U.S. Securities and Exchange Commission
Washington, D.C. 20549
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FORM 10-QSB
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[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarter ended September 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ________ to ________
Commission File No. 0-26290
BNCCORP, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 45-0402816
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization
322 East Main
Bismarck, North Dakota 58501
(Address of principal executive offices)
(701) 250-3040
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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 1, 1997 was 2,338,720
Transitional Small Business Disclosure Format: Yes ___ No X
1
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
(In thousands, except share and per share data)
ASSETS September 30 December 31,
1997 1996
---------- ----------
(unaudited)
CASH AND DUE FROM BANKS $ 6,623 $ 5,495
INTEREST - BEARING DEPOSITS IN BANKS 1,739 865
FEDERAL FUNDS SOLD 600 6,900
SECURITIES AVAILABLE FOR SALE 63,376 59,491
LOANS, net of allowance for loan losses of $2,904 and
$1,594 236,277 201,403
PREMISES, LEASEHOLD IMPROVEMENTS AND EQUIPMENT, net 7,999 6,657
ACCRUED INTEREST RECEIVABLE 3,017 2,442
OTHER ASSETS 1,513 1,226
INTANGIBLE ASSETS, net 4,392 4,079
---------- ----------
$ 325,536 $ 288,558
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS:
Noninterest-bearing $ 22,873 $ 22,218
Interest-bearing -
Savings, NOW and money market 60,260 52,483
Time deposits $100,000 and over 40,542 39,725
Other time deposits 125,633 125,344
SHORT-TERM BORROWINGS 27,304 11,437
LONG-TERM BORROWINGS 21,178 10,615
OTHER LIABILITIES 4,152 4,101
---------- ----------
Total liabilities 301,942 265,923
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 2,000,000 shares
authorized; no shares issued or outstanding -- --
Common stock, $.01 par value, 10,000,000 shares
authorized; 2,364,100 shares issued,
2,338,720 shares outstanding 23 23
Capital surplus 13,768 13,768
Retained earnings 9,782 9,017
Treasury stock (25,380 shares) (216) (216)
Unrealized holding gain on securities available for
sale, net of income tax effects of $93 and $16 237 43
---------- ----------
Total stockholders' equity 23,594 22,635
---------- ----------
$ 325,536 $ 288,558
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(In thousands, except per share data)
For the Three Months EnFor the Nine Months
September 30, Ended September 30,
--------------------- --------------------
1997 1996 1997 1996
--------- --------- -------- --------
(unaudited) (unaudited)
--------- ---------
INTEREST INCOME:
Interest on loans $ 5,797 $ 4,559 $ 16,142 $ 11,504
Interest on investment securities-
U.S. Treasury and agency 210 181 615 579
State and municipal 27 17 72 55
Other 859 790 2,550 2,906
--------- --------- --------- ---------
Total interest income 6,893 5,547 19,379 15,044
--------- --------- --------- ---------
INTEREST EXPENSE:
Deposits 2,865 2,391 8,389 7,097
Short-term borrowings 379 307 811 648
Long-term borrowings 388 187 884 347
--------- --------- --------- ---------
Total interest expense 3,632 2,885 10,084 8,092
--------- --------- --------- ---------
Net interest income 3,261 2,662 9,295 6,952
PROVISION FOR LOAN LOSSES 204 385 2,457 604
--------- --------- --------- ---------
NET INTEREST INCOME AFTER PROVISION 3,057 2,277 6,838 6,348
FOR LOAN LOSSES
--------- --------- --------- ---------
NONINTEREST INCOME:
Fees on loans 365 713 715 1,186
Service charges 113 114 352 314
Rental income 10 8 45 26
Net gain (loss) on sales of securities 8 4 (3) 17
Other 159 90 492 278
--------- --------- --------- ---------
Total noninterest income 655 929 1,601 1,821
--------- --------- --------- ---------
NONINTEREST EXPENSE:
Salaries and employee benefits 1,275 1,243 3,793 3,280
Depreciation and amortization 314 258 892 723
Occupancy 222 181 643 502
Professional services 162 70 359 275
Office supplies, telephone and postage 138 133 413 378
Marketing and promotion 56 47 253 262
FDIC and other assessments 44 75 127 218
Other 230 188 650 579
--------- --------- --------- ---------
Total noninterest expense 2,441 2,195 7,130 6,217
--------- --------- --------- ---------
INCOME BEFORE TAXES 1,271 1,011 1,309 1,952
INCOME TAXES 499 401 544 761
--------- --------- --------- ---------
NET INCOME $ 772 $ 610 $ 765 $ 1,191
========= ========= ========= =========
EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARE
(Primary and fully diluted) $ 0.33 $ 0.26 $ 0.33 $ 0.51
========= ========== ========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30
(In thousands)
1997 1996
---------- ----------
(unaudited)
----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 765 $ 1,191
Adjustments to reconcile net income to net cash provided by
operating activities --
Provision for loan losses 2,457 604
Depreciation and amortization, fixed assets 493 362
Amortization of intangible assets 399 361
Amortization of discount on subordinated debt 26 --
Proceeds from loans recovered 93 149
Change in accrued interest receivable and other assets (1,574) (735)
(Gain) loss on sale of securities 3 (17)
Change in other liabilities, net 52 (577)
Originations of loans to be participated (46,483) (27,962)
Proceeds from participations of loans 46,483 27,962
---------- ----------
Net cash provided by operating activities 2,714 1,338
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in federal funds sold 6,300 2,950
Purchases of investment securities (30,950) (13,007)
Proceeds from sales of investment securities 18,190 40,758
Proceeds from maturities of investment securities 9,066 7,149
Net increase in loans (37,425) (76,929)
Additions to premises, leasehold improvements
and equipment, net (1,835) (1,277)
Purchase of land for future development -- (560)
---------- ----------
Net cash used in investing activities (36,654) (40,916)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand, savings, NOW and money
market accounts 8,432 1,717
Net increase in time deposits 1,106 5,858
Net increase in short-term borrowings 15,867 21,110
Repayments of long-term borrowings (22,283) (354)
Proceeds from long-term borrowings 32,820 8,249
Stock offering costs -- (8)
---------- ----------
Net cash provided by financing activities 35,942 36,572
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,002 (3,006)
CASH AND CASH EQUIVALENTS, beginning of period 6,360 11,259
---------- ----------
CASH AND CASH EQUIVALENTS, end of period $ 8,362 $ 8,253
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 9,896 $ 8,678
========== ==========
Income taxes paid $ 815 $ 652
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
For the Nine Months Ended September 30, 1997
(In thousands, except share data)
<TABLE>
<CAPTION>
Unrealized
Gain (Loss)
on Securities
Common Stock Capital Retained Treasury Availablefor
Shares Amount Surplus Earnings Stock Sale, Net Total
-------- ------- ------- -------- ------ -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996 2,364,100 $23 $13,768 $9,017 $(216) $43 $22,635
Net income (unaudited) -- -- -- 765 -- -- 765
Change in unrealized holding gain
on securities available for sale,
net of income taxes (unaudited) -- -- -- -- -- 194 194
-------- ------- ------- -------- ------ -------- --------
BALANCE, September 30, 1997
(unaudited) 2,364,100 $23 $13,768 $9,782 ($216) $237 $23,594
======== ======= ======= ======== ====== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1997
NOTE 1 - Basis of Presentation
The accompanying interim consolidated financial statements have been prepared by
BNCCORP, Inc. (the "Company"), without audit, in accordance with generally
accepted accounting principles 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, 1997 and for
the three and nine month periods ended September 30, 1997 and 1996 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, 1997.
