U.S. Securities and Exchange Commission
Washington, D.C. 20549
------
FORM 10-Q
------
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the quarter ended September 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 (IRS Employer Identification No.)
of 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
October 31, 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)
September 30, December 31,
ASSETS 2002 2001
-------------- --------------
(unaudited)
CASH AND DUE FROM BANKS...................... $ 14,060 $ 16,346
INTEREST-BEARING DEPOSITS WITH BANKS......... 148 126
FEDERAL FUNDS SOLD........................... -- 7,500
-------------- --------------
Cash and cash equivalents............... 14,208 23,972
INVESTMENT SECURITIES AVAILABLE FOR
SALE....................................... 217,619 211,801
FEDERAL RESERVE AND FEDERAL HOME LOAN
BANK STOCK................................. 6,216 7,380
LOANS AND LEASES, net of unearned income..... 317,099 297,924
ALLOWANCE FOR CREDIT LOSSES.................. (4,939) (4,325)
-------------- --------------
Net loans and leases.................... 312,160 293,599
PREMISES, LEASEHOLD IMPROVEMENTS AND
EQUIPMENT, net.......................... 11,215 9,180
INTEREST RECEIVABLE.......................... 3,051 3,008
OTHER ASSETS................................. 4,185 4,856
GOODWILL..................................... 13,950 437
OTHER INTANGIBLE ASSETS, net................. 9,140 1,734
ASSETS OF DISCONTINUED FARGO OPERATION....... -- 29,090
-------------- --------------
$ 591,744 $ 585,057
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS:
Noninterest-bearing.................... $ 40,449 $ 30,521
Interest-bearing -
Savings, NOW and money market...... 186,708 160,721
Time deposits $100,000 and over.... 66,844 78,969
Other time deposits................ 104,408 105,066
-------------- --------------
Total deposits......................... 398,409 375,277
SHORT-TERM BORROWINGS....................... 15,390 760
FHLB BORROWINGS............................. 97,200 117,200
LONG-TERM BORROWINGS........................ 8,573 13
OTHER LIABILITIES........................... 13,336 6,192
LIABILITIES OF DISCONTINUED FARGO
OPERATION................................. -- 32,692
-------------- --------------
Total liabilities............. 532,908 532,134
GUARANTEED PREFERRED BENEFICIAL INTERESTS
IN COMPANY'S SUBORDINATED DEBENTURES...... 22,080 22,244
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value -
2,000,000 shares authorized;
150 shares issued and outstanding
as of September 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......... 16,594 14,084
Retained earnings...................... 16,631 15,435
Treasury stock (42,880 shares)......... (513) (513)
Accumulated other comprehensive
income, net of income taxes......... 2,517 1,649
-------------- --------------
Total stockholders' equity.... 36,756 30,679
-------------- --------------
$ 591,744 $ 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 Nine Months
Ended September 30, Ended September 30,
----------------------------- -----------------------------
2002 2001 2002 2001
------------- ------------- ------------- --------------
(unaudited) (unaudited)
INTEREST INCOME:
Interest and fees on loans............. $ 5,433 $ 6,079 $ 15,206 $ 18,276
Interest and dividends on
investment securities -
Taxable............................. 2,668 2,532 7,707 9,659
Tax-exempt.......................... 250 197 689 626
Dividends........................... 54 71 164 294
Other.................................. 26 8 71 31
------------- ------------- ------------- --------------
Total interest income...... 8,431 8,887 23,837 28,886
------------- ------------- ------------- --------------
INTEREST EXPENSE:
Deposits............................... 2,599 3,552 7,927 11,253
Short-term borrowings.................. 23 77 75 388
FHLB borrowings........................ 1,616 2,203 4,793 5,916
Long-term borrowings................... 109 195 201 776
------------- ------------- ------------- --------------
Total interest expense..... 4,347 6,027 12,996 18,333
------------- ------------- ------------- --------------
Net interest income........ 4,084 2,860 10,841 10,553
PROVISION FOR CREDIT LOSSES.............. 400 500 802 1,450
------------- ------------- ------------- --------------
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES...................... 3,684 2,360 10,039 9,103
------------- ------------- ------------- --------------
NONINTEREST INCOME:
Insurance commissions.................. 3,044 468 5,928 1,421
Net gain on sales of securities........ 819 49 1,615 1,376
Fees on loans.......................... 521 478 1,532 1,057
Brokerage income....................... 239 359 963 1,068
Service charges........................ 203 153 543 478
Trust and financial services........... 172 184 603 712
Rental income.......................... 23 22 67 32
Other.................................. 102 114 336 347
------------- ------------- ------------- --------------
Total noninterest income... 5,123 1,827 11,587 6,491
------------- ------------- ------------- --------------
NONINTEREST EXPENSE:
Salaries and employee benefits......... 4,085 2,589 10,741 7,254
Occupancy.............................. 558 432 1,601 1,229
Interest on subordinated debentures.... 464 425 1,376 891
Depreciation and amortization.......... 339 286 973 824
Professional services.................. 329 311 1,105 945
Office supplies, telephone and postage. 283 225 828 696
Amortization of intangible assets...... 265 121 615 365
Marketing and promotion................ 183 193 554 460
FDIC and other assessments............. 52 48 161 145
Other.................................. 797 454 1,962 1,280
------------- ------------- ------------- --------------
Total noninterest expense.. 7,355 5,084 19,916 14,089
------------- ------------- ------------- --------------
Income (loss) from continuing operations
before income taxes.................... 1,452 (897) 1,710 1,505
Income tax provision (benefit)........... 430 (378) 494 347
------------- ------------- ------------- --------------
Income (loss) from continuing
operations............................. 1,022 (519) 1,216 1,158
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations, continued
(In thousands, except per share data)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
---------------------------- -----------------------------
2002 2001 2002 2001
------------ ------------ ------------- -------------
(unaudited) (unaudited)
Discontinued operation:
Income (loss) from operation of discontinued Fargo
branch (including net loss on sale of $49 for the
three and nine month periods in 2002)..................... $ (98) $ (98) $ 41 $ (335)
Income tax provision (benefit) ............................ (29) (41) 12 (77)
------------ ------------ ------------- -------------
Income (loss) on discontinued operation.................... (69) (57) 29 (258)
------------ ------------ ------------- -------------
Income (loss) before extraordinary item and cumulative effect
of change in accounting principle......................... 953 (576) 1,245 900
Extraordinary item - loss on early extinguishment of debt,
net of income taxes....................................... -- (142) -- (134)
Cumulative effect of change in accounting principle, net of
income taxes.............................................. -- -- -- (113)
---------------------------- ------------- -------------
NET INCOME (LOSS)............................................. $ 953 $ (718) $ 1,245 $ 653
============----============ ============= =============
Dividends on preferred stock.................................. $ (30) $ -- $ (49) $ --
------------ ------------ ------------- -------------
Income (loss) available to (attributable to) common
stockholders.............................................. $ 923 $ (718) $ 1,196 $ 653
============ ============ ============= =============
BASIC EARNINGS PER COMMON SHARE:
Basic earnings (loss) per share from continuing operations.... $ 0.37 $ (0.22) $ 0.45 $ 0.48
Basic earnings (loss) per share from discontinued Fargo
branch, net of income taxes............................... (0.03) (0.02) 0.01 (0.10)
Extraordinary item - loss on early extinguishment of debt,
net of income taxes....................................... -- (0.06) -- (0.06)
Cumulative effect of change in accounting principle, net of
income taxes.............................................. -- -- -- (0.05)
------------ ------------ ------------- -------------
Basic earnings (loss) per common share........................ $ 0.34 $ (0.30) $ 0.46 $ 0.27
============ ============ ============= =============
DILUTED EARNINGS PER COMMON SHARE:
Diluted earnings (loss) per share from
continuing operations......................................... $ 0.37 $ (0.22) $ 0.45 $ 0.48
Diluted earnings (loss) per share from discontinued Fargo
branch, net of income taxes................................ (0.03) (0.02) 0.01 (0.11)
Extraordinary item - loss on early extinguishment of debt,
net of income taxes........................................ -- (0.06) -- (0.06)
Cumulative effect of change in accounting principle, net of
income taxes............................................... -- -- -- (0.05)
------------ ------------ ------------- -------------
Diluted earnings (loss) per common share...................... $ 0.34 $ (0.30) $ 0.46 $ 0.26
============ ============ ============= =============
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 Nine Months
Ended September 30, Ended September 30,
------------------------------ -------------------------------
2002 2001 2002 2001
------------- ------------- ------------- --------------
(unaudited) (unaudited)
NET INCOME (LOSS)..................................... $ 953 $ (718) $ 1,245 $ 653
OTHER COMPREHENSIVE INCOME-
Unrealized gains on securities:
Unrealized holding gains arising during the
period, net of income taxes.................. 737 1,175 1,946 2,089
Less: reclassification adjustment for
securities gains included in net income, net
of income taxes.............................. (541) (33) (1,078) (929)
Net loss on derivative instruments designated and
qualifying as cash flow hedging instruments,
net of income taxes............................. -- (25) -- --
------------- ------------- ------------- --------------
OTHER COMPREHENSIVE INCOME............................ 196 1,117 868 1,160
------------- ------------- ------------- --------------
COMPREHENSIVE INCOME.................................. $ 1,149 $ 399 $ 2,113 $ 1,813
============= ============= ============= ==============
The accompanying notes are an integral part of these consolidated
financial statements.
