<PAGE>
$15,000,000
BNCCORP, INC.
8 5/8% SUBORDINATED NOTES DUE 2004
Interest on the 8 5/8% Subordinated Notes due 2004 (the "Notes") issued by
BNCCORP, Inc. ("BNC" or the "Company") will be payable on the first business day
of each month, commencing July 1, 1997. The Notes will mature on May 31, 2004.
The Notes will not be redeemable prior to May 31, 2000. Thereafter, the Notes
will be redeemable, in whole or in part, at the option of the Company at par
plus accrued interest to the date of redemption. The Notes will have no sinking
fund. The Notes will only be offered in denominations of $1,000 and integral
multiples thereof. The Notes will be unsecured general obligations of the
Company and subordinated to all existing and future Senior Indebtedness (as
defined herein) of the Company. The Indenture (as defined herein) does not limit
the ability of the Company or its subsidiaries to incur Senior Indebtedness or
indebtedness ranking on a parity with the Notes. Payment of principal of the
Notes may be accelerated only in the case of certain events relating to the
bankruptcy, insolvency or reorganization of the Company. There is no right to
acceleration in the case of a default in the payment of principal or interest on
the Notes or in the performance of any other covenant of the Company. See
"Description of the Notes."
The Notes will be represented by one or more global certificates
("Registered Global Securities") registered in the name of The Depository Trust
Company ("DTC") or its nominee. Beneficial interests in the Notes will be shown
on, and transfers thereof will be effected only through, records maintained by
DTC and its participants. Except as described herein, the Notes in certificate
form will not be issued in exchange for Registered Global Securities. See
"Description of the Notes--Book-Entry, Delivery and Form."
The Company does not intend to list the Notes on any securities exchange and
no active trading market is likely to develop. Although the Underwriter has
informed the Company that it intends to make a market in the Notes, the
Underwriter is not obligated to make a market in the Notes, and any market
making may be discontinued at any time at the sole discretion of the
Underwriter. See "Underwriting."
------------------------
THE NOTES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
---------------------
THE NOTES ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION, BY ANY OTHER
GOVERNMENT AGENCY OR OTHERWISE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS TO
TO PUBLIC DISCOUNT(1) COMPANY(2)
<S> <C> <C> <C>
Per Note................................. 100.0% 5.0% 95.0%
Total(2)................................. $15,000,000 $750,000 $14,250,000
</TABLE>
(1) The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $150,000.
------------------------
The Notes are being offered by the Underwriter named herein subject to prior
sale and when, as and if delivered to and accepted by the Underwriter. It is
expected that the Notes will be ready for delivery in book-entry form only
through the facilities of The Depository Trust Company in New York, New York, on
or about May 29, 1997, against payment therefor in immediately available funds.
DAIN BOSWORTH
INCORPORATED
The date of this Prospectus is May 23, 1997
2
<PAGE>
BNC LOCATIONS
[LOGO]
------------------------
The Company intends to furnish holders of the Notes with annual reports
containing audited financial statements together with a report of independent
public accountants.
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE NOTES, INCLUDING
THOSE DESCRIBED IN "UNDERWRITING."
3
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION
AND THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE
IN THIS PROSPECTUS.
THE COMPANY
BNCCORP, INC. (together with its consolidated subsidiaries, "BNC" or the
"Company") is a bank holding company headquartered in Bismarck, North Dakota,
which provides a broad range of banking and financial services to small and
mid-size businesses and individuals through its nine full service banking
facilities in North Dakota and Minnesota. BNC operates primarily through its two
commercial banking subsidiaries, BNC National Bank ("BNC-North Dakota"), which
is headquartered in Bismarck and has seven additional branches in North Dakota,
and BNC National Bank of Minnesota ("BNC-Minnesota," together with BNC-North
Dakota, the "Banks"), which is located in Minneapolis, Minnesota. In addition,
the Company provides asset-based commercial financing through its non-bank
subsidiary, BNC Financial Corporation ("BNC Financial"), located in St. Cloud,
Minnesota.
Due to its focus on customer service and local relationship banking with
small and mid-size businesses and individuals, BNC has experienced significant
growth. Management believes that the Company's entrepreneurial approach to
banking and the introduction of new products and services will continue to
attract small and mid-size businesses which are often not of sufficient size to
be of interest to the larger banks in the Company's market areas. Small and
mid-size businesses and individuals frequently have difficulty finding banking
services that meet their specific needs and have sought, and management believes
will continue to seek, banking institutions that are more relationship-oriented.
BNC offers an increasing number of banking and finance-related products and
services, including trust services, asset management, retirement planning, tax
planning and preparation, insurance and other private banking services.
BNC was formed in 1987 with the objective of acquiring and improving the
performance of strategically located banks in North Dakota. As part of this
strategy, the Company has completed several acquisitions. The largest of these
acquisitions was the Company's July 1995 acquisition of seven North Dakota
branches, with aggregate deposits of approximately $104.8 million, from First
Bank fsb. In January 1996, the Company established a DE NOVO national bank in
Minneapolis, Minnesota which primarily serves small and mid-size businesses in
the Minneapolis/St. Paul metropolitan area. In addition, the Company acquired
BNC Financial, a non-bank commercial finance company that primarily engages in
asset-based lending, in May 1996.
Management believes that these initiatives have generated significant growth
for the Company. From December 31, 1992 to March 31, 1997, the Company's net
loans increased from $69.3 million to $207.7 million, total assets increased
from $118.0 million to $307.8 million and total deposits increased from $102.7
million to $253.3 million. During this same period, the Company's ratio of
nonperforming loans to total loans decreased from 5.80% to 0.22%. The Company's
goal continues to be the creation of a well-capitalized $500 million to $1
billion financial services organization focused on local relationship banking.
Efforts are ongoing to ensure that the executive management team and operating
systems are in place to achieve this goal.
BNC was incorporated in North Dakota in 1987 and reincorporated in Delaware
in July 1995. BNC's principal executive office is located at 322 East Main,
Bismarck, North Dakota 58501, and its telephone number is (701) 250-3040.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Notes Offered........ $15,000,000 principal amount of 8 5/8% Subordinated Notes due 2004.
See "Description of the Notes."
Denominations........ $1,000 and integral multiples thereof.
Maturity............. May 31, 2004.
Interest Payment
Dates.............. Monthly, commencing July 1, 1997, and on the first business day of
each month thereafter. The first interest payment date will represent
interest from the date of issuance of the Notes through June 30,
1997.
Sinking Fund......... None.
Optional Redemption.. The Company may elect to redeem the Notes, in whole or in part, upon
30 days' prior written notice, at any time on or after May 31, 2000,
at 100% of the principal amount thereof plus accrued interest to the
date of redemption. See "Description of the Notes--Redemption at the
Option of the Company."
Covenants............ The indenture under which the Notes will be issued (the "Indenture")
will restrict the ability of the Company, under certain
circumstances, to pay cash dividends, redeem or repurchase stock or
make other capital distributions. The Indenture does not limit the
ability of the Company or its subsidiaries to incur additional
indebtedness. See "Description of the Notes--Limitation on Dividends
and Other Payments."
Limited Rights of
Acceleration....... Payment of principal of the Notes may be accelerated only in the case
of certain events relating to the bankruptcy, insolvency or
reorganization of the Company. There is no right of acceleration in
the case of a default in the payment of principal or interest on the
Notes or a failure to fulfill any other covenant of the Company
contained in the Indenture. See "Description of the Notes--
Acceleration Events."
Subordination........ The Notes will be unsecured general obligations of BNC and will be
subordinated to all existing and future Senior Indebtedness (as
defined herein). As of May 16, 1997, the Company had approximately
$32.0 million of outstanding Senior Indebtedness (excluding
deposits). The Indenture does not limit the ability of the Company or
its subsidiaries to incur additional Senior Indebtedness or
indebtedness ranking on a parity with the Notes. See "Capitalization"
and "Description of the Notes."
Use of Proceeds...... The estimated net proceeds of approximately $14.1 million from the
sale of the Notes will be used to repay approximately $9.6 million of
indebtedness expected to be outstanding under the Firstar Line of
Credit (as defined herein) at the time of the offering. In subsequent
periods, BNC expects to borrow additional funds under the Revolving
Lines of Credit (as defined herein) in order to provide additional
working capital for general corporate purposes, including the funding
of loans at BNC Financial. See "Use of Proceeds."
</TABLE>
INFORMATION CONTAINED IN THIS PROSPECTUS CONTAINS "FORWARD-LOOKING
STATEMENTS" WHICH CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY
SUCH AS "MAY," "WILL," "EXPECT," "ANTICIPATE," "ESTIMATE," OR "CONTINUE" OR THE
NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE TERMINOLOGY. THE
STATEMENTS IN "RISK FACTORS" BEGINNING ON PAGE 7 OF THIS PROSPECTUS CONSTITUTE
CAUTIONARY STATEMENTS IDENTIFYING IMPORTANT FACTORS, INCLUDING CERTAIN RISKS AND
UNCERTAINTIES, WITH RESPECT TO SUCH FORWARD-LOOKING STATEMENTS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE REFLECTED IN SUCH FORWARD-LOOKING
STATEMENTS.
4
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The statement of income data for the three years ended December 31, 1996,
and the statement of financial condition data as of December 31, 1996 and 1995
set forth below have been derived from the consolidated financial statements of
the Company audited by Arthur Andersen LLP and included elsewhere in this
Prospectus. The statement of financial condition data as of December 31, 1994
has been derived from financial statements not included in this Prospectus,
which have been audited by Arthur Andersen LLP. The statement of income data for
the two years ended December 31, 1993 and the statement of financial condition
data as of December 31, 1993 and 1992 have been derived from financial
statements not included in this Prospectus, which were audited by James J.
Wosepka, CPA, independent public accountant. The statement of income and
statement of financial condition data for the three months ended and as of March
31, 1997 and 1996 are derived from the unaudited consolidated financial
statements of the Company and, in the opinion of management, reflect all
adjustments (consisting only of normal recurring adjustments) necessary for fair
presentation thereof. The results for the three month period ended March 31,
1997 are not necessarily indicative of results to be expected for the full year.
The following summary historical financial data should be read in conjunction
with the Company's Consolidated Financial Statements and the notes thereto
included elsewhere in this Prospectus and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
AT OR FOR THE
THREE MONTHS ENDED AT OR FOR THE
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Interest income................................. $ 6,060 $ 4,485 $ 20,957 $ 15,283 $ 10,263 $ 8,920 $ 9,376
Interest expense................................ 3,115 2,537 11,107 8,542 4,411 4,068 4,995
--------- --------- --------- --------- --------- --------- ---------
Net interest income............................. 2,945 1,948 9,850 6,741 5,852 4,852 4,381
Provision for loan losses....................... 170 84 739 168 179 89 236
--------- --------- --------- --------- --------- --------- ---------
Net interest income after provision for loan
losses........................................ 2,775 1,864 9,111 6,573 5,673 4,763 4,145
Noninterest income(1)........................... 481 371 2,096 1,736 1,399 993 957
Noninterest expense............................. 2,340 1,966 8,213 6,511 5,202 4,207 3,916
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes...................... 916 269 2,994 1,798 1,870 1,549 1,186
Income taxes.................................... 355 127 1,147 641 679 453 267
--------- --------- --------- --------- --------- --------- ---------
Net income...................................... $ 561 $ 142 $ 1,847 $ 1,157 $ 1,191 $ 1,096 $ 919
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net income per common share..................... $ 0.24 $ 0.06 $ 0.79 $ 0.67 $ 0.98 $ 0.89 $ 0.83
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Weighted average common shares outstanding...... 2,338,720 2,338,720 2,338,720 1,720,030 1,218,909 1,238,100 1,103,395
STATEMENT OF FINANCIAL CONDITION DATA:
Total assets.................................... $ 307,802 $ 239,807 $ 288,558 $ 240,399 $ 147,645 $ 122,414 $ 117,958
Net loans....................................... 207,747 147,812 201,403 119,635 109,450 82,777 69,328
Investment securities........................... 61,953 73,290 59,491 94,416 25,111 26,964 35,591
Deposits........................................ 253,300 202,959 239,770 211,048 124,649 107,496 102,666
Stockholders' equity............................ 22,903 20,968 22,635 20,887 9,540 8,904 7,808
Book value per common share..................... $ 9.79 $ 8.97 $ 9.68 $ 8.93 $ 7.87 $ 7.19 $ 7.08
Tangible book value per common share............ 8.07 7.23 7.93 7.24 7.31 6.65 6.36
</TABLE>
- ------------------------
(1) Includes loan origination fees of $191 and $164 for the three month periods
ended March 31, 1997 and 1996, respectively, and $1,276, $559, $650, $320
and $173 for the years ended December 31, 1996, 1995, 1994, 1993 and 1992,
respectively.
5
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE
THREE MONTHS ENDED
AT OR FOR THE
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- ------------------------------------------
1997 1996 1996 1995 1994 1993
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
KEY RATIOS:(1)
Net interest margin........................................... 4.38% 3.59% 4.09% 3.71% 4.70% 4.40%
Net interest spread........................................... 3.89 3.13 3.63 3.27 4.34 4.10
Return on average assets...................................... 0.77 0.24 0.71 0.59 0.87 0.90
Return on average equity...................................... 9.87 2.70 8.53 8.11 12.34 12.92
Stockholders' equity to total assets.......................... 7.44 8.74 7.84 8.69 6.46 7.27
Nonperforming assets to total assets.......................... 0.20 0.29 0.15 0.20 0.44 1.47
Nonperforming loans to total loans............................ 0.22 0.47 0.14 0.40 0.49 1.93
Allowance for loan losses to total loans...................... 0.83 0.76 0.78 0.87 0.92 0.85
Allowance for loan losses to nonperforming loans.............. 382 164 555 218 188 44
Efficiency ratio(2)........................................... 68.32 84.80 68.75 76.81 71.74 71.98
Ratio of earnings to fixed charges:(3)
Including interest on deposits.............................. 1.29x 1.11x 1.27x 1.21x 1.42x 1.38x
Excluding interest on deposits.............................. 3.48 2.74 3.19 3.43 5.01 6.61
<CAPTION>
1992
---------
<S> <C>
KEY RATIOS:(1)
Net interest margin........................................... 4.08%
Net interest spread........................................... 3.71
Return on average assets...................................... 0.78
Return on average equity...................................... 13.70
Stockholders' equity to total assets.......................... 6.62
Nonperforming assets to total assets.......................... 3.74
Nonperforming loans to total loans............................ 5.80
Allowance for loan losses to total loans...................... 1.55
Allowance for loan losses to nonperforming loans.............. 27
Efficiency ratio(2)........................................... 73.36
Ratio of earnings to fixed charges:(3)
Including interest on deposits.............................. 1.24x
Excluding interest on deposits.............................. 4.52
</TABLE>
- ------------------------------
(1) Ratios for the three months ended March 31, 1997 and 1996 have been
annualized and are not necessarily indicative of the results for the entire
year.
(2) The efficiency ratio is calculated by dividing noninterest expense by an
amount equal to net interest income plus noninterest income.
(3) The consolidated ratio of earnings to fixed charges has been computed by
dividing net income plus all applicable income taxes plus fixed charges by
fixed charges. Fixed charges represent interest expense (ratios are
presented both including and excluding interest on deposits). Interest
expense (other than on deposits) includes interest on long-term debt,
federal funds purchased and securities sold under agreements to repurchase,
mortgages, commercial paper and other borrowed funds.
6
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE NOTES OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. IN
ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING FACTORS
SHOULD BE CONSIDERED CAREFULLY.
DEPENDENCE ON DIVIDENDS FROM SUBSIDIARY BANKS
As a holding company, with the substantial majority of its assets
represented by its equity interest in the Banks, the Company's ability to pay
principal and interest on the Notes depends primarily upon the cash dividends
the Company receives from the Banks, and, to a lesser extent, from BNC
Financial. Dividend payments from the Banks are subject to state and federal
regulatory limitations that are based on each Bank's earnings and capital.
Payment of dividends is also subject to regulatory restrictions if such
dividends would impair the capital of the Banks. Payment of dividends by the
Banks is also subject to the Banks' profitability, financial condition and
capital expenditures and other cash flow requirements. At March 31, 1997, the
Banks could pay total dividends to the Company of approximately $4.4 million
without prior regulatory approval. Substantially all of the consolidated assets
of the Company are held by the Banks, and, in the event of liquidation of both
the Company and either of the Banks, creditors of such Banks, including
depositors, would have first claim to such assets before holders of the Notes.
No assurance can be given that the Banks will be able to pay dividends at past
levels, or at all, in the future. See "Supervision and Regulation."
LIMITED COVENANTS
The covenants in the Indenture are limited and are not designed to protect
holders of the Notes in the event of a material adverse change in the Company's
financial condition or results of operations. The covenants also do not limit
the ability of the Company or any subsidiary to incur additional indebtedness.
The covenants in the Indenture should not be a significant factor to an investor
in evaluating whether the Company will be able to comply with its obligations
under the Notes. See "Description of the Notes."
LIMITED RIGHT OF ACCELERATION OF NOTES
Payment of principal or interest on the Notes may be accelerated only in the
case of the bankruptcy, insolvency, reorganization or other similar proceeding
of the Company. There is no right of acceleration in the case of a default in
the payment of principal or interest on the Notes or in the performance of any
other covenant of the Company. See "Description of the Notes--Acceleration
Events."
SUBORDINATION
The Notes will be unsecured general obligations of the Company and will be
subordinated to all present and future Senior Indebtedness of the Company. The
Notes also will be effectively subordinated to all of the present and future
liabilities of the Company's subsidiaries. Since the Notes are obligations of
the holding company only, the Company's subsidiaries are not obligated or
required to pay any amounts pursuant to the Notes or to make funds available
therefor in the form of dividends or advances to the Company. In the event of
bankruptcy, liquidation, reorganization or similar proceeding of the Company,
the holders of the Notes would not receive payment until all Senior Indebtedness
had been paid in full. As of May 16, 1997, the Company had approximately $32.0
million of outstanding Senior Indebtedness (excluding deposits). The Indenture
does not limit the ability of the Company or its subsidiaries to incur
additional Senior Indebtedness or indebtedness ranking on a parity with the
Notes. In the event of a payment default with respect to the Senior
Indebtedness, no payments may be made on account of the Notes until such default
has been cured or waived. See "Description of the Notes--Subordination." The
Notes are not insured by the Federal Deposit Insurance Corporation ("FDIC") or
otherwise and are not secured by any collateral or subject to any sinking fund.
7
<PAGE>
RISKS OF GROWTH STRATEGY
BNC has pursued and intends to continue to pursue an aggressive growth
strategy. This strategy is focused primarily on expanding existing account
relationships and developing new account relationships through its existing
banking locations, but may also include acquisitions and establishment of DE
NOVO banks and additional branches. The success of BNC's growth strategy will
depend primarily on its ability to generate loans at acceptable risk and pricing
levels and deposits with acceptable interest rates without proportionate
increases in noninterest expenses. In addition, no assurance can be given that
the Company will be successful in managing its internal growth and integrating
acquired businesses, if any, into its existing operations. The management of
such growth or the integration of any acquired business could result in
unforeseen operational difficulties or require a disproportionate amount of
management's attention.
The Company intends to pursue internal growth through an emphasis on
expanding its existing account relationships and by developing new relationships
with small and mid-sized business customers and individuals. The Company's
internal growth will depend in part on the economic conditions in its market
areas. There can be no assurance that BNC will be successful in implementing its
internal growth strategy. See "Business--Growth Strategy" and "--Market Area."
BNC may pursue acquisitions of community banks and other financial
institutions in its market areas and other strategic locations. BNC does not
currently have any agreements, arrangements or understandings regarding the
acquisition of any financial institution. BNC may not be successful in
identifying acquisition candidates, integrating acquired institutions into BNC's
operations, or preventing deposit erosion at acquired institutions. There are a
limited number of attractive acquisition candidates in BNC's targeted market
area, and BNC must compete with a variety of institutions, including
multi-regional bank holding companies, for potential acquisitions. This
competition, especially from multi-regional bank holding companies, is expected
to intensify with the expected increase in interstate banking and branching that
will be allowed under recently passed banking regulation. Any acquisition will
be subject to regulatory approval, and there can be no assurance that BNC will
obtain such approval. Moreover, the success of BNC's acquisition growth strategy
will depend on maintenance of acceptable capital levels. There can be no
assurance that BNC will be successful in implementing its acquisition growth
strategy. See "Business-- Growth Strategy," "--Market Area" and "Supervision and
Regulation."
The Company intends to use a portion of the net proceeds of this offering
and funds available to it under the Revolving Lines of Credit (as defined
herein) to fund loan growth at BNC Financial, a non-bank commercial finance
subsidiary acquired by the Company in 1996. Such lending often involves loans
that have higher risk of default than traditional loans made by the Banks. See
"Use of Proceeds" and "Business--Products and Services--Loans."
ALLOWANCE FOR LOAN LOSSES
The inability of borrowers to repay loans can erode earnings and capital of
banks. Like all banks, BNC maintains an allowance for loan losses to provide for
loan defaults and nonperformance. The allowance is based on prior experience
with loan losses, as well as an evaluation of the risks in the current
portfolio. BNC maintains the allowance at a level considered adequate by
management to absorb anticipated losses. The amount of future losses is
susceptible to changes in economic, operating and other conditions, including
changes in interest rates, that may be beyond BNC's control. Such future losses
may exceed current estimates of BNC's allowance for loan losses. At March 31,
1997, BNC had total nonperforming loans of $454,000 (0.22% of total loans). At
the same date, BNC's allowance for loan losses was $1.7 million (0.83% of total
loans and 382% of nonperforming loans). There can be no assurance that BNC's
allowance for loan losses will be adequate to cover actual losses. Future
additions to BNC's allowance for loan losses could result in a material decrease
in BNC's net income and capital. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Financial Condition--
8
<PAGE>
Nonperforming Loans and Assets," "--Allowance for Loan Losses" and the Company's
Consolidated Financial Statements and notes thereto included elsewhere herein.
IMPACT OF INTEREST RATES AND ECONOMIC CONDITIONS
BNC's operating results may be materially and adversely affected by changes
in prevailing economic conditions, including declines in real estate market
values, rapid changes in interest rates and the monetary and fiscal policies of
the federal government. BNC's profitability is in part a function of the spread
between the interest rates earned on assets and the interest rates paid on
deposits and other interest-bearing liabilities. Since 1991, many banking
organizations, including BNC, have experienced historically high interest rate
spreads. There can be no assurance, however, that such high interest rate
spreads will continue. Although economic conditions in BNC's market area have
been generally stronger than those in other regions of the country, there can be
no assurance that such conditions will continue to prevail. Substantially all of
BNC's existing loans are to businesses and individuals in western North Dakota
and Minnesota, and any decline in the economies of these areas could have an
adverse impact on BNC. Like most banking institutions, BNC's net interest margin
will continue to be affected by general economic conditions and other factors
that influence market interest rates and BNC's ability to respond to changes in
such rates. At any given time, BNC's assets and liabilities will be affected
differently by a given change in interest rates, and as a result an increase or
decrease in rates could have a positive or negative effect on BNC's net income,
capital and liquidity. There can be no assurance that the positive trends or
developments discussed in this Prospectus will continue or that negative trends
or developments will not have a material adverse effect on BNC. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business--Market Area," and "Supervision and Regulation--Monetary
Policy."
DEPENDENCE ON KEY PERSONNEL
BNC is highly dependent on the continued services of Tracy J. Scott, its
Chairman of the Board and Chief Executive Officer, Gregory K. Cleveland, its
President and Chief Financial Officer, Thomas J. Resch, President and Chief
Executive Officer of BNC-Minnesota, and other key management personnel. The loss
of any of these persons could adversely affect BNC's operations. BNC has entered
into employment agreements with each of Tracy J. Scott, Gregory K. Cleveland and
Thomas J. Resch. See "Management."
COMPETITIVE BANKING ENVIRONMENT
The banking business is highly competitive. BNC competes for loans,
including asset-based loans, and deposits with other commercial banks, savings
banks, savings and loan associations, finance companies, money market funds,
brokerage houses, credit unions and other non-bank financial institutions. Many
of these competitors have substantially greater resources and lending limits
than BNC, offer certain services that BNC does not currently provide and may
offer more favorable pricing than BNC. In addition, non-depository institution
competitors are generally not subject to the extensive laws and regulations
applicable to BNC. Recent changes in federal banking laws are expected to
facilitate and increase interstate branching and mergers and acquisitions among
banks. Since September 1995, certain bank holding companies have been authorized
to acquire banks throughout the United States. In addition, after June 1, 1997,
certain banks will be permitted to merge with banks organized under the laws of
different states and to operate branches in BNC's markets without a separate
charter. These changes may result in even greater competition in the banking
business. There can be no assurance that BNC's operations and profitability will
not be adversely effected by the anticipated increase in competition in the
banking business. Moreover, increased competition from multi-regional bank
holding companies for acquisition candidates may affect BNC's ability to grow
through acquisitions. See "Business--Competition" and "Supervision and
Regulation."
9
<PAGE>
NEED FOR TECHNOLOGICAL CHANGE
The banking industry is undergoing rapid technological changes with frequent
introductions of new technology-driven products and services. In addition to
better serving customers, the effective use of technology increases efficiency
and enables financial institutions to reduce costs. The Company's future success
will depend in part on its ability to address the needs of its customers by
using technology to provide products and services that will satisfy customer
demands for convenience as well as to create additional efficiencies in BNC's
operations. Many of BNC's competitors have substantially greater resources to
invest in technological improvements. There can be no assurance that the Company
will be able to effectively implement new technology-driven products and
services or be successful in marketing such products and services to its
customers.
POTENTIAL LIABILITY FOR UNDERCAPITALIZED SUBSIDIARY
Under federal law, a bank holding company may be required to guarantee a
capital plan filed by an undercapitalized bank subsidiary with its primary
regulator. If the subsidiary defaults under the plan, the holding company may be
required to contribute to the capital of the subsidiary bank an amount equal to
the lesser of 5% of the bank's assets at the time it became undercapitalized or
the amount necessary to bring the bank into compliance with applicable capital
standards. Therefore, it is possible that BNC will be required to contribute
capital to one or both of the Banks or any other bank that it may acquire in the
event either of the Banks or such other bank becomes undercapitalized. Such
capital contribution may adversely affect BNC's operations and limit its ability
to pay principal of and interest on the Notes. See "Supervision and
Regulation--BNC--Capital Adequacy" and "--The Banks--Capital Adequacy."
GOVERNMENT REGULATION
BNC and the Banks are subject to extensive federal and state legislation,
regulation and supervision that is intended to protect depositors rather than
investors in the Company's securities. These regulations limit the manner in
which BNC conducts its business and obtains financing. Powers of bank regulatory
authorities include, but are not limited to, the ability to impose restrictions
on the operation of a financial institution, to require the classification of
assets by an institution and to dictate an increase in an institution's
allowance for loan losses. Recently enacted, proposed and future legislation and
regulations designed to strengthen the banking industry have had and may
continue to have a significant impact on the banking industry. Although some of
the legislative and regulatory changes may benefit BNC, others may increase its
costs of doing business or otherwise adversely affect it and create competitive
advantages for non-bank competitors. The Company cannot determine at this time
the effect any changes could have on the Company's operations. See "Supervision
and Regulation."
ABSENCE OF A PUBLIC MARKET FOR THE NOTES
The Notes are a new issue of securities for which there is currently no
public market. The Company does not intend to list the Notes on any securities
exchange and no active trading market is expected to develop. Although the
Underwriter has informed the Company that it intends to make a market in the
Notes, the Underwriter is not obligated to make a market in the Notes and any
market making may be discontinued at any time at the sole discretion of the
Underwriter. If a market develops for the Notes, there can be no assurance as to
the liquidity of such market, the ability of holders to sell their Notes or the
prices at which holders would be able to sell their Notes. If a market for the
Notes does develop, the Notes may trade at a discount to their principal amount,
depending upon prevailing interest rates, the market for similar securities,
performance of the Company, performance of the banking industry and other
factors. See "Underwriting."
10
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Notes offered hereby,
after deducting the underwriting discount and estimated offering expenses, will
be approximately $14.1 million. BNC anticipates that approximately $9.6 million
of the net proceeds will be used to repay indebtedness outstanding under the
Firstar Line of Credit.
The Company has a $12.0 million revolving line of credit with Firstar Bank
Milwaukee, N.A. (the "Firstar Line of Credit") which matures in February 1998
and bears interest at either the prime rate or LIBOR plus 2%, at the Company's
option (7.51% per annum as of May 16, 1997). The Company expects to have $9.6
million outstanding under the Firstar Line of Credit immediately prior to the
offering. BNC Financial has a $1.3 million revolving line of credit with Bank
Windsor, N.A. (the "Windsor Line of Credit" and together with the Firstar Line
of Credit, the "Revolving Lines of Credit") which matures in September 1997 and
bears interest at the prime rate plus 0.75% (9.25% per annum as of May 16,
1997). The Company does not expect to have any amounts outstanding under the
Windsor Line of Credit immediately prior to the offering.
After the completion of the offering and the application of the net proceeds
thereof as described herein, the Company and BNC Financial expect to borrow
additional funds under the Revolving Lines of Credit to provide additional
working capital for general corporate purposes, including the funding of loans
at BNC Financial.
The Notes are expected to qualify as Tier 2 capital for regulatory purposes.
As Tier 2 capital, the Notes will help to further strengthen the capital
structure of the Company.
11
<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization (including
deposits) of BNC as of March 31, 1997, and as adjusted to give effect to the
sale of the Notes offered hereby and the application of the estimated net
proceeds therefrom. This information is derived from the Company's Consolidated
Financial Statements and should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's Consolidated Financial Statements and the notes thereto contained
elsewhere herein.
<TABLE>
<CAPTION>
MARCH 31, 1997
-----------------------
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
Deposits................................................................................. $ 253,300 $ 253,300
---------- -----------
---------- -----------
Borrowings:
Federal funds purchased................................................................ $ 3,708 $ 3,708
Securities sold under agreements to repurchase......................................... 1,598 1,598
Advances from the Federal Home Loan Bank............................................... 10,000 10,000
Notes payable:
Revolving Lines of Credit(1)......................................................... 8,485 --
Term loans........................................................................... 3,111 3,111
Subordinated Notes due 2004 offered hereby............................................. -- 15,000
---------- -----------
Total borrowings................................................................... $ 26,902 $ 33,417
---------- -----------
---------- -----------
Stockholders' equity:
Preferred Stock, $.01 par value per share, 2,000,000 shares authorized; no shares
outstanding.......................................................................... $ -- $ --
Common Stock, $.01 par value per share, 10,000,000 shares authorized; 2,364,100 shares
issued, 2,338,720 shares outstanding................................................. 23 23
Additional paid-in capital............................................................. 13,768 13,768
Retained earnings...................................................................... 9,578 9,578
Treasury stock (25,380 shares)......................................................... (216) (216)
Unrealized loss on securities available for sale, net.................................. (250) (250)
---------- -----------
Total stockholders' equity......................................................... $ 22,903 $ 22,903
---------- -----------
---------- -----------
</TABLE>
- ------------------------
(1) Amounts due under the Revolving Lines of Credit are expected to be
approximately $9.6 million immediately prior to the date of this Prospectus,
which amount is expected to be paid in full with proceeds of the offering.
Upon completion of the offering and the application of the net proceeds
thereof as described in "Use of Proceeds," the Company will have
approximately $13.3 million available under the Revolving Lines of Credit.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING SECTION SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO AND OTHER DETAILED
INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
BNC was formed in 1987 with the objective of acquiring and improving the
performance of strategically located banks in North Dakota. In 1988, BNC
acquired its initial bank, the First National Bank of Linton. In 1990, the
Company formed BNC National Bank, formerly Bismarck National Bank, and acquired
the Bismarck branch of Midwest Federal Savings Bank from the Resolution Trust
Corporation. In January 1994, BNC acquired its third bank, Farmers & Merchants
Bank of Beach ("FMB"), which had been managed and owned by certain members of
BNC's executive management team since 1985. In 1995, BNC acquired seven North
Dakota branches of First Bank fsb and sold FMB. In August 1995, the Company
merged the First National Bank of Linton and BNC National Bank of Bismarck and
changed the name of the resulting entity to BNC National Bank. In January 1996,
BNC established a DE NOVO national bank in Minneapolis, Minnesota, and in May
1996 acquired BNC Financial, a non-bank finance company located in St. Cloud,
Minnesota that primarily engages in asset-based lending.
RESULTS OF OPERATIONS
Net income was $561,000 for the three month period ended March 31, 1997
compared to $142,000 for the three month period ended March 31, 1996. Net income
was $1.8 million for the year ended December 31, 1996 as compared to $1.2
million in 1995. This earnings growth was due primarily to an increase in net
interest income, which was driven by loan growth, and an increase in noninterest
income.
Loans totaled $209.5 million at March 31, 1997, an increase of $60.5
million, or 40.6%, from March 31, 1996. Total assets increased $68.0 million, or
28.4%, to $307.8 million as of March 31, 1997 compared to $239.8 million at
March 31, 1996. Total deposits increased $50.3 million, or 24.8%, to $253.3
million at March 31, 1997 compared to $203.0 million at March 31, 1996.
