland,
David A. Erickson, John A. Hipp, M.D., Brenda L. Rebel, Brad J. Scott and Tracy
Scott.
At the Annual Meeting, the stockholders also voted on and approved a proposal to
ratify the BNCCORP, Inc. 2002 Stock Incentive Plan adopted by the Company's
Board of Directors. Holders of 1,872,152 shares voted for, holders of 347,328
shares voted against and holders of 10,650 shares abstained from voting on the
proposal. There were no non-votes with respect to the proposal.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Part II, Exhibit 10.1 - BNCCORP, Inc. 2002 Stock Incentive Plan
(incorporated by reference to Appendix A to the Company's Definitive
Proxy Statement dated May 17, 2002).
Part II, Exhibit 99 - Subsequent Review of the Company's Form 10-Q for
the Period Ended March 31, 2002.
(b) Reports on Form 8-K
The Company filed a Form 8-K on April 5, 2002, reporting, under "Item
4. Changes in the Registrant's Certifying Accountant," the resignation
of Arthur Andersen LLP as the Company's independent auditors.
The Company filed a Form 8-K on May 1, 2002, reporting, under "Item 2.
Acquisition or Disposition of Assets," the acquisition of Milne Scali.
The Company filed a Form 8-K on May 28, 2002, reporting, under "Item
4. Changes in the Registrant's Certifying Accountant," the appointment
of KPMG, LLP as the Company's independent auditors.
The Company filed a Form 8-K/A on June 28, 2002, reporting, under
"Item 7. Financial Statements and Exhibits," the financial statements
of Milne Scali, along with pro forma financial statements for BNCCORP,
Inc. and Subsidiaries.
The Company filed a Form 8-K/A on July 17, 2002, reporting, under
"Item 7. Financial Statements and Exhibits," amendments to the pro
forma financial statements for BNCCORP, Inc. and Subsidiaries
originally filed in the Form 8-K/A filed on June 28, 2002.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BNCCORP, Inc.
Date: August 13, 2002 By /s/ Gregory K. Cleveland
---------------------------------------------
Gregory K. Cleveland
President
Chief Executive Officer
By /s/ Brenda L. Rebel
---------------------------------------------
Brenda L. Rebel
Treasurer
Chief Financial Officer