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
For the Nine Months Ended September 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)...... -- -- -- -- -- -- 1,245 -- -- 1,245
Other comprehensive income -
Change in unrealized
holding gain on
securities available
for sale, net of
income taxes and
reclassification
adjustment (unaudited)... -- -- -- -- -- -- -- -- 868 868
Issuance of preferred
stock (unaudited).......... 150 -- 1,500 -- -- -- -- -- -- 1,500
Preferred stock
dividends (unaudited)...... -- -- -- -- -- -- (49) -- -- (49)
Issuance of common
stock (unaudited).......... -- -- -- 297,759 3 2,497 -- -- -- 2,500
Other (unaudited)............ -- -- -- 1,000 -- 13 -- -- -- 13
------ ------ --------- --------- ------- -------- -------- -------- ------------- -------
Balance, September 30, 2002
(unaudited)................. 150 $ -- $ 1,500 2,740,809 $ 27 $ 16,594 $ 16,631 $ (513) $ 2,517 $36,756
====== ====== ========= ========= ======= ======== ======== ======== ============= =======
The accompanying notes are an integral part of these
consolidated financial statements.
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30
(In thousands)
2002 2001
------------- -------------
(unaudited)
OPERATING ACTIVITIES:
Net Income...................................... $ 1,245 $ 653
Adjustments to reconcile net income to net
cash provided by operating activities -
Provision for credit losses................. 802 1,450
Depreciation and amortization............... 1,142 1,009
Amortization of intangible assets........... 615 365
Net premium amortization on
investment securities..................... 1,850 1,523
Proceeds from loans recovered............... 45 149
Change in interest receivable
and other assets, net..................... 183 (610)
Change in dividend payable -
trust preferred securities................ (236) 32
Net realized gains on sales of
investment securities..................... (1,615) (1,376)
Change in other liabilities, net............ 303 3,513
Originations of loans to be sold............ (69,188) (81,773)
Proceeds from sale of loans................. 69,188 81,773
------------- -------------
Net cash provided by
operating activities.................... 4,334 6,708
------------- -------------
INVESTING ACTIVITIES:
Purchases of investment securities.............. (109,470) (123,270)
Proceeds from sales of investment
securities.................................... 70,313 118,081
Proceeds from maturities of
investment securities......................... 35,681 73,197
Net increase in loans........................... (16,025) (68,375)
Additions to premises, leasehold
improvements and equipment.................... (2,579) (1,570)
Proceeds from sale of premises
and equipment................................. -- 51
Cash paid for acquisition, net
of cash received.............................. (13,964) --
Sale of branch, net............................ (4,365) --
------------- -------------
Net cash used in investing
activities............................. (40,409) (1,886)
------------- -------------
FINANCING ACTIVITIES:
Net increase in demand, savings,
NOW and money market accounts................. 44,600 124
Net increase (decrease) in time deposits........ (23,009) 27,844
Net decrease in short-term and FHLB
borrowings.................................... (5,370) (36,984)
Repayments of long-term borrowings.............. -- (12,987)
Proceeds from long-term borrowings.............. 8,560 --
Proceeds from trust preferred offering.......... -- 14,429
Amortization of discount on subordinated
debentures.................................... 65 31
Proceeds from issuance of preferred stock....... 1,500 --
Payment of preferred stock dividends............ (49) --
Other........................................... 14 345
------------- -------------
Net cash provided by (used in)
financing activities................... 26,311 (7,198)
------------- -------------
NET DECREASE IN CASH AND
CASH EQUIVALENTS............................... (9,764) (2,376)
CASH AND CASH EQUIVALENTS,
beginning of period............................ 23,972 15,583
------------- -------------
CASH AND CASH EQUIVALENTS,
end of period.................................. $ 14,208 $ 13,207
============= =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid............................... $ 15,673 $ 19,846
============= =============
Income taxes paid........................... $ 137 $ 920
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
BNCCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 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 nineteen 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, 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 September 30, 2002 and for
the three and nine-month periods ended September 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. See Note 8.
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 September 30:
Net Earnings
Income Shares Per Share
------------ ------------ -----------
2002
Basic earnings per share:
Income from continuing operations...... $ 1,022,000
Less: Preferred stock dividends........ (30,000)
-------------
Income from continuing operations
available to common stockholders..... 992,000 2,697,929 $ 0.37
Loss from discontinued Fargo branch,
net of income taxes.................. (69,000) 2,697,929 (0.03)
------------- -----------
Income attributable to common
stockholders......................... $ 923,000 2,697,929 $ 0.34
============= ===========
Effect of dilutive shares -
Options............................. 7,780
------------
Diluted earnings per share:
Income from continuing operations...... $ 1,022,000
Less: Preferred stock dividends........ (30,000)
-------------
Income from continuing operations
available to common stockholders..... 992,000 2,705,709 $ 0.37
Loss from discontinued Fargo branch,
net of income taxes.................. (69,000) 2,705,709 (0.03)
------------- -----------
Income attributable to common
stockholders......................... $ 923,000 2,705,709 $ 0.34
============= ===========
2001
Basic earnings per share:
Loss from continuing operations........ $ (519,000) 2,398,118 $ (0.22)
Loss from discontinued Fargo branch,
net of income taxes.................. (57,000) 2,398,118 (0.02)
Extraordinary item - loss on early
extinguishment of debt, net of
income taxes......................... (142,000) 2,398,118 (0.06)
------------- -----------
Loss attributable to common
stockholders......................... $ (718,000) 2,398,118 $ (0.30)
============= ===========
Effect of dilutive shares -
Options.............................. --
------------
Diluted earnings per share:
Loss from continuing operations........ $ (519,000) 2,398,118 $ (0.22)
Loss from discontinued Fargo branch,
net of income taxes.................. (57,000) 2,398,118 (0.02)
Extraordinary item - loss on early
extinguishment of debt, net of
income taxes......................... (142,000) 2,398,118 (0.06)
------------- -----------
Loss attributable to common
stockholders......................... $ (718,000) 2,398,118 $ (0.30)
============= ===========
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 nine-month periods ended September 30:
Net Earnings
Income Shares Per Share
------------- ------------ -------------
2002
Basic earnings per share:
Income from continuing operations.... $ 1,216,000
Less: Preferred stock dividends...... (49,000)
-------------
Income from continuing operations
available to common stockholders... 1,167,000 2,581,865 $ 0.45
Income from discontinued Fargo
branch, net of income taxes........ 29,000 2,581,865 0.01
------------- -------------
Income attributable to common
stockholders....................... $ 1,196,000 2,581,865 $ 0.46
============= =============
Effect of dilutive shares -
Options........................... 19,441
------------
Diluted earnings per share:
Income from continuing operations.... $ 1,216,000
Less: Preferred stock dividends...... (49,000)
-------------
Income from continuing operations
available to common stockholders... 1,167,000 2,601,306 $ 0.45
Income from discontinued Fargo
branch, net of income taxes........ 29,000 2,601,306 0.01
------------- ------------
Income attributable to common
stockholders....................... $ 1,196,000 2,601,306 $ 0.46
============== ============
2001
Basic earnings per share:
Income from continuing operations..... $ 1,158,000 2,395,698 $ 0.48
Loss from discontinued Fargo
branch, net of income taxes......... (258,000) 2,395,698 (0.10)
Extraordinary item - loss on early
extinguishment of debt, net of
income taxes........................ (134,000) 2,395,698 (0.06)
Cumulative effect of change in
accounting principle, net of
income taxes........................ (113,000) 2,395,698 (0.05)
------------- ------------
Income available to common
stockholders........................ $ 653,000 2,395,698 $ 0.27
============= ============
Effect of dilutive shares -
Options............................ 26,801
-----------
Diluted earnings per share:
Income from continuing operations..... $ 1,158,000 2,422,499 $ 0.48
Loss from discontinued Fargo
branch, net of income taxes......... (258,000) 2,422,299 (0.11)
Extraordinary item - loss on early
extinguishment of debt, net of
income taxes........................ (134,000) 2,422,499 (0.06)
Cumulative effect of change in
accounting principle, net of
income taxes........................ (113,000) 2,422,499 (0.05)
------------- ------------
Income available to common
stockholders........................ $ 653,000 2,422,499 $ 0.26
============= ============
The following number of options, with exercise prices ranging from $7.25 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
Quarter ended September 30..... 103,498 95,508
NOTE 5 - Segment Disclosures
BNCCORP segments its operations into three separate business activities, based
on the nature of the products and services for each segment: Banking operations,
insurance operations and brokerage 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 a full range of insurance services including
commercial insurance, bonds, employee benefits, personal insurance and claims
management.
