U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
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[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 For the fiscal year ended December 31, 1996
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
Commission File No. 0-26290
BNCCORP, INC.
(Name of small business issuer in its charter)
Delaware 45-0402816
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or orrganization)
322 East Main 58501
Bismarck, North Dakota (Zip Code)
(Address of principal executive offices)
Issuer's telephone number: (701) 250-3040
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 of 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No ___
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.
The issuer's revenues for its most recent fiscal year: $23,053,000
The aggregate market value of the voting stock held by non-affiliates of
the Registrant at March 1, 1997 computed by reference to the closing price on
the NASDAQ National Market was $20,746,000.
The number of shares of the Registrant's common stock outstanding on March
1, 1997 was 2,338,720 common shares.
Documents incorporated by reference. Portions of the Registrant's proxy
statement to be filed with the Securities and Exchange Commission in connection
with the Registrant's 1997 annual meeting of stockholders are incorporated by
reference into Part III hereof.
Transitional Small Business Disclosure Format (check one): Yes ___ No X
<PAGE>
BNCCORP, INC.
ANNUAL REPORT ON FORM 10-KSB
FOR FISCAL YEAR ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
Page
PART I
Item 1 Description of Business............................................... 1
Item 2 Description of Property............................................... 8
Item 3 Legal Proceedings..................................................... 8
Item 4 Submission of Matters to a Vote of Security Holders................... 8
PART II
Item 5 Market for Common Equity and Related Stockholder Matters...............9
Item 6 Management's Discussion and Analysis or Plan of Operation..............9
Item 7 Financial Statements..................................................33
Item 8 Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure..................................................57
PART III
Item 9 Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act ....................57
Item 10. Executive Compensation...............................................57
Item 11. Security Ownership of Certain Beneficial Owners and Management.......57
Item 12. Certain Relationships and Related Transactions.......................57
PART IV
Item 13. Exhibits and Reports on Form 8-K.....................................57
<PAGE>
PART I
Item 1. Description of Business
General
BNCCORP, Inc. (together with its consolidated subsidiaries, "BNC" or the
"Company") is a bank holding company headquartered in Bismarck, North Dakota
which provides a full range of commercial and consumer 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. The Company also
provides asset-based commercial financing. The Company was incorporated in North
Dakota in 1987 and was reincorporated in Delaware in 1995 in connection with its
initial public offering (see Notes 1 and 8 to the Consolidated Financial
Statements included under Item 7 below). Note 2 to the Consolidated Financial
Statements included under Item 7 below details the Company's recent acquisitions
and other corporate developments, all of which were driven by the Company's
growth and operating strategies discussed below.
BNC operates through its two commercial banking subsidiaries, BNC National
Bank of Bismarck ("BNC -- North Dakota") (headquartered in Bismarck with seven
additional branches in North Dakota) and BNC National Bank of Minnesota ("BNC --
Minnesota") (located in Minneapolis, Minnesota), and its non-bank commercial
finance subsidiary, BNC Financial Corporation ("BNC Financial") (located in St.
Cloud, Minnesota).
Growth Strategy
BNC continued to experience significant internal growth in 1996 due to its focus
on customer service and local relationship banking with small and mid-size
businesses and professionals in its market areas (see "Market Area" below).
Management believes that the Company's entrepreneurial approach to banking and
the introduction of new products and services will continue to attract small to
mid-size businesses which often are not of sufficient size to be of interest to
the larger banks in its market areas. Professionals frequently have difficulty
finding banking services that meet their specific needs and have sought, and
management believes will continue to seek, banking relationships with more
relationship-oriented financial institutions. BNC has positioned itself to
provide an increasing number of banking and finance-related products and
services (see "Products and Services" below).
External growth has and will continue to be part of the Company's strategy. BNC
has established itself in the Minnesota market and intends to generate further
external growth through the acquisition of financial institutions or their
branches in North Dakota, South Dakota, Minnesota and possibly Iowa and
Wisconsin. Management believes that regulatory burdens and competitive pressures
to increase efficiency will generate continued consolidation in the banking
industry and provide acquisition opportunities for BNC. The Company will
continue to analyze opportunities to expand through de novo branching. Potential
opportunities exist where multiple acquisitions by other institutions have
resulted in significant overlap in market areas served by different banks owned
by the same holding company. Consolidation of multiple banking locations in
these cases may create market opportunities for other institutions such as BNC
to establish new locations at a relatively low cost.
BNC's strategies to date have created significant growth for the Company. Net
loans have increased from $39.7 million as of December 31, 1990 to $201.4
million as of December 31, 1996. As of December 31, 1996, total assets had grown
to $288.6 million, deposits to $239.8 million and stockholders' equity to $22.6
million. 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.