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, 1996. Accordingly, footnote
disclosures which would substantially duplicate the disclosures contained in the
December 31, 1996 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, 1996
and the notes thereto.
In June 1996, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 125").
The FASB subsequently amended SFAS 125 in December 1996. As amended, SFAS 125
applies to securities lending, repurchase agreements, dollar rolls, and other
similar secured financing transactions occurring after December 31, 1997 and to
all other transfers and servicing of financial assets occurring after December
31, 1996. The adoption of SFAS 125 did not and is not expected to have a
material effect on the Company's financial position or results of operations.
NOTE 2 -- Reclassifications
Certain of the 1996 amounts have been reclassified to conform with the 1997
presentations. These reclassifications had no effect on net income or
stockholders' equity.
6
<PAGE>
NOTE 3 -- Derivative Financial Instruments -- Interest Rate Swaps
Interest rate swaps involve the contractual exchange of fixed and floating rate
interest payment obligations based on a notional principal amount. During 1997,
the Company, through BNC National Bank ("BNC -- North Dakota"), entered into
interest rate swap contracts to manage interest rate risk caused by fluctuations
in interest rates. The Company does not conduct trading activities or hold
derivative financial instruments for speculative purposes.
At September 30, 1997, two interest rate swaps totaling $10 million hedged fixed
rate certificates of deposit at BNC -- North Dakota and a swap for $15 million
effectively hedged the Company's fixed rate subordinated notes issued in May
1997 (see Note 4). Under the swap agreements, BNC -- North Dakota is a receiver
of fixed-rate interest and a payer of floating-rate interest. Pursuant to the
accrual method of accounting, each net payment / receipt due or owed under the
contracts is recognized in earnings during the period to which the payment /
receipt relates (i.e., interest income or expense under the swaps is recorded as
an adjustment to interest income or expense). The terms of the contracts are as
follows:
Variable
Notional Fixed-Rate Rate Paid Variable
Amount Term Maturity Received (as of 9/30/97) Rate Index
- ------------ ------- ---------- ---------- ------------- -------------
$5 million 2 yrs 3/10/99 6.25% 5.72% 3-Month LIBOR
$5 million 2 yrs* 4/28/99* 6.95% 5.72% 3-Month LIBOR
$15 million 7 yrs 6/09/04 6.67% 5.72% 3-Month LIBOR
*The Counterparty has the option to extend this contract 1 year at the end of
the second year.
Interest rate swap contracts result in gains and losses subsequent to the date
of the contract, due to interest rate movements. The Company does not recognize
changes in market value of these contracts as gains or losses in the period of
change because the contracts qualify as hedges of interest rate risk exposures
(i.e., the designated hedged items expose the Company to interest rate risk, and
the contracts reduce the risk of exposure and are designated as hedges of the
applicable items). Gains or losses associated with the termination of interest
rate swap contracts for identified positions (hedges) would be deferred and
amortized over the original life of the hedge, as an adjustment to the yield of
the hedged asset or liability, if the hedged item remained outstanding. If the
hedged item were no longer outstanding, gains or losses resulting from the
termination of a swap contract would be recognized into income in the period of
termination. Unamortized deferred gains or losses would be included in the
statement of financial position as deferred income or deferred charges. There
were no unamortized gains or losses at September 30, 1997. The Company had no
interest rate swap contracts outstanding at December 31, 1996.
Based on current interest rates, if the outstanding contracts were terminated as
of September 30, 1997, the Company would receive and record gains of
approximately $14,000, $147,000 and $312,000, respectively, for the three
contracts listed above (see Note 8). Market value of the swap contracts is
defined as the current replacement value of the contract.
7
<PAGE>
NOTE 4 -- Subordinated Notes and Debt Covenants
In May 1997, the Company sold $15 million of 8 5/8 percent subordinated
notes pursuant to a public offering (the "Subordinated Notes" or "Notes"). The
net proceeds of the offering of $14.3 million were used to repay approximately
$9.6 million of indebtedness outstanding under the Company's revolving line of
credit with Firstar Bank Milwaukee, N.A. ("Firstar") and BNC Financial
Corporation's ("BNC Financial's") revolving line of credit with Bank Windsor,
N.A. ("Bank Windsor") and for other general corporate purposes. (The Company and
BNC Financial have since borrowed additional funds under these revolving lines
of credit which remain available as a source of additional working capital for
general corporate purposes, including the funding of loans at BNC Financial.)
The Subordinated Notes mature on May 31, 2004. The Notes, 60 to 70 percent of
which currently qualify as Tier 2 capital under the Federal Reserve Board's
risk-based capital guidelines, are considered unsecured general obligations of
the Company. They are redeemable, at the option of the Company, at par plus
accrued interest to the date of redemption, beginning on May 31, 2000. Interest
on the Notes is payable on the first business day of each month beginning on
July 1, 1997. Payment of principal of the Notes may be accelerated only in the
case of certain events relating to bankruptcy, insolvency or reorganization of
the Company. A discount of $750,000 is being amortized to interest expense over
the term of the Notes using the effective interest method. Related debt offering
costs of $160,000 have been deferred and are being amortized over the term of
the Notes using the effective interest method.
The Company's loan agreements and the indenture pursuant to which the
Subordinated Notes were issued contain covenants which, among other matters,
restrict or limit the ability of BNCCORP and its subsidiaries, under certain
circumstances, to pay cash dividends, redeem or repurchase stock or make other
capital distributions, incur indebtedness, allow liens or other encumbrances on
property owned or acquired, or guarantee obligations of others (other than in
the ordinary course of banking business). The Company and its subsidiaries must
also maintain certain ratios regarding capital, nonperforming loans, loan loss
reserve coverage, and other measures. At September 30, 1997 the Company and its
subsidiaries were in compliance with all material debt covenants.