NET INTEREST INCOME. Net interest income, the difference between total
interest income earned on earning assets and total interest expense paid on
interest-bearing liabilities, is the Company's principal source of earnings. The
amount of net interest income is affected by changes in the volume and mix of
earning assets, the level of rates earned on those assets, the volume and mix of
interest-bearing liabilities, and the level of rates paid on those
interest-bearing liabilities.
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
Net interest income increased $1.0 million, or 51%, to $2.9 million for the
quarter ended March 31, 1997 as compared to the same period in 1996. Total
interest income increased $1.6 million, or 35%, to $6.1 million for the first
quarter of 1997 as compared to the $4.5 million recorded in the first quarter of
1996. The increase in interest income was primarily due to loan growth, as
average earning assets increased $54.4 million, or 25%, to $272.9 million for
the three months ended March 31, 1997 as compared to $218.5 million for the same
period in 1996. The increase in net interest income between periods was also
attributable in part to an increase in the yield on average earning assets to
9.00% for the quarter ended March 31, 1997 as compared to 8.26% for the same
period in 1996. A change in mix of the earning asset portfolio contributed to
the increase in interest income. During the first quarter of 1997, loans totaled
75% of the average earning asset portfolio as compared to only 62% for the
quarter ended March 31, 1996. This increase in volume and the change in mix of
the earning asset portfolio were caused by the Company's significant loan growth
as investments were sold to fund loans. The increase in yield resulted from an
increase in loan yield of 43 basis points (to 9.84% for the first quarter of
1997 from 9.41% for the first
13
<PAGE>
quarter of 1996) and the change in mix of the earning asset portfolio from lower
yielding investments to higher yielding loans.
Total interest expense increased $578,000, or 23%, to $3.1 million for the
three months ended March 31, 1997 as compared to $2.5 million for the same
period in 1996. The increase in interest expense was caused by an increase in
volume of average interest-bearing liabilities, partially offset by decreases in
cost on these liabilities. Total average interest-bearing liabilities increased
$48.1 million, or 24%, to $247.1 million for the quarter ended March 31, 1997 as
compared to $199.0 million for the quarter ended March 31, 1996. Average
interest-bearing deposits and borrowings increased $35.2 million and $13.0
million, or 19% and 135%, respectively, for the three months ended March 31,
1997 as compared to the same period in 1996. The average cost on
interest-bearing deposits decreased 10 basis points to 4.96% for the quarter
ended March 31, 1997 as compared to 5.06% for the same period in 1996. The
average cost of borrowed funds increased 15 basis points to 6.66% for the first
quarter of 1997 as compared to 6.51% for the same period in 1996. The decrease
in cost on deposits was offset somewhat by the increased cost on borrowings
resulting in an improvement in total cost on rate related liabilities of 2 basis
points to 5.11% for the quarter ended March 31, 1997 as compared to 5.13% for
the same period in 1996.
Net interest margin for the first quarter of 1997 was 4.38% as compared to
3.59% for the same period in 1996. The improvement in the Company's net interest
margin was mainly attributable to the increase in yield on earning assets
discussed above.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
Net interest income increased $3.1 million, or 46%, to $9.9 million for the
year ended December 31, 1996 as compared to the same period in 1995. Total
interest income increased $5.7 million, or 37%, to $21.0 million for 1996 as
compared to the $15.3 million recorded in 1995. Loan growth during 1996 caused
the increase in interest income as average earning assets increased $59.0
million, or 32%, to $240.9 million for the year ended December 31, 1996 as
compared to $181.9 million in 1995. The increase in net interest income between
periods was also attributable in part to an increase in the yield on average
earning assets to 8.70% for 1996 as compared to 8.40% for 1995. A change in mix
of the earning asset portfolio also contributed to the increase in interest
income. During 1996, the average earning asset portfolio was comprised of 29%
investments (yielding 6.50%) and 71% loans (yielding 9.54%) as compared to 36%
investments (yielding 6.13%) and 64% loans (yielding 9.58%) in 1995. The volume
increase and change in mix of the earning asset portfolio were caused by the
Company's significant loan growth as investments were sold to fund loans. The
increase in yield resulted from the increase in investment yield noted above and
the change in mix of the earning asset portfolio from lower yielding investments
to higher yielding loans.
Total interest expense increased $2.6 million, or 30%, to $11.1 million for
the year ended December 31, 1996 as compared to $8.5 million for 1995. The
increase in interest expense was caused by an increase in volume of average
interest-bearing liabilities offset by decreases in cost on these liabilities.
Total average interest-bearing liabilities increased $52.6 million, or 32%, to
$219.1 million for the year ended December 31, 1996 as compared to $166.5
million for the year ended December 31, 1995. Average interest-bearing deposits
and borrowings increased $41.6 million and $11.0 million, or 27% and 105%,
respectively, for the year ended December 31, 1996 as compared to 1995. The
average cost on interest-bearing deposits decreased 47, 55, 15 and 26 basis
points for interest-bearing checking and money market accounts, savings
accounts, time deposits under $100,000 and time deposits of $100,000 and over,
respectively. The decreased costs of deposits on a category by category basis,
however, resulted in only a 7 basis point decrease in total deposit cost to
4.93% for the year ended December 31, 1996 as compared to 5.00% for 1995.
Offsetting the by-category cost decreases was a shift in average deposit
portfolio mix as time deposits accounted for 71% of total average deposit
balances for the year ended December 31, 1996 as compared to less than 65% for
1995. This change was caused primarily by the mix of deposits acquired
14
<PAGE>
in 1995. Over 80% of the $94.2 million of such acquired and retained deposits
were time deposits (a portion of which were sold along with FMB in October
1995).
YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31, 1994
Net interest income increased $889,000, or 15%, to $6.7 million for the year
ended December 31, 1995 as compared to the $5.9 million recorded for the same
period in 1994. Total interest income increased $5.0 million, or 49%, to $15.3
million for 1995 as compared to the $10.3 million recorded in 1994. The
increased interest income was the net result of rate, volume and mix variances
in the earning asset portfolio. The most significant factor was the increase in
average earning assets of $57.4 million, or 46%, to $181.9 million for the
twelve months ended December 31, 1995 as compared to $124.5 million for the same
period in 1994. The yield on earning assets increased 16 basis points to 8.40%
for 1995 as compared to 8.24% for 1994. A change in mix of the earning asset
portfolio also occurred. During 1995, the average earning asset portfolio was
comprised of 36% investments (yielding 6.13%) and 64% loans (yielding 9.58%) as
compared to 21% investments (yielding 5.34%) and 79% loans (yielding 8.95%) in
1994. The increases in loan and investment yields were offset by the mix change
noted above. The volume increase and change in mix of the earning asset
portfolio were caused by a combination of the Company's corporate developments
in 1995, including the deposit acquisition (as acquired funds were invested),
internal loan growth and the sale of FMB.
Total interest expense increased $4.1 million, or 94%, to $8.5 million for
the year ended December 31, 1995 as compared to $4.4 million for 1994. The
increase in interest expense was caused by an increase in volume of average
interest-bearing liabilities and increases on costs of the liabilities. Total
average interest-bearing liabilities increased $53.6 million, or 47%, to $166.5
million for the year ended December 31, 1995 as compared to $112.9 million for
1994. Average interest-bearing deposits and borrowings increased $52.6 million
and $1.0 million, or 51% and 10%, respectively, for the year ended December 31,
1995 as compared to 1994. The average cost on interest-bearing deposits
increased to 5.00% for 1995 as compared to 3.81% for 1994. The increase in cost
of deposits was caused by an aggressive bid for deposits at BNC-North Dakota in
late 1994 and early 1995 and the higher than anticipated cost on the deposits
acquired in August 1995. The high percentage of time deposits to total deposits
acquired also contributed to the overall increase in average deposit cost as the
mix of the deposit portfolio changed such that a higher percentage of deposits
were in time deposits versus noninterest and low interest-bearing deposits. See
"--Financial Condition--Deposits and Borrowed Funds."
The following table sets forth, for the periods indicated, certain
information relating to BNC's average balance sheets and reflects the yield on
average assets and cost of average liabilities. Such yields and costs are
derived by dividing income and expense by the average balance of assets and
liabilities. No tax equivalent adjustments were made, and all average balances
have been derived from monthly averages which are indicative of daily averages.
15
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------------------------------------
1997 1996
------------------------------- -------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE EARNED OR YIELD OR AVERAGE EARNED OR YIELD OR
BALANCE PAID COST BALANCE PAID COST
--------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold.......... $ 11,840 $ 159 5.45% $ 2,769 $ 40 5.81%
Taxable investments......... 57,032 915 6.51 79,242 1,236 6.27
Tax-exempt investments...... 789 12 6.17 1,245 20 6.46
Loans(1).................... 204,931 4,974 9.84 136,317 3,189 9.41
Allowance for loan losses... (1,675) -- -- (1,081) -- --
--------- --------- --------- ---------
Total interest-earning
assets(2)............... 272,917 6,060 9.00 218,492 4,485 8.26
Noninterest-earning assets:
Cash and due from banks... 6,074 5,202
Other..................... 15,058 12,858
--------- ---------
Total assets............ $ 294,049 $ 236,552
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
NOW and money market
accounts................ $ 45,840 $ 338 2.99% $ 36,772 $ 233 2.55%
Savings................... 8,694 49 2.29 8,147 46 2.27
Certificates of deposit:
Under $100,000.......... 128,123 1,768 5.60 126,114 1,832 5.84
$100,000 and over....... 41,962 590 5.70 18,426 271 5.92
--------- --------- --------- ---------
Total interest-bearing
deposits............ 224,619 2,745 4.96 189,459 2,382 5.06
Short-term borrowings:
Securities and loans sold
under agreements to
repurchase and federal
funds purchased......... 1,346 21 6.33 5,302 70 5.31
FHLB notes payable........ 10,000 141 5.72 1,000 17 6.84
Long-term borrowings........ 11,184 208 7.54 3,272 68 8.36
--------- --------- --------- ---------
Total interest-bearing
liabilities........... 247,149 3,115 5.11 199,033 2,537 5.13
Noninterest-bearing demand
accounts.................. 19,349 12,198
--------- ---------
Total deposits and
interest-bearing
liabilities........... 266,498 211,231
Other noninterest-bearing
liabilities............... 4,484 4,225
--------- ---------
Total liabilities....... 270,982 215,456
Stockholders' equity........ 23,067 21,096
--------- ---------
Total liabilities and
stockholders'
equity................ $ 294,049 $ 236,552
--------- ---------
--------- ---------
Net interest income........... $ 2,945 $ 1,948
--------- ---------
--------- ---------
Net interest spread........... 3.89% 3.13%
--------- ---------
--------- ---------
Net interest margin........... 4.38% 3.59%
--------- ---------
--------- ---------
Ratio of average
interest-earning assets to
average interest-bearing
liabilities................. 110.43% 109.78%
--------- ---------
--------- ---------
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------- ------------------------------- -------------------------------
INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE
AVERAGE EARNED OR YIELD OR AVERAGE EARNED OR YIELD OR AVERAGE EARNED OR YIELD OR
BALANCE PAID COST BALANCE PAID COST BALANCE PAID COST
--------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Federal funds sold.......... $ 2,714 $ 145 5.34% $ 11,348 $ 651 5.74% $ 4,086 $ 110 2.69%
Taxable investments......... 66,547 4,359 6.55 52,154 3,213 6.16 21,260 1,211 5.70
Tax-exempt investments...... 1,090 70 6.42 1,705 134 7.86 1,287 100 7.77
Loans(1).................... 171,780 16,383 9.54 117,773 11,285 9.58 98,749 8,842 8.95
Allowance for loan losses... (1,265) -- -- (1,117) -- -- (871) -- --
--------- --------- --------- --------- --------- ---------
Total interest-earning
assets(2)............... 240,866 20,957 8.70 181,863 15,283 8.40 124,511 10,263 8.24
Noninterest-earning assets:
Cash and due from banks... 5,240 5,290 4,216
Other..................... 13,393 10,095 7,883
--------- --------- ---------
Total assets............ $ 259,499 $ 197,248 $ 136,610
--------- --------- ---------
--------- --------- ---------
LIABILITIES AND STOCKHOLDERS'
Deposits:
NOW and money market
accounts................ $ 38,920 $ 1,004 2.58% $ 38,941 $ 1,187 3.05% $ 36,423 $ 990 2.72%
Savings................... 8,498 196 2.31 7,598 217 2.86 7,187 189 2.63
Certificates of deposit:
Under $100,000.......... 124,682 7,055 5.66 93,983 5,456 5.81 50,259 2,277 4.53
$100,000 and over....... 25,499 1,483 5.82 15,486 942 6.08 9,523 488 5.12
--------- --------- --------- --------- --------- ---------
Total interest-bearing
deposits............ 197,599 9,738 4.93 156,008 7,802 5.00 103,392 3,944 3.81
Short-term borrowings:
Securities and loans sold
under agreements to
repurchase and federal
funds purchased......... 7,340 408 5.56 3,546 172 4.85 3,366 60 1.78
FHLB notes payable........ 7,192 406 5.65 3,483 231 6.63 2,667 130 4.87
Long-term borrowings........ 7,027 555 7.90 3,499 337 9.63 3,525 277 7.86
--------- --------- --------- --------- --------- ---------
Total interest-bearing
liabilities........... 219,158 11,107 5.07 166,536 8,542 5.13 112,950 4,411 3.90
Noninterest-bearing demand
accounts.................. 15,147 13,233 11,942
--------- --------- ---------
Total deposits and
interest-bearing
liabilities........... 234,305 179,769 124,892
Other noninterest-bearing
liabilities............... 3,539 3,208 2,068
--------- --------- ---------
Total liabilities....... 237,844 182,977 126,960
Stockholders' equity........ 21,655 14,271 9,650
--------- --------- ---------
Total liabilities and
stockholders'
equity................ $ 259,499 $ 197,248 $ 136,610
--------- --------- ---------
--------- --------- ---------
Net interest income........... $ 9,850 $ 6,741 $ 5,852
--------- --------- ---------
--------- --------- ---------
Net interest spread........... 3.63% 3.27% 4.34%
--------- --------- ---------
--------- --------- ---------
Net interest margin........... 4.09% 3.71% 4.70%
--------- --------- ---------
--------- --------- ---------
Ratio of average
interest-earning assets to
average interest-bearing
liabilities................. 109.91% 109.20% 110.24%
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------------
(1) Interest income does not include loan origination fees other than those
amortized and included as an adjustment to loan yield as required under
Statement of Financial Accounting Standards No. 91, "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans
and Initial Direct Costs of Leases." Average nonaccrual loans are included
in average loans outstanding.
(2) Yields do not include adjustments for tax-exempt interest because such
interest is not material.
16
<PAGE>
The following table illustrates, for the periods indicated, the changes in
BNC's net interest income and interest expense for the major components of
interest-earning assets and interest-bearing liabilities and distinguishes
between the increase related to higher outstanding balances and the volatility
of interest rates. Changes in net interest income due to both volume and rate
have been included in the changes due to rate.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
--------------------------------- ---------------------------------------------------------
1997 COMPARED TO 1996 1996 COMPARED TO 1995 1995 COMPARED TO 1994
--------------------------------- --------------------------------- ----------------------
CHANGE DUE TO CHANGE DUE TO CHANGE DUE TO
---------------------- ---------------------- ----------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL VOLUME RATE
----------- --------- --------- ----------- --------- --------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold................. $ 131 $ (12) $ 119 $ (496) $ (10) $ (506) $ 196 $ 345
Investments........................ (354) 25 (329) 856 226 1,082 1,821 215
Loans.............................. 1,605 180 1,785 5,175 (77) 5,098 1,703 740
----------- --------- --------- ----------- --------- --------- ----------- ---------
Total increase in interest
income......................... 1,382 193 1,575 5,535 139 5,674 3,720 1,300
----------- --------- --------- ----------- --------- --------- ----------- ---------
Interest-bearing liabilities:
NOW and money market accounts...... 57 48 105 (1) (182) (183) 68 129
Savings............................ 3 -- 3 26 (47) (21) 11 17
Certificates of deposit:
Under $100,000................... 29 (93) (64) 1,782 (183) 1,599 1,981 1,198
$100,000 and over................ 346 (27) 319 609 (68) 541 306 148
Short-term borrowings:
Securities and loans sold under
agreements to repurchase and
federal funds purchased........ (52) 3 (49) 184 52 236 3 109
FHLB notes payable............... 153 (29) 124 246 (71) 175 40 61
Long-term borrowings............... 164 (24) 140 340 (122) 218 (2) 62
----------- --------- --------- ----------- --------- --------- ----------- ---------
Total increase (decrease) in
interest expense............... 700 (122) 578 3,186 (621) 2,565 2,407 1,724
----------- --------- --------- ----------- --------- --------- ----------- ---------
Increase (decrease) in net
interest income................ $ 682 $ 315 $ 997 $ 2,349 $ 760 $ 3,109 $ 1,313 $ (424)
----------- --------- --------- ----------- --------- --------- ----------- ---------
----------- --------- --------- ----------- --------- --------- ----------- ---------
<CAPTION>
TOTAL
---------
<S> <C>
Interest-earning assets:
Federal funds sold................. $ 541
Investments........................ 2,036
Loans.............................. 2,443
---------
Total increase in interest
income......................... 5,020
---------
Interest-bearing liabilities:
NOW and money market accounts...... 197
Savings............................ 28
Certificates of deposit:
Under $100,000................... 3,179
$100,000 and over................ 454
Short-term borrowings:
Securities and loans sold under
agreements to repurchase and
federal funds purchased........ 112
FHLB notes payable............... 101
Long-term borrowings............... 60
---------
Total increase (decrease) in
interest expense............... 4,131
---------
Increase (decrease) in net
interest income................ $ 889
---------
---------
</TABLE>
PROVISION FOR LOAN LOSSES. Management determines a provision for loan
losses which it considers sufficient to maintain an adequate allowance for loan
losses. In evaluating the adequacy of the allowance for loan losses,
consideration is given to historical charge-off experience, growth of the loan
portfolio, changes in the composition of the loan portfolio, general economic
conditions, information regarding specific borrower status including financial
condition and related loan collateral values and other factors and estimates
that are subject to change over periods of time. Estimating the risk and
potential amount of loss on loans is subjective. Ultimate losses may vary from
current estimated losses. Management reviews its estimates periodically and, as
adjustments become necessary, such adjustments are reported in income through
the provision for loan losses in the appropriate period.
The provision for loan losses was $170,000 during the quarter ended March
31, 1997 as compared to $84,000 for the quarter ended March 31, 1996. The
increased provision was booked in order to allow the Company's allowance for
loan losses to keep pace with the loan growth the Company has experienced. The
allowance for loan losses as a percentage of total loans increased from 0.76% at
March 31, 1996 to 0.83% at March 31, 1997.
The provision for loan losses was $739,000 in 1996, an increase of $571,000
or 340% over the 1995 provision which was $168,000, a decrease of $11,000, or
6%, from 1994's provision for loan losses of $179,000. Management increased the
loan loss provision in 1996 due to the Company's significant loan growth.
Management believes the resulting allowance for loan losses is adequate to cover
anticipated
17
<PAGE>
losses in the loan portfolio at March 31, 1997. The decrease in the provision
for 1995 as compared to 1994 reflects the fact that $9.2 million of loans were
sold with FMB during 1995, resulting in a lower average risk grade in the
Company's loan portfolio and an allowance for loan losses considered adequate to
cover anticipated losses in the loan portfolio at December 31, 1995.
Net charge-offs through the allowance for loan losses were $28,000 for the
three month period ended March 31, 1997, while net recoveries were $4,000 for
the three month period ended March 31, 1996. Net charge-offs were $193,000 and
$41,000 for the years ended December 31, 1996 and 1995, respectively. Net
recoveries through the allowance for loan losses during 1994 were $129,000. The
allowance for loan losses was $1.7 million as of March 31, 1997 and $1.1 million
as of March 31, 1996 and 1995. See "--Financial Condition--Allowance for Loan
Losses."
NONINTEREST INCOME. The following table presents, for the periods
indicated, the major categories of the Company's noninterest income:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED
DECEMBER 31,
-------------------- -------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loan fees............................................................ $ 191 $ 164 $ 1,276 $ 559 $ 650
Service charges...................................................... 124 99 418 401 259
Rental income........................................................ 24 9 34 37 126
Net gain (loss) on sales of securities............................... (11) 5 19 (18) 28
Other noninterest income............................................. 153 94 349 757 336
--------- --------- --------- --------- ---------
Total noninterest income........................................... $ 481 $ 371 $ 2,096 $ 1,736 $ 1,399
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
Total noninterest income increased $110,000 or 30% to $481,000 for the three
months ended March 31, 1997 from $371,000 for the first quarter of 1996. This
increase resulted from small increases in loan fees, service charges and rental
income as well as an increase in other non-interest income, primarily fee income
from the Company's recently established private banking division at BNC-North
Dakota. Total noninterest income increased $360,000, or 21%, to $2.1 million for
the year ended December 31, 1996 as compared to the same period in 1995. Total
noninterest income for the year ended December 31, 1995 was $1.7 million, an
increase of $337,000, or 24%, from the $1.4 million recorded for the year ended
December 31, 1994.
LOAN FEE INCOME totaled $191,000 for the first quarter of 1997, a $27,000
increase over the same period in 1996. Loan fee income for the twelve month
period ended December 31, 1996 totaled $1.3 million, a $717,000 increase over
the same period in 1995. Loan fee income for the year ended December 31, 1995
was $559,000 as compared to $650,000 for the same period in 1994. The increase
in loan fee income for the year ended December 31, 1996 as compared to the same
period in 1995 was primarily the result of recognition of loan origination fees
on several large commercial loans originated and sold without recourse during
1996. BNC-North Dakota generated over $1.0 million of the $1.3 million in loan
fees recognized in 1996. Management cannot predict with any degree of certainty
the amount of loans which will be originated and related loan fees which will be
recognized in future periods.
SERVICE CHARGES totaled $124,000 for the first quarter of 1997 as compared
to $99,000 for the same period in 1996. Service charges for the year ended
December 31, 1996 totaled $418,000 as compared to $401,000 for the same period
in 1995. Service charges in 1995 increased $142,000, or 55%, from the $259,000
recorded in 1994. The increase in service charge income for the year ended
December 31, 1995 as compared to 1994 was due primarily to volume-related
increases in service charge income on commercial transaction accounts coupled
with increases in fees charged for certain account activity.
RENTAL INCOME was $24,000 and $9,000 for the three month periods ending
March 31, 1997 and 1996, respectively, and $34,000, $37,000 and $126,000 for the
years ended December 31, 1996, 1995 and 1994,
18
<PAGE>
respectively. The decrease in rental income in 1996 and 1995 as compared to 1994
is attributable to the Company's growth. Excess space in the Company's principal
office building in Bismarck was rented to outside entities in 1994. During 1995
and 1996, that space was occupied by BNC personnel.
NET INVESTMENT SECURITIES LOSSES were $11,000 for the three month period
ended March 31, 1997 as compared to net gains of $5,000 for the same period in
1996. For the year ended December 31, 1996, the Company had net investment
securities gains of $19,000 as compared to net losses of $18,000 and net gains
of $28,000 for the years ended December 31, 1995 and 1994, respectively. In
1996, the proceeds from securities sales were $49 million with resultant gross
gains and losses recorded of $32,000 and $13,000, respectively. In 1995, the
proceeds from securities sales were $89 million with resultant gross gains and
losses recorded of $5,000 and $23,000, respectively. In 1994, the proceeds from
securities sales were $18 million with resultant gross gains and losses recorded
of $33,000 and $5,000, respectively.
OTHER NONINTEREST INCOME, which includes various fee income items,
commission income from the sale of nondeposit investments, consulting income and
other miscellaneous income items was $153,000 and $94,000 for the three month
periods ended March 31, 1997 and 1996, respectively, and $349,000 for the year
ended December 31, 1996 as compared to $757,000 and $336,000 for the years ended
December 31, 1995 and 1994, respectively. The decrease in other noninterest
income of $408,000 for the year ended December 31, 1996 as compared to the year
ended December 31, 1995 was primarily the result of the $316,000 gain recognized
on the sale of FMB during 1995. Commission income on sales of nondeposit
investments decreased $135,000 in 1996 as compared to 1995 due to a reduction of
personnel in the nondeposit investment sales area. These items were offset by
smaller increases in other miscellaneous fee income and income derived from the
consulting activities of BNC Financial. The increase of $421,000 in other
noninterest income for 1995 as compared to 1994 was a result of the $316,000
gain on the sale of FMB recorded in 1995 and an increase of $217,000 in
commission income on the sale of nondeposit investments in 1995 as compared to
1994. The increased commission income recorded for the year ended December 31,
1995 as compared to the year ended December 31, 1994 reflects the fact that 1995
was the first full year of nondeposit investment sales activities for the
Company. The increased income from the sale of nondeposit investments and the
gain on the sale of FMB in 1995 were offset by smaller decreases in fee income,
consulting income and other miscellaneous income in 1995.
NONINTEREST EXPENSE. The following table presents, for the periods
indicated, the major categories of the Company's noninterest expense:
<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDED
ENDED MARCH 31, DECEMBER 31,
-------------------- -------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits............... $ 1,284 $ 976 $ 4,311 $ 3,352 $ 2,990
Depreciation and amortization................ 280 219 980 619 444
Occupancy.................................... 221 140 675 413 305
Office supplies, telephone and postage....... 125 121 505 521 227
Professional services........................ 81 103 360 246 236
Marketing and promotion...................... 87 112 352 424 211
FDIC and other assessments................... 41 71 239 296 308
Other........................................ 221 224 791 640 481
--------- --------- --------- --------- ---------
Total noninterest expense.................... $ 2,340 $ 1,966 $ 8,213 $ 6,511 $ 5,202
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Efficiency ratio(1).......................... 68.32% 84.80% 68.75% 76.81% 71.74%
</TABLE>
- ------------------------
(1) Noninterest expense divided by an amount equal to net interest income plus
noninterest income.
Noninterest expense increased $374,000 or 19% from $2.0 million for the
three months ended March 31, 1996 to $2.3 million for the three months ended
March 31, 1997. The increase in non-interest
19
<PAGE>
expense is a function of the growth experienced by the Company during the past
24 months. Salaries and employee benefits expense increased $308,000 for the
first quarter of 1997 as compared to the same quarter in 1996, as average
full-time equivalent employees increased from 95 for the quarter ended March 31,
1996 to 116 for the quarter ended March 31, 1997. The Company also experienced
increases in occupancy, depreciation and amortization expense in the first
quarter of 1997 as compared to the same period in 1996. These increases were
caused by additional rent expense, the purchase (and related depreciation
expense) of furniture and equipment and the amortization of intangibles related
to BNC-Minnesota (chartered in January 1996), BNC Financial (acquired in May
1996), the acquisitions of the accounting firm of Gregory K. Cleveland & Company
(December 1996) and J.D. Meier Insurance Agency (early 1997) and BNC-North
Dakota's purchase of an additional office building in Bismarck (early 1997). See
"Certain Transactions." These increases in non-interest expense were partially
offset by decreases in FDIC and Office of the Comptroller of the Currency
("OCC") assessments and professional and marketing expenses.
For the year ended December 31, 1996, total noninterest expense increased
$1.7 million, or 26%, as compared to total noninterest expense for the same
period in 1995. Total noninterest expense for the year ended December 31, 1995
was $6.5 million, an increase of $1.3 million, or 25%, as compared to total
noninterest expense for the year ended December 31, 1994. The overall increases
in noninterest expense resulted from the growth and expansion the Company
experienced during this two year period.
SALARIES AND EMPLOYEE BENEFITS represent the largest category of noninterest
expense at 55%, 50%, 52%, 51% and 57% of total noninterest expense for the
quarters ended March 31, 1997 and 1996 and for the years ended December 31,
1996, 1995 and 1994, respectively. Salary and employee benefits expense includes
salaries, applicable payroll and unemployment taxes, premiums for health, life
and disability insurance, incentive bonuses and contributions to the Company's
401(k) plan. Salaries and benefits totaled $1.3 million for the first quarter of
1997, an increase of 32% over the same period in 1996, and $4.3 million for the
year ended December 31, 1996, an increase of $959,000, or 29%, as compared to
1995. The total salaries and benefits expense of $3.4 million recorded for the
year ended December 31, 1995 represented an increase of $362,000, or 12%, over
the total salaries and benefits recorded for the year ended December 31, 1994.
Salaries and incentives totaled $1.1 million, $831,000, $3.7 million, $3.0
million and $2.4 million for the three months ended March 31, 1997 and 1996 and
for the years ended December 31, 1996, 1995 and 1994, respectively. Officer and
employee insurance expenses totaled $60,000, $52,000, $215,000, $132,000 and
$140,000 for the three months ended March 31, 1997 and 1996 and for the years
ended December 31, 1996, 1995 and 1994, respectively. Increases in these
expenses are attributable to the Company's expansion which resulted in average
full-time equivalent employees of 118, 97, 105, 68 and 54 for the three months
ended March 31, 1997 and 1996 and for the years ended December 31, 1996, 1995
and 1994, respectively.
DEPRECIATION AND AMORTIZATION EXPENSE totaled $280,000 for the first quarter
of 1997 as compared to $219,000 for the same period in 1996. For the year ended
December 31, 1996, depreciation and amortization totaled $980,000, an increase
of $361,000, or 58%, as compared to the year ended December 31, 1995. The total
depreciation and amortization expense of $619,000 recorded for the year ended
December 31, 1995 represented an increase of $175,000, or 39%, over the $444,000
recorded for the year ended December 31, 1994. Total depreciation and
amortization expense on premises, leasehold improvements and equipment recorded
for the three month periods ending March 31, 1997 and 1996 and the years ending
December 31, 1996, 1995 and 1994 was $152,000, $104,000, $499,000, $377,000 and
$348,000, respectively, with the increases resulting from additions to premises,
leasehold improvements and equipment of $850,000 and $360,000 in the first
quarters of 1997 and 1996, respectively, and $1.4 million, $2.0 million and
$345,000 in the years ending December 31, 1996, 1995 and 1994, respectively.
Amortization expense on intangible assets totaled $128,000, $115,000, $481,000,
$242,000 and $96,000 for the three month periods ending March 31, 1997 and 1996
and the years ending December 31, 1996, 1995 and 1994, respectively. This
increase is attributable to intangible assets recorded on acquisitions during
1995 and
20
<PAGE>
1996, including $3.6 million in deposit premiums and acquisition costs relating
to the August 1995 deposit acquisition, and certain smaller intangibles relating
to BNC's other acquisitions.
OCCUPANCY EXPENSE for the three months ended March 31, 1997 totaled
$221,000, a 58% increase over the same period in 1996. Occupancy expenses for
the year ended December 31, 1996 increased $262,000, or 63%, as compared to the
year ended December 31, 1995. The total occupancy expense of $413,000 recorded
for the year ended December 31, 1995 represented an increase of $108,000, or
35%, over the year ended December 31, 1994. This category includes rent expense,
building maintenance, utilities, real estate taxes, property insurance, and
furniture and fixture, EDP and other maintenance. The $262,000 increase in
occupancy expense in 1996 was caused primarily by increased rent expense of
$187,000 attributable to BNC's facilities in Minneapolis and St. Cloud,
Minnesota as well as Garrison and Watford City, North Dakota. See
"Business--Properties." The remainder of the $262,000 increase consisted of
small increases in each of the other occupancy expense categories attributable
to operation of the facilities acquired during the second half of 1995 and early
1996. The $108,000 increase in occupancy expense recorded in 1995 as compared to
1994 resulted from small increases in most of the occupancy expense categories
and was attributable to the acquisition of the North Dakota branches during
third quarter 1995 and the operation of a loan production office by BNC-North
Dakota in Minneapolis prior to BNC-Minnesota being chartered in January 1996.
OFFICE SUPPLIES, TELEPHONE AND POSTAGE EXPENSES decreased slightly for the
year ended December 31, 1996, in comparison to the same period in 1995. The
increase in expense in this category of $294,000 from the $227,000 recorded for
the year ended December 31, 1994 to the $521,000 recorded for the year ended
December 31, 1995 was caused primarily by expenses incurred in opening the loan
production office in Minneapolis and bringing the BNC-North Dakota branch
offices on line in August 1995. Such expenses totaled $125,000 in the first
quarter of 1997, a 3% increase from the same period in 1996. Expenses included
in this category are office supplies, special forms, customer checks, data
processing supplies, telephone and postage and freight expense. BNC recorded
decreases in expenses relating to office supplies, special forms, customer
checks and data processing supplies during 1996 as compared to 1995. Telephone
and postage and freight expense, however, increased in 1996 as a result of the
number of facilities operating and the additional customers acquired in the 1995
branch acquisition.
PROFESSIONAL SERVICES EXPENSE includes legal, audit and tax preparation fees
as well as software support and other consulting expense. Total professional
services expense of $81,000, $103,000, $360,000, $246,000 and $236,000 was
recorded for the three months ended March 31, 1997 and 1996 and for the years
ending December 31, 1996, 1995 and 1994, respectively. The $114,000 increase for
1996 as compared to 1995 was mainly attributable to increases in legal and audit
fees.
MARKETING AND PROMOTION EXPENSES totaled $87,000, $112,000, $352,000,
$424,000 and $211,000 for the three months ended March 31, 1997 and 1996 and for
the years ended December 31, 1996, 1995 and 1994, respectively. This category
includes advertising, public and community relations and miscellaneous
promotional campaign expenses. The $213,000 increase in this category for 1995
as compared to 1994 is almost entirely attributable to ad campaigns conducted in
connection with the 1995 branch acquisition and the reorganization of the
Company's North Dakota banks into BNC-North Dakota, and the resulting name
change for such bank.