1
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Operating Strategy
BNC's objective is to continue to build a growing, profitable banking network.
The principal elements of BNC's operating strategy are:
. Emphasize high quality customer service. BNC believes that service
is a critical competitive factor in its market areas and a key
determinant of its future success. Customer service is emphasized in
all aspects of its operations and is an integral component of all
employee training programs. BNC's decentralized management approach,
coupled with the continuity of service by the same staff members,
enables BNC to develop long-term customer relationships, maintain
high quality service and respond quickly to customer needs.
Management believes that BNC's customers are willing to pay a
premium for high quality service, and faster, more flexible decision
making.
. Emphasize community banking. BNC believes that considering the needs
of local communities in which it operates is critical to its success
and customer satisfaction. BNC follows a decentralized banking
approach and provides substantial autonomy to the senior management
of its banking offices over credit and pricing decisions, subject to
loan committee approval for larger credits.
. Encourage entrepreneurial attitude. BNC strives to maintain an
entrepreneurial attitude at all organizational levels. Management
desires to lead rather than follow other banking organizations in
its market areas by applying new technologies and implementing
creative ideas in providing products and customer service. BNC now
provides an array of products and services typically found in only
major regional banks.
. Maintain high asset quality. BNC seeks credit risks of good quality
within its market areas that exhibit good historical trends, stable
cash flows and secondary sources of repayment from tangible
collateral. BNC seeks to maintain high asset quality through a
program that includes regular reviews of loans by responsible loan
officers, BNC's senior credit officers, and independent outside
professionals, training and supervision of lending officers, and
prompt and strict adherence to established credit policies. BNC's
compensation system for its lending officers is geared towards
maintaining high asset quality rather than loan growth. As a
result, BNC's ratio of nonperforming loans to total loans
decreased from 7.56% as of December 31, 1990 to .14% as of December
31, 1996.
. Achieve efficiencies through centralized administrative and
support functions. BNC seeks to maximize operational and support
efficiencies consistent with maintaining high quality customer
service. BNC strives to improve its efficiency through the use of
technology and to continue to reduce its ratio of noninterest
expense to revenue. Various management, administrative and data
processing functions, including consumer credit processing and
lending, investment management and accounting have been
consolidated to enable personnel to better focus on customer
service and sales. Management believes these operating
efficiencies will simplify the integration of any financial
institutions that may be acquired in the future into BNC's operating
systems and management structure.
2
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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 the Minnesota market area. A substantial majority of the Company's
total consolidated net loans are attributable to customers located in the North
Dakota market area, although in 1996 BNC -- Minnesota experienced significant
loan growth in the Minneapolis/St. Paul market area (see Note 4 to the
Consolidated Financial Statements included under Item 7 below). Generally, each
branch draws most of its deposits from its general market area. The following
table presents certain information about each of BNC's locations:
As of December 31, 1996
-----------------------
Year Opened Total
Bank Location or Acquired Deposits Gross Loans
- ---------------------------- ----------- --------- ----------
(in thousands)
BNC -- North Dakota
Bismarck.................. 1990 $ 81,148 $ 148,068
Linton.................... 1987 47,059 10,462
Ellendale................. 1995 12,212 863
Garrison.................. 1995 14,744 543
Stanley................... 1995 15,455 462
Kenmare................... 1995 17,540 543
Crosby.................... 1995 17,451 83
Watford City.............. 1995 15,340 175
BNC-- Minnesota............. 1996 18,821 35,955
BNC Financial............... 1996 -- 5,636
BNCCORP (parent company).... -- -- 545
--------- ----------
Total................. $ 239,770 $ 203,335
========= ==========
BNC's staff focuses on establishing and maintaining long-term relationships with
customers. Officers are encouraged to participate in community organizations
and, within credit standards and rate of return parameters, BNC attempts to meet
the credit needs of its communities. BNC also invests in local municipal
securities (see "Management's Discussion and Analysis or Plan of Operation --
Financial Condition -- Investment Securities" under Item 6 below).
Products and Services
Loans and Investments
General. 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.
3
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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 December 31, 1996,
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 following is a brief description of the types of lending and investment
activities engaged in by the Company. Further information regarding the
Company's lending activities is presented below at "Management's Discussion and
Analysis or Plan of Operation -- Financial Condition -- Loan Portfolio." Further
information regarding the Company's investment activities is presented below at
"Management's Discussion and Analysis or Plan of Operation -- Financial
Condition -- Investment Securities."
Commercial and Industrial Loans. Commercial and industrial loans represent the
largest portion of BNC's loan portfolio. These loans consist primarily of loans
to small or mid-size businesses and professionals in a wide variety of
industries. The loans, which are made for various purposes, generally are
collateralized by inventory, accounts receivable or other commercial assets.