The Company manages interest rate risk associated with its borrowings as part of
its overall asset/liability management program. Accordingly, the Company,
through BNC-- North Dakota , has entered into an interest rate swap agreement
which effectively converts the Company's fixed rate Subordinated Notes into
variable-rate borrowings (the "Agreement"). No premium was paid or received in
connection with the Agreement. Under the Agreement, the Company receives a fixed
rate of interest of 6.6650 percent on the notional amount of $15 million and
pays a variable rate based on 3-month LIBOR, 5.7185 percent at September 30,
1997. As indicated in Note 3 above, based upon market interest rates at
September 30, 1997, the Company would receive approximately $312,000 if the
Agreement were terminated. If the Agreement were terminated at any time before
its scheduled termination date of June 9, 2004, the Company would defer any
resulting gain or loss and amortize it to income over the remaining original
life of the Agreement provided the Company's Subordinated Notes were still
outstanding at that time (see Note 8).
NOTE 5 -- Earnings per Share
Earnings per share is computed by dividing net income by the weighted average
number of shares of common stock outstanding during the period plus the
equivalent number of shares pertaining to common stock options and warrants, if
dilutive, using the Treasury Stock method. Primary and fully
8
<PAGE>
diluted earnings per share for the three and nine month periods ending September
30, 1997 and 1996 are based upon 2,338,720 shares.
In February 1997, the FASB issued Statement of Financial Accounting Standards
No. 128, "Earnings per Share" ("SFAS 128"), which is effective for periods
ending after December 15, 1997. The Company expects to adopt SFAS 128 in the
fourth quarter of 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods presented. SFAS 128 eliminates primary earnings per share and earnings
per common share, assuming full dilution, and requires the presentation of basic
and diluted earnings per share. As a result, under the new requirements, the
Company's computation of earnings per common and common equivalent share will be
replaced by earnings per common share (basic earnings per share), which excludes
any dilutive effects of outstanding stock options and warrants. Also, the
Company's computation of earnings per common share, assuming full dilution, will
be replaced with diluted earnings per share and will be based on the average
market price of the Company's common stock for the period. Had SFAS 128 been in
effect for the periods covered by these financial statements, basic earnings per
share would have been equal to primary earnings per common and common equivalent
share as presented in the consolidated statements of income. Diluted earnings
per share under SFAS 128, had it been in effect for the periods presented, would
have been equal to fully diluted earnings per common and common equivalent share
as presented in the consolidated statements of income. Because of the nature of
stock prices in prior periods and the fact that the Company has not had a
significant number of common stock equivalents outstanding in those periods,
restatement of prior period earnings per share under SFAS 128 is not expected to
have a material effect on those stated earnings per share.
NOTE 6 -- Acquisitions and Divestitures
In August 1997, BNC -- North Dakota purchased a management agreement
between Preferred Investment Services, Inc., a related party of BNCCORP officer
and director, Gregory K. Cleveland, and Preferred Pension Investors I-87, an
Illinois Parntership (the "Agreement"). Under the Agreement, BNC -- North Dakota
will provide administrative management services for pension assets. The purchase
price was $394,000, or 4.71 percent of total assets under management
(approximately $8.4 million at the time of purchase of the Agreement).
The Company continues to engage in an acquisition program. Pursuant to that
program, the Company periodically considers or participates in discussions
concerning acquisitions. At the present time, the Company has no binding
commitments or agreements regarding acquisitions, but additional agreements may
be negotiated or entered into in the future.
NOTE 7 -- Recently Issued Accounting Standards
Statement of Financial Accounting Standards No. 129, "Disclosure of Information
About Capital Structure" ("SFAS 129"), issued in February 1997 and effective for
reporting periods ending after December 15, 1997, summarizes disclosure
requirements pertaining to an entity's capital structure. The Company expects to
adopt SFAS 129 in the fourth quarter of 1997. Because SFAS 129 is a compilation
of several previously issued standards and pronouncements, adoption of this
standard is not expected to have a material effect on the Company's consolidated
financial statements.
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"), issued in June 1997 and effective for fiscal years
beginning after December 15, 1997, requires that changes in the amounts of items
which bypass the income statement and are only reported with a balance in
shareholders' equity (for example, unrealized holding gains and losses on
securities available for sale), be shown in a financial statement. While SFAS
130 does not require a specific format for the financial statement, it does
require that an amount representing total comprehensive income be reported and
that prior period financial statements be reclassified for comparative purposes.
9
<PAGE>
Adoption of this standard is not expected to have a material effect on the
Company's consolidated financial statements.
Statement of Financial Accounting Standards No. 131, "Disclosures About Segments
of an Enterprise and Related Information" ("SFAS 131"), issued in June 1997 and
effective for fiscal years beginning after December 15, 1997, supersedes
Statement of Financial Accounting Standards No. 14, "Financial Reporting for
Segments of a Business Enterprise", and will change the way public companies
report information about segments of their business in their annual financial
statements and require them to report selected segment information in any
quarterly reports to shareholders. It also requires entity-wide disclosures
about the products and services an entity provides, the material countries in
which it holds assets and reports revenues, and its major customers. SFAS 131
requires that companies disclose segment data based on how management makes
decisions about allocating resources to segments and measuring their
performance. While adoption of this standard may require additional disclosures
in the Company's consolidated financial statements, it would not have an effect
on consolidated net income or stockholders' equity.
NOTE 8 -- Subsequent Events
On October 30, 1997, BNC -- North Dakota sold two interest rate swaps which
were accounted for as hedges and effectively converted fixed-rate certificates
of deposit (notional amount of $5 million; original maturity March 10, 1999) and
the Company's fixed-rate Subordinated Debt (notional amount of $15 million;
original maturity June 9, 2004) into variable-rate instruments (see Notes 3 and
4). The Company received proceeds of $388,000 from early termination of the
interest rate swaps. Gains of $16,000 and $372,000 will be amortized to income
over the remaining original lives of the hedged instrument, 16 and 79 months,
respectively, provided the hedged item remains outstanding. The unamortized
deferred gains will be recorded in the statement of financial condition as
prepaid expenses.