FDIC AND OTHER ASSESSMENTS EXPENSE includes FDIC deposit insurance premiums
and OCC assessments. Total FDIC and OCC assessments were $41,000, $71,000,
$239,000, $296,000 and $308,000 for the three months ended March 31, 1997 and
1996 and for the years ended December 31, 1996, 1995 and 1994, respectively. The
decreases in this expense category have been caused primarily by changes in the
FDIC's risk related deposit insurance premiums. During 1994, the Company paid
FDIC assessments of 23 basis points annually on its deposits insured by the Bank
Insurance Fund ("BIF"). In 1995, the Company acquired approximately $94 million
of deposits insured by the Savings Association Insurance Fund ("SAIF"). The
addition of the SAIF deposits and the increased insurance expense attributable
to them was offset by the reduction of premium rates on BIF deposits to 0 basis
points for the Banks and an FDIC
21
<PAGE>
deposit insurance refund paid to BIF insured banks due to the recapitalization
of the BIF to the required level of 1.25% of insured deposits. During 1996, the
Company's assessment expenses further decreased because of the reduction of
premium rates on SAIF deposits to 0 basis points and a deposit insurance refund
paid to SAIF insured banks upon recapitalization of the SAIF to 1.25% of insured
deposits. Unless there are additional changes to the deposit insurance
regulations, management expects expense in this category to decline in 1997, as
they did in the first quarter of 1997, as the Banks are currently being assessed
only for interest payable on Financing Corporation bonds (issued between 1987
and 1989 to resolve failed savings and loan associations). The assessments are
1.30 basis points annually on BIF insured deposits and 6.48 basis points
annually on SAIF insured deposits.
OTHER NONINTEREST EXPENSE includes directors fees, blanket bond and other
insurance expense, education and development expense, correspondent changes,
travel, dues, conventions and other miscellaneous expense categories. Total
other noninterest expense was $221,000, $224,000, $791,000, $640,000 and
$481,000 for the three months ended March 31, 1997 and 1996 and the years ended
December 31, 1996, 1995 and 1994, respectively. The increase of $151,000 in this
expense category for 1996 as compared to 1995 was attributable to small
increases in several of the categories mentioned above. The increase of $159,000
for 1995 as compared to 1994 was also caused by small increases in many of the
categories mentioned above.
INCOME TAXES. Federal and state income taxes increased by $228,000 from
$127,000 for the three months ended March 31, 1996 to $355,000 for the three
months ended March 31, 1997 due to an increase in pretax income of $647,000. The
income tax provision for the years 1996, 1995 and 1994 was $1.1 million,
$641,000 and $679,000, respectively. As a percentage of pretax income, income
tax expense for 1996 was 38.3%, as compared to 35.7% in 1995 and 36.3% in 1994.
The increase in income tax expense relative to pretax income in 1996 as compared
to 1995 resulted from an increase in the percentage of taxable income on
municipal bonds. Consolidated federal income tax returns were filed for all of
the periods presented.
FINANCIAL CONDITION
INVESTMENT SECURITIES. BNC's investment policy is designed to: enhance net
income and return on equity through prudent management of risk; ensure liquidity
for cash-flow requirements; help manage interest rate risk; ensure collateral is
available for public deposits, advances and repurchase agreements; and manage
asset diversification. In managing the portfolio and the composition of the
entire balance sheet, the Company seeks a balance among earnings, credit and
liquidity considerations, with a goal of maximizing the longer-term overall
profitability of the Company.
Investments are centrally managed by the President of BNC-North Dakota in
order to aid in compliance with federal laws and regulations, which place
certain restrictions on the amounts and types of investments BNC may hold. See
"Supervision and Regulation." BNC's liquidity is monitored and managed, and the
maturity dates of the Company's investments are structured to maintain necessary
liquidity. See "--Liquidity." However, the primary goal of BNC's investment
policy is to maintain an appropriate relationship between assets and liabilities
while maximizing interest rate spreads. Accordingly, BNC monitors the
sensitivity of its assets and liabilities to changes in interest rates and
maturities and directs the Company's overall acquisition and allocation of
funds. See "--Asset/Liability Management."
As of March 31, 1997, BNC had $62.0 million of securities in its investment
portfolio as compared to $59.5 million, $94.4 million and $25.1 million for the
years ended December 31, 1996, 1995 and 1994, respectively. The decrease in
investment securities in 1996 and 1997 has resulted from the transfer of funds
from investments to loans as the Company has funded the significant loan growth
experienced during 1996 and 1997. The increase in investment securities at
December 31, 1995 as compared to 1994 resulted from the investment of the funds
received in the 1995 branch acquisition. See "--Results of Operations--Net
Interest Income" and "--Financial Condition--Loan Portfolio." Investments
accounted for 20%, 21%, 39% and 17% of total assets as of March 31, 1997 and
December 31, 1996, 1995 and 1994, respectively.
22
<PAGE>
The following table presents the amortized cost and estimated fair market
value (book value) of the securities in BNC's investment portfolio by major
category as of the periods indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------
MARCH 31, 1997 1996 1995 1994
------------------------ ------------------------ ------------------------ -----------
ESTIMATED ESTIMATED ESTIMATED
FAIR FAIR FAIR
AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET AMORTIZED
COST VALUE(1) COST VALUE(1) COST VALUE(1) COST
----------- ----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE:
U.S. Treasury securities........ $ 13,975 $ 13,917 $ 13,814 $ 13,856 $ 25,041 $ 25,101 $ 8,973
U.S. government agency mortgage-
backed securities............. 11,068 11,017 9,555 9,559 4,798 4,843 5,205
U.S. government agencies
securities.................... 5,620 5,549 3,633 3,642 7,513 7,520 7,363
Collateralized mortgage
obligations................... 23,783 23,524 23,898 23,855 44,800 44,803 1,881
Other securities................ 6,671 6,666 7,773 7,779 10,882 10,885 1,004
State and municipal bonds....... 1,248 1,280 759 800 1,162 1,264 --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total........................... 62,365 61,953 59,432 59,491 94,196 94,416 24,426
----------- ----------- ----------- ----------- ----------- ----------- -----------
HELD TO MATURITY:
State and municipal bonds....... -- -- -- -- -- -- 1,148
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total........................... -- -- -- -- -- -- 1,148
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total investments............... $ 62,365 $ 61,953 $ 59,432 $ 59,491 $ 94,196 $ 94,416 $ 25,574
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
ESTIMATED
FAIR
MARKET
VALUE(1)
-----------
<S> <C>
AVAILABLE FOR SALE:
U.S. Treasury securities........ $ 8,860
U.S. government agency mortgage-
backed securities............. 5,102
U.S. government agencies
securities.................... 7,263
Collateralized mortgage
obligations................... 1,734
Other securities................ 1,004
State and municipal bonds....... --
-----------
Total........................... 23,963
-----------
HELD TO MATURITY:
State and municipal bonds....... 1,195
-----------
Total........................... 1,195
-----------
Total investments............... $ 25,158
-----------
-----------
</TABLE>
- ------------------------------
(1) The estimated fair market values of the securities contained in BNC's
investment portfolio are calculated using the quoted market price, updated
monthly.
------------------------------
The following table sets forth the amortized cost and approximate yields of
the securities in BNC's investment portfolio as of March 31, 1997.
<TABLE>
<CAPTION>
MATURING
-----------------------------------------------------------------------------------------
AFTER 1 BUT AFTER 5 BUT AFTER 10
WITHIN 1 YEAR WITHIN 5 YEARS WITHIN 10 YEARS YEARS
------------------------ ------------------------ ------------------------ -----------
YIELD YIELD YIELD
AMOUNT (1) AMOUNT (1) AMOUNT (1) AMOUNT
----------- ----- ----------- ----- ----------- ----- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE:(2)
U.S. Treasury securities............ -- -- $ 13,975 5.89% -- -- --
U.S. government agency mortgage-
backed securities(3).............. -- -- 1,799 6.87 $ 6,926 6.52% $ 2,343
U.S. government agencies
securities........................ -- -- 2,626 7.18 2,994 6.76 --
Collateralized mortgage
obligations(3).................... -- -- 310 5.93 10,128 6.07 13,345
Other securities.................... $ 6,671 6.80% -- -- -- -- --
State and municipal bonds........... 70 6.37 180 8.34 150 7.39 848
----------- ----------- ----------- -----------
Total amortized cost of investment
securities........................ $ 6,741 6.80% $ 18,890 6.18% $ 20,198 6.34% $ 16,536
----------- --- ----------- --- ----------- --- -----------
----------- --- ----------- --- ----------- --- -----------
Unrealized holding loss on
securities available for sale.....
Total investment in securities (at
estimated fair market value)......
<CAPTION>
TOTAL
------------------------
YIELD YIELD
(1) AMOUNT (1)
----- ----------- -----
<S> <C> <C> <C>
AVAILABLE FOR SALE:(2)
U.S. Treasury securities............ -- $ 13,975 5.89%
U.S. government agency mortgage-
backed securities(3).............. 6.59% 11,068 6.59
U.S. government agencies
securities........................ -- 5,620 6.96
Collateralized mortgage
obligations(3).................... 6.49 23,783 6.30
Other securities.................... -- 6,671 6.80
State and municipal bonds........... 9.61 1,248 8.98
-----------
Total amortized cost of investment
securities........................ 6.66% $ 62,365 6.43%
---
---
Unrealized holding loss on
securities available for sale..... (412)
-----------
Total investment in securities (at
estimated fair market value)...... $ 61,953 6.47%(4)
----------- ---
----------- ---
</TABLE>
- ------------------------------
(1) Yields do not include adjustments for tax-exempt interest because such
interest is not material; yields also do not reflect changes in fair value
that are reflected as a separate component of stockholders' equity (except
as noted in (4) below).
(2) Based on amortized cost.
(3) Maturities of mortgage-backed securities and collateralized mortgage
obligations are based on contractual maturities.
(4) Yield reflects changes in fair value that are reflected as a separate
component of stockholders' equity.
23
<PAGE>
At March 31, 1997, BNC held no securities of any single issuer, other than
the U.S. Treasury and U.S. government agencies, that exceeded 10% of
stockholders' equity. A significant portion of the Company's investment
securities portfolio (approximately 62% at March 31, 1997) is used as collateral
for public funds time deposits, securities sold under agreements to repurchase
and other BNC borrowings.
LOAN PORTFOLIO. The following table presents the composition of the
Company's loan portfolio at the end of the periods indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------------------
MARCH 31,
1997 1996 1995 1994 1993
-------------------- -------------------- -------------------- -------------------- --------------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and
industrial(1)... $ 96,878 46.6 $ 94,701 47.0 $ 41,639 34.8 $ 39,218 35.9 $ 23,011 27.8
Agricultural...... 20,084 9.7 20,673 10.3 18,046 15.1 22,144 20.2 16,101 19.5
Real estate
mortgage........ 49,601 23.9 47,451 23.6 36,606 30.6 32,805 30.0 31,655 38.2
Real estate
construction.... 11,597 5.6 8,806 4.4 5,884 4.9 3,992 3.6 4,462 5.4
Consumer.......... 18,738 9.0 18,734 9.3 9,960 8.3 9,331 8.5 4,937 6.0
Lease financing... 12,827 6.2 12,970 6.4 8,660 7.2 3,076 2.8 3,324 4.0
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Total face amount
of loans........ 209,725 101.0 203,335 101.0 120,795 100.9 110,566 101.0 83,490 100.9
Deferred loan fees
and costs....... (242) (0.1) (338) (0.2) (112) (0.1) (95) (0.1) -- --
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Loans............. 209,483 100.9 202,997 100.8 120,683 100.8 110,471 100.9 83,490 100.9
Less allowance for
loan losses..... (1,736) (0.9) (1,594) (0.8) (1,048) (0.8) (1,021) (0.9) (713) (0.9)
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Net loans......... $ 207,747 100.0 $ 201,403 100.0 $ 119,635 100.0 $ 109,450 100.0 $ 82,777 100.0
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
<CAPTION>
1992
--------------------
AMOUNT %
--------- ---------
<S> <C> <C>
Commercial and
industrial(1)... $ 17,610 25.4
Agricultural...... 21,420 30.9
Real estate
mortgage........ 20,669 29.8
Real estate
construction.... 3,227 4.7
Consumer.......... 5,119 7.4
Lease financing... 2,483 3.6
--------- ---------
Total face amount
of loans........ 70,528 101.8
Deferred loan fees
and costs....... (112) (0.2)
--------- ---------
Loans............. 70,416 101.6
Less allowance for
loan losses..... (1,088) (1.6)
--------- ---------
Net loans......... $ 69,328 100.0
--------- ---------
--------- ---------
</TABLE>
- ------------------------------
(1) The commercial and industrial loan category includes asset-based loans held
by BNC Financial totaling $6.5 million at March 31, 1997 and $5.6 million at
December 31, 1996.
The Company's primary source of income is interest earned on loans. The
Company's loan portfolio has grown significantly during the past three years as
a result of BNC's strategy of increasing the amount of loans outstanding to
increase net interest income. Net loans were $207.7 million at March 31, 1997, a
41% increase from net loans at March 31, 1996. Net loans increased $81.8
million, or 68%, to $201.4 million at December 31, 1996 as compared to $119.6
million at December 31, 1995. In 1995, net loans increased $10.2 million, or 9%,
as compared to December 31, 1994 ($9.2 million in loans were sold in 1995 along
with FMB).
BNC's significant loan growth is attributable in part to each of its
subsidiaries. BNC-North Dakota has experienced continued growth mainly in the
commercial and industrial loan category but also in each other loan category
presented above. BNC-Minnesota added significant loan growth, particularly in
the commercial and industrial category. BNC Financial had $6.5 million of
asset-based commercial and industrial loans as of March 31, 1997. While
prospects for continued loan growth appear favorable, management cannot predict
with any degree of certainty the Company's future loan growth potential.
CREDIT POLICY AND APPROVAL PROCEDURES. BNC follows a uniform credit policy
that sets forth underwriting and loan administration criteria. The loan policy,
including lending guidelines for the various types of credit offered by the
Company, is established by the Company's Board of Directors (the "Board") based
24
<PAGE>
upon the recommendations of senior lending management and the executive credit
committee (comprised of the Company's President, BNC-North Dakota's Executive
Vice President of Corporate Finance, BNC-Minnesota's President and Chief
Executive Officer and BNC-North Dakota's Executive Vice President of Lending
(collectively, the "Loan Committee")). The loan policy is reviewed and
reaffirmed by the Board at least annually. Underwriting criteria are based upon
the risks associated with each type of credit offered, the related borrowers and
types of collateral.
The Company delegates lending decision authority among various lending
officers and the Loan Committee based on the size of the customer's credit
relationship with BNC. Individual loan officers at the Banks are assigned loan
approval limits not exceeding $200,000. Senior lenders at BNC-North Dakota may
approve credit relationships at BNC-North Dakota above individual officer limits
up to $500,000 and $1,000,000 in the case of its Executive Vice President of
Corporate Finance. Relationships over $500,000 and $1,000,000, respectively, up
to the bank's legal lending limit must be approved by the Loan Committee. The
President and Chief Executive Officer at BNC-Minnesota may approve BNC
- -Minnesota credit relationships in excess of officer limits up to the bank's
legal lending limit, not to exceed $1 million. All BNC-Minnesota credit
relationships in excess of $1 million and up to the bank's legal lending limit
must be approved by the Loan Committee. The President/CEO of BNC Financial may
approve BNC Financial credit relationships up to $750,000. All BNC Financial
credit relationships over $750,000 must be approved by a loan committee
comprised of the Company's President and BNC-North Dakota's Executive Vice
President of Corporate Finance, BNC-Minnesota's President and Chief Executive
Officer and BNC Financial's President/CEO. All loans and commitments in excess
of $300,000 are presented to the Board on a monthly basis for summary review.
Any exceptions to loan policies and guidelines are subject to special approval
by Bank executive lenders or the Loan Committee based upon the lending authority
as described above.
LOAN PARTICIPATIONS. Pursuant to BNC's lending policy, loans do not exceed
85% of Bank lending limits (except to the extent collateralized by treasury
securities or Bank deposits and, accordingly, excluded from the Bank's lending
limit). To accommodate customers whose financing needs exceed its lending limits
and internal loan restrictions relating primarily to industry concentration, BNC
sells loan participations to outside participants without recourse. At March 31,
1997, the outstanding balances of loan participations sold by BNC to outside
banks were $58.2 million. At December 31, 1996, 1995 and 1994, the outstanding
balances of loan participations sold by BNC to outside banks were $57.3 million,
$35.0 million and $23.4 million, respectively. At March 31, 1997, loan
participations sold to outside banks totaled $55.0 million and $3.2 million for
BNC-North Dakota and BNC-Minnesota, respectively. All outstanding participations
at December 31, 1995 were attributable to BNC-North Dakota. BNC has retained
servicing rights on loan participations sold and traditionally has been able to
recognize loan origination fees received in respect to such loans. Management
cannot reliably predict BNC's ability to continue to generate or sell loan
participations or the terms of any such sales.
COMMERCIAL AND INDUSTRIAL LOANS consist primarily of loans to small and
mid-size businesses and sole proprietors in a wide variety of industries. These
loans, which are made for various purposes, generally are collateralized by
inventory, accounts receivable or other commercial assets. Commercial and
industrial loans, which have been the largest component of the Company's loan
portfolio in each of the periods presented herein, were $96.9 million at March
31, 1997, $94.7 million, $41.6 million and $39.2 million at December 31, 1996,
1995 and 1994, respectively. Commercial and industrial loans represented 47%,
47%, 35% and 36% of the Company's loan portfolio at March 31, 1997 and December
31, 1996, 1995 and 1994, respectively. As of March 31, 1997, commercial and
industrial loans totaled $63.9 million, $26.4 million, $6.5 million and $100,000
at BNC-North Dakota, BNC-Minnesota, BNC Financial and BNC, respectively. All of
BNC Financial's loans are asset-based loans. Management anticipates growth of
asset-based loans at BNC Financial could approximate $15 to $25 million during
1997. See "--Deposits and Borrowed Funds" for further discussion regarding
anticipated funding for the Company's asset-based loans.
25
<PAGE>
AGRICULTURAL LOANS include loans to feed lot operators, dairy farmers and
commercial farming organizations. These loans are generally collateralized by
accounts receivable, equipment and other assets. Agricultural loans totaled
$20.0 million at March 31, 1997. Loans of this type increased $2.6 million, or
15%, to $20.7 million at December 31, 1996 as compared to December 31, 1995. The
sale of FMB in 1995 and the strong growth in commercial and industrial loans
resulted in agricultural loans representing only 10% of the Company's loan
portfolio at March 31, 1997 and December 31, 1996 as compared to 15% and 20% at
December 31, 1995 and 1994, respectively.
REAL ESTATE MORTGAGE LOANS include various types of loans for which BNC
holds real property as collateral. A large portion of these loans (approximately
40% at March 31, 1997) are made to commercial customers where the collateral for
the loan is, among other things, the real estate occupied by the business of the
customer. Whenever practicable, the Company seeks to receive real estate as
collateral in making commercial loans in addition to other appropriate
collateral. Accordingly, many loans in this category can be characterized as
commercial loans that are secured by real estate. Real estate mortgage loans
totaled $49.6 million at March 31, 1997. Loans of this type increased $10.8
million, or 30%, to $47.4 million at December 31, 1996 as compared to $36.6
million at December 31, 1995. Approximately $4.0 million of this growth was
attributable to BNC-North Dakota, while approximately $6.8 million was
attributable to BNC-Minnesota. Real estate mortgage loans represented 24%, 24%,
31% and 30% of the total loan portfolio at March 31, 1997 and December 31, 1996,
1995 and 1994, respectively.
REAL ESTATE CONSTRUCTION LOANS are loans to finance the construction of
residential and non-residential property. These loans are generally
collateralized by first liens on the real estate. BNC conducts periodic
inspections, either directly or through an architect or other agent, prior to
approval of periodic draws on these loans. The Company generally requires that a
permanent financing commitment be in place prior to the approval of a
residential construction loan. These loans totaled $11.6 million at March 31,
1997. Loans of this type increased $2.9 million, or 50%, to $8.8 million at
December 31, 1996 as compared to $5.9 million at December 31, 1995. Construction
loans represented 6% of the Company's loan portfolio at March 31, 1997 as
compared to 4%, 5% and 4% at December 31, 1996, 1995 and 1994, respectively.
CONSUMER LOANS, which generally have terms of two to five years, include
home equity loans, credit cards and other installment loans. These loans totaled
$18.7 million at March 31, 1997. Loans of this type increased $8.7 million, or
88%, to $18.7 million at December 31, 1996 as compared to $10.0 million at
December 31, 1995. BNC-North Dakota accounted for $6.2 million of the increase
due to increased consumer loan demand in the Bismarck market and consumer loan
originations at the branches acquired in 1995. Consumer loans represented 9%,
9%, 8% and 9% of the Company's loan portfolio at March 31, 1997 and December 31,
1996, 1995 and 1994, respectively.
FINANCING LEASES are generally structured such that the Company retains
title to the assets leased in order to secure payment. The Company generally
provides lease financing to customers with whom it has other lending
relationships. Financing leases totaled $12.8 million at March 31, 1997. Loans
of this type increased $4.3 million, or 50%, to $13 million at December 31, 1996
as compared to $8.7 million at December 31, 1995. These leases represented 6% of
the Company's loan portfolio at March 31, 1997 as compared to 6%, 7% and 3% as
of December 31, 1996, 1995 and 1994, respectively.
There was no concentration of loans to any single industry exceeding 10% of
total loans (other than those listed above) nor were there any loans classified
as highly leveraged transactions as of March 31, 1997.
The following table sets forth the remaining maturities of loans in each
major category of BNC's portfolio as of March 31, 1997. Maturities are based
upon contractual maturities. Actual maturities may differ from the contractual
maturities shown below as a result of renewals and prepayments. Loan renewals
are evaluated in the same manner as new credit applications. Floating rate loans
include loans that would
26
<PAGE>
reprice prior to maturity if base rates change. See "--Asset/Liability
Management" for further discussion regarding repricing of loans and other
assets.
<TABLE>
<CAPTION>
OVER ONE YEAR
THROUGH FIVE YEARS OVER FIVE YEARS
-------------------- --------------------
LESS THAN FIXED FLOATING FIXED FLOATING
ONE YEAR RATE RATE RATE RATE TOTAL
----------- --------- --------- --------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commercial and industrial.............................. $ 30,219 $ 19,858 $ 36,285 $ 4,560 $ 5,956 $ 96,878
Agricultural........................................... 8,903 2,994 2,796 1,521 3,870 20,084
Real estate mortgage................................... 4,708 8,730 4,584 11,408 20,171 49,601
Real estate construction............................... 11,374 -- -- -- 223 11,597
Consumer............................................... 8,765 7,829 1,587 547 10 18,738
Lease financing........................................ 1,299 8,830 2,643 55 -- 12,827
----------- --------- --------- --------- --------- ----------
Total face amount of loans......................... $ 65,268 $ 48,241 $ 47,895 $ 18,091 $ 30,230 $ 209,725
----------- --------- --------- --------- --------- ----------
----------- --------- --------- --------- --------- ----------
</TABLE>
NONPERFORMING LOANS AND ASSETS. The Company's lending personnel are
responsible for continuous monitoring of the quality of the loan portfolio.
Officer compensation depends, to a substantial extent, on maintaining loan
quality and dealing with credit issues in a proactive manner. Lenders are not
compensated for growth at the expense of credit quality. Loan officers are
responsible for ongoing and regular review of past due loans in their respective
portfolios. The Company's loan portfolio is also monitored regularly and
examined by the Company's loan review personnel. Loans demonstrating weaknesses
are downgraded and the Board receives a listing of all such loans on a monthly
basis. The Company also has an annual independent credit review which tests
credit quality, compliance with loan policy and documentation for all loans over
$100,000 and a sampling of smaller loans.
27
<PAGE>
The following table sets forth the amounts of nonperforming loans, other
real estate owned, the allowance for loan losses and certain ratios at the ends
of the periods indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, -----------------------------------------------------
1997 1996 1995 1994 1993 1992
----------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Nonperforming loans:
Loans 90 days or more delinquent and still accruing
interest.................................................. $ 236 $ 129 $ 290 $ 39 $ 87 $ 467
Nonaccrual loans(1)(2)...................................... 86 22 71 248 1,338 3,332
Restructured loans(1)(2).................................... 132 136 119 257 188 283
----------- --------- --------- --------- --------- ---------
Total nonperforming loans................................. 454 287 480 544 1,613 4,082
Other real estate owned....................................... 159 159 -- 100 193 332
----------- --------- --------- --------- --------- ---------
Total nonperforming assets.................................... $ 613 $ 446 $ 480 $ 644 $ 1,806 $ 4,414
----------- --------- --------- --------- --------- ---------
----------- --------- --------- --------- --------- ---------
Allowance for loan losses..................................... $ 1,736 $ 1,594 $ 1,048 $ 1,021 $ 713 $ 1,088
----------- --------- --------- --------- --------- ---------
----------- --------- --------- --------- --------- ---------
Ratio of total nonperforming loans to total loans............. 0.22% 0.14% 0.40% 0.49% 1.93% 5.80%
Ratio of total nonperforming assets to total assets........... 0.20 0.15 0.20 0.44 1.47 3.74
Ratio of allowance for loan losses to total loans............. 0.83 0.78 0.87 0.92 0.85 1.55
Ratio of allowance for loan losses to total nonperforming
loans....................................................... 382 555 218 188 44 27
</TABLE>
- ------------------------
(1) If the Company's nonaccrual and restructured loans at December 31, 1996 had
been current in accordance with their original terms, additional interest
income would have been recognized into earnings in the amount of $12,000 for
the year ended December 31, 1996.
(2) The interest income on nonaccrual and restructured loans actually included
in the Company's net income was approximately $6,000 for the year ended
December 31, 1996.
LOANS 90 DAYS OR MORE DELINQUENT AND STILL ACCRUING INTEREST. This category
of loans includes loans over 90 days past due which management believes, based
on its specific analysis of the loan, do not present doubt about the collection
of interest and principal in accordance with the loan contract. Loans in this
category must be well-secured and in the process of collection. These loans are
monitored closely by BNC lending and management personnel.
NONACCRUAL LOANS. Accrual of interest is discontinued on a loan 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 period is reversed against interest income of the current period.
Accrued but uncollected interest income applicable to previous periods is
charged against the allowance for loan losses as BNC provides for a reserve for
accrued interest. No additional interest is accrued on the loan balance until
the collection of both principal and interest becomes reasonably certain. When a
problem loan is finally resolved, there may ultimately be an actual write down
or charge-off of the principal balance of the loan which may necessitate
additional charges to earnings.
RESTRUCTURED LOANS. 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.
28
<PAGE>
OTHER REAL ESTATE OWNED. Other real estate owned represents properties
acquired through foreclosures or other proceedings or those considered
in-substance foreclosures, and is stated at the lower of cost or fair value at
the date of acquisition. Write downs to fair value at the time of acquisition
are charged to the allowance for loan losses; write downs and costs incurred
subsequent to acquisition are charged to expense as incurred. As of March 31,
1997 and December 31, 1996, the Company had a recorded investment of $159,000 of
property acquired in foreclosure proceedings or under agreements with delinquent
borrowers. The Company had no property acquired in foreclosure proceedings at
December 31, 1995.
POTENTIAL PROBLEM LOANS. In addition to the loans presented above,
management has identified, through its internal loan monitoring activities,
approximately 19 loans with stated balances totaling $4.0 million at March 31,
1997 that exhibit a higher than normal credit risk but are not considered
impaired or nonperforming under the definitions presented above. These loans are
not in default but have characteristics such as recent adverse operating cash
flows or general risk characteristics that the loan officer feels might
jeopardize the future timely collection of principal or interest payments. The
ultimate resolution of these credits is subject to changes in economic
conditions and other factors. These loans are monitored closely to ensure that
the Company's position as a creditor is protected.
ALLOWANCE FOR LOAN LOSSES. An allowance for loan losses has been
established to provide for those loans which may not be repaid in their
entirety. It represents management's recognition of the risks of extending
credit and its evaluation of the quality of the loan portfolio. Loan losses are
primarily created from the loan portfolio, but may also be generated from other
sources, such as commitments to extend credit, guarantees, and standby letters
of credit. The allowance for loan losses is increased by provisions charged to
expense and decreased by charge-offs, net of recoveries. See "--Results of
Operations-- Provision for Loan Losses." Although a loan is charged-off by
management when deemed uncollectible, collection efforts continue and future
recoveries may occur.
The allowance is maintained at a level considered adequate to provide for
anticipated loan losses based on past loss experience, general economic
conditions, information about specific borrower situations, including their
financial position, collateral values, and other factors and estimates which are
subject to change over time. Estimating the risk of loss and amount of loss on
any loan is subjective and ultimate losses may vary from current estimates.
These estimates are reviewed periodically and, as adjustments become necessary,
they are reported in income through the provision for loan losses in the periods
in which they become known. The adequacy of the allowance for loan losses is
monitored by management and reported to the Board. Although management believes
that the allowance for loan losses is adequate to absorb any losses on existing
loans that may become uncollectible, there can be no assurance that the
allowance will prove sufficient to cover actual loan 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 loan
losses. Such agencies may require BNC to make additional provisions to the
allowance based upon their judgments about information available to them at the
time of their examination.
29
<PAGE>
The following table summarizes, for the periods indicated, activity in the
allowance for loan losses, including amounts of loans charged-off, amounts of
recoveries, additions to the allowance charged to operating expense and the
ratio of net charge-offs to average total loans:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
------------------------- -----------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
------------ ----------- ------------ ------------ ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance of allowance for loan
losses at beginning of
period..................... $ 1,594 $ 1,048 $ 1,048 $ 1,021 $ 713 $ 1,088 $ 1,298
Charge-offs:
Commercial and industrial.. 7 1 104 114 22 641 529
Agricultural............... -- -- 22 130 -- -- --
Real estate mortgage....... 24 -- -- -- -- -- 6
Real estate construction... -- -- -- -- -- -- --
Consumer................... 8 -- 6 4 1 17 17
Lease financing............ -- -- 218 -- -- -- --
------------ ----------- ------------ ------------ ----------- ----------- -----------
Total charge-offs........ 39 1 350 248 23 658 552
------------ ----------- ------------ ------------ ----------- ----------- -----------
Recoveries:
Commercial and industrial.. 9 4 5 116 147 192 95
Agricultural............... -- 1 146 84 -- -- --
Real estate mortgage....... 1 -- 6 3 -- -- 5
Real estate construction... -- -- -- -- -- -- --
Consumer................... 1 -- -- 4 5 2 6
Lease financing............ -- -- -- -- -- -- --
------------ ----------- ------------ ------------ ----------- ----------- -----------
Total recoveries......... 11 5 157 207 152 194 106
------------ ----------- ------------ ------------ ----------- ----------- -----------
Net (charge-offs)
recoveries................. (28) 4 (193) (41) 129 (464) (446)
Provision for loan losses
charged to operations...... 170 84 739 168 179 89 236
Allowance attributable to
FMB........................ -- -- -- (100)(1) -- -- --
------------ ----------- ------------ ------------ ----------- ----------- -----------
Balance of allowance for loan
losses at end of period.... $ 1,736 $ 1,136 $ 1,594 $ 1,048 $ 1,021 $ 713 $ 1,088
------------ ----------- ------------ ------------ ----------- ----------- -----------
------------ ----------- ------------ ------------ ----------- ----------- -----------
Ratio of net (charge-offs)
recoveries to average
loans...................... (0.01)% 0.00% (0.11)% (0.03)% 0.13% (0.62)% (0.66)%
------------ ----------- ------------ ------------ ----------- ----------- -----------
------------ ----------- ------------ ------------ ----------- ----------- -----------
Average gross loans
outstanding during the
period..................... $ 204,931 $ 136,317 $ 171,780 $ 117,773 $ 98,749 $ 75,171 $ 67,265
------------ ----------- ------------ ------------ ----------- ----------- -----------
------------ ----------- ------------ ------------ ----------- ----------- -----------
</TABLE>
- ------------------------
(1) In connection with the sale of FMB in October 1995, $100,000 of the
Company's allowance for loan and lease losses, together with approximately
$9.2 million of loans originated by FMB, was transferred to Community First
Bankshares, Inc.
Management regards the allowance for loan losses as a general reserve which
is available to absorb losses from all loans. However, for purposes of complying
with disclosure requirements of the Securities and Exchange Commission (the
"Commission"), the table below presents an allocation of the allowance for loan
losses among the various loan categories and sets forth the percentage of loans
in each category to gross loans. The allocation of the allowance for loan losses
as shown in the table should neither be
30
<PAGE>
interpreted as an indication of future charge-offs, nor as an indication that
charge-offs in future periods
will necessarily occur in these amounts or in the indicated proportions.