Brokerage operations provide securities brokerage services to individuals and
businesses. Investment options include individual equities, fixed income
investments and mutual funds. The Company's brokerage operations segment does
not meet the quantitative thresholds to be separately reported as an operating
segment for purposes of financial statement segment disclosures.
The accounting policies of the three segments are the same as those described in
the summary of significant accounting policies included in the Company's 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 quarters ended September 30 (in
thousands):
2002 2001
------------------------------------------- ------------------------------------------
Banking Insurance Other (a) Totals Banking Insurance Other (a) Totals
-------- --------- --------- ---------- -------- --------- --------- ----------
Net interest income.................. $ 4,160 $ 13 $ (565) $ 3,608 $ 2,959 $ 5 $ (524) $ 2,440
Other revenue-external
customers.......................... 2,202 3,075 344 5,621 1,036 492 437 1,965
Other revenue-from other
segments........................... 160 -- 180 340 108 -- 161 269
Depreciation and amortization........ 383 214 7 604 369 22 16 407
Equity in the net income (loss)
of investees....................... -- -- 1,434 1,434 -- -- (138) (138)
Other significant noncash items:
Provision for credit losses........ 400 -- -- 400 500 -- -- 500
Segment profit (loss) from
continuing operations.............. 1,738 645 (931) 1,452 (230) 52 (719) (897)
Income tax provision (benefit)....... 460 188 (218) 430 (169) 8 (217) (378)
Loss from discontinued operation,
net of income taxes................ (34) -- -- (34) (57) -- -- (57)
Loss on sale of discontinued
operation, net of income taxes..... (35) -- -- (35) -- -- -- --
Extraordinary item - loss on
early extinguishment of debt,
net of income taxes................ -- -- -- -- -- -- (142) (142)
Segment profit (loss)................ 1,209 457 (713) 953 (118) 44 (644) (718)
Segment assets, from continuing
operations......................... 568,645 28,186 7,080 603,911 545,390 2,013 53,059 600,462
Segment assets....................... 568,645 28,186 7,080 603,911 570,623 2,013 53,059 625,695
2002 2001
--------------------------------------------- ---------------------------------------------
Reportable Intersegment Consolidated Reportable Intersegment Consolidated
Segments Other(a) Elimination Total Segments Other(a) Elimination Total
---------- -------- ------------ ------------- ---------- -------- ------------ ------------
Net interest income................. $ 4,173 $ (565) $ 476 $ 4,084 $ 2,964 $ (524) $ 420 $ 2,860
Other revenue-external customers.... 5,277 344 (498) 5,123 1,528 437 (138) 1,827
Other revenue-from other segments... 160 180 (340) -- 108 161 (269) --
Depreciation and amortization....... 597 7 -- 604 391 16 -- 407
Equity in the net income (loss)
of investees...................... -- 1,434 (1,434) -- -- (138) 138 --
Other significant noncash items:
Provision for credit losses....... 400 -- -- 400 500 -- -- 500
Segment profit (loss) from
continuing operations............. 2,383 (931) -- 1,452 (178) (719) -- (897)
Income tax provision (benefit)...... 648 (218) -- 430 (161) (217) -- (378)
Loss from discontinued operation,
net of income taxes............... (34) -- -- (34) (57) -- -- (57)
Loss on sale of discontinued
operation, net of income taxes.... (35) -- -- (35) -- -- -- --
Extraordinary item - loss on early
extinguishment of debt, net of
income taxes...................... -- -- -- -- -- (142) -- (142)
Segment profit (loss)............... 1,666 (713) -- 953 (74) (644) -- (718)
Segment assets, from continuing
operations........................ 596,831 7,080 (12,167) 591,744 547,403 53,059 (57,522) 542,940
Segment assets...................... 596,831 7,080 (12,167) 591,744 572,636 53,059 (57,522) 568,173
- -------------------------------------
(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 nine months ended September 30 (in
thousands):
2002 2001
------------------------------------------- ------------------------------------------
Banking Insurance Other (a) Totals Banking Insurance Other (a) Totals
-------- --------- --------- ----------- -------- --------- --------- ----------
Net interest income.................$ 10,949 $ 22 $ (1,547) $ 9,424 $ 11,123 $ 14 $ (1,414) $ 9,723
Other revenue-external
customers......................... 5,105 6,003 1,239 12,347 3,898 1,459 1,211 6,568
Other revenue-from other
segments.......................... 519 -- 493 1,012 118 -- 564 682
Depreciation and amortization....... 1,147 417 24 1,588 1,046 74 69 1,189
Equity in the net income of
investees......................... -- -- 2,409 2,409 -- -- 1,857 1,857
Other significant noncash items:
Provision for credit losses....... 802 -- -- 802 1,450 -- -- 1,450
Segment profit (loss) from
continuing operations............. 3,193 831 (2,314) 1,710 3,388 146 (2,029) 1,505
Income tax provision (benefit)...... 1,047 266 (819) 494 1,141 (2) (792) 347
Income (loss) from discontinued
operation, net of income taxes.... 64 -- -- 64 (258) -- -- (258)
Loss on sale of discontinued
operation, net of income taxes.... (35) -- -- (35) -- -- -- --
Extraordinary item - loss on
early extinguishment of debt,
net of income taxes............... -- -- -- -- -- -- (134) (134)
Cumulative effect of change in
accounting principle, net
of income taxes................... -- -- -- -- (113) -- -- (113)
Segment profit (loss)............... 2,176 565 (1,496) 1,245 1,876 148 (1,371) 653
Segment assets, from continuing
operations........................ 568,645 28,186 7,080 603,911 545,390 2,013 53,059 600,462
Segment assets...................... 568,645 28,186 7,080 603,911 570,623 2,013 53,059 625,695
2002 2001
---------------------------------------------- ----------------------------------------------
Reportable Intersegment Consolidated Reportable Intersegment Consolidated
Segments Other (a) Elimination Total Segments Other (a) Elimination Total
---------- --------- ------------ ------------ ---------- --------- ----------- ------------
Net interest income............... $ 10,971 $ (1,547) $ 1,417 $ 10,841 $ 11,137 $ (1,414) $ 830 $ 10,553
Other revenue-external
customers....................... 11,108 1,239 (760) 11,587 5,357 1,211 (77) 6,491
Other revenue-from other
segments........................ 519 493 (1,012) -- 118 564 (682) --
Depreciation and amortization..... 1,564 24 -- 1,588 1,120 69 -- 1,189
Equity in the net income of
investees....................... -- 2,409 (2,409) -- -- 1,857 (1,857) --
Other significant noncash items:
Provision for credit losses..... 802 -- -- 802 1,450 -- -- 1,450
Segment profit (loss) from
continuing operations........... 4,024 (2,314) -- 1,710 3,534 (2,029) -- 1,505
Income tax provision (benefit).... 1,313 (819) -- 494 1,139 (792) -- 347
Income (loss) from discontinued
operation, net of income taxes.. 64 -- -- 64 (258) -- -- (258)
Loss on sale of discontinued
operation, net of income taxes.. (35) -- -- (35) -- -- -- --
Extraordinary item - loss on
early extinguishment of debt,
net of income taxes............. -- -- -- -- -- (134) -- (134)
Cumulative effect of change in
accounting principle, net of
income taxes.................... -- -- -- -- (113) -- -- (113)
Segment profit (loss)............. 2,740 (1,495) -- 1,245 2,024 (1,371) -- 653
Segment assets, from continuing
operations...................... 596,831 7,080 (12,167) 591,744 547,403 53,059 (57,522) 542,940
Segment assets.................... 596,831 7,080 (12,167) 591,744 572,636 53,059 (57,522) 568,173
- ----------------------------------
(a) The financial information in the "Other" column is for the bank holding
company and BNC Asset Management, Inc.