Item 2. Management's Discussion and Analysis or Plan of Operation
Comparison of Financial Condition at September 30, 1997 and December 31, 1996
Assets. Total assets increased $36.9 million, or 13 percent, from $288.6 million
at December 31, 1996 to $325.5 million at September 30, 1997. The increase is
largely attributable to an increase in net loans of $34.9 million, or 17
percent, from $201.4 million at December 31, 1996 to $236.3 million at September
30, 1997. The most significant increase in loan volume during the past nine
months was in Minnesota with BNC National Bank of Minnesota ("BNC -- Minnesota")
showing strong loan origination activity. BNC Financial, the company's non-bank
commercial finance company located in St. Cloud, Minnesota, has also increased
its loan volume as has BNC -- North Dakota. Management anticipates continued
increases in loan volume from its Minnesota operations.
Investment in securities available for sale increased $3.9 million between
year-end 1996 and September 30, 1997. This increase was partially offset by a
decrease in federal funds sold of $6.3 million as funds were placed in
investments such as U.S. Treasury notes, government secured mortgages and
government sponsored debentures.
10
<PAGE>
Premises, leasehold improvements and equipment increased $1.3 million between
December 31, 1996 and September 30, 1997. This increase is mainly attributable
to the purchase of the Centennial Plaza office building in Bismarck and the
subsequent remodeling and furnishing of the building. See " --Capital Adequacy
and Expenditures."
Allowance for Loan Losses. The following table sets forth information regarding
changes in the Company's allowance for loan losses for the three and nine month
periods ending September 30, 1997 (amounts are in thousands):
Three Months Nine Months
Ended Ended
September 30, 1997 September 30, 1997
------------- -------------
(Unaudited)
-------------
Balance, beginning of period $ 2,936 $ 1,594
Provision for loan losses 204 2,457
Loans charged off (287) (1,240)
Loans recovered 51 93
------------- -------------
Balance, end of period $ 2,904 $ 2,904
============= =============
Ending loan portfolio $ 239,181
=============
Allowance for loan losses as a percentage of
ending portfolio 1.21%
During the second quarter of 1997, the Company booked a special $1.9 million
loan loss provision. As previously disclosed, the additional provision resulted
from questionable loan practices by a dismissed loan officer at BNC -- North
Dakota and was entirely due to certain irregularities discovered during a
routine internal audit of the subsidiary bank's loan portfolio. In addition,
more than 80 percent of the $1.9 million provision is attributable to
questionable activity with one customer. After conducting a detailed review of
the loans that were identified during the internal audit, the Company terminated
the loan officer and has initiated legal proceedings against her. See Part II,
Item 1, "Legal Proceedings." An exhaustive review of all other loans in the
dismissed officer's portfolio has been performed. No additional problem loans
have been identified, indicating that the Company's special $1.9 million loan
loss provision appears to have been adequate.
As of September 30, 1997, the Company's allowance for loan losses stands at 1.21
percent of total loans as compared to .79 percent at December 31, 1996 and .76
percent one year ago.
Net charge-offs as a percentage of average loans for the three and nine month
periods ended September 30, 1997 were .10 and .52 percent, respectively, as
compared to .03 and .10 percent, respectively, for the same periods last year.
Management believes there is the possibility of recovering all or a portion of
the losses associated with the lending activities of the dismissed loan officer.
However, because there is no guarantee of such recovery and litigation is
ongoing, an extended period of time could be required before the matter is
resolved. See Part II, Item 1, "Legal Proceedings." Further
11
<PAGE>
discussion regarding the impact of the special loan loss provision (and related
matters) on operating results is included below under "Comparison of Operating
Results for the Three Months Ended September 30, 1997 and 1996" and "Comparison
of Operating Results for the Nine Months Ended September 30, 1997 and 1996."
The Company maintains its allowance for loan losses at a level considered by
management to be adequate to cover the risk of loss in the loan portfolio at a
particular point in time. Management's judgment as to whether an additional
amount should be added to the allowance in excess of the amount of loan losses
takes into consideration a number of factors, including, among other things,
loss experience in relation to outstanding loans and the existing level of the
allowance for loan losses, a continuing review of problem loans and overall
portfolio quality, results of regular examinations by state and federal
supervisory authorities and economic conditions. Because certain of these
factors are uncontrollable, management's judgment of the adequacy of the
allowance is necessarily approximate and imprecise. There can be no assurance
that the allowance for loan losses will not be increased in any future period;
this could adversely affect the Company's earnings. Further, there can be no
assurance that the Company's actual loan losses will not exceed its allowance
for loan losses. See "Comparison of Operating Results for the Three Months Ended
September 30, 1997 and 1996 --Provision for Loan Losses" and "Comparison of
Operating Results for the Nine Months Ended September 30, 1997 and 1996 --
Provision for Loan Losses."
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, 1997 December 31, 1996
--------------- ---------------
(Unaudited)
Nonperforming loans:
Loans 90 days or more delinquent and still
accruing interest $ 2,014 $ 129
Nonaccrual loans 1,198 22
Restructured loans 120 136
--------- ---------
Total nonperforming loans 3,332 287
Other real estate owned 159 159
--------- ---------
Total nonperforming assets $ 3,491 $ 446
========= =========
Allowance for loan losses $2,904 $1,594
Ratio of total nonperforming assets to total assets 1.07% 0.15%
Ratio of total nonperforming loans to total loans 1.39% 0.14%
Ratio of allowance for loan losses to total
nonperforming loans 87% 555%
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.
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<PAGE>
Restructured loans are those for which concessions, including the reduction of
interest rates below a rate otherwise available to that borrower or the deferral
of interest or principal, have been granted due to the borrower's weakened
financial condition. Other real estate owned includes property acquired by the
Company in foreclosure proceedings or under agreements with delinquent
borrowers. See Note 8 to the Consolidated Financial Statements.
The increase in the Company's nonperforming loans at September 30, 1997 was
caused by a combination of factors. Over $1.1 million, or 95 percent, of the
loans on nonaccrual are attributable to the activities of the terminated loan
officer discussed earlier. See " -- Allowance for Loan Losses." All of these
loans relate to the officer's activities involving one customer. In addition,
$1.4 million, or 70 percent, of the loans past due 90 days or more and still
accruing interest were commercial loans which were 91 or 92 days past due on
September 30, 1997. Officers were expecting payments on these past due loans
and/or the loans were in the process of renewal at September 30, 1997. Payments
were, in fact, received on several of these loans subsequent to September 30.
Management expects these past due loans to return to current status.
Liabilities. Total liabilities increased $36.0 million, or 14 percent, from
$265.9 million at December 31, 1996 to $301.9 million at September 30, 1997. The
increase was attributable to increases in both deposits and borrowings. Total
deposits increased $9.5 million, or 4 percent, from $239.8 million at December
31, 1996 to $249.3 million at September 30, 1997. Noninterest-bearing deposits
increased $655,000 while savings, NOW and money market accounts increased $7.8
million and time deposits increased $1.1 million.