<TABLE>
<CAPTION>
MARCH 31, 1997
-----------------------
LOANS IN
CATEGORY
AS A
PERCENTAGE
AMOUNT OF TOTAL
OF GROSS
ALLOWANCE LOANS
---------- -----------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Commercial and
industrial........ $ 833 46%
Agricultural........ 159 10
Real estate
mortgage.......... 325 24
Real estate
construction...... 81 5
Consumer............ 95 9
Leasing............. 64 6
Unallocated......... 179 --
---------- ---
Total........... $ 1,736 100%
---------- ---
---------- ---
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------
1996 1995 1994
----------------------- ----------------------- -----------------------
LOANS IN LOANS IN LOANS IN
CATEGORY CATEGORY CATEGORY
AS A AS A AS A
PERCENTAGE PERCENTAGE PERCENTAGE
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
OF GROSS OF GROSS OF GROSS
ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS
---------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Commercial and
industrial........ $ 721 47% $ 355 35% $ 265 35%
Agricultural........ 176 10 318 15 395 20
Real estate
mortgage.......... 306 24 213 30 267 30
Real estate
construction...... 57 4 41 5 24 4
Consumer............ 97 9 58 8 52 8
Leasing............. 63 6 41 7 18 3
Unallocated......... 174 -- 22 -- -- --
---------- --- ---------- --- ---------- ---
Total........... $ 1,594 100% $ 1,048 100% $ 1,021 100%
---------- --- ---------- --- ---------- ---
---------- --- ---------- --- ---------- ---
</TABLE>
DEPOSITS AND BORROWED FUNDS. BNC's core deposits consist of noninterest
bearing and interest bearing demand deposits, savings deposits, certificates of
deposit under $100,000, certain certificates of deposit of $100,000 and over and
public funds. These deposits, along with other borrowed funds are used by the
Company to support its asset base.
The following table sets forth the distribution of BNC's average deposit
account balances and average cost of funds rates on each category of deposits
for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31, 1997 1996 1995
----------------------------------- --------------------------------- -----------------------------------
PERCENT WTD. PERCENT WTD. PERCENT WTD.
AVERAGE OF AVG. AVERAGE OF AVG. AVERAGE OF AVG.
BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE
--------- ----------- ----- --------- ----------- --------- --------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Interest-bearing
demand deposits.... $ 45,840 18.79% 2.99% $ 38,920 18.29% 2.58% $ 38,941 23.01% 3.05%
Savings deposits..... 8,694 3.56 2.29 8,498 3.99 2.31 7,598 4.49 2.86
Time deposits
("CDs"):
CDs under $100,000... 128,123 52.52 5.60 124,682 58.61 5.66 93,983 55.53 5.81
CDs $100,000 and
over............... 41,962 17.20 5.70 25,499 11.99 5.82 15,486 9.15 6.08
--------- ----------- --------- ----------- --------- -----------
Total time
deposits........... 170,085 69.72 5.62 150,181 70.60 5.69 109,469 64.68 5.84
--------- ----------- --------- ----------- --------- -----------
Total interest-
bearing
deposits......... 224,619 92.07 4.96 197,599 92.88 4.93 156,008 92.18 5.00
Noninterest bearing
demand deposits.... 19,349 7.93 -- 15,147 7.12 -- 13,233 7.82 --
--------- ----------- --------- ----------- --------- -----------
Total deposits..... $ 243,968 100.00% 4.56% $ 212,746 100.00% 4.58% $ 169,241 100.0% 4.61%
--------- ----------- --------- ----------- --------- -----------
--------- ----------- --------- ----------- --------- -----------
<CAPTION>
1994
---------------------------------
PERCENT WTD.
AVERAGE OF AVG.
BALANCE DEPOSITS RATE
--------- ----------- ---------
<S> <C> <C> <C>
Interest-bearing
demand deposits.... $ 36,423 31.58% 2.72%
Savings deposits..... 7,187 6.23 2.63
Time deposits
("CDs"):
CDs under $100,000... 50,259 43.58 4.53
CDs $100,000 and
over............... 9,523 8.26 5.12
--------- -----------
Total time
deposits........... 59,782 51.84 4.63
--------- -----------
Total interest-
bearing
deposits......... 103,392 89.65 3.81
Noninterest bearing
demand deposits.... 11,942 10.35 --
--------- -----------
Total deposits..... $ 115,334 100.00% 3.42%
--------- -----------
--------- -----------
</TABLE>
Average total deposits were $244.0 million for the first quarter of 1997, a
21% increase over the same period in 1996. Average total deposits increased
$43.5 million, or 26%, to $212.7 million for the year ended December 31, 1996,
as compared to $169.2 million for the year ended December 31, 1995. The average
total deposits of $169.2 million for 1995 represented an increase of $53.9
million, or 47%, as compared to the $115.3 million for 1994. In the first
quarter of 1997, average noninterest-bearing deposits totaled $19.3 million as
compared to $12.2 million for the same period in 1996. In 1996, average
noninterest-bearing
31
<PAGE>
deposits increased to $15.1 million as compared to $13.2 million and $11.9
million for 1995 and 1994, respectively. Total average interest-bearing deposits
totaled $224.6 million in the first quarter of 1997. Total average
interest-bearing deposits in 1996 of $197.6 million represented an increase of
$41.6 million, or 27%, as compared to the $156.0 million in 1995. The $156.0
million in 1995 represented an increase of $52.6 million, or 51%, as compared to
1994's $103.4 million. The 1995 branch acquisition and sale of FMB, coupled with
internal deposit growth, impacted the amount, composition and cost of BNC's
deposit portfolio. See "--Results of Operations--Net Interest Income."
Since 1994, earning asset growth has outpaced core deposit growth resulting
in the use of more brokered and out of market certificates of deposit and other
borrowed funds. As of March 31, 1997, BNC held a total of $15.8 million of
brokered certificates of deposit. Under current FDIC regulations, only
"well-capitalized" financial institutions may fund themselves with brokered
deposits without prior approval of regulators. BNC-North Dakota and
BNC-Minnesota were both well capitalized at March 31, 1997.
Time deposits in denominations of $100,000 and greater totaled $46.2 million
at March 31, 1997 as compared to $39.7 million, $16.6 million and $11.7 million
at December 31, 1996, 1995 and 1994, respectively. The following table sets
forth the amount and maturities of time deposits of $100,000 or more as of March
31, 1997:
<TABLE>
<CAPTION>
MARCH 31, 1997
--------------
(IN THOUSANDS)
<S> <C>
Time deposits of $100,000 and over with remaining maturity:
3 months or less............................................................ $ 24,183
Over 3 months through 6 months.............................................. 12,533
Over 6 months through 12 months............................................. 3,853
Over 12 months.............................................................. 5,633
-------
Total..................................................................... $ 46,202
-------
-------
</TABLE>
BNC uses short-term borrowings to support its asset base. These borrowings
include federal funds purchased and U.S. Treasury tax and loan note option
accounts, securities sold under agreements to repurchase, and Federal Home Loan
Bank ("FHLB") borrowings. At March 31, 1997, short-term borrowings were $15.3
million or 5% of total liabilities as compared to $11.4 million or 4% of total
liabilities at December 31, 1996, $1.0 million or 1% of total liabilities at
December 31, 1995 and $7.4 million or 5% of total liabilities at December 31,
1994. Short-term borrowings averaged $14.5 million in 1996 as compared to $7.0
million and $6.0 million in 1995 and 1994, respectively.
The following table provides a summary of the Company's short-term
borrowings, including period end outstandings, average balances, maximum
borrowings and average borrowings outstanding and weighted average interest
rates for the periods presented:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
THREE MONTHS ENDED -------------------------------
MARCH 31, 1997 1996 1995 1994
------------------- --------- --------- ---------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Short-term borrowings outstanding at period end.............. $ 15,306 $ 11,437 $ 1,000 $ 7,360
Weighted average interest rate at period end................. 6.26% 5.60% 6.69% 4.35%
Maximum month-end balance during the period.................. $ 15,306 $ 23,416 $ 34,648 $ 8,952
Average borrowings outstanding for the period................ 11,346 14,532 7,029 6,033
Weighted average interest rate for the period................ 5.78% 5.60% 5.74% 3.15%
</TABLE>
32
<PAGE>
As of March 31, 1997, the Company's long-term debt included a $3.0 million
term loan from Firstar Bank Milwaukee, N.A., $8.3 million outstanding under the
Firstar Line of Credit and $111,000 attributable to a capital lease at BNC-North
Dakota (for the Company's mainframe computer). In addition, $185,000 was
outstanding under the Windsor Line of Credit. BNC was in compliance with all
related debt covenants as of the date of this Prospectus.
The Company's increased usage of long-term borrowings ($11.6 million at
March 31, 1997 as compared to $4.0 million and $3.4 million at March 31, 1996
and 1995, respectively) has been primarily for the purpose of funding the
asset-based lending at BNC Financial. As of March 31, 1997, BNC Financial had
outstanding loans of $6.5 million. Funding for increased loan growth will be
provided through borrowings under the Revolving Lines of Credit. See "Use of
Proceeds."
CAPITAL RESOURCES AND EXPENDITURES. BNC's management actively monitors
compliance with bank regulatory capital requirements, including risk-based and
leverage capital measures. Under the risk-based capital method of capital
measurement, the ratio computed is dependent on the amount and composition of
assets recorded on the balance sheet, and the amount and composition of
off-balance sheet items, in addition to the level of capital. The risk based and
leverage capital ratios of BNC and the Banks as of March 31, 1997 and December
31, 1996 and 1995, are presented in Note 9 to the Company's Consolidated
Financial Statements included elsewhere herein.
As indicated under "Business--Properties," the Company's newly acquired
office building in Bismarck is currently undergoing remodeling. The initial cost
of the building was $525,000 and expected cost of remodeling is approximately
$250,000. Construction of a branch office in north Bismarck is expected to be
completed during 1997. Architects estimate the cost of this facility to
approximate $600,000. The cost of these two projects will be funded from current
operations.
LIQUIDITY
BNC actively manages its liquidity position to maintain sufficient funds to
respond to the needs of depositors and borrowers, as well as to take advantage
of earnings enhancement opportunities. In addition to liquidity from core
deposit growth, together with repayments and maturities of loans and
investments, BNC utilizes brokered deposits, sells securities under agreements
to repurchase and borrows overnight federal funds. BNC-North Dakota is a member
of the FHLB, which affords the Bank the opportunity to borrow funds in terms
ranging from overnight to 10 years and beyond. Borrowings from the FHLB are
collateralized by the Bank's first mortgage residential loans and various
securities from the Company's investment portfolio.
In order to monitor its position, BNC's management measures its liquidity
position regularly. Key factors that determine the Company's liquidity are: the
reliability or stability of its deposit base; the maturity structure and the
pledged/nonpledged status of its investments; and potential loan demand. BNC's
liquidity management system divides the balance sheet into liquid assets,
illiquid assets, reliable funds, and volatile funds. The four variables and
other key factors such as expected loan demand, are tied together to provide a
measure of the Company's liquidity. Management has a targeted range and manages
its operations such that these targets can be achieved.
For the quarter ended March 31, 1997, operating activities provided cash
inflows of $940,000. During the same period, investing activities resulted in
net cash outflows of $17.3 million and included cash outflows of $7.2 million,
$2.8 million and $6.5 million for federal funds sold, investment transactions
and increases in loans, respectively. Net cash inflows from financing activities
were $18.4 million, $13.5 million from increases in deposits, and $4.9 million
from borrowing activities.
For the quarter ended March 31, 1996, operating activities resulted in net
cash outflows of $866,000. Investing activities resulted in net cash outflows of
$4.6 million, including primarily, net cash inflows from investment transactions
of $21.1 million offset by net cash outflows from increases in loans of $28.3
million.
33
<PAGE>
Financing activities resulted in net cash outflows of $175,000 for the first
quarter of 1996. Cash outflows from deposit decreases of $8.1 million was offset
by cash inflows from borrowing activities of $7.9 million.
Cash inflows from operating activities exceeded operating cash outflows by
$1.8 million in 1996, $2.6 million in 1995 and $3.4 million in 1994. Interest
received net of interest paid was the principal source of operating cash inflows
in each of these periods.
Net cash outflows from investing activities was $53.1 million in 1996 as
compared to $86.2 million in 1995 and $24.8 million in 1994. Loan growth
accounted for the majority of the cash outflows in 1996 at $82.7 million while
investment activities resulted in a net cash inflow of $34.9 million. Investment
activities was the largest component of cash outflow from investing activities
in 1995 as the Company invested the funds acquired in the 1995 branch
acquisition. The cash payment (outflow) for the acquisition was $5.4 million and
internal loan growth produced cash outflows of $20.3 million. These cash
outflows were offset somewhat by cash inflows of $16.2 million for loans and
investments and $3.8 million in sales proceeds associated with the FMB sale.
Growth in loans was the most significant source of cash outflows in 1994 at
$26.5 million.
Net cash inflows from financing activities were $46.4 million in 1996, as
compared to $89.4 million in 1995 and $21.5 million in 1994. In 1996, cash
inflows of $7.1 million and $21.6 million resulted from increases in
noninterest-bearing and low cost deposits and time deposits, respectively. Cash
inflows of $10.4 million and $9.9 million resulted from the net change in
short-term borrowings and proceeds from long-term borrowings, respectively. Cash
outflows due to repayments of long-term borrowings totaled $2.6 million. The
most significant cash inflow from financing activities in 1995 was the time
deposits of $86.6 million and the noninterest-bearing and low cost deposits of
$18.1 million acquired in the 1995 branch acquisition. Internal deposit growth
contributed $20.9 million of cash inflows while the initial public offering of
the Company's common stock, completed in July 1995, generated $9.7 million of
cash inflows. These cash inflows were offset by cash outflows of $6.4 million
from the net change in short-term borrowings and $39.3 million from the sale of
deposits in the FMB sale. Primary sources of cash inflow in 1994 were increases
in time deposits of $18.2 million, $5.1 million caused by the net change in
short-term borrowings and $1.5 million in proceeds from long-term borrowings.
These were offset by cash outflows of $2.4 million due to decreases in
noninterest-bearing and low cost deposits and $550,000 in repayments on
long-term debt.
ASSET/LIABILITY MANAGEMENT
The mismatch between maturities and interest rate sensitivities of assets
and liabilities results in interest rate risk. Rising and falling interest rate
environments can have various impacts on net interest income, depending on the
interest rate gap (I.E., the difference between the repricing of
interest-earning assets and interest-bearing liabilities), the relative changes
in interest rates that occur when various assets and liabilities reprice,
unscheduled repayments of loans and investments, early withdrawals of deposits
and other factors. As a general rule, banks with positive interest rate gaps are
more likely to be susceptible to declines in net interest income in periods of
falling interest rates, while banks with negative interest rate gaps are more
likely to experience declines in net interest income in periods of rising
interest rates. BNC's policy is to minimize interest rate risk within policy
guidelines by generally maintaining a position within a narrow range of an
"earnings neutral position," defined as the mix of assets and liabilities that
generates a net interest margin least affected by interest rate changes. At
March 31, 1997, BNC's cumulative interest rate gap for the period of less than
one year was negative 10.62%. Therefore, assuming no change in BNC's gap
position, a rise in interest rates is likely to result in decreased net interest
income, while a decline in interest rates is likely to result in increased net
interest income.
BNC's asset/liability management objectives are to manage, to the degree
possible, its exposure to interest rate risk over both a one year planning
period and a longer-term strategic period and, at the same time, provide a
stable and steadily increasing flow of net interest income. The Company's
primary
34
<PAGE>
measurement of interest rate risk is earnings at risk, which is determined
through computerized simulation modeling. The modeling estimates changes in net
interest income in response to increases or decreases in market interest rates.
The model uses the rates and maturities of the Company's existing
interest-earning assets and interest-bearing liabilities and revises each based
on how the market interest rates move and how the specific Company product would
respond to the rates. The structuring of the Company's balance sheet is
determined by ensuring that the earnings at risk do not exceed predetermined
maximum limits. The Company's policy requires that earnings at risk do not
exceed 10% for each 100 basis point increase or decrease in rates.
The Company also uses static gap analysis to monitor interest rate risk. A
static gap matrix is prepared reflecting repricing and maturity differences
between interest-earning assets and interest-bearing liabilities within specific
time periods. The Company's gap position (see chart below) is liability
sensitive in the short-term (0 to 12 months) and asset sensitive in the longer
term (over one year). Asset sensitive means net interest margin is impacted
positively during periods of rising interest rates and negatively during periods
of falling interest rates. Liability sensitive means net interest margin is
impacted negatively during periods of rising rates and positively during periods
of falling rates. During periods of rising or falling rates, the negative
impacts of rate changes are minimized through restructuring of the Company's
balance sheet. For example, in an asset sensitive position, management's
response to increases in interest rates is to extend funding to lengthen
liabilities and to modify product offerings to shorten asset maturities. In
other words, in expectation of rising rates, BNC's marketing and sales force
would emphasize floating rate loans, including home equity loans, adjustable
rate mortgages and variable rate commercial loans and longer term certificates
of deposit and demand deposits. In addition, wholesale funding such as funding
through the FHLB and/or brokered certificates of deposit would be extended in
term.
35
<PAGE>
The following table sets forth the estimated maturity or repricing, and the
resulting interest rate gap, of BNC's interest-earnings assets and
interest-bearing liabilities at March 31, 1997. Assets and liabilities are
classified by the earliest possible repricing date or maturity, whichever comes
first.
<TABLE>
<CAPTION>
ESTIMATED MATURITY OR REPRICING AT MARCH 31, 1997
---------------------------------------------------------------
LESS THAN THREE MONTHS
THREE TO LESS ONE TO OVER
MONTHS THAN ONE YEAR FIVE YEARS FIVE YEARS TOTAL
---------- ------------- ----------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Cash equivalents.................................. $ 1,146 -- -- -- $ 1,146
Federal funds sold................................ 14,100 -- -- -- 14,100
Investment securities available for sale(1)....... 12,215 $ 10,727 $ 32,994 $ 6,017 61,953
Fixed rate loans(2)............................... 10,829 21,839 48,230 11,433 92,331
Floating rate loans(2)............................ 105,540 7,800 4,054 -- 117,394
---------- ------------- ----------- ----------- ----------
Total interest-earning assets................... $ 143,830 $ 40,366 $ 85,278 $ 17,450 $ 286,924
---------- ------------- ----------- ----------- ----------
---------- ------------- ----------- ----------- ----------
Interest-bearing liabilities(3):
NOW and money market accounts..................... $ 50,709 -- -- -- $ 50,709
Savings........................................... 8,549 -- -- -- 8,549
Time deposits under $100,000...................... 35,654 $ 54,504 $ 36,366 $ 2,214 128,738
Time deposits $100,000 and over................... 24,183 16,386 5,633 -- 46,202
Borrowings........................................ 25,717 1,185 -- -- 26,902
---------- ------------- ----------- ----------- ----------
Total interest-bearing liabilities.............. $ 144,812 $ 72,075 $ 41,999 $ 2,214 $ 261,100
---------- ------------- ----------- ----------- ----------
---------- ------------- ----------- ----------- ----------
Interest rate gap................................... $ (982) $ (31,709) $ 43,279 $ 15,236 $ 25,824
---------- ------------- ----------- ----------- ----------
---------- ------------- ----------- ----------- ----------
Cumulative interest rate gap at March 31, 1997...... $ (982) $ (32,691) $ 10,588 $ 25,824
---------- ------------- ----------- -----------
---------- ------------- ----------- -----------
Cumulative interest rate gap to total assets........ (3.19)% (10.62 )% 3.44% 8.39%
</TABLE>
- ------------------------
(1) Investment securities are generally reported in the time frame representing
the earliest of the repricing date, the call date (for callable securities),
the estimated life or the maturity date. Estimated lives of mortgage-backed
securities and collateralized mortgage obligations are based on published
industry prepayment estimates for securities with comparable weighted
average interest rates and contractual maturities.
(2) Loans are stated gross of the allowance for loan losses and are placed in
the earliest time frame in which maturity or repricing may occur.
(3) The table assumes that all savings and interest-bearing demand deposits
reprice in the earliest period presented, however, BNC's management believes
a significant portion of these accounts constitute a core component and are
generally not rate sensitive. Management's position is supported by the fact
that aggressive reductions in interest rates paid on these deposits has not
caused notable reductions in balances on the deposits.
The table does not necessarily indicate the future impact of general
interest rate movements on the Company's net interest income because the
repricing of certain assets and liabilities is discretionary and is subject to
competitive and other pressures. As a result, assets and liabilities indicated
as repricing within the same period may in fact reprice at different times and
at different rate levels.
EFFECTS OF INFLATION
Unlike most industrial companies, the assets and liabilities of financial
institutions are primarily monetary in nature. Therefore, banking organizations
do not necessarily gain or lose due to the effects of
36
<PAGE>
inflation. Changes in interest rates, which are a major determinant of a
financial service organization's profitability, do not necessarily correspond to
changes in the prices of goods and services. An analysis of a banking
organization's asset and liability structure provides the best indication of how
the organization is positioned to respond to changing interest rates and
maintain profitability.
The financial statements and supplementary financial data have been
prepared, primarily, on a historical basis which is mandated by generally
accepted accounting principles. Fluctuations in the relative value of money due
to inflation or recession are generally not considered.
RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS 128"), issued in February 1997 and effective January 1, 1998, supersedes
AICPA Accounting Principles Board Opinion No. 15, "Earnings per Share" ("APB
15") and other related accounting pronouncements and interpretations, and
specifies new computation, presentation and disclosure requirements for earnings
per share. Adoption of this standard is not expected to have a material effect
on the calculation of BNC's earnings per share.
Statement of Financial Accounting Standards No. 129, "Disclosure of
Information About Capital Structure" ("SFAS 129"), also issued in February 1997
and effective January 1, 1998, summarizes disclosure requirements pertaining to
an entity's capital structure. SFAS 129 is a compilation of several previously
issued standards and pronouncements, therefore, adoption of this standard is not
expected to have a material effect on BNC's consolidated financial statements.
37
<PAGE>
BUSINESS
GENERAL
The Company is a bank holding company headquartered in Bismarck, North
Dakota, which provides a broad range of banking and financial services to small
and mid-size businesses and to individuals through its nine full service banking
facilities in North Dakota and Minnesota. BNC operates primarily through its two
commercial banking subsidiaries, BNC-North Dakota, which is headquartered in
Bismarck and has seven additional branches in North Dakota, and BNC-Minnesota,
located in Minneapolis, Minnesota. In addition, the Company provides asset-based
commercial financing through its non-bank subsidiary, BNC Financial, located in
St. Cloud, Minnesota.
GROWTH STRATEGY
Due to its focus on customer service and local relationship banking with
small and mid-size businesses and individuals, BNC has experienced significant
growth. See "--Market Area." Management believes that the Company's
entrepreneurial approach to banking and the introduction of new products and
services will continue to attract small and mid-size businesses which often are
not of sufficient size to be of interest to the larger banks in its market
areas. Small and mid-size businesses and individuals frequently have difficulty
finding banking services that meet their specific needs and have sought, and
management believes will continue to seek, banking institutions that are more
relationship-oriented. BNC offers an increasing number of banking and
finance-related products and services, including trust services, asset
management, retirement planning, tax planning and preparation, insurance and
other private banking services. See "--Products and Services."
BNC was formed in 1987 with the objective of acquiring and improving the
performance of strategically located banks in North Dakota. As part of this
strategy, the Company has completed several acquisitions. The largest of these
acquisitions was the Company's July 1995 acquisition of seven North Dakota
branches, with aggregate deposits of approximately $104.8 million, from First
Bank fsb. In January 1996, the Company established a DE NOVO national bank in
Minneapolis, Minnesota which primarily serves small and mid-size businesses in
the Minneapolis/St. Paul metropolitan area. In addition, the Company acquired
BNC Financial, a non-bank commercial finance company that primarily engages in
asset-based lending, in May 1996.
Management believes that these initiatives have generated significant growth
for the Company. From December 31, 1992 to March 31, 1997, the Company's net
loans increased from $69.3 million to $207.7 million, total assets increased
from $118.0 million to $307.8 million and total deposits increased from $102.7
million to $253.3 million. During this same period, the Company's ratio of
nonperforming loans to total loans decreased from 5.80% to 0.22%. The Company's
goal continues to be the creation of a well-capitalized $500 million to $1
billion financial services organization focused on local relationship banking.
Efforts are ongoing to ensure that the executive management team and operating
systems are in place to achieve this goal.
MARKET AREA
BNC's primary market areas are the Bismarck/Mandan (North Dakota)
metropolitan area, the Minneapolis/St. Paul (Minnesota) metropolitan area, and
the rural communities surrounding the branch offices of BNC-North Dakota
(Linton, Ellendale, Garrison, Stanley, Kenmare, Crosby and Watford City, North
Dakota). The asset-based lending activities of BNC Financial have been conducted
primarily in Minnesota. A substantial majority of the Company's total
consolidated net loans are attributable to customers located in western North
Dakota, although in 1996, BNC-Minnesota experienced significant loan growth in
the Minneapolis/St. Paul market area. Generally, each branch draws most of its
deposits
38
<PAGE>
from its general market area. The following table presents certain information
about each of BNC's locations:
<TABLE>
<CAPTION>
MARCH 31, 1997
--------------------------
YEAR OPENED TOTAL
BANK LOCATION OR ACQUIRED DEPOSITS GROSS LOANS
- ------------------------------------------ ----------- ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
BNC-North Dakota:
Bismarck................................ 1990 $ 80,748 $ 150,333
Linton.................................. 1987 47,289 10,428
Ellendale............................... 1995 12,494 907
Garrison................................ 1995 14,838 460
Stanley................................. 1995 15,408 373
Kenmare................................. 1995 17,806 527
Crosby.................................. 1995 18,904 163
Watford City............................ 1995 15,353 139
BNC-Minnesota............................. 1996 30,460 39,401
BNC Financial............................. 1996 -- 6,519
BNCCORP (parent company).................. 1987 -- 475
------------- -----------
Total................................. $ 253,300 $ 209,725
------------- -----------
------------- -----------
</TABLE>
PRODUCTS AND SERVICES
LOANS. The Company's loans primarily consist of commercial and industrial
loans, agricultural loans, real estate mortgage loans, real estate construction
loans, consumer loans and lease financing. In allocating its assets among loans,
investments and other earning assets, BNC attempts to maximize return while
managing risk at acceptable levels. BNC's primary lending focus is on commercial
loans and owner-occupied real estate loans to small and mid-size businesses and
professionals. The Company offers a broad range of commercial and retail lending
services, including commercial revolving lines of credit, residential and
commercial real estate mortgage loans, consumer loans and equipment financing.
For a description of the types of lending activities engaged in by the Company,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Financial Condition."
Interest rates charged on loans may be fixed or variable and vary with the
degree of risk, loan term, underwriting and servicing costs, loan amount, and
extent of other banking relationships maintained with customers. Rates are
further subject to competitive pressures, the current interest rate environment,
availability of funds and government regulations. As of March 31, 1997,
approximately 56% of the loans in BNC's portfolio had interest rates that float
with BNC's base rate or some other reference rate.
The Company also offers asset-based commercial financing through BNC
Financial, the Company's non-bank subsidiary which was acquired in 1996. BNC
Financial provides asset-based working capital and term financing to small and
mid-size companies for refinancings, recapitalizations, acquisitions and
seasonal borrowing through senior loans secured by business assets such as
equipment, accounts receivable and inventory. Revolving credit facilities and
term loans are cross-collateralized. Management of BNC Financial is experienced
in this type of lending and has adopted policies and procedures to address the
risks associated with this type of lending. Asset-based lending often involves
higher risk than loans traditionally extended by banks, but often involves
higher returns.
DEPOSITS. Each of BNC's Bank branches offers the usual and customary range
of depository products provided by commercial banks, including checking, savings
and money market deposits and certificates of deposit. Deposits are insured by
the FDIC up to statutory limits. The Banks also purchase brokered deposits from
time to time when such transactions are beneficial to the Banks. See
"Management's
39
<PAGE>
Discussion and Analysis of Financial Condition and Results of
Operations--Financial Condition--Deposits and Borrowed Funds."
TRUST, PERSONAL BANKING, INVESTMENT AND INSURANCE PRODUCTS. Since January
1997, BNC-North Dakota's newly established Financial Services division has been
providing a wide array of trust, personal banking, investment and insurance
services for corporations and individuals. Management believes the introduction
of these new services enhances BNC's ability to meet the banking and financial
needs of its current customer base and establish new customer relationships in
its markets. The new division provides services ranging from fiduciary and
personal trust services to tax planning and preparation, payroll processing,
financial planning, retirement planning, employee stock option plans, employee
benefit plans, individual retirement accounts ("IRAs"), including custodial
self-directed IRAs, asset preservation, charitable giving and related services.
Management views the establishment of this new division as an opportunity to
solidify customer relationships by enhancing BNC's ability to identify and meet
a wide variety of customer financial needs.
CONSULTING SERVICES. In addition to its asset-based lending program, BNC
Financial manages a consulting services division which provides a number of
services including pre-funding due diligence, collateral review, problem loan
consulting, bankruptcy support and asset valuation.
INVESTMENT PORTFOLIO. The purpose of the Company's investment portfolio is
to provide a source of earnings and, secondarily, to manage liquidity.
Investments are centrally managed in order to aid in compliance with federal
laws and regulations, which place certain restrictions on the amounts and types
of investments BNC may hold. BNC maintains, through the President of BNC-North
Dakota, an investment grade portfolio oriented toward U.S. Treasury securities,
U.S. government agency securities and a small amount of investment grade
obligations of state and political subdivisions. In managing its interest rate
exposure, the Company also invests in mortgage-backed securities and floating
rate collateralized mortgage obligations. Investment securities totaled $62.0
million as of March 31, 1997. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Financial Condition--Investment
Securities."
COMPETITION
The deregulation of the banking industry, the increasing number of state
laws that permit multi-bank holding companies, and the increasing availability
of nationwide interstate banking have heightened the level of competition in an
already intensely competitive market. The North Dakota and Minnesota market
areas are highly competitive banking environments. Competition is encountered
primarily in seeking deposits and in obtaining loan customers. Principal
competitors include multi-regional financial institutions such as Norwest
Corporation, First Bank System, Inc. and Community First Bankshares, Inc. as
well as large and small thrifts, independent banks, credit unions and many
national and regional brokerage houses. BNC also competes with other non-bank
financial institutions, including retail stores that maintain their own credit
programs and government agencies that make low cost or guaranteed loans
available to certain borrowers. Some of these competitors have substantially
greater resources and lending limits than BNC, and may offer certain services
that BNC does not provide. In addition, some of the non-bank financial
institutions that compete with BNC are not subject to the extensive federal
regulations that govern BNC. Management believes that many competitors have
emphasized retail banking and financial services, leaving the small and mid-size
business market underserved. This has allowed BNC to compete effectively by
emphasizing customer service, establishing long-term customer relationships and
providing services meeting the needs of such businesses and the individuals
associated with them. The banking business is highly competitive, and the
profitability of the Company will depend on its ability to compete in its market
areas.
40
<PAGE>
PROPERTIES
The principal offices of BNC and BNC-North Dakota are located in BNC's main
office building at 322 East Main, Bismarck, North Dakota. The building is owned
by BNC-North Dakota. BNC-North Dakota also owns a branch office located at 219
South 3rd Street in Bismarck. In early 1997, the Company purchased an office
building at 116 North 4th Street in Bismarck, approximately one half block from
the principal office building. Certain bank and holding company departments will
be housed at this facility upon expected completion of remodeling during the
second quarter of 1997. BNC also owns its banking facilities at Linton, Crosby,
Ellendale, Kenmare and Stanley, North Dakota.
Facilities in Garrison and Watford City, North Dakota and additional
facilities in Bismarck are leased. The Garrison and Watford City leases expire
in June 2000 and April 1998, respectively. Office facilities in Bismarck are
being leased on a month to month basis pending completion of remodeling at the
4th Street location in Bismarck. The land at BNC-North Dakota's branch office on
South 3rd Street is also leased. This lease expires in 2006.
The Company also leases the facilities occupied by BNC-Minnesota at 333
South Seventh Street, Minneapolis, Minnesota. Leases on this property expire in
June 2001. Facilities housing BNC Financial at 4150 South 2nd Street, St. Cloud,
Minnesota are leased. The lease on this property expires in April 2002.
BNC owns land in north Bismarck and intends to construct a branch office for
BNC-North Dakota on this location during 1997. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Financial
Condition--Capital Resources and Expenditures."
All owned and leased properties are considered in good operating condition
and are believed adequate for the Company's present and foreseeable future
operations. BNC does not anticipate any difficulty in leasing additional
suitable space upon expiration of present lease terms.
LEGAL PROCEEDINGS
BNC is currently not a party to any material legal proceedings.
Periodically, and in the ordinary course of business, various claims and
lawsuits which are incidental to BNC's business may be brought against or by
BNC, such as claims to enforce liens, condemnation proceedings on properties in
which BNC holds security interests, claims involving the making and servicing of
real property loans and other issues incidental to the Company's business.
EMPLOYEES
At March 31, 1997, BNC had approximately 132 employees, including 118
full-time employees. None of BNC's employees is covered by a collective
bargaining agreement and management believes that its relationship with its
employees is good.