NOTE 6 - Redemption/Purchases of Subordinated Notes
Between January 1 and July 31, 2001, the Company purchased $82,000 of its 8 5/8
percent subordinated notes due 2004. The notes were purchased at a discount.
These transactions resulted in extraordinary gains of $8,000 (net of income
taxes of $4,000). These notes were purchased using cash generated from the sale
of BNC Financial Corporation, the Company's asset-based lending subsidiary that
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 its related companies ("Milne Scali") for
297,759 shares of newly issued common stock (valued at $2.5 million) 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, the amounts recorded as adjustments to goodwill and deferred tax
liabilities would be subject to modification. If the Section 338(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 and are
not reflected in the Company's current consolidated balance sheet.
Prospectively, the goodwill, all of which is attributable to the Company's
insurance segment, will be evaluated for possible impairment under the
provisions of Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets." Other acquired intangible assets related to personal
and commercial insurance lines books of business and 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):
Nine Months Ended Nine Months Ended
September 30, 2002 September 30, 2001
-------------------- --------------------
(Unaudited) (Unaudited)
Net interest income................ $ 10,691 $ 10,025
Noninterest income................. 14,844 13,851
Noninterest expense................ 21,243 18,897
Income from continuing
operations...................... 1,504 1,899
Income (loss) from
discontinued operation.......... 29 (258)
Income before extraordinary
item and cumulative effect
of change in accounting
principle....................... 1,533 1,641
Net income......................... 1,533 1,394
-------------------- --------------------
Basic earnings per share........... $ 0.52 $ 0.52
-------------------- --------------------
Diluted earnings per share......... $ 0.52 $ 0.51
==================== ====================
NOTE 8 - Sale of Fargo Branch of BNC National Bank
On September 30, 2002, BNC National Bank sold its Fargo, North Dakota branch to
Alerus National, NA ("Alerus") largely due to the fact that the branch did not
achieve critical mass for the Company in the Fargo marketplace and the sale
allows the Company to redirect assets to markets where they can be more
productively and profitably employed. Pursuant to a definitive branch purchase
and assumption agreement dated July 26, 2002, Alerus purchased the assets of the
Fargo branch, including the bank building, furniture, fixtures and equipment
totaling $6.0 million and $19.5 million of loans. Alerus also assumed $31.0
million in deposits. Prior to the application of the Company's direct costs
incurred in the sale of the branch ($56,000), the transaction resulted in a net
gain on sale of $7,000. These amounts are included in the line item "Income
(loss) from operation of discontinued Fargo branch (including net loss on sale
of $49,000 for the three and nine month periods in 2002)" in the consolidated
statement of operations. The Fargo branch's pretax profit or loss, for the
periods presented, is also reflected in this line item. Additionally, included
in this line item are the following amounts of net interest income for the Fargo
branch for the three months ended September 30, 2002 and 2001 and for the nine
months ended September 30, 2002 and 2001, respectively: $259,000; $195,000;
$973,000; and $413,000. The Fargo branch had previously been reported in the
banking operations segment of the Company's segment disclosures.
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 (loss) from
continuing operations, income (loss) 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 nine months
ended September 30, ended September 30,
----------------------------- -----------------------------
2002 2001 2002 2001
------------- ------------ ------------ -------------
Reported income (loss) from
continuing operations................ $ 1,022 $ (519) $1,216 $ 1,158
Add back: goodwill amortization,
net of income taxes.................. -- 13 -- 41
------------- ------------ ------------ -------------
Adjusted income (loss) from
continuing operations................ $ 1,022 $ (506) $1,216 $ 1,199
============= ============ ============ =============
Reported income (loss) before
extraordinary item and
cumulative effect of change
in accounting principle.............. $ 953 $ (576) $1,245 $ 900
Add back: goodwill amortization,
net of income taxes.................. -- 13 -- 41
------------- ------------ ------------ -------------
Adjusted income (loss) before
extraordinary item and
cumulative effect of change
in accounting principle.............. $ 953 $ (563) $1,245 $ 941
============= ============ ============ =============
Reported net income (loss)............... $ 953 $ (718) $ 1,245 $ 653
Add back: goodwill amortization,
net of income taxes.................. -- 13 -- 41
------------- ------------ ------------ -------------
Adjusted net income (loss)............... $ 953 $ (705) $ 1,245 $ 694
============= ============ ============ =============
Basic earnings (loss) per common share:
Reported net income (loss).............. $ 0.34 $ (0.30) $ 0.46 $ 0.27
Goodwill amortization,
net of income taxes.......... -- 0.01 -- 0.02
------------- ------------ ------------ -------------
Adjusted net income (loss)............... $ 0.34 $ (0.29) $ 0.46 $ 0.29
============= ============ ============ =============
Diluted earnings (loss) per common
share:
Reported net income (loss)............. $ 0.34 $ (0.30) $ 0.46 $ 0.26
Goodwill amortization,
net of income taxes.......... -- 0.01 -- 0.02
------------- ------------ ------------ -------------
Adjusted net income (loss)............... $ 0.34 $ (0.29) $ 0.46 $ 0.28
============= ============ ============ =============
Intangible Assets:
The gross carrying amount of intangible assets and the associated accumulated
amortization at September 30, 2002 is presented in the table below (amounts are
in thousands). Amortization expense for intangible assets was $265,000 for the
quarter ended September 30, 2002 and $615,000 for the nine months ended
September 30, 2002.
As of September 30, 2002
--------------------------------------------
Gross
Carrying Accumulated Net Carrying
Amount Amortization Amount
----------- ------------- ------------
Intangible assets:
Core deposit intangibles....... $ 3,497 $ 2,497 $ 1,000
Insurance books of business
intangibles................. 8,018 305 7,713
Other.......................... 874 447 427
----------- ------------- ------------
Total...................... $ 12,389 $ 3,249 $ 9,140
=========== ============= ============
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 September 30,
2002 (amounts are in thousands). Projections of amortization expense are based
on existing asset balances as of September 30, 2002. Actual amortization expense
may differ significantly depending upon changes in market conditions:
Insurance
Commercial and
Core Personal Books
Deposit of Business
Intangibles Intangibles Other Total
----------- -------------- --------- --------
Three months ending
December 31, 2002......... $ 87 $166 $ 12 $ 265
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
September 30, 2002 (amounts are in thousands):
Balance, January 1, 2002.......................... $ 437
Goodwill attributable to purchase acquisition..... 13,513
-------------
Balance, September 30, 2002....................... $ 13,950
=============
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
amount 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
$195,000. 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
September 30, 2002 and 2001, the impact of marking the contracts to market was
$(253,000) and $(695,000), respectively. During the nine months ended September
30, 2002 and 2001, the impact of marking the contracts to market was $(721,000)
and $(652,000), 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. Under the recently adopted standard, the sale of the Fargo
branch of BNC National Bank on September 30, 2002 has been presented as a
discontinued operation for financial reporting purposes.
In October 2002, the FASB issued Statement of Financial Accounting Standards No.