Agricultural Loans. 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.
Real Estate Mortgage Loans. These loans include various types of loans for which
BNC holds real property as collateral.
Real Estate Construction Loans. The Company makes loans to finance the
construction of residential and nonresidential 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 approval of
a residential construction loan.
Consumer Loans. Consumer loans include home equity loans, credit cards and other
installment loans. Consumer loans generally have terms of two to five years.
Lease Financing. BNC provides lease financing to its business customers in order
to provide a full range of lending services. The leases are generally structured
as financing leases such that BNC retains title to the assets leased in order to
secure payment. BNC generally provides lease financing to customers who have
other relationships with the Company.
Asset Based Lending. Asset based commercial financing is offered by BNC
Financial, the non-bank commercial finance company acquired in 1996 (see Note 2
to the Consolidated Financial Statements included under Item 7 below). The
financing offerings consist of asset based working capital and term financing to
small to 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 which address
the risks associated with this type of lending.
Credit Commitments. In the ordinary course of business, BNC enters into various
types of transactions that include commitments to extend credit. BNC applies the
same credit standards to these commitments as it uses in its regular lending
activities and has included these commitments in its lending risk evaluations.
See Note 11 to the Consolidated Financial Statements included under Item 7
below.
4
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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 to maximize compliance and effectiveness of overall
investing activities. 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 $ 59.5
million as of December 31, 1996 (see "Management's Discussion and Analysis or
Plan of Operation -- Financial Condition -- Investment Securities").
Deposit and Other Products and Services
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 Federal Deposit Insurance Corporation ("FDIC") up to statutory limits. BNC
banks also purchase brokered deposits from time to time when such transactions
are beneficial to the banks (see "Management's Discussion and Analysis or Plan
of Operation -- 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 will provide 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.
Competition
The North Dakota and Minnesota market areas are located in highly competitive
banking environments. Competition is encountered primarily in seeking deposits
and in obtaining loan customers. Principal competitors include regional
financial institutions such as Norwest Corporation, First Bank System, Inc. and
Community First Bancshares, Inc. as well as large and small thrifts, independent
banks, credit unions and all of the national and regional brokerage houses. BNC
also competes with other nonfinancial institutions, including retail stores that
maintain their own credit programs and government agencies that make low cost or
guaranteed loans available to certain borrowers. Many competitors have
emphasized retail banking and financial services leaving the small to 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.
5
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Supervision and Regulation
General. Financial institutions and their holding companies are extensively
regulated under federal and state laws. As a result, the business, financial
condition and prospects of the Company can be materially affected not only by
management decisions and general economic conditions, but also by applicable
statutes and regulations and the legislative and governmental actions of
Congress and the various federal and state regulatory agencies with jurisdiction
over the Company. The impact of applicable statutes, regulations and policies
can be significant, cannot be predicted with a high degree of certainty and can
change over time. Furthermore, such statutes, regulations and other
pronouncements and policies are generally intended to protect the Company's bank
depositors and the FDIC's deposit insurance funds, not BNC stockholders. Bank
holding companies and banks are subject to enforcement actions by their
regulators for statutory and regulatory violations and safety and soundness
considerations.
The statutory requirements pertaining to, and regulatory supervision of, bank
holding companies and banks are not static. Legislation may be introduced from
time to time that could, if enacted, have a significant impact on the operations
of BNC. Recently enacted legislation includes the Deposit Insurance Funds Act of
1996 ("DIFA") (see below) and legislation allowing bank holding companies to
engage in certain activities without the advance approval of the Federal Reserve
Board ("FRB"). Congress has recently considered legislation to broaden the
powers of bank holding companies and permit other financial service companies to
own banks. Legislation also has been introduced in the Congress to restructure
the federal bank regulatory system. There is no certainty as to the effect, if
any, that such legislation would have on BNC or its business and affairs.
Significant Statutes, Regulations and Pronouncements. The following brief
discussions and descriptions of some of the more significant regulations
applicable to banks and their parent holding companies are not intended to
constitute a complete statement of all legal restrictions and requirements
applicable to the Company and all such descriptions are qualified in their
entirety by reference to applicable statutes, regulations, pronouncements and
policies.
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 FRB. BNC is required to file periodic reports with the FRB
and such other reports as the FRB may require pursuant to the BHCA. As a non-
bank subsidiary, BNC Financial is also subject to regulation by the FRB. BNC --
North Dakota and BNC -- Minnesota (the "Banks") are national banking associa-
tions and are subject to supervision, regulation and examination by the Office
of the Comptroller of the Currency ("OCC") and the FDIC. Deposits of the Banks
are insured by the FDIC (see below) and the Banks are also members of the
Federal Reserve System.