41
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information, as of April 1, 1997,
with respect to BNC's directors and executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------------- --- ---------------------------------------------------
<S> <C> <C>
Tracy J. Scott............................... 49 Chairman of the Board, Chief Executive Officer and
Director
Gregory K. Cleveland......................... 49 President, Chief Financial Officer and Director
John A. Malmberg............................. 52 President of BNC-North Dakota and Director
Thomas J. Resch.............................. 50 President and Chief Executive Officer of
BNC-Minnesota and Director
Brad J. Scott................................ 38 Executive Vice President of Corporate
Finance--BNC-North Dakota and Director
Jeffrey A. Reed.............................. 42 President and Chief Executive Officer of BNC
Financial
Brenda L. Rebel.............................. 38 Vice President--Corporate Controller
John A. Hipp, M.D............................ 50 Director
Richard M. Johnsen, Jr....................... 52 Director
John M. Shaffer.............................. 50 Director
Jerry R. Woodcox............................. 54 Director
</TABLE>
There are no family relationships among any of the directors and executive
officers of BNC.
TRACY J. SCOTT has served as Chairman of the Board, Chief Executive Officer
and a director of BNC since he and Gregory K. Cleveland founded the Company in
1987. He served as the President of BNC-North Dakota from September 1990 to
March 1993. Mr. Scott also served as the President of FMB from 1985 to 1990 and
as a loan officer of FMB from 1982 to 1985. Prior to 1982, Mr. Scott, a
certified public accountant, practiced accounting at an accounting firm that he
established in 1972. He was previously employed by Arthur Young and Co. from
1969 to 1972. Mr. Scott holds a B.S. in business administration with a minor in
accounting from Dickinson State College.
GREGORY K. CLEVELAND has served as an officer and director of BNC since its
inception in 1987. He has served as Chief Financial Officer of BNC since
February 1994 and as President of BNC since March 1995. From 1978 to 1996, Mr.
Cleveland, a certified public accountant, was a partner of Gregory K. Cleveland
& Company, an accounting firm which he established that was acquired by the
Company in December 1996. See "Certain Transactions." From 1974 to 1977, Mr.
Cleveland served as Vice President--Taxation for First & Merchants Corporation,
a bank holding company in Virginia that was the predecessor of Sovran Bank
Corporation. Prior to that time, Mr. Cleveland was employed by Arthur Andersen
LLP from 1970 to 1974. He holds a B.S. in business administration with a major
in accounting from the University of North Dakota.
JOHN A. MALMBERG has served as President of BNC-North Dakota and a director
since April 1993. Mr. Malmberg has over 20 years of experience in the banking
industry. He served as Executive Vice President and Chief Operating Officer of
the Bank of North Dakota from February 1989 to December 1992 at which time he
became Acting President and Chief Executive Officer, a position he held until
42
<PAGE>
April 1993. From 1977 to 1989, Mr. Malmberg served in various capacities for
First American National Bank, Wausau, Wisconsin, including a broad range of
senior managerial positions. He also served as a Trust Officer for American
National Bank, St. Paul, Minnesota from 1973 to 1977. Mr. Malmberg holds a B.S.
degree from the University of Minnesota and an M.B.A. from Golden Gate
University, San Francisco and is a graduate of the Stonier Graduate School of
Banking, Rutgers University.
THOMAS J. RESCH became President and Chief Executive Officer of
BNC-Minnesota in January 1996 and has been a director of BNC since June 1995.
From June 1995 to January 1996, he served as Senior Vice President--Loan
Production of BNC-North Dakota. Mr. Resch has over 20 years of experience in the
banking industry. He served as Vice President at National City Bank of
Minneapolis from March 1989 to May 1995 and as Department Manager of the
Business Banking division. From 1985 to 1989, Mr. Resch served as Vice President
of Midwest Federal and as Manager of the St. Paul Corporate Banking division.
From 1984 to 1985 he served as Vice President of United Financial Savings Bank.
Mr. Resch served in various capacities for American National Bank of St. Paul
from 1972 to 1984, including Managing Vice President of Commercial Lending. He
holds a B.S. degree from the University of Minnesota and is a graduate of the
Stonier Graduate School of Banking, Rutgers University.
BRAD J. SCOTT has served as BNC-North Dakota's Executive Vice President of
Corporate Finance since January 1997. He served as BNC's Chief Credit Officer
between July 1992 and January 1997 and has been a director since January 1993.
He joined BNC in January 1991 as the Senior Vice President of Commercial Lending
at BNC-North Dakota. Mr. Scott previously worked with the Bismarck branch of
First Bank, N.A. where he served as a Vice President in the Commercial Loan
Department from November 1986 to December 1990 and as Agricultural Loan Manager
from 1984 to 1986. He also served as a loan officer for Norwest Bank in
Marshall, Minnesota from 1981 to 1984. Mr. Scott holds an A.S. degree in
agricultural business from Bismarck State College and a B.S. degree in
agricultural economics from North Dakota State University.
JEFFREY A. REED became President and Chief Executive Officer of BNC
Financial in May 1996. Mr. Reed has been involved in the banking/commercial
finance industry since 1978. From March 1995 to April 1996, Mr. Reed served as
President of Cambridge Bank Professionals, LLC, a bank credit consulting firm
whose assets were acquired by BNC Financial in May 1996. See "Certain
Transactions." He served as Vice President and Manager of the Special
Loans/Collateral Audit Division at National City Bank of Minneapolis from
December 1991 to February 1995. From January 1989 to December 1991, Mr. Reed was
a self-employed consultant to commercial banks in the area of problem loan
management. Mr. Reed served as a Manager of the Business Investigations Service
Unit and Specialized Lender Services Unit during his employment with Coopers &
Lybrand LLP from October 1987 to January 1989. From November 1985 to October
1987, he served as Vice President and Team Leader, Special Loans Division of
Norwest Bank, Minneapolis. Mr. Reed also held positions with Barclays American
Corporation (Commercial Loan Officer, Manager of Work-Out Department) and
Norwest Business Credit, Inc. (Assistant Vice President and Audit Manager.) Mr.
Reed holds a B.S. degree from Bemidji State University.
BRENDA L. REBEL, a certified public accountant, has served as Vice
President--Corporate Controller since August 1995. She served as Vice
President--Regulatory Compliance from June 1991 to July 1995. From January 1990
to May 1991, she served as Financial Reporting Manager of Comprecare Health Care
Services, Inc., Aurora, Colorado. From 1988 to 1990, Ms. Rebel was employed by
Arthur Andersen LLP, Denver, Colorado. She holds a B.S. degree in social and
behavioral sciences from the University of Mary and a Master of Accountancy from
the University of North Dakota.
JOHN A. HIPP, M.D., who has been a director since 1988, has practiced
medicine in Bismarck since 1980 as a principal in Pathology Consultants, a
professional corporation specializing in medical laboratory and computer
consulting services. Dr. Hipp is board certified in anatomic and clinical
pathology by the American Board of Pathology. He holds a B.A. in history and
natural science and a B.S. in medicine from
43
<PAGE>
the University of North Dakota. Dr. Hipp earned his M.D., C.M. degree from the
Faculty of Medicine, McGill University.
RICHARD M. JOHNSEN, JR., who has been a director since June 1995, has served
since 1979 as Chairman of the Board and Chief Executive Officer of Johnsen
Trailer Sales, Inc., which sells and services trailers in Bismarck and Fargo,
North Dakota. Since 1990, Mr. Johnsen has also been a partner in Johnsen Real
Estate Partnership, which owns and operates rental property in Bismarck and
Fargo, North Dakota. He holds a B.S. degree in management from the University of
North Dakota.
JOHN M. SHAFFER, who has been a director since June 1995, has served as
President of Atlas, Inc., a ready-mix concrete producer and concrete
construction company based in Bismarck, North Dakota. Since 1979, Mr. Shaffer
has also been a partner in Capital Investments, which invests in property and
equipment in North Dakota. He attended Bismarck Junior College for 1 1/2 years
and Dickinson State College for 1 1/2 years.
JERRY R. WOODCOX, who has been a director since June 1995, has served since
1970 as President of Arrowhead Cleaners and Laundry, Inc., a laundry and dry
cleaning services business operating in Bismarck, North Dakota. He holds a B.S.
degree in industrial engineering from North Dakota State University.
DIRECTOR COMPENSATION
Each director who is not an employee of BNC is paid a director's fee of
$7,200 per year and fees of $500 for each committee meeting attended. Directors
are reimbursed for expenses incurred in attending board and committee meetings.
COMMITTEES
BNC's Board of Directors has an Executive Committee, Audit Committee and
Compensation Committee. The members of the Executive Committee are directors
Tracy J. Scott (Chairperson), Gregory K. Cleveland, Brad J. Scott, John A.
Malmberg and Thomas J. Resch as well as Michael Miller, the Executive Vice
President of Lending at BNC-North Dakota. The Executive Committee is authorized
to exercise all powers of the Board of Directors to the extent permitted by
Delaware law. All actions taken by the Executive Committee are submitted to the
full Board of Directors for ratification.
The Audit Committee, on which Messrs. Johnsen and Shaffer serve, is
responsible for (i) making recommendations to the Board of Directors concerning
the engagement of independent public accountants, (ii) consulting with the
independent public accountants with regard to the plan of audit, (iii)
consulting directly with BNC's Chief Financial Officer on any matter that the
Audit Committee or the Chief Financial Officer deems appropriate in connection
with carrying out the audit, (iv) reviewing the results of audits of BNC by its
independent public accountants and certain regulatory agencies, (v) discussing
audit recommendations with management and reporting results of its reviews to
the Board of Directors, (vi) reviewing all related party transactions and all
other potential conflict of interests situations, and (vii) performing such
other functions as may be prescribed by the Board of Directors.
The Compensation Committee is responsible for administering BNC's 1995 Stock
Incentive Plan and Incentive Bonus Plan and performing such other functions as
may be prescribed by the Board of Directors. The current members of the
Compensation Committee are Messrs. Hipp and Woodcox.
EXECUTIVE COMPENSATION
The following table summarizes the compensation that BNC paid to its chief
executive officer and each of its four most highly compensated executive
officers (the "Named Executive Officers") for each of the years ended December
31, 1996, 1995 and 1994.
44
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
AWARDS
ANNUAL COMPENSATION --------------------------
---------------------------------------- RESTRICTED SECURITIES
NAME AND ALL OTHER STOCK UNDERLYING
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) AWARDS(2) OPTIONS
- ---------------------------------------- --------- ---------- --------- ----------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Tracy J. Scott,......................... 1996 $ 178,000 -- $ 6,247 -- --
Chairman of the Board and 1995 156,000 -- 4,902 $ 75,080 6,034
Chief Executive Officer 1994 156,000 $ 24,305 5,205 -- --
Gregory K. Cleveland,................... 1996 150,000 -- 5,997 -- --
President and Chief Financial 1995 128,000 -- 4,235 72,570 5,657
Officer 1994 128,000 19,942 4,432 -- --
John A. Malmberg,....................... 1996 140,000 -- 5,047 -- --
President of BNC-North Dakota 1995 140,000 -- 5,022 -- 3,226
1994 140,000 20,054 2,954 -- --
Thomas J. Resch,........................ 1996 123,333 -- 5,047 -- --
President and Chief Executive 1995 58,333 30,000 117 -- 3,226
Officer of BNC-Minnesota(3)
Brad J. Scott,.......................... 1996 120,000 -- 5,043 -- --
Executive Vice President of 1995 100,000 27,750 5,006 25,330 3,813
Corporate Finance of BNC-North Dakota 1994 72,000 148,720 5,171 -- --
</TABLE>
- ------------------------
(1) Comprised of (i) the Company's matching contributions to the Company's
401(k) Plan in the following amounts: Mr. T. Scott ($4,750 in 1996, $4,500
in 1995 and $4,701 in 1994), Mr. Cleveland ($4,500 in 1996, $3,840 in 1995
and $3,928 in 1994), Mr. B. Scott ($4,750 in 1996, $4,620 in 1995 and $4,840
in 1994), Mr. Malmberg ($4,750 in 1996, $4,620 in 1995 and $2,450 in 1994)
and Mr. Resch ($4,750 in 1996); and (ii) premium payments in the following
amounts for life insurance policies providing death benefits to the
executive officers' beneficiaries: Mr. T. Scott ($1,497 in 1996, $402 in
1995 and $504 in 1994), Mr. Cleveland ($1,497 in 1996, $395 in 1995 and $504
in 1994), Mr. B. Scott ($293 in 1996, $386 in 1995 and $331 in 1994), Mr.
Malmberg ($297 in 1996, $402 in 1995 and $504 in 1994) and Mr. Resch ($297
in 1996 and $117 in 1995).
(2) As of December 31, 1996, the Company had outstanding a total of 20,000
restricted shares valued at $250,000 (based on the fair market value of the
Company's Common Stock at December 31, 1996 of $12.50 per share). The
restricted shares will vest in 33 1/3% increments on July 10, 1998, 1999 and
2000. The Company does not plan to pay dividends on its restricted shares.
(3) Mr. Resch joined the Company in June 1995.
------------------------
OPTIONS
There were no stock options granted during the year ended December 31, 1996
to the Named Executive Officers. The number and value of unexercised stock
options held by the Named Executive Officers at December 31, 1996 is set forth
in the following table. No stock options were exercised during the year ended
December 31, 1996.
45
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
DECEMBER 31, 1996 AT DECEMBER 31, 1996(1)
------------------------------ --------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------------ ------------- --------------- ----------- -------------
<S> <C> <C> <C> <C>
Tracy J. Scott.................................. 2,414 3,620 $ 6,035 $ 9,050
Greg K. Cleveland............................... 2,263 3,394 5,658 8,485
John A. Malmberg................................ 1,290 1,936 3,225 4,840
Thomas J. Resch................................. 1,290 1,936 3,225 4,840
Brad J. Scott................................... 1,525 2,288 3,813 5,720
</TABLE>
- ------------------------
(1) The value of unexercised, in-the-money options is calculated as the excess
of the market value of Common Stock at December 31, 1996 ($12.50) over the
option price. The values of unexercised in-the-money stock options at
December 31, 1996 shown above are presented pursuant to the rules of the
Commission. The actual amount, if any, realized upon exercise of stock
options will depend upon the market value of the Common Stock relative to
the exercise price per share of Common Stock of the stock option at the time
the stock option is exercised.
------------------------
STOCK INCENTIVE PLAN
In 1995, BNC adopted the 1995 Stock Incentive Plan (the "Stock Plan") to
provide long-term incentives to its key employees, including officers and
directors who are employees of BNC (the "Eligible Employees"). Under the Stock
Plan, which is administered by the Compensation Committee of the Board (the
"Committee"), BNC may grant Eligible Employees incentive stock options,
non-qualified stock options, restricted stock, stock awards or any combination
thereof (the "Incentives"). The Committee establishes the exercise price of any
stock options granted under the Stock Plan, provided that the exercise price may
not be less than the fair market value of a share of Common Stock on the date of
grant.
A total of 250,000 shares of Common Stock are available for issuance under
the Stock Plan. Incentives with respect to no more than 50,000 shares of Common
Stock may be granted to any single Eligible Employee in one calendar year.
Proportionate adjustments will be made to the number of shares of Common Stock
subject to the Stock Plan, including the shares subject to outstanding
Incentives, in the event of any recapitalization, stock dividend, stock split,
combination of shares or other change in the Common Stock. In the event of such
adjustments, the purchase price of any outstanding option will be adjusted as
and to the extent appropriate, in the reasonable discretion of the Committee, to
provide participants with the same relative rights before and after such
adjustment.
All outstanding Incentives will automatically become exercisable and fully
vested and all performance criteria will be deemed to be waived by the Company
upon (a) a reorganization, merger or consolidation of BNC in which BNC is not
the surviving entity, (b) the sale of all or substantially all of the assets of
BNC, (c) a liquidation or dissolution of BNC, (d) a person or group of persons,
other than any employee benefit plan of BNC, becoming the beneficial owner of
30% or more of BNC's voting stock or (e) the replacement of a majority of BNC's
Board in a contested election (a "Significant Transaction"). The Committee also
has the authority to take several actions regarding outstanding Incentives upon
the occurrence of a Significant Transaction, including requiring that
outstanding options remain exercisable only for a limited time, providing for
mandatory conversion of outstanding options in exchange for either a cash
payment or Common Stock, making equitable adjustments to Incentives or providing
that outstanding options will become options relating to securities to which a
participant would have been entitled in connection with the Significant
Transaction if the options had been exercised.
46
<PAGE>
INCENTIVE BONUS PLAN
In 1995, BNC adopted an Incentive Bonus Plan (the "Incentive Plan") to
provide annual incentive cash bonuses to BNC's employees. Under the Incentive
Plan, which is administered solely by the Committee, each full-time employee of
BNC other than loan officers is eligible to receive a cash bonus based on a
percentage of his or her annual salary to be calculated according to a formula
based on elements of the Company's performance during the annual performance
period. Officers designated by the Committee are eligible to receive an
additional annual cash bonus based on a percentage of his or her annual salary
according to a formula based on an increase in the Company's stock price during
the annual performance period.
EMPLOYMENT AGREEMENTS
BNC and each of Messrs. T. Scott, Cleveland, B. Scott and Resch (the
"Executives") have entered into an employment agreement that provides for
minimum annual salaries of $156,000, $128,000, $120,000, and $140,000,
respectively, throughout the term of the agreement, and an annual incentive
bonus as may from time to time be fixed by the Committee. In addition, Mr. Resch
received a $30,000 bonus upon entering into his agreement. Under the agreements,
the Executives will also be provided with benefits under any employee benefit
plan maintained by BNC for its employees generally, or for its senior executive
officers in particular, on the same terms as are applicable to other senior
executives of BNC. The term of the employment agreements will continue until
June 1, 1998, unless earlier terminated as described below. Thereafter, the
employment agreements automatically renew for consecutive one year terms unless
either party terminates the agreement on 90 days' prior notice.
Each employment agreement provides for the termination of the Executive's
employment (i) upon the Executive's death; (ii) by the Company upon the
Executive's disability; (iii) by the Company for cause which includes willful
and continuing failure to perform the Executive's duties, conviction of a felony
or willful engaging in gross misconduct injurious to the Company; provided,
however, that prior to termination, three-fourths of the entire Board of
Directors, not including the Executive, must find that the Executive was guilty
of such conduct; (iv) by the Executive for good reason, which includes changing
the Executive's current position with the Company or diminishing the duties,
responsibilities or position of the Executive; (v) by either the Company or the
Executive for a material breach not cured within thirty days; or (vi) upon the
occurrence of a "change in control" of BNC. Under the agreement, a "change in
control" occurs if (a) any person or group of persons (other than an employee
benefit plan of BNC) acquires the beneficial ownership of 30% or more of BNC's
Common Stock, excluding certain acquisitions approved by BNC's Board of
Directors, or (b) a majority of BNC's Board is replaced within any two year
period by directors not approved by two-thirds of the Board. If the Executive
terminates his employment with BNC for other than good reason, the Executive
will be prohibited from competing with BNC for a two year period following such
termination.
Upon termination due to death or disability, the Company will pay the
Executive, all compensation owing through the date of termination, plus any
deferred compensation and accrued vacation (the "Accrued Obligations") and
benefits ("Other Benefits"), reduced by the amount of any disability benefits
received, if applicable. Upon termination by the Company for cause or for
termination by the Executive for other than good reason, the Executive will be
entitled to all compensation owing through the date of termination and Other
Benefits. Upon termination by the Executive for good reason, due to a change in
control or due to a breach of the agreement by the Company, the Executive is
entitled to all compensation owing through the date of termination plus three
times his current compensation and benefits, office space, secretarial
assistance and other facilities and services for a period of three years.
47
<PAGE>
LIMITATION OF DIRECTORS' LIABILITY AND INDEMNIFICATION
In accordance with the Delaware General Corporation Law, BNC's Certificate
of Incorporation (the "Certificate") contains provisions eliminating the
personal liability of the directors to BNC and its stockholders for monetary
damages for breaches of their fiduciary duties as directors to the fullest
extent permitted by Delaware law. By virtue of these provisions, under current
Delaware law a director of BNC will not be personally liable for monetary
damages for breach of his or her fiduciary duty except for liability for (a)
breach of his or her duty of loyalty to BNC or to its stockholders, (b) acts or
omissions not in good faith or that involve intentional misconduct or a knowing
violation of law, (c) dividends or stock repurchases or redemptions that are
unlawful under Delaware law, and (d) any transaction from which he or she
receives an improper personal benefit. In addition, the Certificate provides
that if Delaware law is amended to authorize the further elimination or
limitation of the liability of a director, then the liability of the directors
shall be eliminated or limited to the fullest extent permitted by Delaware law,
as amended. These provisions pertain only to breaches of duty by directors as
directors and not in any other corporate capacity, such as officers, and limit
liability only for breaches of fiduciary duties under Delaware corporate law and
not for violations of other laws such as the federal securities laws.
BNC's Bylaws require BNC to indemnify its officers and directors against
expenses and costs, judgments, settlements and fines incurred in the defense of
any claim, including any claim brought by or in the right of BNC, to which they
were made parties by reason of being or having been officers or directors.
In addition, each of BNC's directors has entered into an indemnity agreement
that provides that BNC will indemnify the directors against any costs and
expenses, judgments, settlements and fines incurred in connection with any claim
involving a director by reason of his position as a director; provided that the
director meets certain standards of conduct for claims that (i) have been
successfully defended or (ii) two impartial directors have determined that, with
respect to the conduct giving rise to such claim, the officer or director acted
in good faith. No indemnification may be made, however, for claims in which the
officer or director has been adjudicated in a final judgment to be liable to BNC
except to the extent that the court finds indemnification to be proper.
Insofar as indemnification for liabilities arising under the Securities Act
of 1993, as amended (the "Securities Act") may be permitted to directors,
officers and controlling persons of BNC pursuant to the foregoing provisions, or
otherwise, BNC has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
48
<PAGE>
CERTAIN TRANSACTIONS
In January 1997, BNC-North Dakota acquired all of the outstanding common
stock of the J.D. Meier Insurance Agency (the "Agency"). Each of Messrs. T.
Scott, Cleveland and David A. Erickson, a 5% stockholder of the Company, owned
25% of the common stock in the Agency. The purchase price was determined by an
independent appraisal resulting in an approximate total purchase price for
Messrs. T. Scott, Cleveland and Erickson's shares of $26,000. The Agency is
currently operating as a subsidiary of BNC-North Dakota as a general insurance
agency.
In December 1996, BNC-North Dakota acquired the accounting firm of Gregory
K. Cleveland & Co., Bismarck, North Dakota (the "Accounting Firm"). The
Accounting Firm was owned by Mr. Cleveland. The purchase price for the
Accounting Firm was approximately $368,000 and was determined by an independent
appraisal. Employees of the Accounting Firm now staff the newly established
trust and private banking division of BNC-North Dakota.
In May 1996, the Company, through BNC Financial, acquired for $85,000 the
assets of Cambridge Bank Professionals, LLC, a bank credit consulting firm in
part owned by Jeffrey A. Reed, who became an executive officer of the Company
after the acquisition. These assets now are used in the operations of BNC
Financial.
In October 1995, the Company sold FMB to Community First Bankshares, Inc.
Messrs T. Scott, Cleveland and Erickson beneficially owned 113, 112 and 50
shares of common stock of FMB, respectively, which represented 2.83%, 2.80% and
1.25% of the outstanding shares of common stock of FMB, respectively. Messrs.
Scott, Cleveland and Erickson received $121,475, $120,400 and $53,750,
respectively, in the sale of FMB.
The executive officers, directors and principal stockholders of BNC and
members of their immediate families and businesses in which they hold
controlling interests are customers of the Banks, and it is anticipated that
such parties will continue to be customers of the Banks in the future. All
outstanding loans and extensions of credit by the Banks to these parties were
made in the ordinary course of business in accordance with applicable laws and
regulations and on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other unaffiliated persons, and in the opinion of management do not involve more
than the normal risk of collectibility or present other unfavorable features. At
March 31, 1997, the aggregate balance of the Banks' loans and advances under
existing lines of credit to these parties was approximately $397,000 or 0.20% of
the Banks' total loans.
49
<PAGE>
SUPERVISION AND REGULATION
BNC and the Banks are extensively regulated under federal and state laws and
regulations. These laws and regulations are primarily intended to protect
depositors and the federal deposit insurance funds, not investors in the
securities of BNC. The following information summarizes certain material
statutes and regulations affecting BNC and the Banks and is qualified in its
entirety by reference to the particular statutory and regulatory provisions. Any
change in applicable laws, regulations or regulatory policies may have a
material effect on the business, operations and prospects of BNC and the Banks.
The Company is unable to predict the nature or extent of the effects that fiscal
or monetary policies, economic controls or new federal or state legislation may
have on its business and earnings in the future.
BNC
GENERAL. BNC is a bank holding company registered under the Bank Holding
Company Act of 1956, as amended ("BHCA"), and is subject to regulation,
supervision and examination by the Board of Governors of the Federal Reserve
System ("FRB"). The BHCA and other federal laws subject bank holding companies
to particular restrictions on the types of activities in which they may engage,
and to a range of supervisory requirements and activities, including regulatory
enforcement actions for violations of laws and regulations. The Company is
required to file quarterly and annual reports with the FRB, and such additional
information as the FRB may require pursuant to the BHCA. The FRB may examine BNC
or any of its subsidiaries, and charge BNC for the cost of such an examination.
ACQUISITIONS. As a bank holding company, BNC is required to obtain the
prior approval of the FRB before acquiring control of more than 5% of the voting
shares or substantially all the assets of another bank holding company or
merging with another bank holding company. In reviewing acquisition
applications, the FRB considers the competitive effects of the proposed
transaction, and managerial, financial, capital and other factors, including the
record of performance of the applicant and the bank or banks to be acquired
under the Community Reinvestment Act of 1977 ("CRA"). See "--The
Banks--Community Reinvestment Act."
PERMISSIBLE ACTIVITIES. A bank holding company may not engage in, or
acquire direct or indirect control of more than 5% of the voting shares of any
company engaged in a non-banking activity, unless such activity has been
determined by the FRB to be closely related to banking or managing banks. The
FRB has identified certain non-banking activities in which a bank holding
company may engage without notice or prior approval by the FRB, such as making
or servicing loans and certain types of leases, engaging in certain insurance
and discount brokerage activities, performing certain data processing services,
acting as a fiduciary or investment or financial advisor in certain
circumstances, and making investments in certain corporations or projects
designed primarily to promote community welfare.
SAFE AND SOUND BANKING PRACTICES. Activities and operations of bank holding
companies are generally subject to FRB review for unsafe and unsound banking
practices. Pursuant to such authority, the FRB may require a bank holding
company to seek FRB approval before the bank holding company may take certain
actions and cause a bank holding company to take certain steps to prevent unsafe
and unsound banking practices, such as requiring a bank holding company to make
funds available to its banking subsidiaries if the FRB believes it prudent to do
so.
ANTI-TYING RESTRICTIONS. Bank holding companies and their affiliates are
prohibited from tying the provision of certain services, such as extensions of
credit, to other services offered by a holding company or its affiliates.
CAPITAL ADEQUACY. The FRB monitors on a consolidated basis the capital
adequacy of bank holding companies by using a combination of risk-based and
leverage ratios. Failure to meet the capital guidelines may result in
supervisory or enforcement actions by the FRB. Under the risk-based capital
guidelines, different categories of assets are assigned different risk weights,
based generally on the perceived credit
50
<PAGE>
risk of the asset. These risk weights are multiplied by corresponding asset
balances to determine a "risk-weighted" asset base. For purposes of the
risk-based capital guidelines, total capital is defined as the sum of "Tier 1"
and "Tier 2" capital elements, with Tier 2 capital being limited to 100% of Tier
1 capital. Tier 1 capital includes, with certain restrictions, common stock,
retained earnings, perpetual preferred stock (no more than 25% of Tier 1 capital
being comprised of cumulative preferred stock) and minority interests in
consolidated subsidiaries, less most intangible assets. Tier 2 capital includes,
with certain limitations, perpetual preferred stock not included in Tier 1
capital, certain maturing capital instruments and the allowance for loan and
lease losses (limited to 1.25% of risk-weighted assets). The Notes offered
hereby are expected to qualify as Tier 2 capital. The regulatory guidelines
require a minimum ratio of total capital to risk-weighted assets of 8% (of which
at least 4% should be in the form of Tier 1 capital). The FRB has also
implemented a leverage ratio, which is defined to be a company's Tier 1 capital
divided by its average total consolidated assets. The minimum required leverage
ratio for top-rated bank holding companies is 3%, but most companies are
required to maintain an additional cushion of at least 100 to 200 basis points.
The table below sets forth BNC's ratios of (i) total capital to
risk-weighted assets, (ii) Tier 1 capital to risk-weighted assets and (iii) Tier
1 leverage ratio, at March 31, 1997 and as adjusted to give effect to the
estimated net proceeds from the offering.
<TABLE>
<CAPTION>
AT MARCH 31, 1997
-----------------------------------------
MINIMUM
RATIO ACTUAL AS ADJUSTED REQUIRED
- --------------------------------------------------------------------------------- ----------- ------------- -------------
<S> <C> <C> <C>
Total capital to risk-weighted assets............................................ 8.8% 14.8% 8.0%
Tier 1 capital to risk-weighted assets........................................... 8.1 8.1 4.0
Tier 1 leverage ratio............................................................ 6.6 6.6 3.0
</TABLE>
------------------------
SUPPORT OF BANKS. As discussed below, the Banks are also subject to capital
adequacy requirements. BNC could be required to guarantee the capital
restoration plan of one or more of its Banks, should such Banks become
"undercapitalized," as defined in the banking laws and regulations. See "--The
Banks-- Capital Adequacy." BNC's maximum liability under any such guarantee
would be the lesser of 5% of the undercapitalized Bank's total assets at the
time it became undercapitalized or the amount necessary to bring the Bank into
compliance with the capital plan. The FRB also has stated that bank holding
companies are subject to the "source of strength doctrine," which requires bank
holding companies to serve as a source of "financial and managerial" strength to
their subsidiary banks.
Federal banking regulators are required to take "prompt corrective action"
with respect to capital-deficient institutions. In addition to requiring the
submission of a capital restoration plan, there are broad restrictions on
certain activities of undercapitalized institutions involving asset growth,
acquisitions, branch establishment, and expansion into new lines of business.
With certain exceptions, an insured depository institution is prohibited from
making capital distributions, including dividends, and is prohibited from paying
management fees to control persons if the institution would be undercapitalized
after any such distribution or payment.
THE BANKS
GENERAL. As national banking associations, the Banks are principally
supervised, examined and regulated by the OCC. The OCC regularly examines such
areas as capital adequacy, loss reserves, loan portfolio, investments and
management practices. The Banks must also furnish quarterly and annual reports
to the OCC, and the OCC may exercise cease and desist and other enforcement
powers over the Banks if their actions represent unsafe or unsound practices or
violations of law. Since the deposits of the Banks are insured by the FDIC
through the BIF and SAIF, as applicable, the Banks are also subject to
regulations and supervision by the FDIC. The Banks are also members of the
Federal Reserve System.
51
<PAGE>
COMMUNITY REINVESTMENT ACT. The CRA requires the Banks to adequately meet
the credit needs of their communities. The CRA allows regulators to turn down an
applicant seeking, among other things, to make an acquisition or establish a
branch unless it has performed satisfactorily under the CRA. Federal regulators
regularly conduct CRA examinations to assess the performance of financial
institutions. In each of the last two examinations, the Banks received
satisfactory ratings.
TRANSACTIONS WITH AFFILIATES. The Banks are subject to Section 23A of the
Federal Reserve Act, which limits the amount of loans to, investments in, and
certain other transactions with, affiliates of the Banks, including BNC,
requires certain levels of collateral for such loans or transactions, and limits
the amount of advances to third parties that are collateralized by the
securities or obligations of affiliates, unless the affiliate is a bank and is
at least 80% owned by BNC. If the affiliate is a bank and 80% or greater
ownership exists, the transactions are generally exempted from these
restrictions, except as to "low quality" assets, as defined under the Federal
Reserve Act, provided that such transaction is consistent with safe and sound
banking practices. In addition, Section 23A generally limits transactions with
affiliates of a bank to 10% of the bank's capital and surplus and generally
limits all transactions with affiliates to 20% of the bank's capital and
surplus.
Section 23B of the Federal Reserve Act requires that certain transactions
between any of the Banks and their non-bank affiliates must be on substantially
the same terms, or at least as favorable to the Banks, as those prevailing at
the time for comparable transactions with or involving nonaffiliated companies
or, in the absence of comparable transactions, on terms and under circumstances,
including credit standards, that in good faith would be offered to or would
apply to nonaffiliated companies. The aggregate amount of an institution's loans
to officers, directors and principal shareholders (or their affiliates) is
limited to the amount of its unimpaired capital and surplus, unless the FDIC
determines that a lesser amount is appropriate.
A violation of the restrictions of Section 23A or Section 23B may result in
the assessment of civil monetary penalties on a bank or a person participating
in the conduct of the affairs of such bank or the imposition of an order to
cease and desist.
CROSS-GUARANTEE. A depository institution insured by the FDIC can be held
liable for any loss incurred by, or reasonably expected to be incurred by, the
FDIC in connection with (i) the default of a commonly controlled FDIC-insured
depository institution or (ii) any assistance provided by the FDIC to a commonly
controlled FDIC-insured institution in danger of default.