147, "Acquisition of Certain Financial Institutions, an amendment to FASB
Statements No. 72 ("SFAS 72") and 144 and FASB Interpretation No. 9" ("SFAS
147"). SFAS 147 removes acquisitions of financial institutions from the scope of
both SFAS 72 and Interpretation 9 and requires that those transactions be
accounted for in accordance with FASB Statements No. 141, "Business
Combinations," and No. 142, "Goodwill and Other Intangible Assets." Thus, the
requirement to recognize (and subsequently amortize) any excess of the fair
value of liabilities assumed over the fair value of tangible and identifiable
intangible assets acquired as an unidentifiable intangible asset no longer
applies to acquisitions within the scope of SFAS 147. Entities with previously
recognized unidentifiable intangible assets that are still amortizing them in
accordance with SFAS 72 must, effective the latter of the date of the
acquisition or the full adoption of SFAS 142, reclassify those intangible assets
to goodwill and terminate amortization on them. BNCCORP adopted SFAS 147 on
October 1, 2002 and the adoption resulted in no reclassification or revisions to
prior period financial statements.
NOTE 12 - Recently Issued Accounting Standards
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143 amends
FASB Statement No. 19, "Financial Accounting and Reporting by Oil and Gas
Producing Companies," and applies to all entities. The statement addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. It applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and / or the normal operation of a long-lived asset, except for certain
obligations of lessees. BNCCORP will adopt this standard on January 1, 2003;
however adoption of this statement is not expected to have a material impact.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Comparison of Financial Condition at September 30, 2002 and December 31, 2001
Assets. Total assets included in continuing operations increased $35.7 million,
from approximately $556.0 million at December 31, 2001 to $591.7 million at
September 30, 2002. The following table presents the Company's assets by
category as of September 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
------------------------------
Assets September 30, December 31,
2002 2001 $ %
- --------------------------------------------- ---------------- ----------------- ------------- ------------
Cash and due from banks..................... $ 14,060 $ 16,346 $ (2,286) (14.0)%
Interest-bearing deposits with banks........ 148 126 22 17.5%
Federal funds sold.......................... -- 7,500 (7,500) (100.0)% (a)
Investment securities available for sale.... 217,619 211,801 5,818 2.7% (b)
Federal Reserve and Federal Home Loan Bank
Stock.................................... 6,216 7,380 (1,164) (15.8)%
Loans and leases, net....................... 312,160 293,599 18,561 6.3% (c)
Premises, leasehold improvements and
equipment, net........................... 11,215 9,180 2,035 22.2% (d)
Interest receivable......................... 3,051 3,008 43 1.4%
Other assets................................ 4,185 4,856 (671) (13.8)%
Goodwill.................................... 13,950 437 13,513 3092.2% (e)
Other intangible assets, net................ 9,140 1,734 7,406 427.1% (f)
---------------- ----------------- ------------- ------------
Total assets, continuing operations..... 591,744 555,967 35,777 6.4%
Assets from discontinued Fargo operation.... -- 29,090 -- -- (g)
---------------- ----------------- -------------
Total assets....................... $ 591,744 $ 585,057 $ 6,687 1.1%
================ ================= =============
- --------------------
(a) Federal funds can fluctuate on a day-to-day basis depending upon daily
transactions and the funds management activities of the Company.
(b) At September 30, 2002, the Company increased its available for sale
securities as opposed to holding excess liquidity in federal funds sold.
Approximately $1.4 million of the change is due to the increase in the net
unrealized gain on securities available for sale between December 31, 2001
and September 30, 2002.
(c) Net loans increased due to loan growth primarily in the Arizona market.
(d) The increase in premises, leasehold improvements and equipment primarily
reflects the purchase of a tract of land for a future bank site in
Scottsdale, Arizona and the addition of the fixed assets of Milne Scali,
acquired on April 16, 2002.
(e) The increase in goodwill represents the goodwill acquired in the Milne
Scali acquisition.
(f) 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.
(g) On September 30, 2002, BNC National Bank sold its Fargo, North Dakota
branch to Alerus. As part of the sale, Alerus purchased $19.5 million in
loans along with accrued interest on the loans and the building, furniture
and fixtures and other fixed assets associated with the Fargo branch. The
assets reflected in the December 31, 2001 column are the assets associated
with the Fargo branch office as of that date.
Allowance for Credit Losses. The following table sets forth information
regarding changes in the Company's allowance for credit losses for the three and
nine-month periods ended September 30, 2002 (amounts are in thousands):
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------- ---------------------
2002 2001 2002 2001
----------- ----------- --------- -----------
Balance, beginning of period..... $ 4,627 $ 4,548 $ 4,325 $ 3,588
Provision for credit losses...... 400 500 802 1,450
Loans charged off................ (102) (407) (233) (490)
Loans recovered.................. 14 56 45 149
----------- ---------- --------- -----------
Balance, end of period........... $ 4,939 $ 4,697 $ 4,939 $ 4,697
=========== ========== ========= ===========
Ending loan portfolio ........... $ 317,099 $ 317,855
=========== ==========
Allowance for credit losses
as a percentage of ending
loan portfolio................. 1.56% 1.48%
As of September 30, 2002 the Company's allowance for credit losses was 1.56
percent of total loans as compared to 1.45 percent at December 31, 2001 and 1.48
percent at September 30, 2001. Net charge-offs as a percentage of average loans
for the three and nine month periods ended September 30, 2002 and 2001 were as
follows:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2002 2001 2002 2001
--------- ---------- --------- ----------
Ratio of net charge-offs
to average total loans.... (0.03)% (0.11)% (0.06)% (0.12)%
Ratio of net charge-offs
to average total loans,
annualized............... (0.11)% (0.44)% (0.08)% (0.16)%
The provisions for loan losses for the three and nine-month periods ended
September 30, 2002 were lower than the provisions for the same periods in 2001.
This difference can be explained by two primary factors. First, loans
outstanding grew at a much faster pace in 2001 as compared to the same period in
2002. Between January 1, 2001 and September 30, 2001, net loans outstanding
increased by $65.1 million compared to growth of $19.2 million through the same
period in 2002. Second, during the first half of 2001, a number of credits of
borrowers engaged in the construction and trucking industries began to show
signs of financial deterioration. This prompted a further increase in loan loss
provisions during 2001.
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 that meet the
criteria as being "impaired" under the definition in Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a
Loan." 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):
September 30, December 31,
2002 2001
--------------- ---------------
(Unaudited)
Nonperforming loans:
Loans 90 days or more delinquent
and still accruing interest......... $ 194 $ 983
Nonaccrual loans...................... 3,502 3,391
Restructured loans.................... -- 5
--------------- ---------------
Total nonperforming loans................. 3,696 4,379
Other real estate owned
and repossessed assets............ 184 70
--------------- ---------------
Total nonperforming assets................ $ 3,880 $ 4,449
=============== ===============
Allowance for credit losses............... $ 4,939 $ 4,325
=============== ===============
Ratio of total nonperforming
assets to total assets ................. 0.66% 0.80%
Ratio of total nonperforming
loans to total loans.................... 1.17% 1.47%
Ratio of allowance for credit
losses to total nonperforming loans..... 134% 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
$789,000 between December 31, 2001 and September 30, 2002. Outside of a number
of smaller transactions that either increased or decreased this category, the
primary cause for the decrease was a single commercial credit relationship, with
$956,000 in loans, being restructured and brought current.
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 $3.5 million of loans in this
category at September 30, 2002, $3.3 million relates to three commercial
relationships. One of these relationships with total net outstandings of
$528,000 is partially guaranteed by the Small Business Administration.