Short-term borrowings, all at subsidiary banks, increased $15.9 million from
$11.4 million at December 31, 1996 to $27.3 million at September 30, 1997,
including increases of $269,000 in federal funds purchased and U.S. Treasury tax
and loan note option accounts ("TT&L accounts"), $5.6 million in repurchase
agreements and $10.0 million in Federal Home Loan Bank ("FHLB") borrowings. The
repurchase agreements held as of September 30, 1997 bore interest at rates
between 4.00 and 5.73 percent and matured in the first half of October 1997. As
of November 6, 1997, the Company's subsidiary banks held a total of $21.3
million of short-term borrowings, including $701,000 of federal funds purchased
and TT&L accounts, $561,000 of repurchase agreements and $20 million of FHLB
borrowings. The FHLB borrowings bear rates currently ranging from 5.51 to 5.55
percent, mature in July 1998 ($5.0 million) and July 2000 ($15.0 million) and
are callable quarterly. Costs on the Company's short-term borrowings have been
comparable to the cost of time deposits for the three and nine month periods
ending September 30, 1997. See "Comparison of Operating Results for the Three
Months Ended September 30, 1997 and 1996 -- Net Interest Income" and "Comparison
of Operating Results for the Nine Months Ended September 30, 1997 and 1996 --
Net Interest Income." The increased borrowings were used mainly to fund loan
growth. See "Comparison of Operating Results for the Nine Months Ended September
30, 1997 and 1996 -- Liquidity."
The Company's long-term borrowings increased $10.6 million from $10.6 million at
December 31, 1996 to $21.2 million at September 30, 1997. During May 1997, the
Company issued $15 million of its 8 5/8 percent Subordinated Notes. See Note 4
to the Consolidated Financial Statements. At the time of the offering, a portion
of the $14.3 million in net proceeds was used to repay approximately $9.6
million of indebtedness outstanding under the Company's revolving line of credit
with Firstar and BNC Financial's revolving line of credit with Bank Windsor.
These lines of credit (totaling $13.0 million) remain available for use for
general corporate purposes and the Company has since borrowed additional funds
under the lines. As of September 30, 1997, outstanding long-term debt included
the
13
<PAGE>
Subordinated Notes, a $3.0 million term loan and $5.8 million under the
revolving line of credit with Firstar, and a $92,000 capitalized lease at BNC --
North Dakota. The increased long-term borrowings have been used for general
corporate purposes and to fund loan growth at BNC Financial.
Stockholders' Equity. The Company's equity capital increased $959,000 between
December 31, 1996 and September 30, 1997. This increase resulted from the
$765,000 of earnings recorded for the nine months ended September 30, 1997
combined with a $194,000 increase in the net unrealized holding gain on
securities available for sale. See "Comparison of Operating Results for the Nine
Months Ended September 30, 1997 and 1996 -- General."
Capital Adequacy and Expenditures. BNCCORP's management continues to actively
monitor compliance with bank regulatory capital requirements, including
risk-based and leverage capital measures. Despite the special loan loss
provision of $1.9 million taken during the second quarter of 1997, the Company
and each of its subsidiaries remain well capitalized for regulatory capital
purposes.
Construction on a branch office in north Bismarck is in process and is the only
currently planned major capital expenditure remaining for 1997. The most current
estimate on the cost of this facility is $630,000; it will be funded through
cash generated through operations.
Comparison of Operating Results for the
Three Months Ended September 30, 1997 and 1996
General. Net income for the three months ended September 30, 1997 was a record
$772,000, a 26.6 percent increase from the $610,000 recorded for the three
months ended September 30, 1996. The Company's primary and fully diluted
earnings per share was $0.33 for the quarter ended September 30, 1997 as
compared to $0.26 for the same period one year ago. The returns on average
assets and average equity for the three months ended September 30, 1997 were .95
and 13.22 percent, respectively, as compared to .90 and 10.95 percent,
respectively, for the same period last year. Net income for the third quarter of
1997 was impacted by $85,000 of expenses related to proceedings involving a loan
officer dismissed earlier in the year. See " -- Noninterest Expense." These
expenses had a negative impact of $0.02 on the Company's earnings per share for
the third quarter of 1997.
BNC -- North Dakota reported net income of $691,000 for the quarter ended
September 30, 1997, as compared to 1996 third quarter earnings of $830,000. For
the three months ended September 30, 1997, BNC -- North Dakota recorded total
interest income and net interest income of $5.5 and $2.6 million, respectively,
as compared to $4.9 and $2.3 million, respectively, for the same period in 1996.
BNC -- Minnesota reported net income of $210,000 for the quarter ended September
30, 1997 as compared to a net loss of $27,000 for the same period last year. For
the same periods, total interest income and net interest income were $1.2
million and $647,000, respectively, for 1997 as compared to $722,000 and
$385,000, respectively, for 1996. BNC -- Minnesota was chartered in January
1996.
Net Interest Income. Net interest income increased $599,000, or 23 percent, to
$3.3 million for the three months ended September 30, 1997 from $2.7 million for
the same period in 1996. For the same periods, total interest income increased
$1.4 million, or 24 percent, to $6.9 million as compared to $5.5 million. The
increase in interest income is largely attributable to loan growth from the
Company's Minnesota operations. Average loans increased $43.0 million, or 22
percent, while average earning assets increased $48.5 million, or 19 percent.
Average loans comprised 78 percent of the average
14
<PAGE>
earning asset portfolio for the three months ended September 30, 1997 as
compared to 76 percent for the same period in 1996. While the historical trend
of shifting a larger percentage of the Company's earning asset portfolio from
lower yielding investments to higher yielding loans is less evident in this
quarterly comparison, interest income continues to increase due to the growth
the Company has experienced. This growth was coupled with an increase in the
yield on earning assets of 33 basis points. The increase was driven by improved
loan yields of 33 basis points due primarily to the 25 basis point increase in
prime rates in April 1997. Also contributing to improved loan yields was a shift
in loan mix to a higher percentage of variable rate loans which have been
yielding higher than fixed rate loans.