DIVIDEND RESTRICTIONS. Dividends paid by the Banks provide a substantial
portion of BNC's cash flow. Under both federal and state law, the approval of a
bank's principal regulator is required prior to the declaration of any dividend
by a bank if the total of all dividends declared in any calendar year exceed the
total of its net profits for that year combined with its retained net profits
for the preceding two years. North Dakota and Minnesota law prohibit the payment
of a dividend that would impair an institution's capital. In addition, a bank
cannot pay a dividend if it will cause the bank to be "undercapitalized," as
discussed below.
CAPITAL ADEQUACY. Federal regulations establish minimum requirements for
the capital adequacy of depository institutions that are generally the same as
those established for bank holding companies. See "--BNC--Capital Adequacy."
Banks with capital ratios below the required minimum are subject to certain
administrative actions, including the termination of deposit insurance and the
appointment of a receiver and may also be subject to significant operating
restrictions. See "--BNC--Support of Banks."
52
<PAGE>
The following table sets forth the respective capital ratios of BNC-North
Dakota and BNC-Minnesota at March 31, 1997.
<TABLE>
<CAPTION>
AT MARCH 31, 1997
----------------------------
MINIMUM
RATIO ACTUAL REQUIRED
- ------------------------------------------------------------------------- ----------- ---------------
<S> <C> <C>
Total capital to risk-weighted assets
BNC-North Dakota....................................................... 10.6% 8.0%
BNC-Minnesota.......................................................... 11.3 8.0
Tier 1 capital to risk-weighted assets
BNC-North Dakota....................................................... 9.9 4.0
BNC-Minnesota.......................................................... 10.5 4.0
Tier 1 leverage ratio
BNC-North Dakota....................................................... 7.2 4.0
BNC-Minnesota.......................................................... 11.5 4.0
</TABLE>
------------------------
PROMPT CORRECTIVE ACTION. The OCC is required to take "prompt corrective
action" with respect to any national bank that does not meet specified minimum
capital requirements. The applicable regulations establish five capital levels,
ranging from "well capitalized" to "critically undercapitalized," which
authorize, and in certain cases require, the OCC to take certain specified
supervisory action. Under certain circumstances, a well capitalized, adequately
capitalized or undercapitalized institution may be treated as if the institution
were in the next lower capital category.
With certain exceptions, national banks will be prohibited from making
capital distributions or paying management fees to a holding company if the
payment of such distributions or fees will cause them to become
undercapitalized. Furthermore, undercapitalized national banks will be required
to file capital restoration plans with the OCC. Such a plan will not be accepted
unless, among other things, the banking institution's holding company guarantees
the plan up to a certain specified amount. Any such guarantee from a depository
institution's holding company is entitled to a priority of payment in
bankruptcy. Undercapitalized national banks also will be subject to restrictions
on growth, acquisitions, branching and engaging in new lines of business unless
they have an approved capital plan that permits otherwise. The OCC also may,
among other things, require an undercapitalized national bank to issue shares or
obligations, which could be voting stock, to recapitalize the institution or,
under certain circumstances, to divest itself of any subsidiary.
The OCC is authorized to take various enforcement actions against any
significantly undercapitalized national bank and any national bank that fails to
submit an acceptable capital restoration plan or fails to implement a plan
accepted by the OCC. These powers include, among other things, requiring the
institution to be recapitalized, prohibiting asset growth, restricting interest
rates paid, requiring primary approval of capital distributions by any bank
holding company which controls the institution, requiring divestiture by the
institution of its subsidiaries or by the holding company of the institution
itself, requiring new election of directors, and requiring the dismissal of
directors and officers.
Significantly and critically undercapitalized national banks may be subject
to more extensive control and supervision. The OCC may prohibit any such
institution from, among other things, entering into any material transaction not
in the ordinary course of business, amending its charter or bylaws, or engaging
in certain transactions with affiliates. In addition, critically
undercapitalized institutions generally will be prohibited from making payments
of principal or interest on outstanding subordinated debt. Within 90 days of a
national bank becoming critically undercapitalized, the OCC must appoint a
receiver or conservator unless certain findings are made with respect to the
prospect for the institution's continued viability.
53
<PAGE>
As of the date of this Prospectus, the Banks met the capital requirements of
"well-capitalized" institutions.
DEPOSIT INSURANCE. The deposits of the Banks are insured by the FDIC
through the BIF or SAIF, as applicable, to the extent provided by law. Under the
FDIC's risk-based insurance system, BIF- and SAIF-insured institutions are
currently assessed premiums of between zero and twenty seven cents per $100 of
eligible deposits, depending upon the institution's capital position and other
supervisory factors. Congress recently enacted legislation that, among other
things, provides for assessments against BIF- and SAIF-insured institutions that
will be used to pay certain Financing Corporation ("FICO") obligations which
currently range from $0.0130 to $0.0648.
CONSERVATOR AND RECEIVERSHIP POWERS. Federal banking regulators have broad
authority to place depository institutions into conservatorship or receivership
to include, among other things, appointment of the FDIC as conservator or
receiver of an undercapitalized institution under certain circumstances. In the
event a bank is placed into conservatorship or receivership, the FDIC is
required, subject to certain exceptions, to choose the method for dissolving the
institution that is least costly to the BIF, such as liquidation. In any event,
if either of the Banks was placed into conservatorship or receivership, because
of the cross-guarantee provisions of the Federal Deposit Insurance Act, as
amended, the Company as the sole shareholder of the Bank, would likely lose its
investment in the Bank.
RESTRICTIONS ON LOANS TO ONE BORROWER. Under federal law, permissible loans
to one borrower by the Banks are generally limited to 15% of their unimpaired
capital, surplus, undivided profits and loan loss reserves. The Banks seek
participations to accommodate borrowers whose financing needs exceed lending
limits.
CONSUMER LAWS AND REGULATIONS. In addition to the laws and regulations
discussed herein, the Banks are also subject to certain consumer laws and
regulations that are designed to protect customers in transactions with Banks.
These include but are not limited to the Truth in Lending Act, the Truth in
Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability
Act, the Equal Credit Opportunity Act and the Fair Housing Act. These laws and
regulations mandate certain disclosure requirements and regulate the manner in
which financial institutions must deal with customers when taking deposits or
making loans to such customers.
INTERSTATE BANKING AND BRANCHING
Federal legislation enacted in 1994 removed certain barriers to interstate
banking and permitted DE NOVO interstate branching for the first time. Effective
June 1, 1997, banks may engage in interstate branching by merging with banks in
those states that have not opted out of the federal legislation. Banks will also
be able to establish DE NOVO branches in states where they do not own any
depository institutions, but only if the state specifically elects to opt in to
the DE NOVO branching provisions of the federal legislation. Both North Dakota
and Minnesota have elected to opt into such provisions.
CHANGING REGULATORY STRUCTURE
The FRB, OCC and FDIC have extensive authority to police unsafe or unsound
practices and violations of applicable laws and regulations by depository
institutions and their holding companies. The agencies' authority has been
expanded by federal legislation in recent years, and the agencies have not yet
fully tested the limits of their powers. In addition, the North Dakota
Department of Banking and Financial Institutions and the Minnesota Department of
Commerce possess significant authority to address violations of their respective
state's banking laws by banks operating in their respective states by
enforcement and other supervisory actions.
The laws and regulations affecting banks and bank holding companies have
changed significantly in recent years, and there is reason to expect that
changes will continue in the future, although it is difficult to
54
<PAGE>
predict the outcome of these changes. From time to time, various bills are
introduced in the United States Congress with respect to regulation of financial
institutions. Certain of these proposals, if adopted, could significantly change
the regulation of banks and the financial services industry. BNC cannot predict
whether any of these proposals will be adopted or, if adopted, how these
proposals would affect BNC.
MONETARY POLICY
The monetary policy of the FRB has a significant effect on the operating
results of bank holding companies and their subsidiaries. The FRB uses the
various means at its disposal to influence overall growth and distribution of
bank loans, investments and deposits, and interest rates charged on loans or
paid on deposits. FRB monetary policies have materially affected the operations
of commercial banks in the past and are expected to continue to do so in the
future. The nature of future monetary policies and the effect of such policies
on the business and earnings of BNC and its subsidiaries cannot be predicted.
55
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth as of April 1, 1997 certain information
regarding beneficial ownership of the Common Stock by (i) each stockholder known
by BNC to be the beneficial owner of more than 5% of the outstanding Common
Stock, (ii) each director of BNC, (iii) each Named Executive Officer, and (iv)
all of BNC's directors and executive officers as a group. Unless otherwise
indicated, BNC believes that the stockholders listed below have sole investment
and voting power with respect to their shares based on information furnished to
BNC by such owners. As of April 1, 1997, the Company had 2,338,720 shares of
Common Stock outstanding.
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF SHARES OUTSTANDING
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED COMMON STOCK(1)
- ------------------------------------------------------------------------- --------------------- ----------------
<S> <C> <C>
Tracy J. Scott(2)........................................................ 129,700(3)(4)(5)(6) 5.5%
Gregory K. Cleveland..................................................... 91,182(3)(4)(5)(7) 3.9%
John A. Malmberg......................................................... 42,993(3)(5) 1.8%
Thomas J. Resch.......................................................... 8,328(3)(5)(8) *
Brad J. Scott............................................................ 36,303(3)(4)(5) 1.6%
David A. Erickson(2)..................................................... 169,191(3)(9) 7.2%
John A. Hipp, M.D........................................................ 99,900(10) 4.3%
Richard M. Johnsen, Jr................................................... 1,000 *
John M. Shaffer.......................................................... 3,500 *
Jerry R. Woodcox......................................................... 2,500 *
BNC National Bank, as Trustee of the BNCCORP, Inc. 401(k) Savings Plan
(the "Plan")(2)(11).................................................... 174,501 7.5%
FBL Investment Advisory Services, Inc. ("FBL")(2)(12).................... 151,500 6.5%
All directors and executive officers as a group (11 persons)............. 417,298(3)(4)(5) 17.8%
</TABLE>
- ------------------------------
* Less than 1%.
(1) Shares subject to options exercisable within 60 days of April 1, 1997 are
deemed outstanding for computing the percentage of the Company's common
stock owned by a person holding such options and for the percentage owned by
all directors and executive officers as a group but are not deemed
outstanding for computing the ownership percentage of any other person.
(2) The address of Mr. T. Scott is c/o BNCCORP, Inc., 322 East Main, Bismarck,
North Dakota 58501, the address of Mr. Erickson is 500 East Elm Street,
Linton, North Dakota, 58552, the address of the trustee of the Plan is 322
East Main, Bismarck, North Dakota 58501 and the address of FBL is 5400
University Avenue, West Des Moines, Iowa 50266.
(3) Includes shares allocated to such individuals' accounts as of April 1, 1997
under the Company's 401(k) Plan as follows: Mr. T. Scott (13,458 shares),
Mr. Cleveland (3,182 shares), Mr. Malmberg (34,443 shares), Mr. Resch (1,038
shares), Mr. B. Scott (16,105 shares), Mr. Erickson (38,871 shares) and all
directors and executive officers as a group (68,955 shares).
(4) Includes shares of restricted stock that were issued under, and are subject
to the restrictions of, the Stock Plan, as follows: Mr. T. Scott (7,508),
Mr. Cleveland (7,257), Mr. B. Scott (2,533) and all directors and executive
officers as a group (17,899). See "Management--Stock Incentive Plan."
(5) Includes shares issuable upon the exercise of stock options that will be
exercisable within 60 days: Mr. T. Scott (2,414), Mr. Cleveland (2,263), Mr.
Malmberg (1,290), Mr. Resch (1,290), Mr. B. Scott (1,525) and all directors
and executive officers as a group (9,144).
(6) Includes 2,000 shares owned of record by Mr. Scott's children.
(7) Includes 78,480 shares owned of record by Mr. Cleveland's wife.
(8) Includes 3,000 shares owned of record by Mr. Resch's wife.
(9) Includes 38,820 shares owned of record by Mr. Erickson's wife.
(10) Includes 60,000 shares owned of record by Dr. Hipp's wife and 3,000 owned
by Dr. Hipp's children.
(11) Each participant of the Plan will be entitled to direct the trustee of the
Plan as to the manner in which to vote the shares allocated to the
participant's account.
(12) Pursuant to a Schedule 13G filed on May 13, 1996, FBL reported sole voting
and dispositive power with respect to 151,500 shares of Common Stock.
56
<PAGE>
DESCRIPTION OF THE NOTES
The Notes will be issued pursuant to an Indenture dated as of May 29, 1997
by and between the Company and Firstar Trust Company, as Trustee (the
"Trustee"). The Notes are not savings accounts or deposits of the Banks and are
not insured by the FDIC, any other governmental agency or otherwise. A copy of
the Indenture has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part. The following is a summary of certain
provisions of the Notes and the Indenture. These summaries do not purport to be
complete and are subject to and qualified in their entirety by the terms of the
Notes and the Indenture. Wherever particular provisions and definitions of the
Indenture are referred to, such provisions and definitions are incorporated by
reference as part of the statements made, and the statements are qualified in
their entirety by such reference. For purposes of the following summary, the
term the "Company" excludes the Company's subsidiaries unless otherwise
provided. Capitalized terms used herein shall have the same meanings as in the
Indenture.
GENERAL
The Notes will be limited in principal amount to $15,000,000. The Notes will
be offered only in denominations of $1,000 and integral multiples thereof. The
Notes mature on May 31, 2004 and will bear interest at the rate per annum set
forth on the cover page of this Prospectus. Interest will be payable monthly, on
the first Business Day of each month, commencing with July 1, 1997, to each
person in whose name the Note is registered at the close of business on the
fifteenth day of the month immediately preceding such Interest Payment Date.
Interest will be computed on the basis of a 360-day year of twelve 30-day
months. Principal and interest will be payable at the offices of the Trustee,
provided that, at the option of the Company, if the Notes are no longer in the
form of Registered Global Securities, payment of interest may be made by check
mailed to the address of the person entitled thereto as it appears in the
Security Register maintained by the Security Registrar. The Notes will not be
entitled to any sinking fund.
Subject to the terms of the Indenture and the limitations applicable to
Registered Global Securities, the Notes will be transferable and exchangeable at
the office of the Registrar or any co-registrar and will be issued in fully
registered form, provided that the Company shall not be required to register a
transfer of or to exchange the Notes during the period of 15 days immediately
preceding any selection of Notes for redemption. The Company may require payment
of a sum sufficient to cover any transfer tax or other similar governmental
charge payable in connection with certain transfers and exchanges.
The Notes will not be secured by the assets of the Company or any of its
Subsidiaries or otherwise and will not have the benefit of a sinking fund for
the retirement of principal. In addition, the rights of the Company to
participate in any distribution of assets of any Subsidiary, including a Bank,
upon its liquidation or reorganization or otherwise (and thus the ability of the
Holders of the Notes to benefit indirectly from such distribution) are subject
to the prior claims of creditors of that Subsidiary. Claims on the Company's
Subsidiaries by creditors other than the Company may include substantial
obligations with respect to deposit liabilities, federal funds purchased and
securities sold under repurchase agreement and other debt obligations. There are
also limitations on the extent to which the Banks may pay dividends or make
other payments to the Company.
As long as the Company is a reporting company under the Exchange Act, the
Company will furnish to the Holders of the Notes, annual reports of the Company
containing audited financial statements. If the Company ceases to be a reporting
company under the Exchange Act, the Company will furnish to Holders of the Notes
annual audited financial statements.
The Indenture does not contain provisions that would provide protection to
Holders against a sudden and dramatic decline in credit quality resulting from
takeovers, recapitalizations or similar restructurings.
57
<PAGE>
REDEMPTION AT THE OPTION OF THE COMPANY
The Notes may not be redeemed before May 31, 2000. At any time after May 31,
2000, the Notes will be redeemable, in whole or in part, at the option of the
Company, upon notice given no more than 60 days and no less than 30 days prior
to redemption, given as provided in the Indenture, at par plus accrued interest
to the date fixed for redemption. In case of the redemption of less than all of
the outstanding Notes, the Notes to be redeemed shall be selected by the Trustee
by such method as the Trustee shall deem fair and appropriate, including the
selection for redemption of a portion of the principal amount of any Note but
not less than $1,000. On and after the Redemption Date, interest will cease to
accrue on the Notes or portions thereof called for redemption. As long as the
Notes are represented in the form of a Registered Global Security, a new
Registered Global Security or Securities will be executed and authenticated in
exchange for the unredeemed portion of the principal of any partially redeemed
Note.
SUBORDINATION
The Notes will be unsecured general obligations of the Company and will be
subordinated to all Senior Indebtedness (as defined below) of the Company and
effectively subordinated to all present and future liabilities of the Company's
Subsidiaries.
Upon any payment or distribution of assets or securities of the Company in
any dissolution, winding up, total or partial liquidation or reorganization of
the Company, if (i) an event of default has occurred and is continuing with
respect to any Senior Indebtedness or (ii) an Acceleration Event shall have
occurred and the principal and interest on, and any other amounts in respect of,
the Notes has been declared due and payable and such declaration has not been
rescinded or annulled, then all Senior Indebtedness, including any interest
occurring on such Senior Indebtedness must be paid in full before any payment of
principal or interest on the Notes can be made. By reason of such subordination,
in the event of insolvency, holders of the Notes may recover less, ratably, than
other creditors of the Company.
"Senior Indebtedness" means all Indebtedness of the Company, including
principal and interest on such Indebtedness whether outstanding on the date of
the Indenture or hereafter created, incurred, assumed or guaranteed by the
Company, unless such Indebtedness, by its terms or the terms of the instrument
creating or evidencing it is subordinate in right of payment to, or PARI PASSU
with, the Notes.
"Indebtedness" means (without duplication), with respect to any Person, (i)
any obligation, contingent or otherwise, of such Person for borrowed money, (ii)
any obligation (including the Notes) of such Person evidenced by bonds,
debentures, notes or other similar instruments, (iii) any obligation of such
Person to pay the deferred purchase price of property or services (including
conditional sale and title retention arrangements and any interest accruing
subsequent to an event of default with respect to such obligation), except
accounts payable and accrued expenses incurred in the ordinary course of
business, and (iv) any obligation under a lease that is required to be
capitalized for financial reporting purposes in accordance with GAAP.
EVENTS OF DEFAULT
An Event of Default includes: (a) failure to pay the principal on the Notes
when due at maturity or upon redemption, as provided in the Indenture, whether
or not prohibited by the subordination provisions of the Indenture; (b) failure
to pay any interest on the Notes for 10 days after such interest shall have
become due and payable, whether or not prohibited by the subordination
provisions of the Indenture; (c) failure to perform any other covenant set forth
in the Indenture for 30 days after receipt of written notice from the Trustee or
Holders of at least 25% in principal amount of the outstanding Notes specifying
the default and requiring the Company to remedy such default; (d) default in the
payment at maturity of Indebtedness of the Company or a Subsidiary having an
outstanding principal amount due at maturity greater than $2.0 million and such
default having continued without being cured, waived or consented to or without
such Indebtedness being discharged for a period of 30 days beyond any applicable
grace period;
58
<PAGE>
(e) an event of default as defined in any mortgage, indenture or instrument of
the Company or any Subsidiary shall have happened and resulted in the
acceleration of indebtedness which together with the principal amount of any
other Indebtedness so accelerated, aggregates $2.0 million or more at any time,
and such default shall not have been cured or waived and such acceleration shall
not have been rescinded or annulled; (f) entry of a final judgment, decree or
order against the Company or any Subsidiary for the payment of money in excess
of $1.0 million and such judgment, decree or order continues unsatisfied for 60
days from the entry thereof, unless vacated, discharged or stayed pending appeal
within such 60-day period; and (g) certain events of bankruptcy, insolvency, or
reorganization of the Company. Except as described under "--Acceleration Events"
below, there is no right to acceleration in the case of an Event of Default.
The Indenture provides that the Trustee shall, within 90 days after the
occurrence of a "default" (meaning, for this purpose, the events specified above
without grace periods), give the Holders of the Notes notice of all defaults
known to it which have occurred and remain uncured; provided, that, except in
the case of a default in the payment of principal or interest on any of the
Notes, the Trustee shall be protected in withholding such notice if and as long
as it in good faith determines that the withholding of such notice is in the
interest of the Holders.
The Company must furnish annually to the Trustee an Officers' Certificate
stating whether to the best of the knowledge of the signers the Company is in
default under any of the provisions of the Indenture, and specifying all such
defaults and the nature thereof, of which they have knowledge.
Upon the occurrence of any Event of Default the Company shall, upon demand
of the Trustee, pay to the Trustee, for the benefit of the Holders of the Notes,
the whole amount then due and payable with respect to such Notes. If an Event of
Default with respect to the Notes occurs and is continuing, the Trustee may in
its discretion proceed to protect and enforce its rights and the rights of the
Holders of the Notes by such appropriate judicial proceedings as the Trustee
shall deem most effectual to protect and enforce any such rights, whether for
the specific enforcement of any covenant or agreement in the Indenture or such
Notes or in aid of the exercise of any power granted in the Indenture or the
Notes, or to enforce any other proper remedy.
A Holder will not have any right to institute any proceeding with respect to
the Indenture or for any remedy thereunder, unless (a) such Holder shall have
previously given to the Trustee written notice of a continuing Event of Default,
(b) the Holders of at least 25% in aggregate principal amount of the outstanding
Notes shall have made a written request, and offered reasonable indemnity, to
the Trustee to institute such proceeding as Trustee, (c) the Trustee shall have
failed to institute such proceeding within 60 days, and (d) the Trustee shall
not have received from the Holders of a majority in aggregate principal amount
of the outstanding Notes a direction inconsistent with such requests. However,
the Holder of any Note will have an absolute right to receive payment of the
principal of and interest on such Note on or after the respective due dates and
to institute suit for the enforcement of any such payment.
ACCELERATION EVENTS
The Indenture defines an "Acceleration Event" as an Event of Default
relating to bankruptcy, insolvency or reorganization of the Company. If an
Acceleration Event shall occur and be continuing, either the Trustee or the
Holders of at least 25% in aggregate principal amount of outstanding Notes may
accelerate the maturity of all such outstanding Notes. If an Acceleration Event
has occurred and a declaration of acceleration made before a judgment or decree
for payment of money due is obtained, holders of a majority of the outstanding
Notes may rescind the acceleration of the Notes if all Acceleration Events have
been remedied and all payments due, other than those due as a result of
acceleration, have been made.
59
<PAGE>
LIMITATION ON DIVIDENDS AND OTHER PAYMENTS
The Company has agreed not to declare or pay dividends on, or purchase,
redeem or acquire its capital stock, return any capital to holders of capital
stock, or make any distribution of assets to holders of capital stock, except
that the Company (i) may declare and pay a dividend in capital stock of the
Company and (ii) declare and pay a dividend or make another distribution in cash
or property other than capital stock of the Company if the amount of such
dividend or distribution, together with the amount of all such previous
dividends and distributions after March 31, 1997, would not exceed the sum of
(A) $2 million, (B) 75% of the Company's Consolidated Net Income (or, in the
event such aggregate Consolidated Net Income shall be a loss, minus 100% of such
loss) accrued on a cumulative basis during the period beginning on April 1, 1997
and ending on the last day of the Company's fiscal quarter immediately preceding
such dividend or distribution and (C) 100% of the net proceeds received by the
Company from the issuance or sale (other than to a Subsidiary) of capital stock
of the Company, including any such shares issued upon exercise of any warrants,
options or similar rights (other than Disqualified Stock), subsequent to the
Initial Issuance Date.
MERGER, CONSOLIDATION OR SALE OF ASSETS; SUCCESSOR CORPORATION
The Indenture provides that the Company may not consolidate with, merge
with, or transfer all or substantially all of its assets to another entity
unless such other entity assumes the Company's obligations under the Indenture
and unless, after giving effect thereto, no event shall have occurred and be
continuing which, after notice or lapse of time, would become an Event of
Default, each insured institution controlled by the surviving corporation shall
be in compliance with applicable minimum capital requirements and certain other
conditions are met.
SATISFACTION, DISCHARGE AND DEFEASANCE OF INDEBTEDNESS
The Company may satisfy and discharge its obligations under the Indenture by
delivery to the Trustee for cancellation all outstanding Notes or by depositing
with the Trustee, after the Notes have become due and payable, cash sufficient
to pay at maturity all of the outstanding Notes and paying all other sums
payable under the Indenture by the Company.
Under terms satisfactory to the Trustee, the Company may discharge
substantially all of its obligations under the Indenture to holders of Notes
which by their terms are due and payable within one year (or are to be called
for redemption within one year) by depositing with the Trustee in trust for the
benefit of the holders money in an amount sufficient to pay and discharge the
principal of and interest on, the Notes then outstanding at and through the
maturity or redemption date ("defeasance"). Under terms satisfactory to the
Trustee, the Company may also discharge substantially all of its obligations
under the Indenture imposed by the covenants described above ("defeasible
events") and omit to comply with such provisions without creating an Event of
Default ("covenant defeasance"). Defeasance or covenant defeasance may be
effected only if, among other things, the Company irrevocably deposits with the
Trustee in trust for the benefit of the holders, Money in an amount of or United
States Government Obligations, which through the payment of interest and
principal will provide, prior to the due date of principal of and each
installment of interest in respect of the Notes, Money in an amount, or a
combination thereof, sufficient to pay and discharge the principal of and
interest on the Notes then outstanding at maturity or at the earliest date at
which the Company may redeem such Notes if the Company has made adequate
arrangements with the Trustee to redeem such Notes at such time and complies
with certain other requirements. The Indenture will not be discharged if, among
other things, an Event of Default (other than a defeasible event), or an event
which with notice or lapse of time would have become such an Event of Default,
shall have occurred and be continuing on the date of such deposit or during the
period ending on the 91st day after such date. In the event of any such
defeasance and discharge, the holders of the Notes will thereafter be able to
look only to such trust fund for payment of principal and interest on the Notes.
60
<PAGE>
MODIFICATION AND WAIVER
The Indenture provides that modifications and amendments to the Indenture or
the Notes may be made by the Company and the Trustee with the consent of the
holders of a majority in principal amount of the Notes then outstanding;
PROVIDED that no such modification or amendment may, without the consent of the
holder of each Note then outstanding, (i) change the maturity of the principal
of, or any installment of interest on, any Note, reduce the principal amount of
a Note or the rate of interest thereon, change the place of payment where or the
coin or currency in which amounts due on the Notes are payable; (ii) make any
reduction in the principal amount of Notes whose holders must consent to an
amendment or any waiver under the Indenture or modify the Indenture provisions
relating to such amendments or waivers; or (iii) impair or affect the right to
institute suit for the enforcement of any payment with respect to the Notes.
Without the consent of any holder of Notes, the Company and the Trustee may
amend the Indenture to (i) evidence the succession of another Person to the
Company and the assumption by any such successor of the covenants and agreements
of the Company under the Indenture or the Notes; (ii) add covenants of the
Company for the benefit of the Holders of the Note, or to surrender any right or
power conferred upon the Company in the Indenture; (iii) secure the Notes; or
(iv) cure any ambiguity, correct or supplement any provision of the Indenture
which may be inconsistent with any other provision of the Indenture, or any such
other provisions with respect to the matters or questions arising under the
Indenture which shall not be inconsistent with the provisions of the Indenture,
provided such action pursuant to this clause (iv) shall not adversely affect the
interests of the holders of the Notes in any material respect.
The Indenture will provide that the holders of a majority in aggregate
principal amount of the Notes then outstanding may waive any past default under
the Indenture with respect to the Notes, except a default in the payment of
principal or interest.
GOVERNING LAW
The Indenture and the Notes will be governed by and construed in accordance
with the laws of the State of New York, and for all purposes shall be construed
in accordance with the laws of such state.
THE TRUSTEE
Firstar Trust Company will initially be the Trustee under the Indenture. The
Company has also appointed the Trustee as the initial Registrar and as initial
Paying Agent under the Indenture. The Indenture and provisions of the Trust
Indenture Act incorporated by reference therein contain limitations on the
rights of the Trustee, should it become a creditor of the Company to obtain
payment of claims in certain cases or to realize on certain property received by
it in respect of any such claim as security or otherwise. The Trustee does
banking business on a regular basis with the Company and is a lender to the
Company, including under the Firstar Line of Credit, outstanding amounts under
which will be repaid with proceeds of this offering. See "Use of Proceeds."
BOOK-ENTRY, DELIVERY AND FORM
The Notes will be represented by one or more Registered Global Securities
registered in the name of DTC or its nominee. Unless and until it is exchanged
in whole or in part for Notes in definitive form, a Registered Global Security
may not be transferred except as a whole to a nominee of DTC for such Registered
Global Security, or by a nominee of DTC to DTC or another nominee of DTC, or by
DTC or any such nominee to a successor Depository or a nominee of such successor
Depository. Initially, the Notes will be registered in the name of Cede & Co.,
the nominee of DTC.
Ownership of beneficial interests in a Registered Global Security will be
limited to persons who have accounts with DTC or its nominee ("participants") or
persons who hold interests through participants.
61
<PAGE>
Ownership of beneficial interests in the Registered Global Security will be
shown on, and the transfer of these ownership interests will be effected only
through, records maintained by DTC or its nominee (with respect to interests of
participants) and the records of participants (with respect to interests of
persons held by such participants on their behalf).
As long as DTC, or its nominee, is the registered owner or holder of a
Registered Global Security, DTC or such nominee, as the case may be, will be
considered the sole owner or holder of the Notes represented by such Registered
Global Security for all purposes under the Indenture and the Notes. In addition,
no beneficial owner of an interest in a Registered Global Security will be able
to transfer that interest except in accordance with the applicable procedures of
DTC.
Payments on a Registered Global Security will be made to DTC or its nominee,
as the registered owner thereof. None of the Company, the Trustee or any Paying
Agent will have any responsibility or liability for any aspect of the records
relating to or payments made on account of beneficial ownership interests in a
Registered Global Security or for maintaining, supervising or reviewing any
records related to such beneficial ownership interests.
The Company has been advised by DTC that upon receipt of any payment in
respect of a Registered Global Security representing any Notes held by it or its
nominee, DTC will immediately credit participants' accounts with payments in
amounts proportionate to their respective beneficial interests in the principal
amount of such Registered Global Security for such Notes as shown on the records
of DTC or its nominee. The Company also expects that payments by participants
will be governed by standing instructions and customary practices, as is now the
case with securities held for the accounts of customers registered in the names
of nominees for such customers. Such payment will be the responsibility of such
participants. None of the Company, the Trustee or any agent of the Company, or
the Trustee shall have any responsibility or liability for any aspect of the
records relating to or payments made on account of beneficial interests in a
Registered Global Security, or for maintaining, supervising or reviewing any
records relating to such beneficial interests.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules. The laws of some states require that certain
persons take physical delivery of securities in definitive form. Consequently,
the ability to transfer beneficial interests in a Registered Global Security to
such persons may be limited. Because DTC can only act on behalf of participants,
who in turn act on behalf of indirect participants (as defined below) and
certain banks, the ability of a person having a beneficial interest in a
Registered Global Security to pledge such interest to Persons that do not
participate in the DTC system, or otherwise take actions in respect of such
interest, may be affected by the lack of a physical certificate of such
interest.
DTC has advised the Company as follows: DTC is a limited-purpose trust
company organized under the New York Banking Law, a "banking organization"
within the meaning of the New York Banking Law, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the New York Uniform
Commercial Code and a "clearing agency" registered pursuant to the provisions of
Section 17A of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). DTC holds securities that its participants deposit with DTC and
facilitates the settlement among participants of securities transactions, such
as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in participants' accounts, thereby eliminating
the need for physical movement of securities certificates. Direct participants
include securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations. Access to the DTC system is also
available to others such as securities brokers and dealers, banks and trust
companies that clear through or maintain a custodial relationship with a direct
participant, either directly or indirectly ("indirect participants"). The rules
applicable to DTC and its participants are on file with the Commission.
Although DTC is expected to follow the foregoing procedures in order to
facilitate transfers of interests in a Registered Global Security among
participants of DTC, it is under no obligation to perform
62
<PAGE>
or continue to perform such procedures, and such procedures may be discontinued
at any time. Neither the Company nor the Trustee will have any responsibility
for the performance by DTC or the participants or indirect participants of their
respective obligations under the rules and procedures governing their
operations.
Notes represented by a Registered Global Security will be exchangeable for
Notes in definitive form of like tenor as such Registered Global Security in
denominations of $1,000 and in any greater amount that is an integral multiple
if DTC notifies the Company that it is unwilling or unable to continue as
Depository for such Registered Global Security or if at any time DTC ceases to
be a clearing agency registered under applicable law and a successor depositary
is not appointed by the Company within 90 days or the Company in its discretion
at any time determines not to require all of the Notes to be represented by a
Registered Global Security and notifies the Trustee thereof. Any Notes that are
exchangeable pursuant to the preceding sentence are exchangeable for Notes
issuable in authorized denominations and registered in such names as DTC shall
direct. Subject to the foregoing, a Registered Global Security is not
exchangeable, except for a Registered Global Security or Registered Global
Securities of the same aggregate denominations to be registered in the name of
DTC or its nominee.
Neither the Company nor the Trustee will be liable for any delay by the
related Global Registered Security Holder or DTC in identifying the beneficial
owners of the related Notes, and each such Person may conclusively rely on, and
will be protected in relying on, instructions from such Global Registered
Security Holder or of DTC for all purposes (including with respect to the
registration and delivery, and the respective principal amounts, of the Notes to
be issued).