Nonaccrual loans decreased $111,000 between December 31, 2001 and September 30,
2002. There were a total of nine credits on nonaccrual status as of September
30, 2002. This increase was largely associated with placing one relationship,
totaling $657,000 on nonaccrual status. Offsetting this addition to the category
were numerous pay-downs and the reclassification of one credit to other real
estate owned. These loans were all classified as nonaccrual loans 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 included in continuing operations increased $33.5
million, from $499.4 million at December 31, 2001 to $532.9 million at September
30, 2002. The following table presents the Company's liabilities by category as
of September 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
----------------------
September 30, December 31,
Liabilities 2002 2001 $ %
- ------------------------ ------------- ------------ --------- -----------
DEPOSITS:
Noninterest-bearing..... $ 40,449 $ 30,521 $ 9,928 32.5% (a)
Interest-bearing
Savings, NOW and
money market......... 186,708 160,721 25,987 16.2% (b)
Time deposits
$100,000 and over.... 66,844 78,969 (12,125) (15.4)% (c)
Other time deposits... 104,408 105,066 (658) (0.6)%
Short-term borrowings... 15,390 760 14,630 1925.0% (d)
FHLB borrowings......... 97,200 117,200 (20,000) (17.1)% (e)
Long-term borrowings.... 8,573 13 8,560 -- (f)
Other liabilities....... 13,336 6,192 7,144 115.4% (g)
------------- ------------ ---------- ---------
Total liabilities,
continuing
operations.......... 532,908 499,442 33,466 6.7%
Liabilities of
discontinued Fargo
operation............. -- 32,692 -- -- (h)
------------- ------------ ---------- ---------
Total liabilities.. $ 532,908 $ 532,134 $ 774 0.1%
============= ============ ========== =========
- -------------------
(a) The Company's non-interest bearing deposits increased between December 31,
2001 and September 30, 2002 due to deposit growth in the Arizona and
Minnesota markets.
(b) The increase in savings, NOW and money market accounts is primarily
attributable to continued growth in the Company's Wealthbuilder money
market deposit account in the Arizona and Minnesota markets.
(c) Time deposits $100,000 and over decreased $12.1 million partially due to an
$8.7 million decrease in brokered and national market CD's between December
31, 2001 and September 30, 2002.
(d) Short-term borrowings can fluctuate daily depending upon daily transactions
and the funds management activities of the Company.
(e) The Company's FHLB borrowings decreased $20.0 million because two $10.0
million advances matured in January 2002.
(f) The Company incurred $8.5 million of long-term debt at the time of the
Milne Scali acquisition in April 2002.
(g) The increase in other liabilities includes $2.3 million of deferred tax
liabilities recorded as part of the Milne Scali purchase transaction, other
liabilities of Milne Scali including insurance company payables and $1.3
million due to Alerus pending final closing of the Fargo branch sale. The
$1.3 million was paid to Alerus on October 2, 2002.
(h) On September 30, 2002, BNC National Bank sold its Fargo, North Dakota
branch to Alerus. As part of the sale, Alerus purchased $31.0 million in
deposits along with accrued interest on the deposits. The liabilities
reflected in the December 31, 2001 column are the liabilities associated
with the Fargo branch office as of that date.
Stockholders' Equity. The Company's equity capital increased $6.1 million
between December 31, 2001 and September 30, 2002. This increase was primarily
attributable to the issuance of $1.5 million of preferred stock, $1.2 million of
earnings recorded for the nine months ended September 30, 2002, $2.5 million of
common stock issued in the Milne Scali acquisition and a $868,000 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 September 30, 2002:
Tier 1 Total Tier 1
Risk-Based Risk-Based Leverage
Ratio Ratio Ratio
------------- ------------- -------------
BNCCORP, consolidated....... 6.28% 10.23% 4.19%
BNC National Bank........... 9.93% 11.18% 6.63%
As of September 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
Nine-Month Periods Ended September 30, 2002 and 2001
General. BNCCORP reported its largest quarterly net income since becoming a
publicly traded company in 1995. The record earnings performance largely
reflected net income generated by the Company's insurance business, growth in
several other noninterest income areas, and an increase in net interest income.
For the third quarter ended September 30, 2002, the Company recorded net income
of $953,000, or $0.34 per share on a diluted basis. This compares with a net
loss of $718,000, or $0.30 per share (including an extraordinary charge of $0.06
for early extinguishment of debt), in the year-ago period. Results for the third
quarter of 2002 included net income from insurance operations of $457,000,
reflecting the first full quarter of operations of Milne Scali, which was
acquired in April 2002. Results for all periods have been reclassified to
reflect the operations of the Fargo, North Dakota branch office as discontinued,
due to the sale of the office on September 30, 2002. The results reported above
included a loss from discontinued Fargo operations of ($0.03) per share in the
2002 period, and ($0.02) per share in the 2001 period.
For the nine months ended September 30, 2002, BNCCORP reported net income of
approximately $1.25 million, or $0.46 per common share on a diluted basis. This
represented an increase of 90.7% from net income of $653,000, or $0.26 per share
(which included extraordinary charges of $0.06 for early extinguishment of debt
and $0.05 for cumulative effect of a change in accounting principle), for the
same period of 2001. The Company's results for the nine months ended September
30, 2002 included net income from insurance operations of $565,000. The results
reported above included income from discontinued Fargo operations of $0.01 per
share in the 2002 period, and a loss from the discontinued operations of ($0.11)
per share in the 2001 period.
The returns on average assets and average common stockholders' equity, from
continuing operations, were 0.69 and 11.14 percent, respectively, for the three
months ended September 30, 2002 as compared to (0.38) and (6.65) percent for the
same period one year earlier. The returns on average assets and average common
stockholders' equity, from continuing operations, were 0.29 and 4.70 percent,
respectively, for the nine months ended September 30, 2002 as compared to 0.29
and 5.07 percent for the same period one year earlier.
Net Interest Income. Net interest income, from continuing operations, for the
three-month period ended September 30, 2002 increased $1.2 million, or 42.8
percent. Net interest margin increased to 3.06 percent for the quarter ended
September 30, 2002 from 2.23 percent for the same period one year earlier. Net
interest income and margin for the three-month periods ended September 30, 2002
and 2001 were impacted by derivative contract-related transactions during the
periods totaling $(253,000) and $(794,000), respectively. Without these
derivative transactions, net interest income for these periods would have been
$4.3 and $3.7 million, respectively, an 18.7 percent improvement in 2002. Net
interest margin would have been 3.25 percent for the quarter ended September 30,
2002 compared to 2.86 percent for the same period in 2001.
Net interest income, from continuing operations, for the nine-month period ended
September 30, 2002 increased $288,000, or 2.7 percent. Net interest margin
increased to 2.82 percent for the nine months ended September 30, 2002 from 2.76
percent for the same period one year earlier. Net interest income and margin for
the nine-month periods ended September 30, 2002 and 2001 were impacted by
derivative contract-related transactions during the periods totaling $(721,000)
and $(495,000), respectively. Without these derivative transactions, net
interest income for these periods would have been $11.6 and $11.0 million,
respectively, a 4.7 percent improvement in 2002. Net interest margin would have
been 3.01 percent for the nine months ended September 30, 2002 compared to 2.89
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 nine-month periods ended September 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 September 30, *
----------------------------------------------------------------------
2002 2001 Change
---------------------------------- ---------------------------------- ---------------------------------
Interest Average Interest Average Interest Average
Average earned yield or Average earned yield or Average earned yield
Balance or paid cost balance or paid cost balance or paid or cost
---------- ---------- ---------- ---------- ----------- ---------- ----------- ----------- ---------
Interest-earning
assets
Federal funds
sold/interest
bearing due from...... $ 5,731 $ 26 1.80% $ 1,143 $ 8 2.78% $ 4,588 $ 18 -0.98%