Total interest expense increased $747,000, or 26 percent, from $2.9 million for
the quarter ended September 30, 1996 to $3.6 million for the same period in
1997. The increase was caused by an increase in the volume of average
interest-bearing liabilities coupled with an overall increase in the cost of
those liabilities. Average interest-bearing liabilities increased $46.4 million,
$32.6 million attributable to average interest-bearing deposits and $13.8
million attributable to average borrowings. Funds from the increased deposits
and borrowings were used primarily to fund loan growth. See "Comparison of
Operating Results for the Nine Months Ended September 30, 1997 and 1996
- --Liquidity." The cost of total deposits and interest-bearing deposits increased
9 and 12 basis points, respectively, as the average cost of time deposits, the
largest component of the deposit portfolio, increased 4 basis points due to some
higher renewal rates and an increase in average brokered deposits. Costs on
money market accounts also increased in the third quarter of 1997 as compared to
the same period one year ago. This increase can be attributed to increased
volume in corporate money market accounts paying higher rates of interest. The
Company's cost on short-term borrowings for the third quarter of 1997 (5.65
percent) increased only slightly from the same period in 1996 (5.63 percent).
During the same periods, the cost of long-term borrowings increased from 7.80
percent to 8.35 percent, or 55 basis points, due largely to the inclusion of the
Subordinated Notes issued in May 1997. See Note 4 to the Consolidated Financial
Statements.
Net interest margin for the third quarter of 1997 was 4.32 percent as compared
to 4.22 percent for the same period one year ago. As indicated above and in the
table below, the increase is mainly attributable to improved yield on loans
which was offset somewhat by the increase in cost of interest-bearing
liabilities.
The following table presents average balances, interest earned or paid, and
associated yields on interest-earning assets and costs on interest-bearing
liabilities for the three months ended September 30, 1997 and 1996 (amounts are
in thousands):
15
<PAGE>
Three Months ended September 30,
1997 1996
Interest Average Interest Average
Average earned yield Average earned yield or
balance or paid cost balance or paid cost
------ ----- ----- ------ ----- ------
Interest-earning assets
Investments $ 68,121 $1,096 6.38% $ 60,780 $ 988 6.47%
Loans 234,360 5,797 9.81% 191,344 4,559 9.48%
Allowance for loan losses (3,053) (1,241)
------ ----- ------ -----
Total interest-earning
assets $299,428 $6,893 9.13% $250,883 $5,547 8.80%
====== ----- ======= -----
Interest-bearing liabilities
Savings, NOW & money market
accounts $ 59,982 $ 456 3.02% $48,823 $ 309 2.52%
Certificates of deposits 169,325 2,409 5.64% 147,868 2,082 5.60%
Short-term borrowings 26,589 379 5.65% 21,702 307 5.63%
Long-term borrowings 18,441 388 8.35% 9,527 187 7.80%
------ ----- ------ -----
Total interest-bearing
liabilities $274,337 $3,632 5.25%$227,920 $2,885 5.04%
====== ======
Net interest income / spread $3,261 3.88% $2,662 3.76%
===== ===== ===== ======
Net interest margin 4.32% 4.22%
===== ======
Provision for Loan Losses. The provision for loan losses was $204,000 for the
quarter ended September 30, 1997 as compared to $385,000 for the same period one
year ago. The decrease in the most recent quarter, as compared to the same
period one year ago, is reflective of the $1.9 million special provision made
during the second quarter of 1997 and the fact that the allowance for loan
losses now stands at 1.21 percent of total loans as compared to .76 percent one
year ago. Management estimates indicate that the allowance for loan losses is
adequate to cover the risk of loss in the loan portfolio at the present time.
See "Comparison of Financial Condition at September 30, 1997 and December 31,
1996 --- Allowance for Loan Losses."
Noninterest Income. Noninterest income decreased $274,000 for the third quarter
of 1997 as compared to the same period last year. The decrease for the quarter
is due to a $348,000 decrease in loan fees offset by an increase in other
noninterest income, primarily fee income from BNC -- North Dakota's new trust
and private banking division.
Noninterest Expense. Noninterest expense increased $246,000 for the quarter
ended September 30, 1997 as compared to the same period in 1996. The increase is
primarily growth-related. Salary and employee benefits expenses increased
$32,000 for the three months ended September 30, 1997 as compared to the same
period last year as the Company's full time equivalent employees increased from
110 at September 30, 1996 to 124 at September 30, 1997. Smaller increases were
also recorded in occupancy, depreciation and amortization, and office supplies,
telephone and postage expenses due to the operation of BNC -- North Dakota's new
trust and private banking division and the Company's new office facility in
Bismarck. In addition, during the third quarter of 1997 the Company incurred
approximately $85,000 of noninterest expenses, primarily legal expenses,
directly related to proceedings involving the loan officer dismissed earlier in
the year. See "Comparison of Financial Position at September 30, 1997 and
December 31, 1996 -- Allowance for Loan Losses." These expenses reduced the
Company's earnings per share for the third quarter of 1997 by approximately
$0.02.
Income tax expense. Income tax expense increased $98,000 due to the increase in
pre-tax income recorded for the quarter ended September 30, 1997 as compared to
the pre-tax income recorded for the same period in 1996. The estimated effective
tax rates for the three month periods ended
16
<PAGE>
September 30, 1997 and 1996 were 39.3 and 39.7 percent, respectively. These
rates are higher than the federal statutory rate of 34.0 percent due principally
to state income taxes.
Earnings per share. Primary and fully diluted earnings per common and common
equivalent share was $0.33 for the quarter ended September 30, 1997 as compared
to $0.26 for the same quarter in 1996. See " -- Noninterest Expense." Weighted
average shares outstanding were 2,338,720 for both periods.
Comparison of Operating Results for the
Nine Months Ended September 30, 1997 and 1996
General. Net income decreased $426,000, or 36 percent, from $1.2 million for the
nine months ended September 30, 1996 to $765,000 for the nine months ended
September 30, 1997. The decrease was mainly attributable to the $1.9 million
special loan loss provision booked during the second quarter of 1997. See
"Comparison of Financial Condition at September 30, 1997 and December 31, 1996
- --Allowance for Loan Losses." The Company's primary and fully diluted earnings
per share was $0.33 for the nine months ended September 30, 1997 as compared to
$0.51 for the same period one year ago. The returns on average assets and
average equity for the nine months ended September 30, 1997 were .33 and 4.42
percent, respectively, as compared to .63 and 7.42 percent, respectively, for
the same period last year. The Company's earnings for the nine months ended
September 30, 1997, without the increase in loan loss provision and expenses
related to proceedings against the dismissed loan officer discussed earlier,
would have been $2.1 million, or $0.88 per share, with returns on average assets
and average equity of .90 and 11.69 percent, respectively.