63
<PAGE>
UNDERWRITING
Dain Bosworth Incorporated (the "Underwriter") has agreed, subject to the
terms and conditions of the Underwriting Agreement, to purchase from the Company
an aggregate of $15,000,000 of Notes at the Price to Public less the
Underwriting Discount set forth on the cover page of this Prospectus.
The Underwriting Agreement provides that the Underwriter's obligation to pay
for and accept delivery of the Notes offered hereby is subject to certain
conditions precedent and that the Underwriter will be obligated to purchase all
such Notes if any are purchased.
The Company has been advised by the Underwriter that it proposes initially
to offer the Notes to the public at the Price to Public set forth on the cover
page of this Prospectus and to certain dealers at such price less a concession
not in excess of 2.0% of principal amount of the Notes. The Underwriter may
allow and such dealers may reallow a concession not in excess of 1.0% of
principal amount of Notes to certain other brokers and dealers. After the
offering, the Price to Public, the concession and reallowances to dealers and
other selling terms may be changed by the Underwriter.
The Notes will be a new issue of securities for which there is currently no
market. The Company does not intend to list the Notes on any securities exchange
and no active trading market in the Notes is expected to develop. Although the
Underwriter has informed the Company that it currently intends to make a market
in the Notes, it is not obligated to do so, and any such market making may be
discontinued at any time without notice. Accordingly, there can be no assurances
as to the development or liquidity of any market for the Notes. If the Notes are
traded after their original issuance, they may trade at a discount to their
principal amount.
During and after the offering, the Underwriter may purchase and sell the
Notes in the open market. These transactions may include customary stabilizing
transactions which may maintain, stabilize or otherwise affect the market price
of the Notes, which may be higher than the price that might otherwise prevail in
the open market. Such stabilizing transactions, if commenced, may be
discontinued at any time.
In the Underwriting Agreement, the Company has agreed to indemnify the
Underwriter against certain liabilities that may be incurred in connection with
the sale of the Notes, including liabilities arising under the Securities Act
and to contribute to payments that the Underwriter may be required to make with
respect thereto.
In conjunction with the Company's initial public offering of Common Stock in
July 1995, the Underwriter acquired and presently owns warrants to purchase an
aggregate of 50,000 shares of Common Stock of the Company at an exercise price
of $12.00 per share. Such warrants are exercisable at any time prior to July 13,
2000.
LEGAL MATTERS
The validity of the Notes offered hereby will be passed upon for BNC by
Jones, Walker, Waechter, Poitevent, Carrere & Denegre, L.L.P., New Orleans,
Louisiana. Oppenheimer Wolff & Donnelly, Minneapolis, Minnesota, is acting as
counsel for the Underwriter in connection with certain legal matters relating to
the Notes offered hereby.
64
<PAGE>
EXPERTS
The consolidated statements of financial condition of BNC as of December
1996 and 1995 and the consolidated statements of income, stockholders' equity
and cash flows for the years ended December 31, 1996, 1995 and 1994 included in
this Prospectus and elsewhere in the Registration Statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of such firm as experts in giving said report.
In February 1995, the Company's Board of Directors replaced James J.
Wosepka, CPA with Arthur Andersen LLP as the Company's independent public
accountants. The report of James J. Wosepka, CPA on the Company's financial
statements as of and for the year ended December 31, 1993 did not contain an
adverse opinion or disclaimer of opinion and was not modified as to uncertainty,
audit scope or accounting principles. There were no disagreements with James J.
Wosepka, CPA on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure at the time of the change of
independent public accounts or with respect to the Company's financial
statements as of and for the year ended December 31, 1993. Prior to retaining
Arthur Andersen LLP, the Company had not consulted with Arthur Andersen LLP
regarding accounting principles.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
SB-2 under the Securities Act with respect to the Notes being offered pursuant
to this Prospectus. This Prospectus does not contain all information set forth
in the Registration Statement, certain parts of which are omitted in accordance
with the rules and regulations of the Commission. Statements contained herein
concerning the provisions of any documents are not necessarily complete and, in
each instance, reference is made to the copy of such document filed as an
exhibit to the Registration Statement.
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy statements and other
information with the Commission. The Registration Statement, as well as such
reports, proxy statements and other information filed with the Commission by the
Company can be inspected and copied at the public reference facilities of the
Commission in Washington, D.C., at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the regional offices of the Commission at
the following locations: Chicago Regional Office, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511 and the New York Regional Office, 7 World
Trade Center, Suite 1300, New York, New York 10048. Copies of such material can
be obtained at prescribed rates from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission
maintains a Web site that contains reports, proxy and information statements and
other information regarding issues that file electronically with the Commission
(http:// www.sec.gov). The Company's Common Stock is traded on the Nasdaq
National Market. Reports, proxy statements and other information concerning the
Company may also be inspected at the offices of the National Association of
Securities Dealers, Inc. at 1735 K Street, N.W., Washington, D.C. 20006.
65
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Public Accountants................................................................... F-2
Consolidated Statements of Financial Condition as of March 31, 1997 (unaudited) and December 31, 1996 and
1995..................................................................................................... F-3
Consolidated Statements of Income for the three months ended March 31, 1997 and 1996 (unaudited) and the
years ended December 31, 1996, 1995 and 1994............................................................. F-4
Consolidated Statements of Stockholders' Equity for the three months ended March 31, 1997 (unaudited) and
the years ended December 31, 1996, 1995 and 1994......................................................... F-5
Consolidated Statements of Cash Flows for the three months ended March 31, 1997 and 1996 (unaudited) and
the years ended December 31, 1996, 1995 and 1994......................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To BNCCORP, Inc.:
We have audited the accompanying consolidated statements of financial
condition of BNCCORP, Inc. (a Delaware corporation) and Subsidiaries as of
December 31, 1996 and 1995, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
BNCCORP's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of BNCCORP,
Inc. and Subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
February 21, 1997
F-2
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
AS OF AS OF DECEMBER 31,
MARCH 31, ------------------------
1997 1996 1995
------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CASH AND DUE FROM BANKS........................... $ 8,340 $ 6,360 $ 11,259
FEDERAL FUNDS SOLD................................ 14,100 6,900 2,950
SECURITIES AVAILABLE FOR SALE (Note 3)............ 61,953 59,491 94,416
LOANS, net (Note 4)............................... 207,747 201,403 119,635
PREMISES, LEASEHOLD IMPROVEMENTS AND EQUIPMENT,
net (Note 5).................................... 7,354 6,657 5,778
ACCRUED INTEREST RECEIVABLE....................... 2,683 2,442 1,963
OTHER ASSETS...................................... 1,805 1,440 439
COST IN EXCESS OF NET ASSETS ACQUIRED, net........ 3,820 3,865 3,959
------------- ----------- -----------
$ 307,802 $ 288,558 $ 240,399
------------- ----------- -----------
------------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS:
Noninterest-bearing............................. $ 19,102 $ 22,218 $ 16,874
Interest-bearing--
Savings, NOW and money market................. 59,258 52,483 50,732
Time deposits $100,000 and over............... 46,202 39,725 16,576
Other time deposits........................... 128,738 125,344 126,866
NOTES PAYABLE (Note 7)............................ 26,902 22,052 4,354
OTHER LIABILITIES................................. 4,697 4,101 4,110
------------- ----------- -----------
Total liabilities........................... 284,899 265,923 219,512
------------- ----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 13 and 14)
STOCKHOLDERS' EQUITY (Note 8):
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 23
Capital surplus................................. 13,768 13,768 13,776
Retained earnings............................... 9,578 9,017 7,170
Treasury stock (25,380 shares).................. (216) (216) (216)
Unrealized holding gain (loss) on securities
available for sale, net of income tax effects
of $162, $16 and $86 (Note 3)................. (250) 43 134
------------- ----------- -----------
Total stockholders' equity.................. 22,903 22,635 20,887
------------- ----------- -----------
$ 307,802 $ 288,558 $ 240,399
------------- ----------- -----------
------------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED FOR THE YEAR ENDED
MARCH 31, DECEMBER 31,
-------------------- -------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
INTEREST INCOME:
Interest on loans.......................................... $ 4,974 $ 3,189 $ 16,383 $ 11,285 $ 8,842
Interest on investment securities--
U.S. Treasury and agency................................. 197 206 770 506 351
State and municipal...................................... 18 20 70 134 100
Other.................................................... 871 1,070 3,734 3,358 970
--------- --------- --------- --------- ---------
Total interest income.................................. 6,060 4,485 20,957 15,283 10,263
--------- --------- --------- --------- ---------
INTEREST EXPENSE:
Deposits................................................... 2,745 2,382 9,738 7,802 3,944
Notes payable.............................................. 370 155 1,369 740 467
--------- --------- --------- --------- ---------
Total interest expense................................. 3,115 2,537 11,107 8,542 4,411
--------- --------- --------- --------- ---------
Net interest income.................................... 2,945 1,948 9,850 6,741 5,852
PROVISION FOR LOAN LOSSES (Note 4)........................... 170 84 739 168 179
--------- --------- --------- --------- ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES.......... 2,775 1,864 9,111 6,573 5,673
--------- --------- --------- --------- ---------
NONINTEREST INCOME:
Fees on loans.............................................. 191 164 1,276 559 650
Service charges............................................ 124 99 418 401 259
Rental income.............................................. 24 9 34 37 126
Net gain (loss) on sales of securities..................... (11) 5 19 (18) 28
Other...................................................... 153 94 349 757 336
--------- --------- --------- --------- ---------
Total noninterest income............................... 481 371 2,096 1,736 1,399
--------- --------- --------- --------- ---------
NONINTEREST EXPENSE:
Salaries and employee benefits............................. 1,284 976 4,311 3,352 2,990
Depreciation and amortization.............................. 280 219 980 619 444
Occupancy.................................................. 221 140 675 413 305
Office supplies, telephone and postage..................... 125 121 505 521 227
Professional services...................................... 81 103 360 246 236
Marketing and promotion.................................... 87 112 352 424 211
FDIC and other assessments................................. 41 71 239 296 308
Other...................................................... 221 224 791 640 481
--------- --------- --------- --------- ---------
Total noninterest expense.............................. 2,340 1,966 8,213 6,511 5,202
--------- --------- --------- --------- ---------
INCOME BEFORE TAXES.......................................... 916 269 2,994 1,798 1,870
INCOME TAXES (Note 6)........................................ 355 127 1,147 641 679
--------- --------- --------- --------- ---------
NET INCOME................................................... $ 561 $ 142 $ 1,847 $ 1,157 $ 1,191
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
EARNINGS PER SHARE........................................... $ 0.24 $ 0.06 $ 0.79 $ 0.67 $ 0.98
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
COMMON STOCK ON SECURITIES
----------------------- CAPITAL RETAINED TREASURY AVAILABLE
SHARES AMOUNT SURPLUS EARNINGS STOCK FOR SALE, NET TOTAL
---------- ----------- --------- ----------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993................... 1,238,100 $ 12 $ 4,070 $ 4,822 $ -- $ -- $ 8,904
Cumulative effect of change in accounting
for securities available for sale........ -- -- -- -- -- (110) (110)
Purchase of treasury stock................. -- -- -- -- (216) -- (216)
Net income................................. -- -- -- 1,191 -- -- 1,191
Change in unrealized holding gain (loss) on
securities available for sale, net of
income taxes............................. -- -- -- -- -- (229) (229)
---------- --- --------- ----------- --------- ----- ---------
BALANCE, December 31, 1994................... 1,238,100 12 4,070 6,013 (216) (339) 9,540
Net income................................. -- -- -- 1,157 -- -- 1,157
Change in unrealized holding gain (loss) on
securities available for sale, net of
income taxes............................. -- -- -- -- -- 473 473
Shares issued.............................. 1,126,000 11 9,706 -- -- -- 9,717
---------- --- --------- ----------- --------- ----- ---------
BALANCE, December 31, 1995................... 2,364,100 23 13,776 7,170 (216) 134 20,887
Net income................................. -- -- -- 1,847 -- -- 1,847
Change in unrealized holding gain (loss) on
securities available for sale, net of
income taxes............................. -- -- -- -- -- (91) (91)
Initial public offering costs.............. -- -- (8) -- -- -- (8)
---------- --- --------- ----------- --------- ----- ---------
BALANCE, December 31, 1996................... 2,364,100 23 13,768 9,017 (216) 43 22,635
Net income (unaudited)..................... -- -- -- 561 -- -- 561
Change in unrealized holding gain (loss) on
securities available for sale, net of
income taxes (unaudited)................. -- -- -- -- -- (293) (293)
---------- --- --------- ----------- --------- ----- ---------
BALANCE, March 31, 1997 (unaudited).......... 2,364,100 $ 23 $ 13,768 $ 9,578 $ (216) $ (250) $ 22,903
---------- --- --------- ----------- --------- ----- ---------
---------- --- --------- ----------- --------- ----- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED FOR THE YEAR ENDED
MARCH 31, DECEMBER 31,
-------------------- -------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................................. $ 561 $ 142 $ 1,847 $ 1,157 $ 1,191
Adjustments to reconcile net income to net cash provided by (used in)
operating activities--
Provision for loan losses............................................. 170 84 739 168 179
Depreciation and amortization......................................... 152 104 499 377 348
Amortization of intangible assets..................................... 128 115 481 242 96
Proceeds from loans recovered......................................... 11 5 157 207 152
Change in accrued interest receivable and other assets................ (689) (799) (1,866) (935) 662
(Gain) loss on sale of bank premises and equipment.................... -- (10) (10) 23 --
(Gain) loss on sale of securities..................................... 11 (5) (19) 18 (28)
Gain on sale of Farmers & Merchants Bank of Beach (Note 2)............ -- -- -- (316) --
Change in other liabilities........................................... 596 (502) (9) 1,676 766
Originations of loans to be participated.............................. (26,854) (3,982) (45,238) (44,231) (16,396)
Proceeds from participations of loans................................. 26,854 3,982 45,238 44,231 16,396
--------- --------- --------- --------- ---------
Net cash provided by (used in) operating activities................. 940 (866) 1,819 2,617 3,366
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in federal funds sold........................................ (7,200) 2,950 (3,950) (2,900) 875
Purchases of investment securities...................................... (17,823) (544) (22,575) (138,385) (20,033)
Proceeds from sales of investment securities............................ 11,910 19,286 48,700 89,143 17,711
Proceeds from maturities of investment securities....................... 3,148 2,332 8,727 (26,623) 3,483
Net increase in loans................................................... (6,525) (28,266) (82,664) (20,272) (26,530)
Additions to premises, leasehold improvements and equipment............. (850) (360) (1,438) (1,973) (345)
Proceeds from sale of Farmers & Merchants Bank of Beach (Note 2)........ -- -- -- 3,811 --
Payment for branch acquisition (Note 2)................................. -- -- -- (5,357) --
Loans sold with Farmers & Merchants Bank of Beach (Note 2).............. -- -- -- 9,228 --
Investments sold with Farmers & Merchants Bank of Beach (Note 2)........ -- -- -- 7,014 --
Proceeds from sale of premises and equipment............................ -- 13 70 112 --
--------- --------- --------- --------- ---------
Net cash used in investing activities............................... (17,340) (4,589) (53,130) (86,202) (24,839)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand, savings, NOW and money market
accounts.............................................................. 3,659 (9,966) 7,095 8,960 (2,399)
Net increase in time deposits........................................... 9,871 1,877 21,627 11,964 18,195
Net increase (decrease) in short-term borrowings........................ 3,869 7,272 10,437 (6,360) 5,109
Repayments of long-term borrowings...................................... (11,240) (354) (2,604) (716) (550)
Proceeds from long-term borrowings...................................... 12,221 1,000 9,865 500 1,486
Demand, savings, NOW and money market accounts acquired through branch
acquisition (Note 2).................................................. -- -- -- 18,131 --
Demand, savings, NOW and money market accounts sold with Farmers &
Merchants Bank of Beach (Note 2)...................................... -- -- -- (14,520) --
Time deposits acquired through branch acquisition (Note 2).............. -- -- -- 86,639 --
Time deposits sold with Farmers & Merchants Bank of Beach (Note 2)...... -- -- -- (24,775) --
Purchase of treasury stock.............................................. -- -- -- -- (216)
Proceeds from issuance of stock (Note 1)................................ -- -- -- 9,717 --
Stock offering costs.................................................... -- (4) (8) -- --
Dividends paid to minority stockholders................................. -- -- -- (92) (87)
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing activities................. 18,380 (175) 46,412 89,448 21,538
--------- --------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...................... 1,980 (5,630) (4,899) 5,863 65
CASH AND CASH EQUIVALENTS, beginning of period............................ 6,360 11,259 11,259 5,396 5,331
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period.................................. $ 8,340 $ 5,629 $ 6,360 $ 11,259 $ 5,396
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid........................................................... $ 2,677 $ 2,790 $ 11,347 $ 6,383 $ 4,156
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Income taxes paid....................................................... $ 81 $ 76 $ 934 $ 615 $ 309
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997 AND DECEMBER 31, 1996 AND 1995
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
1. BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES:
BNCCORP, Inc. (BNCCORP) is a bank holding company incorporated in Delaware.
The following is background information and a summary of significant accounting
policies followed by BNCCORP and its subsidiaries in the determination of
financial position, results of operations and cash flows.
ORGANIZATION
The consolidated financial statements include the accounts of BNCCORP and
its subsidiaries. All significant intercompany accounts have been eliminated in
consolidation. BNCCORP was initially incorporated under the name of Linton
Bancshares and had subsidiary banks in Linton (First National Bank of Linton)
and Bismarck (BNC National Bank of Bismarck), North Dakota. An affiliated bank
holding company, Farmers & Merchants Bancshares, had its subsidiary bank
(Farmers & Merchants Bank of Beach-FMB) in Beach, North Dakota. These two bank
holding companies were merged effective January 1, 1994. This transaction was
recorded in a manner similar to a pooling of interests due to the common
ownership of BNCCORP and Farmers & Merchants Bancshares. In August 1995, the two
BNCCORP subsidiaries, BNC National Bank of Bismarck and First National Bank of
Linton, were merged. Also in August 1995, BNC National Bank of Bismarck acquired
seven North Dakota branches from First Bank System, Inc. (former Metropolitan
Federal Bank, fsb branches). In October 1995, FMB was sold. In January 1996,
BNCCORP was granted a charter for BNC National Bank of Minnesota located in
Minneapolis, Minnesota. In May 1996, BNCCORP acquired a nonbank commercial
finance company, BNC Financial Corporation located in St. Cloud, Minnesota (see
Note 2).
As of December 31, 1996, BNCCORP's wholly owned subsidiaries were BNC
National Bank of Bismarck and Bismarck Properties, Inc. operating primarily in
North Dakota, and BNC National Bank of Minnesota and BNC Financial Corporation
operating primarily in Minnesota.
During 1995, BNCCORP sold 1,106,000 shares of common stock (including
106,000 shares sold pursuant to the underwriters' overallotment option) at
$10.00 per share in an initial public offering. Net proceeds from the offering
of approximately $9,717,000 were received by BNCCORP. A portion of the proceeds
was used in January 1996 to capitalize BNC National Bank of Minnesota (see
above) and to inject additional capital into BNC National Bank of Bismarck, with
the remaining proceeds used for working capital and general corporate purposes.
In addition, 20,000 shares of restricted stock were issued to various company
managers and employees under BNCCORP's stock incentive plan (see Note 15).
INTERIM FINANCIAL STATEMENTS
The consolidated Statement of Financial Condition and Consolidated Statement
of Stockholders' Equity as of March 31, 1997, and the related Consolidated
Statements of Income and Cash Flows for the three months ended March 31, 1997
and 1996, are unaudited and are not covered by the report of independent public
accountants. However, in the opinion of management these interim financial
statements include all adjustments (consisting of only normal recurring
adjustments) which are necessary for the fair presentation of the results for
the interim periods presented. The results of operations for the unaudited
three-month period ended March 31, 1997 are not necessarily indicative of the
results which may be expected for the entire 1997 fiscal year.
F-7
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997 AND DECEMBER 31, 1996 AND 1995
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
1. BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
REGULATORY ENVIRONMENT
BNCCORP and its subsidiary banks are subject to regulations of certain state
and federal agencies, including periodic examinations by those regulatory
agencies. BNCCORP and its subsidiary banks are also subject to minimum
regulatory capital requirements. At December 31, 1996, capital levels exceed
minimum capital requirements (see Note 9).
SECURITIES
BNCCORP follows the accounting prescribed in Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" (SFAS 115). SFAS 115 addresses accounting and reporting for
all investments in debt and equity securities. Under SFAS 115, investments are
classified into three categories and accounted for as follows:
HELD-TO-MATURITY
This category includes debt securities that BNCCORP has the positive intent
and ability to hold to maturity. All securities in this category are recorded at
amortized historical cost. BNCCORP had no securities in the held-to-maturity
portfolio at March 31, 1997 or at December 31, 1996 or 1995.
TRADING SECURITIES
Trading securities are purchased and sold for the purpose of generating
profits on short-term differences in market prices and are recorded at fair
value, with any unrealized gains and losses being reflected in earnings. BNCCORP
holds no securities for trading purposes.
AVAILABLE-FOR-SALE
Available-for-sale securities do not meet the classification criteria for
held-to-maturity or trading securities and are recorded at fair value, with any
unrealized gains and losses being reflected as a separate component of
stockholders' equity, net of tax effects.
Both amortization and accretion are computed using the estimated effective
interest method. Gains or losses on sales of securities are recognized upon
disposal. The adjusted cost of specific securities sold is used to compute the
gain or loss on sale.
PREMISES, LEASEHOLD IMPROVEMENTS AND EQUIPMENT
Premises, leasehold improvements and equipment are reported at cost less
accumulated depreciation and amortization. Depreciation and amortization for
financial reporting purposes is charged to operating expense using the
straight-line method over the estimated useful lives of the assets. Approximate
estimated useful lives are up to 40 years for buildings and three to ten years
for furniture and equipment. Leasehold improvements are amortized over the
shorter of the lease term or the estimated useful life of the improvement.
Accelerated methods of depreciation and amortization are used for income tax
purposes.
F-8
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997 AND DECEMBER 31, 1996 AND 1995
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
1. BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
OTHER REAL ESTATE OWNED
Other real estate owned, which is included in other assets, represents
properties acquired through foreclosures or other proceedings or those
considered in-substance foreclosures, and is stated at the lower of cost or fair
value at the date of acquisition. Write-downs to fair value at the time of
acquisition are charged to the allowance for loan losses; write-downs and costs
incurred subsequent to acquisition are charged to expense. At March 31, 1997 and
December 31, 1996, BNCCORP had a recorded investment in properties acquired
through foreclosures of $159,000. There were no properties acquired through
foreclosures or in-substance foreclosures recorded at December 31, 1995.
LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are stated at the amount of unpaid principal net of unearned fees and
costs and an allowance for loan losses. The allowance for loan losses is
established through a provision for loan losses charged to expense. The
provision for loan losses is based upon BNCCORP's past loan loss experience,
current economic conditions and an evaluation of the loan portfolio. The
allowance for loan losses is increased by the provision for loan losses charged
to expense and is reduced by net loan charge-offs. Current and future economic
developments or other factors may have a significant impact on the market value
of real estate and other collateral. Accordingly, ultimate losses may vary from
current estimates. These estimates are reviewed in detail quarterly and
adjustments, as they become necessary, are reported in the results of operations
in the periods in which they become known. In management's opinion, the
allowance for loan losses is sufficient to adequately provide for potential loan
losses.
Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan" (SFAS 114), and Statement of Financial
Accounting Standards No. 118, "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures" (SFAS 118), effective January 1, 1995,
modified the accounting by creditors for impairment of a loan and in-substance
foreclosure, among other things. Adoption of these standards has not had a
material impact on BNCCORP's consolidated financial statements.
Loans, including impaired loans, are generally placed on a nonaccrual basis
for recognition of interest income when, in the opinion of management,
uncertainty exists as to the ultimate collection of principal or interest. At
the time a loan is placed on nonaccrual status, accrued but uncollected interest
income applicable to the current period is reversed against interest income of
the current period. Accrued but uncollected interest income applicable to
previous periods is charged against the loan loss reserve as BNCCORP provides
for a reserve for accrued interest. While a loan is classified as nonaccrual,
collections of principal and interest are generally applied as a reduction to
principal outstanding.
Loans may be returned to accrual status when all principal and interest
amounts contractually due are reasonably assured of repayment within an
acceptable period of time, and there is a sustained period of repayment
performance by the borrower, in accordance with the contractual terms of
principal and interest.
F-9
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997 AND DECEMBER 31, 1996 AND 1995
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
1. BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
LOAN FEE INCOME
BNCCORP recognizes loan fees and certain direct origination costs over the
estimated life of the loan, utilizing a method that results in a constant rate
of return. Most of the loans originated by BNCCORP are short-term loans. A
significant portion of BNCCORP's loan fee income is derived from loans which are
originated and subsequently sold. Such fees are recognized in income at the date
of sale.
MORTGAGE SERVICING RIGHTS AND TRANSFERS OF FINANCIAL ASSETS
Statement of Financial Accounting Standards No. 122, "Accounting for
Mortgage Servicing Rights" (SFAS 122), effective January 1, 1996, requires an
entity to record an asset for mortgage servicing rights when it sells mortgages
and retains the servicing, and then amortize this asset over the period during
which servicing income is expected to be received. The capitalized mortgage
servicing rights must be assessed for impairment based on the current fair value
of those rights and such impairment must be recognized through a valuation
allowance. Adoption of this standard has not had a material effect on BNCCORP's
consolidated financial statements.
Statement of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
(SFAS 125), effective January 1, 1997, supersedes SFAS 122 and establishes
accounting methods aimed at ensuring that entities recognize only assets
controlled and liabilities incurred and derecognize assets only when control has
been surrendered and liabilities only when they have been extinguished.
Statement of Financial Accounting Standards No. 127, "Deferral of the Effective
Date of Certain Provisions of FASB Statement No. 125" (SFAS 127), effective
January 1, 1997, defers certain provisions of SFAS 125 until January 1, 1998.
Adoption of these standards is not expected to have a material effect on
BNCCORP's consolidated financial statements.
COST IN EXCESS OF NET ASSETS ACQUIRED
Cost in excess of net assets acquired represents the premium paid for
deposits assumed and goodwill. Premiums paid for deposits assumed totaling
$4,022,000 are being amortized over their estimated lives of ten years using the
straight-line method. Accumulated amortization was $914,000 as of March 31,
1997. Goodwill totaling $900,000 represents amounts paid for subsidiaries in
excess of the fair value of identifiable assets. Goodwill is being amortized
over its estimated useful life of 15 to 25 years using the straight-line method.
Accumulated amortization was $188,000 as of March 31, 1997.
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
(SFAS 121), effective January 1, 1996, established accounting standards for the
impairment of long-lived assets. Adoption of this standard has not had a
material impact on BNCCORP's consolidated financial statements.
INCOME TAXES
BNCCORP and its subsidiaries file a consolidated federal income tax return.
State income tax returns are filed separately by each subsidiary. In accordance
with a tax sharing arrangement, BNCCORP collects for or pays to each of its
subsidiaries the tax or tax benefit resulting from its inclusion in the
consolidated federal return.
F-10
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997 AND DECEMBER 31, 1996 AND 1995
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
1. BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Deferred income taxes are reported for temporary differences between items
of income or expense reported for financial statement purposes and those
reported for income tax purposes. The differences relate primarily to
differences in accounting for loan losses, depreciation timing differences,
unrealized gains and losses on investment securities and leases which are
treated as operating leases for tax purposes and capital leases for financial
statement purposes.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and due from banks.
EARNINGS PER SHARE
Earnings per common share are computed by dividing net profits by the
weighted average number of common and common equivalent shares of stock
outstanding during the period. Primary and fully diluted earnings per share are
the same.
The weighted average number of common and common equivalent shares of stock
utilized in the per share computations was 2,338,720, 1,720,030 and 1,218,909 in
1996, 1995 and 1994, respectively and 2,338,720 for the three month periods
ended March 31, 1997 and 1996.
USE OF ESTIMATES IN FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The ultimate results could differ from those estimates.
RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
(SFAS 128), issued in February 1997 and effective January 1, 1998, supersedes
AICPA Accounting Principles Board Opinion No. 15, "Earnings per Share" (APB 15)
and other related accounting pronouncements and interpretations, and specifies
new computation, presentation and disclosure requirements for earnings per
share. Adoption of this standard is not expected to have a material effect on
the calculation of BNC's earnings per share.
Statement of Financial Accounting Standards No. 129, "Disclosure of
Information About Capital Structure" (SFAS 129), also issued in February 1997
and effective January 1, 1998, summarizes disclosure requirements pertaining to
an entity's capital structure. SFAS 129 is a compilation of several previously
issued standards and pronouncements, therefore, adoption of this standard is not
expected to have a material effect on BNC's consolidated financial statements.
2. ACQUISITIONS AND DIVESTITURES:
In August 1995, BNCCORP acquired seven North Dakota branches from First Bank
System, Inc. (former Metropolitan Federal Bank, fsb branches). The purchase
price for the seven branches was
F-11
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997 AND DECEMBER 31, 1996 AND 1995
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
2. ACQUISITIONS AND DIVESTITURES: (CONTINUED)
approximately $5,357,000. The purchase was funded with proceeds from the sale of
common stock in BNCCORP's initial public offering. The acquisition was accounted
for using the purchase method of accounting. One of the seven branches was sold
in October 1995 along with FMB (see below). The resulting premiums paid for
deposits of $3,497,000 and goodwill of $112,000 are being amortized over 10
years and 15 years, respectively.
In October 1995, BNCCORP sold FMB to Community First Bankshares, Inc.
BNCCORP received approximately $3.8 million for its 89.6% interest, resulting in
a gain of $316,000. Proceeds of approximately $238,000 were also received by two
minority shareholders of FMB who are also officers and directors of BNCCORP. As
part of the sale, BNCCORP purchased $17.7 million in loans which had been
participated to FMB and $655,000 in previously nonperforming and restructured
loans.
The following pro forma financial information has been prepared assuming the
sale of FMB had been consummated at the beginning of the respective periods.
Because there did not exist sufficient continuity of the deposits and assets
acquired in connection with the acquisition of the First Bank deposits and
because financial information related to such deposits and assets was not
divisible from the financial information of First Bank, pro forma financial
information regarding the deposits and assets acquired is not included. The pro
forma financial information is not necessarily indicative of the results of
operations that would have occurred had the transactions been consummated on the
assumed dates.
Pro forma financial information for the years ended December 31 (in
thousands, except per share data) is as follows:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Total interest income.................................................... $ 14,108 $ 9,157
Total interest expense................................................... 7,567 3,409
Net interest income...................................................... 6,541 5,748
Net income............................................................... 1,381 815
--------- ---------
--------- ---------
Earnings per share....................................................... $ 0.80 $ 0.67
--------- ---------
--------- ---------
</TABLE>
In January 1996, BNCCORP was granted a charter for its DE NOVO BNC National
Bank of Minnesota, Minneapolis, Minnesota, and provided initial capital of $5.0
million to the wholly-owned bank which is engaged in commercial banking
activities in the Minneapolis/Saint Paul area. The capital injection was funded
through proceeds from the sale of common stock in BNCCORP's initial public
offering (July 1995).
In May 1996, BNCCORP acquired a nonbank commercial finance company, BNC
Financial Corporation, St. Cloud, Minnesota, for $85,000. BNCCORP provided
initial capital of $1.0 million to the wholly-owned subsidiary, which is engaged
primarily in asset-based commercial financing. Goodwill of $66,000 resulting
from the transaction is being amortized over 25 years.
In December 1996, BNCCORP acquired the accounting firm of Gregory K.
Cleveland & Company, Bismarck, North Dakota (the Firm). The Firm was owned by an
executive officer/director of BNCCORP. The purchase price for the Firm was
approximately $368,000 and was based on the Firm's customer receivables,
prepaids and certain intangibles. Goodwill of $265,000 resulting from the
transaction is being
F-12
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997 AND DECEMBER 31, 1996 AND 1995
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
2. ACQUISITIONS AND DIVESTITURES: (CONTINUED)
amortized over 15 years. Employees of the Firm now staff the newly established
trust and private banking division at BNC National Bank of Bismarck.
Effective January 1997, BNCCORP acquired the stock of the J.D. Meier
Insurance Agency, Linton, North Dakota (the Agency). Three executive officers of
BNCCORP owned stock in the Agency. The purchase price for the stock was
approximately $34,000, and BNCCORP provided additional capital of $75,000 to the
wholly owned subsidiary. The Agency is operating as a subsidiary of BNC National
Bank of Bismarck and engages in insurance business.
3. SECURITIES:
BNCCORP had no securities designated as held-to-maturity or trading in its
portfolio at March 31, 1997 or at December 31, 1996 or 1995. In December 1995,
securities with an aggregate amortized cost of $1,129,000 and net unrealized
gains of $134,000 were transferred from held-to-maturity to available-for-sale
in accordance with the implementation provisions of SFAS 115.