Investments............ 211,778 2,972 5.57% 198,374 2,800 5.60% 13,404 172 -0.03%(a)
Loans.................. 316,065 5,433 6.82% 313,619 6,079 7.69% 2,446 (646) -0.87%(a)
Allowance for
loan losses......... (4,596) -- (4,446) -- (150) --
---------- ---------- ---------- ----------- ----------- -----------
Total interest-
earning assets...... $ 528,978 8,431 6.32% $ 508,690 8,887 6.93% $ 20,288 (456) -0.61%
========== ---------- ========== ----------- =========== -----------
Interest-bearing
liabilities
NOW & money
market accounts....... $ 178,110 796 1.77% $ 148,929 1,138 3.03% $ 29,181 (342) -1.26%(b)
Savings................ 4,635 10 0.86% 3,920 14 1.42% 715 (4) -0.56%
Certificates of
deposit under
$100,000.............. 105,918 979 3.67% 103,214 1,372 5.27% 2,704 (393) -1.60%(c)
Certificates of
deposit $100,000
and over.............. 72,700 814 4.44% 74,009 1,028 5.51% (1,309) (214) -1.07%(d)
---------- ---------- ---------- ----------- ----------- -----------
Interest-bearing
deposits............. 361,363 2,599 2.85% 330,072 3,552 4.27% 31,291 (953) -1.42%
Short-term borrowings.. 4,794 23 1.90% 7,797 77 3.92% (3,003) (54) -2.02%(e)
FHLB borrowings........ 97,200 1,616 6.60% 102,484 2,203 8.53% (5,284) (587) -1.93%(e)
Long-term borrowings... 8,567 109 5.05% 8,268 195 9.36% 299 (86) -4.31%(f)
---------- ---------- ---------- ----------- ----------- -----------
Total borrowings...... 110,561 1,748 6.27% 118,549 2,475 8.28% (7,988) (727) -2.01%
---------- ---------- ---------- ----------- ----------- -----------
Total interest-
bearing liabilities.. $ 471,924 4,347 3.65% $ 448,621 6,027 5.33% $ 23,303 (1,680) -1.68%
========== ---------- ========== ---------- =========== -----------
Net interest
income/spread........ $ 4,084 2.67% $ 2,860 1.60% $ 1,224 1.07%
========== =========== ===========
Net interest margin... 3.06% 2.23% 0.83%
Notation:
Noninterest-bearing
deposits.............. $ 35,977 -- $ 28,082 -- $ 7,895 --
---------- ---------- ---------- ----------- ----------- -----------
Total deposits........ $ 397,340 $ 2,599 2.60% $ 358,154 $ 3,552 3.93% $ 39,186 $ (953) -1.33%
========== ========== ========== =========== =========== ===========
Taxable equivalents:
Total interest-
earning assets....... $ 528,978 $ 8,560 6.42% $ 508,690 $ 9,214 7.19% $ 20,288 $ (654) -0.77%
========== ========== ===========
Net interest
income/spread........ -- $ 4,213 2.77% -- $ 3,187 1.86% -- $ 1,026 0.91%
Net interest
margin............... -- -- 3.16% -- -- 2.49% -- -- 0.67%
Notation:
Net interest margin
without impact of
derivative contracts. -- -- 3.25% -- -- 2.86% -- -- 0.39%
* From continuing operations
Nine Months Ended September 30, *
----------------------------------------------------------------------
2002 2001 Change
---------------------------------- ---------------------------------- ---------------------------------
Interest Average Interest Average Interest Average
Average earned yield or Average earned yield or Average earned yield
balance or paid cost balance or paid cost balance or paid or cost
---------- ---------- ---------- ---------- ----------- ---------- ----------- ----------- ---------
Interest-earning
assets
Federal funds
sold/interest
bearing due from....... $ 4,650 $ 71 2.04% $ 946 $ 31 4.38% $ 3,704 $ 40 -2.34%
Investments............. 211,227 8,560 5.42% 228,136 10,579 6.20% (16,909) (2,019) -0.78%(a)
Loans................... 302,332 15,206 6.72% 286,533 18,276 8.53% 15,799 (3,070) -1.81%(a)
Allowance for
loan losses.......... (4,457) -- (4,008) -- (449) --
---------- ---------- ---------- ----------- ----------- -----------
Total interest-
earning assets....... $ 513,752 23,837 6.20% $ 511,607 28,886 7.55% $ 2,145 (5,049) -1.35%
========== ---------- ========== ----------- =========== -----------
Interest-bearing
liabilities
NOW & money
market accounts........ $ 170,574 2,168 1.70% $ 145,393 3,953 3.64% $ 25,181 (1,785) -1.94%(b)
Savings................. 4,310 27 0.84% 3,650 47 1.72% 660 (20) -0.88%
Certificates of
deposit under
$100,000............... 105,593 3,149 3.99% 97,348 4,052 5.57% 8,245 (903) -1.58%(c)
Certificates of
deposit $100,000
and over............... 76,329 2,583 4.52% 71,023 3,201 6.02% 5,306 (618) -1.50%(d)
---------- ---------- ---------- ----------- ----------- -----------
Interest-bearing
deposits............. 356,806 7,927 2.97% 317,414 11,253 4.74% 39,392 (3,326) -1.77%
Short-term borrowings... 4,727 75 2.12% 10,910 388 4.75% (6,183) (313) -2.63%(e)
FHLB borrowings......... 97,881 4,793 6.55% 120,856 5,916 6.54% (22,975) (1,123) 0.01%(e)
Long-term borrowings.... 5,229 201 5.14% 11,165 776 9.29% (5,936) (575) -4.15%(f)
---------- ---------- ---------- ----------- ----------- -----------
Total borrowings...... 107,837 5,069 6.28% 142,931 7,080 6.62% (35,094) (2,011) -0.34%
---------- ---------- ---------- ----------- ----------- -----------
Total interest-
bearing liabilities.. $ 464,643 12,996 3.74% $ 460,345 18,333 5.32% $ 4,298 (5,337) -1.58%
========== ---------- ========== ----------- =========== -----------
Net interest
income/spread........ $ 10,841 2.46% $ 10,553 2.23% $ 288 0.23%
========== =========== ===========
Net interest
margin............... 2.82% 2.76% 0.06%
Notation:
Noninterest-bearing
deposits............... $ 31,904 -- $ 27,333 -- $ 4,571 --
---------- ---------- ---------- ----------- ----------- -----------
Total deposits........ $ 388,710 $ 7,927 2.73% $ 344,747 $ 11,253 4.36% $ 43,963 $ (3,326) -1.63%
========== ========== ========== =========== =========== ===========
Taxable equivalents:
Total interest-
earning assets....... $ 513,752 $ 24,194 6.30% $ 511,607 $ 29,249 7.64% $ 2,145 $ (5,055) -1.34%
========== ========== ===========
Net interest
income/spread........ -- $ 11,198 2.55% -- $ 10,916 2.32% -- $ 282 0.23%
Net interest
margin............... -- -- 2.91% -- -- 2.85% -- -- 0.06%
Notation:
Net interest margin
without impact of
derivative contracts.. -- -- 3.01% -- -- 2.89% -- -- 0.12%
* From continuing operations
- -------------------
(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. This is reflected in the comparative nine-month periods above.
During the comparative three-month periods, average balances of investments
increased in 2002 as the Company employed excess liquidity into its
investment portfolio. 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 and
Minneapolis markets. 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 September
30, 2001.
(d) Certificates of Deposit $100,000 and Over - During the nine months ended
September 30, 2002, average balances of brokered and national market CD's
were $64.8 million as compared to $56.0 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, for the nine-month
period ended September 30, 2002, CD's over $100,000. Additionally, $20.0
million of FHLB advances matured in January 2002.
(f) Long-term Borrowings - In August 2001, the Company redeemed $12.9 million
of its 8 5/8 percent subordinated notes due 2004. See Note 6 to the
Consolidated Financial Statements. In April 2002, the Company borrowed $8.5
million as part of the transaction involving the Milne Scali acquisition.
Reduced borrowing costs are reflective of the payoff of the 8 5/8 percent
subordinated notes and the lower borrowing rate environment in 2002.
Provision for Credit Losses. The provision for credit losses was $400,000 for
the three-month period ended September 30, 2002 as compared to $500,000 for the
same period one year earlier. For the nine months ended September 30, 2002 and
2001, the provision for credit losses was $802,000 and $1,450,000, respectively.
See "Comparison of Financial Condition at September 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 nine month periods ended
September 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 Nine Months Ended
Noninterest Income * September 30, Change September 30, Change
------------------------- --------------------- ------------------------ ---------------------
2002 2001 $ % 2002 2001 $ %
------------ ----------- ---------- ---------- ----------- ----------- ---------- ----------
Insurance commissions............ $ 3,044 $ 468 $2,576 550.4% $ 5,928 $ 1,421 $4,507 317.2% (a)
Net gain on sales of securities . 819 49 770 1571% 1,615 1,376 239 17.4% (b)
Fees on loans.................... 521 478 43 9.0% 1,532 1,057 475 44.9% (c)
Brokerage income................. 239 359 (120) (33.4)% 963 1,068 (105) (9.8)% (d)
Service charges.................. 203 153 50 32.7% 543 478 65 13.6%
Trust and financial services..... 172 184 (12) (6.5)% 603 712 (109) (15.3)% (e)
Rental income.................... 23 22 1 4.5% 67 32 35 109.4%
Other............................ 102 114 (12) (10.5)% 336 347 (11) (3.2)%
------------ ----------- ---------- ----------- ----------- ----------
Total noninterest income...... $ 5,123 $ 1,827 $3,296 180.4% $11,587 $ 6,491 $5,096 78.5%
============ =========== ========== =========== =========== ==========
* From continuing operations
- -----------------
(a) The increase in insurance commission revenue is attributable to the
acquisition of Milne Scali.