BNC -- North Dakota reported net income of $760,000 for the nine month period
ended September 30, 1997, a 59 percent decrease from earnings of $1.9 million
for the same period last year. The decrease in earnings for this subsidiary bank
was mainly attributable to the special loan loss provision of $1.9 million
booked in June 1997. See "Comparison of Financial Condition at September 30,
1997 and December 31, 1996 -- Allowance for Loan Losses" and " -- Provision for
Loan Losses." For the nine months ended September 30, 1997, BNC -- North Dakota
recorded total interest income and net interest income of $15.8 and $7.6
million, respectively, as compared to $14.0 and $6.4 million, respectively, for
the same period in 1996.
BNC -- Minnesota reported net income of $327,000 for the nine month period ended
September 30, 1997 as compared to a net loss of $251,000 for the same period
last year. For the same periods, total interest income and net interest income
were $3.2 and $1.7 million, respectively, for 1997 as compared to $1.3 million
and $706,000, respectively, for 1996.
Net Interest Income. Net interest income increased $2.3 million, or 34 percent,
to $9.3 million for the nine months ended September 30, 1997 from $7.0 million
for the same period in 1996. For the same periods, total interest income
increased $4.4 million, or 29 percent, to $19.4 million as compared to $15.0
million. The increase in interest income is largely attributable to loan growth
from the Company's Minnesota operations. Average loans increased $57.3 million,
or 35 percent, while average earning assets increased $52.0 million, or 22
percent, reflecting the continued trend of shifting lower yielding investments
to higher yielding loans in the earning asset portfolio. Average loans comprised
77 percent of the average earning asset portfolio for the nine months ended
September 30, 1997 as compared to 70 percent for the same period in 1996. The
yield on earning assets also increased 47
17
<PAGE>
basis points partly because of the change in composition of the earning asset
portfolio and partly because of improved loan yields. Loan yields improved 37
basis points largely due to the 25 basis point increase in prime rates in April
1997. Also contributing to improved loan yields was a shift in loan mix to a
higher percentage of variable rate loans which have been yielding higher than
fixed rate loans.
Total interest expense increased $2.0 million, or 25 percent, from $8.1 million
for the nine months ended September 30, 1996 to $10.1 million for the same
period in 1997. The increase was caused by an increase in the volume of average
interest-bearing liabilities coupled with an overall increase in the cost of
those liabilities. Average interest-bearing liabilities increased $47.1 million,
$34.9 million attributable to average interest-bearing deposits and $12.2
million attributable to average borrowings. Funds from the increased deposits
and borrowings, along with funds derived from decreases in investment securities
over the past twelve months were used to fund loan growth. See " -- Liquidity."
Interest bearing deposit costs over the two nine month periods were the same at
4.94 percent, however, a slight change in mix of the deposit portfolio caused
the cost of total deposits to decrease from 4.60 percent in 1996 to 4.55 percent
in 1997. The decrease, however, was offset by a 52 basis point increase in cost
of borrowings due to higher prevailing rates and the inclusion of the $15
million Subordinated Notes beginning in May 1997.
Net interest margin for the first nine months of 1997 was 4.35 percent as
compared to 3.98 percent for the same period one year ago. As indicated above
and in the table below, the increase is mainly attributable to improved yield on
loans which was offset somewhat by the increase in cost of interest-bearing
liabilities.
The following table presents average balances, interest earned or paid, and
associated yields on interest-earning assets and costs on interest-bearing
liabilities for the nine months ended September 30, 1997 and 1996 (amounts are
in thousands):
Nine Months ended September 30,
1997 1996
Interest Average Interest Average
Average earned yield or Average earned yield or
balance or paid cost balance or paid cost
------ ------ ----- ------ ----- ------
Interest-earning assets
Investments $67,923$ 3,237 6.37% $72,180 $3,540 6.55%
Loans 219,855 16,142 9.82% 162,541 11,504 9.45%
Allowance for loan losses (2,184) (1,169)
------ ------ ------ -----
Total interest-earning
assets $285,594 $19,379 9.07% $233,552 $15,044 8.60%
====== ------ ======= ------
Interest-bearing liabilities
Savings, NOW & money market
accounts $ 57,157 $ 1,259 2.94% $ 46,060 $ 861 2.50%
Certificates of deposits 169,677 7,130 5.62% 145,918 6,236 5.71%
Short-term borrowings 18,871 811 5.74% 15,402 648 5.62%
Long-term borrowings 14,590 884 8.10% 5,851 347 7.91%
------ ------ ------ -----
Total interest-bearing
liabilities $260,295 $10,084 5.18% $213,231 $8,092 5.07%
====== =======
Net interest income / spread $ 9,295 3.89% $6,952 3.53%
====== ===== ===== =====
Net interest margin 4.35% 3.98%
===== ======
Provision for Loan Losses. The provision for loan losses was $2.5 million for
the nine months ended September 30, 1997 as compared to $604,000 for the same
period one year ago. As previously discussed, the increase in the Company's
provision for loan losses for the first nine months of 1997
18
<PAGE>
resulted from questionable loan practices by a recently dismissed loan officer.
See "Comparison of Financial Condition at September 30, 1997 and December 31,
1996 -- Allowance for Loan Losses."
Noninterest Income. Noninterest income decreased $220,000 for the first nine
months of 1997 as compared to the same period last year. The decrease is due to
a $471,000 decrease in loan fees offset by a $214,000 increase in other
noninterest income and smaller additional increases in service charges and
rental income. The increase in other noninterest income is primarily due to fee
income from BNC -- North Dakota's new trust and private banking division.
Noninterest Expense. Noninterest expense increased $913,000 for the nine months
ended September 30, 1997 as compared to the same period in 1996. The increase is
primarily growth-related. Salary and employee benefits expenses increased
$513,000 for the nine months ended September 30, 1997 as compared to the same
period last year as the Company's full time equivalent employees increased from
110 at September 30, 1996 to 124 at September 30, 1997. Smaller increases were
also recorded in occupancy, depreciation and amortization, and office supplies,
telephone and postage expenses due to the operation of BNC -- North Dakota's new
trust and private banking division and the Company's new office facility in
Bismarck. During the third quarter of 1997 the Company incurred approximately
$85,000 of noninterest expenses, primarily legal expenses, directly related to
proceedings against the loan officer dismissed earlier in 1997. See "Comparison
of Financial Position at September 30, 1997 and December 31, 1996 -- Allowance
for Loan Losses." These expenses reduced the Company's earnings per share for
the nine months ended September 30, 1997 by approximately $0.02.
Income tax expense. Income tax expense was $544,000 for the first nine months of
1997 as compared to $761,000 for the same period last year. The change is
attributable to the reduction in pretax income resulting primarily from the $1.9
million special loan loss provision booked during the second quarter of 1997.