AVAILABLE-FOR-SALE SECURITIES
The amortized cost, gross unrealized gains and losses, and estimated fair
market value of securities available for sale were as follows as of December 31
(in thousands):
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
1996
U.S. Treasury securities.......................................... $ 13,814 $ 42 $ -- $ 13,856
U.S. government agency mortgage-backed securities................. 9,555 4 -- 9,559
U.S. government agencies securities............................... 3,633 13 (4) 3,642
Collateralized mortgage obligations............................... 23,898 -- (43) 23,855
Other securities.................................................. 7,773 13 (7) 7,779
State and municipal bonds......................................... 759 41 -- 800
----------- ----- ----------- -----------
$ 59,432 $ 113 $ (54) $ 59,491
----------- ----- ----------- -----------
----------- ----- ----------- -----------
1995
U.S. Treasury securities.......................................... $ 25,041 $ 63 $ (3) $ 25,101
U.S. government agency mortgage-backed securities................. 4,798 45 -- 4,843
U.S. government agencies securities............................... 7,513 7 -- 7,520
Collateralized mortgage obligations............................... 44,800 3 -- 44,803
Other securities.................................................. 10,882 7 (4) 10,885
State and municipal bonds......................................... 1,162 102 -- 1,264
----------- ----- ----------- -----------
$ 94,196 $ 227 $ (7) $ 94,416
----------- ----- ----------- -----------
----------- ----- ----------- -----------
</TABLE>
F-13
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997 AND DECEMBER 31, 1996 AND 1995
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
3. SECURITIES: (CONTINUED)
Scheduled maturities for securities available for sale were as follows as of
December 31 (in thousands):
<TABLE>
<CAPTION>
1996 1995
------------------------ ------------------------
ESTIMATED ESTIMATED
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Due in one year or less............................................ $ 11,531 $ 11,538 $ 14,563 $ 14,563
Due after one year through five years.............................. 15,062 15,117 25,703 25,796
Due after five years through ten years............................. 18,934 18,971 21,269 21,381
Due after ten years................................................ 13,905 13,865 32,661 32,676
----------- ----------- ----------- -----------
Total.......................................................... $ 59,432 $ 59,491 $ 94,196 $ 94,416
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
BNCCORP recognized net gains (losses) on sales of securities available for
sale of approximately $19,000, $(18,000) and $28,000 in 1996, 1995 and 1994,
respectively and ($11,000) and $5,000 for the three month periods ended March
31, 1997 and 1996, respectively.
4. LOANS:
The composition of the loan portfolio was as follows (in thousands):
<TABLE>
<CAPTION>
AS OF AS OF DECEMBER 31,
MARCH 31, --------------------
1997 1996 1995
----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Commercial and industrial.................... $ 96,878 $ 94,701 $ 41,639
Agricultural................................. 20,084 20,673 18,046
Real estate:
Mortgage................................... 49,601 47,451 36,606
Construction............................... 11,597 8,806 5,884
Consumer..................................... 18,738 18,343 9,580
Lease financing.............................. 12,827 12,970 8,660
Other........................................ -- 391 380
----------- --------- ---------
Total.................................... 209,725 203,335 120,795
Less:
Allowance for loan losses.................. (1,736) (1,594) (1,048)
Deferred loan fees and costs............... (242) (338) (112)
----------- --------- ---------
$ 207,747 $ 201,403 $ 119,635
----------- --------- ---------
----------- --------- ---------
</TABLE>
Loans on a nonaccrual basis, including impaired loans, were approximately
$86,000, $61,000 and $71,000 at March 31, 1997, December 31, 1996 and 1995,
respectively. Interest on those loans included in income amounted to $1,000 and
$2,000 in 1996 and 1995, respectively. Total interest income of $12,000 and
$13,000 in 1996 and 1995, respectively, would have been recognized under the
original terms of the loans.
F-14
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997 AND DECEMBER 31, 1996 AND 1995
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
4. LOANS: (CONTINUED)
The recorded investment in loans for which impairment had been recognized in
accordance with SFAS 114 totaled $4.0 million and $1.5 million at December 31,
1996 and 1995, respectively. The allowance for loan losses on these loans was
$171,000 and $131,000 at December 31, 1996 and 1995, respectively. For the years
ended December 31, 1996 and 1995, the average recorded investment in impaired
loans was approximately $3.6 million and $2.1 million, respectively. BNCCORP
recognized $216,000 and $122,000 of interest on impaired loans, most of which
was recognized on a cash basis in 1996 and 1995, respectively.
Loans to officers, directors and employees totaled $806,000 and $527,000 at
December 31, 1996 and 1995, respectively, and loans to other related parties
totaled $259,000 and $941,000 at December 31, 1996 and 1995, respectively.
As of December 31, 1996, 66% of BNCCORP's loans were to borrowers located in
the North Dakota market area, 24% were to borrowers in the Minnesota market
area, and 10% were to borrowers in other market areas. Commercial loan borrowers
are generally small- to medium-sized corporations, partnerships and sole
proprietors in a wide variety of businesses. Loans to consumers are both secured
and unsecured. Real estate secured loans are fixed or variable rate and include
both amortizing and revolving line-of-credit loans.
Real estate mortgage loans include various types of loans for which BNCCORP
holds real property as collateral. Of the $47.5 million real estate mortgage
loans as of December 31, 1996, approximately $20 million were loans made to
commercial customers where the collateral for the loan is, among other things,
the real estate occupied by the business of the customer. Accordingly, certain
loans categorized as real estate mortgage loans can be characterized as
commercial loans which are secured by real estate.
Transactions in the allowance for loan losses were as follows (in
thousands):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
FOR THE YEAR ENDED
ENDED MARCH 31, DECEMBER 31,
-------------------- -------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Balance, beginning of period..................................... $ 1,594 $ 1,048 $ 1,048 $ 1,021 $ 713
Provision for loan losses...................................... 170 84 739 168 179
Loans charged off.............................................. (39) (1) (350) (248) (23)
Loans recovered................................................ 11 5 157 207 152
Allowance attributable to subsidiary sold...................... -- -- -- (100) --
--------- --------- --------- --------- ---------
Balance, end of period........................................... $ 1,736 $ 1,136 $ 1,594 $ 1,048 $ 1,021
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
F-15
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997 AND DECEMBER 31, 1996 AND 1995
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
5. PREMISES, LEASEHOLD IMPROVEMENTS AND EQUIPMENT:
Premises, leasehold improvements and equipment consisted of the following
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
MARCH --------- ---------
1997
-----------
(UNAUDITED)
<S> <C> <C> <C>
Land and improvements........................................................... $ 508 $ 508 $ 264
Buildings and improvements...................................................... 3,879 3,346 3,364
Leasehold improvements.......................................................... 753 719 336
Furniture, fixtures and equipment............................................... 3,978 3,701 3,047
----------- --------- ---------
Total cost.................................................................. 9,118 8,274 7,011
Less accumulated depreciation and amortization.................................. (1,764) (1,617) (1,233)
----------- --------- ---------
Net premises, leasehold improvements and equipment.......................... $ 7,354 $ 6,657 $ 5,778
----------- --------- ---------
----------- --------- ---------
</TABLE>
Depreciation and amortization expense on premises, leasehold improvements
and equipment totaled approximately $499,000, $377,000 and $348,000 for the
years ended December 31, 1996, 1995 and 1994, respectively and $152,000 and
$104,000 for the three month periods ended March 31, 1997 and 1996,
respectively.
6. INCOME TAXES:
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED FOR THE YEAR ENDED
MARCH 31, DECEMBER 31,
-------------------- -------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Current................................................................. $ 351 $ 122 $ 965 $ 589 $ 564
Deferred income taxes from the following timing differences:
Provision for loan losses........................................... (56) (20) (274) (11) (105)
Depreciation........................................................ 11 19 87 6 71
Leases.............................................................. 21 20 129 128 118
Other............................................................... 28 (14) 240 (71) 31
--------- --------- --------- --------- ---------
$ 355 $ 127 $ 1,147 $ 641 $ 679
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
F-16
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997 AND DECEMBER 31, 1996 AND 1995
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
6. INCOME TAXES: (CONTINUED)
The provision for federal income taxes expected at the statutory rate
differs from the actual provision as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED FOR THE YEAR ENDED
MARCH 31, DECEMBER 31,
-------------------- -------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Tax at 34% statutory rate................................................ $ 311 $ 92 $ 1,018 $ 611 $ 636
Increase (decrease) resulting from:
State taxes, net of federal benefit.................................. 45 37 131 91 116
Minority interest in consolidated earnings........................... -- -- -- 19 20
Benefit of AMT credit carryforwards.................................. -- -- -- (42) (42)
Tax-exempt interest.................................................. (5) (4) (27) (43) (59)
Other, net........................................................... 4 2 25 5 8
--------- --------- --------- --------- ---------
$ 355 $ 127 $ 1,147 $ 641 $ 679
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
Temporary differences between the financial statement carrying amounts and
tax bases of assets and liabilities that result in significant portions of
BNCCORP's deferred tax assets and liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, --------------------
1997 1996 1995
----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax asset:
Loans, primarily due to differences in accounting for loan
losses.......................................................... $ 634 $ 577 $ 333
Unrealized loss on securities available for sale.................. 162 -- --
Other............................................................. 122 145 41
----- --------- ---------
Deferred tax asset............................................ 918 722 374
----- --------- ---------
Deferred tax liability:
Unrealized gain on securities available for sale.................. -- 16 86
Leases, primarily due to differences in accounting for leases..... 547 524 385
Premises and equipment, primarily due to differences in original
cost basis and depreciation..................................... 463 451 354
----- --------- ---------
Deferred tax liability........................................ 1,010 991 825
----- --------- ---------
Net deferred tax liability.................................... $ 92 $ 269 $ 451
----- --------- ---------
----- --------- ---------
</TABLE>
F-17
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997 AND DECEMBER 31, 1996 AND 1995
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
7. NOTES PAYABLE:
BNCCORP's notes payable consist of the following as of December 31 (in
thousands):
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Federal funds purchased...................................................................... $ 1,437 $ --
Advance from the Federal Home Loan Bank (FHLB), principal due August 1997, interest payable
monthly at 6.60%, secured by single-family mortgage loans and government agency
securities................................................................................. 1,000 1,000
Advances from FHLB, principal due April 1997, interest payable monthly at the one-month LIBOR
rate minus .3% (5.59% at December 31, 1996), secured by single-family mortgage loans and
government agency securities............................................................... 9,000 --
Notes payable to American National Bank, maturing in 2000 with annual paydowns of $550,000 on
March 31 of each year, interest payable quarterly at the prime rate plus .5% (9.25% at
December 31, 1995), secured by stock of subsidiary bank.................................... -- 3,354
Notes payable to Firstar Bank Milwaukee, N.A. (Firstar) including a term note for $3 million
and a revolving line of credit up to $7 million, interest payable quarterly at either the
prime rate or LIBOR rate plus 2% at BNCCORP's option (7.50% at December 31, 1996), secured
by stock of subsidiary banks............................................................... 10,000 --
Revolving line of credit with Bank Windsor, principal due September 1997, interest payable
quarterly at the prime rate plus .75% (9.00% at December 31, 1996)......................... 615 --
--------- ---------
Total.................................................................................. $ 22,052 $ 4,354
--------- ---------
--------- ---------
</TABLE>
The notes payable to American National Bank at December 31, 1995 were
refinanced with Firstar in February 1996.
The Firstar notes were amended in February 1997 to include a $3 million term
note and a $12 million revolving line of credit, both of which mature in 1998.
Collateral, interest rates and timing of payments on those notes are as
indicated above.
BNCCORP was in compliance with all debt covenants at December 31, 1996.
8. STOCKHOLDERS' EQUITY:
BNCCORP and its subsidiary banks are subject to certain minimum capital
requirements (see Note 9). In addition, certain regulatory restrictions exist
regarding the ability of the subsidiary banks to transfer funds to BNCCORP in
the form of cash dividends, loans or advances. Approval of the principal
regulator is required for the banks to pay dividends to BNCCORP in excess of the
subsidiary banks' earnings retained in the current year plus retained net
profits for the preceding two years.
Effective June 1995, BNCCORP declared a 60-for-1 stock split of BNCCORP's
common stock and reincorporated BNCCORP in Delaware, in connection with its
initial public offering. This stock split has been retroactively reflected in
the financial statements.
In connection with its initial public offering (see Note 1), BNCCORP agreed
to sell to the underwriter, for nominal consideration, a warrant to purchase
50,000 shares of common stock (the Warrant).
F-18
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997 AND DECEMBER 31, 1996 AND 1995
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
8. STOCKHOLDERS' EQUITY: (CONTINUED)
The Warrant became exercisable at $12 per share in June 1996 and remains
exercisable for a period of four years. No warrants had been exercised as of
March 31, 1997.
9. REGULATORY CAPITAL:
BNCCORP and its subsidiary banks are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory--and possibly
additional discretionary--actions by regulators that, if undertaken, could have
a direct material effect on the bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
BNCCORP and its subsidiary banks must meet specific capital guidelines that
involve quantitative measures of their assets, liabilities and certain off-
balance-sheet items as calculated under regulatory accounting practices. Capital
amounts and classifications of BNCCORP and its banks are also subject to
qualitative judgments by the regulators about components, risk weightings and
other factors.
Quantitative measures established by the regulations to ensure capital
adequacy require BNCCORP and its banks to maintain minimum amounts and ratios
(set forth in the tables that follow) of total and Tier 1 capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). Management believes that, as of March
31, 1997, BNCCORP and the Banks meet all capital adequacy requirements to which
they are subject.
As of March 31, 1997, the most recent notifications from the Office of the
Comptroller of the Currency (OCC) categorized BNCCORP's subsidiary banks as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, the banks must maintain minimum total
risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the
table that follows. There are no conditions or events since that notification
that management believes have changed the institutions' categories.
F-19
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997 AND DECEMBER 31, 1996 AND 1995
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
9. REGULATORY CAPITAL: (CONTINUED)
Actual capital amounts and ratios of BNCCORP and its subsidiary banks as of
December 31 are also presented in the tables (dollar amounts in thousands):
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
-------------------- -------------------- --------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1996
TOTAL CAPITAL (to risk weighted assets):
Consolidated.................................... $ 20,109 8.8% $ 18,206 a8.0% N/A N/A
BNC National Bank of Bismarck................... 19,009 10.4 14,644 a8.0 $ 18,306 a10.0%
BNC National Bank of Minnesota.................. 4,981 12.2 3,255 a8.0 4,069 a10.0
TIER 1 CAPITAL (to risk weighted assets):
Consolidated.................................... 18,515 8.1 9,103 a4.0 N/A N/A
BNC National Bank of Bismarck................... 17,759 9.7 7,322 a4.0 10,983 a6.0
BNC National Bank of Minnesota.................. 4,688 11.5 1,628 a4.0 2,441 a6.0
TIER 1 CAPITAL (to average assets):
Consolidated.................................... 18,515 6.7 11,112 a4.0 N/A N/A
BNC National Bank of Bismarck................... 17,759 7.1 10,006 a4.0 12,508 a5.0
BNC National Bank of Minnesota.................. 4,688 12.9 1,453 a4.0 1,817 a5.0
AS OF DECEMBER 31, 1995
TOTAL CAPITAL (to risk weighted assets):
Consolidated.................................... 17,768 12.5 11,375 a8.0 N/A N/A
BNC National Bank of Bismarck................... 14,072 10.1 11,202 a8.0 14,003 a10.0
TIER 1 CAPITAL (to risk weighted assets):
Consolidated.................................... 16,720 11.8 5,688 a4.0 N/A N/A
BNC National Bank of Bismarck................... 13,024 9.3 5,601 a4.0 8,402 a6.0
TIER 1 CAPITAL (to average assets):
Consolidated.................................... 16,720 7.0 9,497 a4.0 N/A N/A
BNC National Bank of Bismarck................... 13,024 5.7 9,215 a4.0 11,519 a5.0
</TABLE>
F-20
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997 AND DECEMBER 31, 1996 AND 1995
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
9. REGULATORY CAPITAL: (CONTINUED)
Ratios of the Company and its subsidiary banks as of March 31, 1997 are
presented below:
<TABLE>
<CAPTION>
TO BE WELL
MINIMUM CAPITALIZED
REQUIRED UNDER PROMPT
FOR CORRECTIVE
CAPITAL ACTION
ACTUAL ADEQUACY PROVISIONS
--------- ---------- -------------
<S> <C> <C> <C>
Total Capital (to risk weighted assets):
Consolidated.............................................................. 8.8% a8.0% N/A
BNC National Bank of Bismarck............................................. 10.6 a8.0 a10.0%
BNC National Bank of Minnesota............................................ 11.3 a8.0 a10.0
Tier 1 Capital (to risk weighted assets):
Consolidated.............................................................. 8.1 a4.0 N/A
BNC National Bank of Bismarck............................................. 9.9 a4.0 a6.0
BNC National Bank of Minnesota............................................ 10.5 a4.0 a6.0
Tier 1 Capital (to average assets):
Consolidated.............................................................. 6.6 a4.0 N/A
BNC National Bank of Bismarck............................................. 7.2 a4.0 a5.0
BNC National Bank of Minnesota............................................ 11.5 a4.0 a5.0
</TABLE>
F-21
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997 AND DECEMBER 31, 1996 AND 1995
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
10. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The estimated fair values of BNCCORP's financial instruments are as follows
as of December 31 (in thousands):
<TABLE>
<CAPTION>
1996 1995
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Assets:
Cash, due from banks and federal funds sold.................... $ 13,260 $ 13,260 $ 14,209 $ 14,209
Securities available for sale.................................. 59,491 59,491 94,416 94,416
Loans, net..................................................... 201,403 200,669 119,635 119,959
---------- ---------- ---------- ----------
274,154 $ 273,420 228,260 $ 228,584
---------- ----------
---------- ----------
Other assets................................................... 14,404 12,139
---------- ----------
$ 288,558 $ 240,399
---------- ----------
---------- ----------
Liabilities:
Deposits, noninterest-bearing.................................. $ 22,218 $ 22,218 $ 16,874 $ 16,874
Deposits, interest-bearing..................................... 217,552 217,684 194,174 194,017
Notes payable.................................................. 22,052 22,060 4,354 4,358
---------- ---------- ---------- ----------
261,822 $ 261,962 215,402 $ 215,249
---------- ----------
---------- ----------
Other liabilities.............................................. 4,101 4,110
Stockholders' equity........................................... 22,635 20,887
---------- ----------
$ 288,558 $ 240,399
---------- ----------
---------- ----------
</TABLE>
The following methods and assumptions were used to estimate the above fair
values.
CASH AND CASH EQUIVALENTS, NONINTEREST-BEARING DEPOSITS AND DEMAND DEPOSITS
The carrying amounts for cash and cash equivalents, as well as
noninterest-bearing deposits, approximate fair value due to the short maturity
of the instruments. The fair value of demand deposits, such as NOW, savings and
money market accounts, is equal to the amount payable on demand at the reporting
date.
SECURITIES
The fair value of BNCCORP's securities equals the quoted market price.
LOANS
Fair values for loans are estimated by discounting future cash flow payment
streams using rates at which current loans to borrowers with similar credit
ratings and similar loan maturities are being made.
F-22
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997 AND DECEMBER 31, 1996 AND 1995
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
10. FAIR VALUE OF FINANCIAL INSTRUMENTS: (CONTINUED)
INTEREST-BEARING DEPOSITS
Fair values of interest-bearing deposit liabilities are estimated by
discounting future cash flow payment streams using rates at which comparable
current deposits with comparable maturities are being issued.
BORROWINGS
The carrying amount of short-term borrowings approximates fair value due to
the short maturity and the instruments' floating interest rates, which are tied
to market conditions. The fair values of long-term borrowings, for which the
maturity extends beyond one year, are estimated by discounting future cash flow
payment streams using rates at which comparable borrowings are currently being
offered.
11. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK:
BNCCORP is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit, including
loan commitments and unused portions of lines of credit, and standby letters of
credit. These instruments involve, to varying degrees, elements of credit risk
in excess of the amount recognized in the balance sheet. The contract or
notional amounts of these instruments reflect the extent of involvement BNCCORP
has in particular classes of financial instruments.
BNCCORP's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for the commitments to extend credit and
standby letters of credit is represented by the contractual or notional amount
of those instruments. BNCCORP generally requires collateral or other security
specifically to support off-balance-sheet financial instruments with credit
risk.
Financial instruments with contract amounts representing credit risk are as
follows as of December 31 (in thousands):
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Commitments to extend credit............................................ $ 59,553 $ 28,034
Standby letters of credit............................................... 1,048 714
--------- ---------
$ 60,601 $ 28,748
--------- ---------
--------- ---------
</TABLE>
12. RELATED-PARTY TRANSACTIONS:
BNCCORP has entered into transactions with its stockholders, directors,
officers and other affiliates including the accounting firm and insurance agency
purchases discussed in Note 2. In the opinion of management, such transactions
have been fair and reasonable to BNCCORP and have been entered into under terms
and rates substantially the same as those offered by BNCCORP in the ordinary
course of business.
F-23
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997 AND DECEMBER 31, 1996 AND 1995
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
13. BENEFIT PLANS:
BNCCORP has a 401(k) plan covering all employees of BNCCORP and its
subsidiaries who meet specified age and service requirements. Eligible employees
may elect to defer up to 10% of compensation each year (15% effective January 1,
1997), not to exceed the dollar limit set by law. At their discretion, BNCCORP
and its subsidiaries provide matching contributions of up to 50% of employee
deferrals up to a maximum employer contribution of 5% of compensation. BNCCORP
made matching contributions of $79,000, $65,000 and $55,000 in 1996, 1995 and
1994, respectively. Under the investment options available under the 401(k)
plan, employees may elect to invest their salary deferrals in BNCCORP stock.
BNCCORP provides no significant postretirement or postemployment benefits.
14. COMMITMENTS AND CONTINGENCIES:
EMPLOYMENT AGREEMENTS
BNCCORP has entered into three-year employment agreements with its chief
executive officer, chief financial officer, executive vice president and the
chief executive officer of BNC National Bank of Minnesota (the Executives). The
Executives will be paid minimum annual salaries throughout the terms of the
agreements and annual incentive bonuses as may, from time to time, be fixed by
the board of directors. The Executives will also be provided with benefits under
any employee benefit plan maintained by BNCCORP for its employees generally, or
for its senior executive officers in particular, on the same terms as are
applicable to other senior executives of BNCCORP. Under the agreements, if the
Executives' status as employees with BNCCORP is terminated for any reason other
than cause, as defined in the agreements, or if they terminate their employment
for good reason, as defined in the agreements, then the Executives will be paid
a lump-sum amount equal to three times their current annual compensation.
LEASES
BNCCORP has entered into operating lease agreements for certain facilities
and equipment used in its operations. Rent expense for the years ended December
31, 1996, 1995 and 1994, was $331,000, $100,000 and $36,000, respectively.
Minimum annual base lease payments for operating leases with remaining terms of
greater than one year are as follows:
<TABLE>
<S> <C>
1997.............................................. $ 227,520
1998.............................................. 162,169
1999.............................................. 146,072
2000.............................................. 137,191
2001.............................................. 86,920
Thereafter........................................ 93,840
</TABLE>
15. STOCK-BASED COMPENSATION PLAN:
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123), issued in October 1995 and effective for
fiscal years beginning after December 15, 1995, allows two alternative methods
of accounting for employee stock options or similar instruments. Under SFAS 123,
F-24
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997 AND DECEMBER 31, 1996 AND 1995
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
15. STOCK-BASED COMPENSATION PLAN: (CONTINUED)
an entity may either implement a fair value based method of accounting for stock
options or elect to continue to measure compensation cost under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25). Entities electing to continue under APB 25 must provide pro forma
disclosures of net income and earnings per share as if the fair value based
method of accounting had been applied.
BNCCORP adopted SFAS 123 on January 1, 1996 and has elected to continue to
measure compensation cost under APB 25 and comply with the pro forma disclosure
requirements of SFAS 123. A description of BNCCORP's stock-based compensation
plan accounted for under APB 25 is presented below.
BNCCORP's Stock Incentive Plan (the "Stock Plan"), adopted during 1995, is
intended to provide long-term incentives to its key employees, including
officers and directors who are employees of BNCCORP. The Stock Plan, which is
administered by the Compensation Committee of the Board of Directors (the
"Committee"), provides for an authorization of 250,000 shares of common stock
for issuance thereunder. Under the Stock Plan, BNCCORP may grant employees
incentive stock options, nonqualified stock options, restricted stock, stock
awards or any combination thereof. The Committee establishes the exercise price
of any stock options granted under the Stock Plan provided that the exercise
price may not be less than the fair market value of a share of common stock on
the date of grant. As of December 31, 1996, 20,000 restricted shares and 30,000
options had been awarded under the Stock Plan. The restricted stock vests in
33 1/3% increments during 1998, 1999 and 2000. All of the options are
exercisable at a price of $10 per share and vest in 20% increments on January
18, 1996 and July 18, 1996, 1997, 1998 and 1999. The options expire on July 18,
2005. No options had been exercised as of December 31, 1996 or March 31, 1997.
Had compensation cost for the plan been determined consistent with SFAS 123,
BNCCORP's net income and earnings per share would have been reduced to the
following pro forma amounts:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
FOR THE THREE DECEMBER 31,
MONTHS ENDED ----------------------
MARCH 31, 1997 1996 1995
-------------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
NET INCOME:
As reported............................................................................ $561,000 $1,847,000 $1,157,000
Pro forma.............................................................................. 557,000 1,814,000 1,157,000
PRIMARY AND FULLY DILUTED EPS:
As reported............................................................................ $ 0.24 $ 0.79 $ 0.67
Pro forma.............................................................................. 0.24 0.77 0.67
</TABLE>
F-25
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997 AND DECEMBER 31, 1996 AND 1995
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
15. STOCK-BASED COMPENSATION PLAN: (CONTINUED)
A summary of the status of the Stock Plan at March 31, 1997, December 31,
1996 and 1995 and changes during the periods then ended is presented in the
table and narrative below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
THREE MONTHS ENDED
MARCH 31, 1997
(UNAUDITED) 1996 1995
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of period.................... 30,000 $ 10 30,000 $ 10 -- $ --
Granted............................................. -- -- -- -- 30,000 10
--------- ----- --------- ----- --------- -----
Outstanding, end of period.......................... 30,000 $ 10 30,000 $ 10 30,000 $ 10
--------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- -----
Exercisable, end of period.......................... 12,000 $ 10 12,000 $ 10 -- $ --
--------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- -----
Weighted average fair value of options granted...... $ -- $ -- $ 4.50
--------- --------- ---------
--------- --------- ---------
</TABLE>
The fair value of the option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions: risk-free
interest rate of 6.08%; expected dividend yields of 0.0%; expected lives of
seven years; and expected volatility of 28.7%.
16. EVENT SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS:
In May 1997 the Company filed a registration statement with the Securities
and Exchange Commission on Form SB-2 in connection with the proposed issuance of
$15,000,000 in subordinated notes. The notes will be unsecured general
obligations of the Company and subordinated in right of payment of all other
Senior Indebtedness of the Company.
F-26
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997 AND DECEMBER 31, 1996 AND 1995
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
17. CONDENSED FINANCIAL INFORMATION--PARENT COMPANY ONLY:
Condensed financial information of BNCCORP on a parent company only basis is
as follows:
PARENT COMPANY ONLY
CONDENSED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
AS OF AS OF DECEMBER 31,
MARCH 31, --------------------
1997 1996 1995
------------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Assets:
Cash and short-term investments............................ $ 182 $ 257 $ 6,074
Investment in subsidiaries................................. 27,618 27,241 16,916
Loans...................................................... 476 545 546
Receivable from subsidiaries............................... 5,516 4,265 277
Cost in excess of net assets acquired, net................. 228 232 247
Other...................................................... 906 574 437
------------- --------- ---------
$ 34,926 $ 33,114 $ 24,497
------------- --------- ---------
------------- --------- ---------
Liabilities and stockholders' equity:
Notes payable.............................................. $ 11,549 $ 10,249 $ 3,354
Accrued expenses and other liabilities..................... 474 185 256
------------- --------- ---------
12,023 10,434 3,610
------------- --------- ---------
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 23
Capital surplus............................................ 13,768 13,768 13,776
Retained earnings.......................................... 9,578 9,062 7,170
Treasury stock............................................. (216) (216) (216)
Unrealized gain (loss) on securities available for sale.... (250) 43 134
------------- --------- ---------
22,903 22,680 20,887
------------- --------- ---------
$ 34,926 $ 33,114 $ 24,497
------------- --------- ---------
------------- --------- ---------
</TABLE>
F-27
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997 AND DECEMBER 31, 1996 AND 1995
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
17. CONDENSED FINANCIAL INFORMATION--PARENT COMPANY ONLY: (CONTINUED)
PARENT COMPANY ONLY
CONDENSED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED FOR THE YEARS ENDED
MARCH 31, DECEMBER 31,
-------------------- -------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Income:
Management fee income............................................ $ 242 $ 212 $ 927 $ 606 $ 753
Consulting income................................................ -- 1 1 -- 18
Interest......................................................... 97 14 210 134 12
Other............................................................ 1 1 137 319 32
--------- --------- --------- --------- ---------
Total income................................................... 340 228 1,275 1,059 815
--------- --------- --------- --------- ---------
Expenses:
Interest......................................................... 205 68 546 336 278
Personnel expense................................................ 214 256 965 987 1,141
Legal and other professional..................................... 20 56 155 103 91
Depreciation and amortization.................................... 12 10 49 63 48
Other............................................................ 97 101 367 300 160
--------- --------- --------- --------- ---------
Total expenses................................................. 548 491 2,082 1,789 1,718
--------- --------- --------- --------- ---------
Loss before income tax benefit and equity in undistributed income
of subsidiaries.................................................. (208) (263) (807) (730) (903)
Income tax benefit................................................. 53 88 281 258 344
--------- --------- --------- --------- ---------
Loss before equity in undistributed income of subsidiaries......... (155) (175) (526) (472) (559)
Equity in undistributed income of subsidiaries..................... 671 317 2,418 1,629 1,750
--------- --------- --------- --------- ---------
Net income..................................................... $ 516 $ 142 $ 1,892 $ 1,157 $ 1,191
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
F-28
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997 AND DECEMBER 31, 1996 AND 1995
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
17. CONDENSED FINANCIAL INFORMATION--PARENT COMPANY ONLY: (CONTINUED)
PARENT COMPANY ONLY
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED MARCH FOR THE YEARS ENDED DECEMBER
31, 31,
-------------------- -------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income........................................ $ 516 $ 142 $ 1,892 $ 1,157 $ 1,191
Adjustments to reconcile net income to net cash
provided by (used in) operating activities -
Gain on sale of subsidiary...................... -- -- -- (316) --
Depreciation and amortization................... 5 5 25 27 9
Amortization of intangible assets............... 7 5 24 36 39
Equity in undistributed income of
subsidiaries.................................. (671) (317) (2,418) (1,629) (1,750)
Change in prepaid expenses and other
receivables................................... (1,595) 98 (3,816) (168) 1,266
Change in accrued expenses and other
liabilities................................... 289 (28) (71) (228) 263
Other........................................... 5 (220) (391) (142) (16)
--------- --------- --------- --------- ---------
Net cash provided by (used in) operating
activities.................................. (1,444) (315) (4,755) (1,263) 1,002
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Net (increase) decrease in loans.................. 69 (137) 1 (546) --
Increase in investment in subsidiaries............ -- (6,000) (8,700) (6,796) (450)
Sale of investment in subsidiary.................. -- -- -- 3,811 --
Net sale (purchases) of premises, leasehold
improvements and equipment...................... -- 58 50 (108) (22)
Dividends received................................ -- -- 700 1,309 --
--------- --------- --------- --------- ---------
Net cash provided by (used in) investing
activities.................................... 69 (6,079) (7,949) (2,330) (472)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Repayments of long-term borrowings................ (10,000) (1,004) (1,004) (716) (550)
Proceeds from long-term borrowings................ 11,300 1,650 7,899 500 216
(Costs) proceeds from issuance of stock........... -- (4) (8) 9,717 --
Payments to repurchase stock...................... -- -- -- -- (216)
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing
activities........................................ 1,300 642 6,887 9,501 (550)
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash
equivalents....................................... (75) (5,752) (5,817) 5,908 (20)
Cash and cash equivalents, beginning of period...... 257 6,074 6,074 166 186
--------- --------- --------- --------- ---------
Cash and cash equivalents, end of period............ $ 182 $ 322 $ 257 $ 6,074 $ 166
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Supplemental cash flow information:
Interest paid..................................... $ 148 $ 78 $ 524 $ 338 $ 268
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Income tax payments received from subsidiary
banks, net of income taxes paid................. $ 75 $ 106 $ 441 $ 16 $ 600
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
F-29
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITER. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE ANY OF THE DATES ON WHICH INFORMATION IS FURNISHED HEREIN OR SINCE THE
DATE HEREOF OR THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
TO THE DATE OF THIS PROSPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, BY ANYONE IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING
SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 7
Use of Proceeds................................ 11
Capitalization................................. 12
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 13
Business....................................... 38
Management..................................... 42
Certain Transactions........................... 49
Supervision and Regulation..................... 50
Principal Stockholders......................... 56
Description of the Notes....................... 57
Underwriting................................... 64
Legal Matters.................................. 64
Experts........................................ 65
Available Information.......................... 65
Index to Consolidated Financial Statements F-1
</TABLE>
$15,000,000
BNCCORP, INC.
8 5/8% SUBORDINATED NOTES DUE 2004
-------------
PROSPECTUS
-------------
DAIN BOSWORTH
INCORPORATED
May 23, 1997
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
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