(b) Although the Company sold $70.3 million of available for sale securities
during the nine-month period ended September 30, 2002 compared with $118.1
million during the same period in the prior year, it recorded more net
gains on the sales of those securities.
(c) Loan fees included in noninterest income may vary depending upon the number
and structure of the loan transactions effected during the period.
(d) The reduction in brokerage revenue is primarily attributable to current
market conditions.
(e) 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 nine-month periods ended
September 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 Nine Months Ended
Noninterest Expense * September 30, Change September 30, Change
--------------------- -------------------- ---------------------- -------------------
2002 2001 $ % 2002 2001 $ %
--------- -------- --------- -------- --------- --------- ------- --------
Salaries and employee
benefits.................... $ 4,085 $ 2,589 $1,496 57.8% $10,741 $ 7,254 $3,487 48.1% (a)
Occupancy..................... 558 432 126 29.2% 1,601 1,229 372 30.3% (b)
Interest on subordinated
debentures.................. 464 425 39 9.2% 1,376 891 485 54.4% (c)
Depreciation and
amortization................ 339 286 53 18.5% 973 824 149 18.1% (d)
Professional services......... 329 311 18 5.8% 1,105 945 160 16.9% (e)
Office supplies,
telephone and postage....... 283 225 58 25.8% 828 696 132 19.0% (f)
Amortization of intangible
assets...................... 265 121 144 119.0% 615 365 250 68.5% (g)
Marketing and promotion....... 183 193 (10) (5.2)% 554 460 94 20.4% (h)
FDIC and other
assessments................. 52 48 4 8.3% 161 145 16 11.0%
Other......................... 797 454 343 75.6% 1,962 1,280 682 53.3% (i)
--------- -------- -------- --------- --------- -------
Total noninterest expense.... $ 7,355 $ 5,084 $2,271 44.7% $19,916 $14,089 $5,827 41.4%
========= ======== ======== ========= ========= ========
Efficiency ratio............ 79.9% 108.4% 88.8% 82.7%
========= ======== ========= =========
Efficiency ratio,
adjusted (j)............... 72.8% 85.0% 80.1% 75.3%
========= ======== ========= =========
* From continuing operations
- -----------------------------
(a) Average full time equivalent employees from continuing operations for the
three and nine-month periods ended September 30, 2002 were 278 and 248,
respectively, as compared to 196 and 185, 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 depreciation and amortization is attributable to the
additions of leasehold improvements, furniture and equipment in the Arizona
locations during 2001 and 2002 along with similar expenses for Milne Scali.
(e) The increase in professional services expenses for the three and nine month
periods ended September 30, 2002 is attributable to increases in various
items in this category, including legal fees, software support services and
other consulting services.
(f) Increases in office supplies, telephone and postage-related expenses are
attributable to Arizona operations as well as the addition of Milne Scali.
(g) Increases in amortization of intangible assets are largely attributable to
the amortizable intangible assets acquired in the Milne Scali acquisition.
(h) Increases in marketing and promotion expenses are attributable to
promotional activities in various markets.
(i) Increases in other expenses are attributable to increases in various
expense items in this category such as insurance expense, travel, dues and
subscriptions, the addition of Milne Scali expenses and expenses associated
with the winding down of the BNC Asset Management, Inc. operations in
Fargo, North Dakota.
(j) Efficiency ratio adjusted for impact of derivative contracts and interest
on subordinated debentures.
Income Tax Expense. The Company recorded income tax provision, from continuing
operations, of $430,000 for the three months ended September 30, 2002. This is
compared to a tax benefit of $378,000 for the same period in 2001.
Income tax expense, from continuing operations, for the nine months ended
September 30, 2002 increased $147,000 as compared to the same period in 2001 due
to the increase in pre-tax income. The estimated effective tax rates for the
nine-month periods ended September 30, 2002 and 2001 were 28.9 and 23.1 percent,
respectively. The increase in effective tax rate for 2002 is largely
attributable to the percentage of tax-exempt income to total income, which was
greater during the nine-month period ended September 30, 2001 than it was during
the same period in 2002.
Earnings per Common Share. See Note 4 to the interim Consolidated Financial
Statements included under Item 1 for a summary of the EPS calculation for the
three and nine-month periods ended September 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 nine months ended September 30, 2001 and
2000, 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):
Nine Months Ended
September 30,
---------------------------
Major Sources and Uses of Funds 2002 2001
- --------------------------------------------------- ------------ ------------
Proceeds from sales and maturities
of investment securities...................... $ 105,994 $ 191,278
Net increase in deposits........................ 21,591 27,968
Proceeds from trust preferred offering.......... -- 14,429
Purchases of investment securities.............. (109,470) (123,270)
Net increase in loans........................... (16,025) (68,282)
Net decrease in short-term and FHLB
borrowings.................................... (5,370) (36,984)
Net decrease in long-term borrowings............ -- (12,987)
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 Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a
Loan." 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
Securities and Exchange Commission, 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 September 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. 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, rates -200bp and -300bp scenarios were not run and
a rates +400bp was added. 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
September 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
September 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 -100bp Unchanged +100bp +200bp +300bp +400bp
------ --------- ------ ------ ------ ------
Projected 12-month net
interest income............................ $14,264 $16,152 $17,194 $17,578 $17,792 $17,778
Dollar change from rates unchanged
scenario................................... $(1,888) -- $ 1,042 $ 1,426 $ 1,640 $ 1,626
Percentage change from rates unchanged
scenario................................... (11.69)% -- 6.45% 8.83% 10.15% 10.07%
Benefit/(cost) from interest rate caps (1)... $ (145) $ (64) $ 69 $ 266 $ 546 $ 768
Total net interest income with caps.......... $14,119 $16,088 $17,263 $17,844 $18,338 $18,546
Dollar change from rates unchanged
w/caps.................................... $(1,969) -- $ 1,175 $ 1,756 $ 2,250 $ 2,458
Percentage change from rates unchanged
w/caps.................................... (12.24)% -- 7.30% 10.91% 13.99% 15.28%
POLICY GUIDELINES (decline limited to)....... 5.00% -- 5.00% 10.00% 15.00% 20.00%
- --------------------------
(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 scenario.
Because one of the objectives of asset/liability management is to manage net
interest income over a one-year planning horizon, policy 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, 15 and 20 percent from the rates unchanged
scenario for the +/-100bp, 200bp, 300bp and 400bp 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 September 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.
Item 4. Controls and Procedures
BNCCORP's Chief Executive Officer and Chief Financial Officer have concluded
that the Company's disclosure controls and procedures (as defined in Section
224.13a-14(c) and 240.15d-14(c)) are effective based on their evaluation of
these controls and procedures as of a date within 90 days of the filing date of
this Form 10-Q. Additionally, there were no significant changes in the Company's
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation.
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Branch Purchase and Assumption Agreement by and among Alerus
Financial, National Association, BNC National Bank and its parent,
BNCCORP, Inc., dated as of July 26, 2002.
(b) Reports on Form 8-K
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.
Certification and Signatures
The undersigned, who are the Chief Executive Officer and Chief Financial Officer
of the Company, respectively, certify that this quarterly report fully complies
with the requirements of Section 13(a) of the Securities Exchange Act of 1934,
and that the information contained in the Form 10-Q fairly presents, in all
material respects, the financial condition and results of operations of the
Company for the period covered by such report. This certification is being
furnished solely to comply with the requirements of Section 906 of the
Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204.
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: November 12, 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
CERTIFICATIONS
I, Gregory K. Cleveland, President and Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of BNCCORP, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 12, 2002 By /s/ Gregory K. Cleveland
-------------------------------------
Gregory K. Cleveland
President
Chief Executive Officer
I, Brenda L. Rebel, Treasurer and Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of BNCCORP, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 12, 2002 By /s/ Brenda L. Rebel
------------------------------------
Brenda L. Rebel
Treasurer
Chief Financial Officer