The estimated effective tax rates for the nine month periods ended September 30,
1997 and 1996 were 41.6 and 39.0, respectively. These rates are higher than the
federal statutory rate of 34.0 percent due principally to state income taxes.
The estimated rate for the nine months ended September 30, 1997 is additionally
impacted by the fact that, while the consolidated entity recorded a loss in the
first six months of 1997, its Minnesota entities recorded income causing a
disproportionately high impact of state taxes on the consolidated income tax
rate.
Earnings per share. Primary and fully diluted earnings per common and common
equivalent share was $0.33 for the nine months ended September 30, 1997 as
compared to $0.51 for the same period in 1996. See " -- Noninterest Expense."
Weighted average shares outstanding were 2,338,720 for both periods.
Liquidity. The Company's continued liquidity management objective is to ensure
its ability to satisfy the cash flow requirements of depositors and borrowers
and allow it to meet its own cash flow needs. For the nine month period ended
September 30, 1997, cash and cash equivalents increased $2.0 million as compared
to a decrease of $3.0 million for the same period in 1996.
Operating activities during the first nine months of 1997 provided net cash
inflows of $2.7 million as compared to $1.3 million for the first nine months of
1996.
Investing activities during the nine months ended September 30, 1997 resulted in
net cash outflows of $36.7 million as compared to $40.9 million for the same
period in 1996. During 1997, cash outflows of $37.4, $3.7 and $1.8 million,
respectively, were attributable to net increases in loans,
19
<PAGE>
transactions in investment securities and net transactions involving premises,
leasehold improvements and equipment. These cash outflows were offset by $6.3
million of cash inflows resulting from the net change in federal funds sold.
This was in comparison to cash outflows of $76.9 million and $1.8 million
attributable to net increases in loans and fixed assets, respectively, offset by
cash inflows of $34.9 million attributable to transactions in investment
securities and $3.0 million attributable to the net change in federal funds sold
during the first nine months of 1996. During the first nine months of 1996, the
Company sold a significant amount of investments in order to fund loan growth
and shift the earning asset portfolio from lower yielding investments to higher
yielding loans.
Financing activities during the first nine months of 1997 provided cash inflows
of $35.9 million as compared to cash inflows of $36.6 million for the same
period in 1996. The 1997 cash inflows were caused by increases in deposits of
$9.5 million, increased short-term borrowings of $15.9 million and a net
increase in long-term borrowings of $10.5 million. The 1996 cash inflows
resulted from a net increase in deposits of $7.6 million, increased short-term
borrowings of $21.1 million and net increases in long-term borrowings of $7.9
million. Deposit and borrowing increases were used to fund the Company's loan
growth in both periods.
The Company anticipates that it will continue to rely primarily upon customer
deposits, FHLB and other short-term borrowings, loan repayments, loan sales and
retained earnings to provide liquidity and to make loans and purchase investment
securities. In addition to these sources of liquidity, the Company can access
additional funds from its revolving lines of credit. See Note 4 to the
Consolidated Financial Statements and "Comparison of Financial Condition at
September 30, 1997 and December 31, 1996 -- Liabilities."
Forward Looking Statements
Statements included in Item 2, "Management's Discussion and Analysis or Plan of
Operation," 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 associated with the Company's acquisition strategy; 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; and other risks which are
difficult to predict and many of which are beyond the control of the Company.
20
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
BNC National Bank v. Debra J. Gronlie and Paul Andahl, Civ. No. 97-C-2020
(South Central Jud. Dist. Burleigh Co. ND). On July 21, 1997, the Company filed
suit against the terminated loan officer and her husband alleging
misrepresentations, reliance on misrepresentations and breaches of fiduciary
responsibilities and conflicts of interest and seeking no less than $1.9 million
in monetary damages and other equitable relief. The Company also reserved the
right to amend the pleadings to seek punitive damages.
The Company filed suit as a result of the irregularities discovered during
an exhaustive review of the loan portfolio of the former loan officer with BNC
- -- North Dakota, who was dismissed during the second quarter of 1997 and the
special $1.9 million loan loss provision charged to operations during the
quarter ended June 30, 1997, all of which related to her lending activities. The
discovery stage has commenced and is currently estimated to be one-half
complete.
Periodically, and in the ordinary course of business, various claims and
lawsuits which are incidental to the Company's business may be brought against
or by the Company, such as claims to enforce liens, condemnation proceedings on
properties in which the Company holds security interests, claims involving the
making and servicing of real property loans and other issues incidental to the
Company's business. Management is unaware of any legal proceedings of this type
pending against the Company that could result in a materially adverse change in
the business or financial condition of the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Part I Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K None.
21
<PAGE>
Signatures
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
BNCCORP, Inc.
Date: November 14, 1997 By /s/ Gregory K. Cleveland
----------------------------
Gregory K. Cleveland
President
Chief Financial Officer
Only Authorized Signature
22
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
statement of condition dated 9/30/97 and statement of income for the nine
months ended 9/30/97 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<CIK> 0000945434
<NAME> BNCCORP, INC.
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 6,623
<INT-BEARING-DEPOSITS> 1,739
<FED-FUNDS-SOLD> 600
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 63,376
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 239,181
<ALLOWANCE> 2,904
<TOTAL-ASSETS> 325,536
<DEPOSITS> 249,308
<SHORT-TERM> 27,304
<LIABILITIES-OTHER> 4,152
<LONG-TERM> 21,178
0
0
<COMMON> 23
<OTHER-SE> 23,571
<TOTAL-LIABILITIES-AND-EQUITY> 325,536
<INTEREST-LOAN> 16,142
<INTEREST-INVEST> 3,237
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 19,379
<INTEREST-DEPOSIT> 8,389
<INTEREST-EXPENSE> 10,084
<INTEREST-INCOME-NET> 9,295
<LOAN-LOSSES> 2,457
<SECURITIES-GAINS> (3)
<EXPENSE-OTHER> 7,130
<INCOME-PRETAX> 1,309
<INCOME-PRE-EXTRAORDINARY> 765
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 765
<EPS-PRIMARY> .33
<EPS-DILUTED> .33
<YIELD-ACTUAL> 9.07
<LOANS-NON> 1,198
<LOANS-PAST> 2,014
<LOANS-TROUBLED> 120
<LOANS-PROBLEM> 7,486
<ALLOWANCE-OPEN> 1,594
<CHARGE-OFFS> 1,240
<RECOVERIES> 93
<ALLOWANCE-CLOSE> 2,904
<ALLOWANCE-DOMESTIC> 2,904
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