As a registered bank holding company, BNC is restricted in its acquisitions,
certain of which are subject to approval by the FRB. A bank holding company may
not acquire, or may be required to give certain notice regarding acquisitions
of, companies considered to engage in activities other than those determined by
the FRB to be closely related to banking or managing banks.
Under Section 23A of the Federal Reserve Act (the "Act"), certain restrictions
are placed on loans and other extensions of credit by the Banks to BNC and BNC
Financial who are defined as "affiliates" of the Banks under the Act. Section
23B of the Act places standards of fairness and reasonableness on the Banks'
transactions with their affiliates.
Under federal law, permissible loans to one borrower by banks are generally
limited to 15 percent of the bank's unimpaired capital, surplus, undivided
profits and loan loss reserves. BNC banks seek participations to accommodate
borrowers whose financing needs exceed lending limits of the Banks.
6
<PAGE>
Certain limitations and reporting requirements are also placed on extensions of
credit by the Banks to principal stockholders of the Company and to directors
and certain executive officers of the Banks (and the Company and its non-bank
subsidiaries provided certain criteria are met) and to "related interests" of
such principal stockholders, directors and officers. In addition, any director
or officer of the Company or the Banks or principal shareholder of the Company
may be limited in his or her ability to obtain credit from financial
institutions with which the Banks maintain correspondent relationships.
Interstate banking and branching provisions of federal and state laws may place
certain limitations on expansion by bank holding companies or banks.
Capital adequacy of BNC and the Banks is monitored by the federal regulatory
agencies using a combination of risk-based and leverage ratios. Failure to meet
the applicable capital guidelines could subject BNC or the Banks to supervisory
or enforcement actions (see Note 9 to the Consolidated Financial Statements
included under Item 7 below).
Federal rules also limit a bank's ability to pay dividends to its bank holding
company in excess of certain amounts or if the payment would result in the bank
being considered "undercapitalized" under capital guidelines.
Under the Community Reinvestment Act ("CRA"), the Banks are encouraged to
respond to the credit and other needs of the communities they serve. Bank
performance under the CRA is periodically tested and the federal bank regulatory
agencies consider CRA ratings in connection with acquisitions involving the
change in control of a financial institution.
FDIC-insured depository institutions that are members of the FDIC's Bank
Insurance Fund ("BIF") and Savings Association Insurance Fund ("SAIF") pay
insurance premiums at rates based on their assessment risk classification, which
is determined in part based on the Bank's capital ratios and in part on factors
that the FDIC deems relevant to determine the risk of loss to the insurance
funds. The DIFA imposed a one time special assessment on SAIF insured financial
institutions. The SAIF insured deposits acquired by BNC -- North Dakota during
1995 (see Note 2 to the Consolidated Financial Statements included under Item 7
below) were acquired after the assessment determination date so no special
assessment was required to be paid.
Other provisions of the DIFA, combined with additional recent amendments to the
deposit insurance regulations have reduced the Company's FDIC deposit insurance
expense (see "Management's Discussion and Analysis or Plan of Operation --
Results of Operations" included under Item 6 below).
The Financial Institutions, Reform, Recovery and Enforcement Act of 1989
provides for cross-guarantees of the liabilities of insured depository
institutions pursuant to which any bank subsidiary of a holding company may be
required to reimburse the FDIC for any loss or anticipated loss to the FDIC that
arises from a default of any of such holding company's other subsidiary banks or
assistance provided to such an institution in danger of default.
Bank holding companies are also subject to the "source of strength doctrine"
which requires such holding companies to serve as a source of "financial and
managerial" strength for their subsidiary banks.
Employees
At December 31, 1996, BNC had approximately 120 employees, which included 110
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.
7
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Item 2. Description of Property
The principal offices of BNC and BNC -- North Dakota are located in BNC's main
office building at 322 East Main Avenue, 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, 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 will construct a branch office for BNC --
North Dakota during 1997 (see "Management's Discussion and Analysis or Plan of
Operation -- Financial Condition -- Capital Resources and Expenditures" included
under Item 6 below).
All owned and leased properties are considered in good operating condition and
are believed adequate for the Company's present and foreseeable future
operations. BNC does not anticipate any difficulty in leasing additional
suitable space upon expiration of present lease terms.
See Note 14 to the Consolidated Financial Statements included under Item 7 below
for additional information concerning lease commitments.
Item 3. 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.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the quarter ended
December 31, 1996.
8
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PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The Company's common stock, $.01 par value ("Common Stock"), is traded on the
Nasdaq National Market under the symbol "BNCC". Prior to July 17, 1995, there
was no public market for the Company's common stock.
The following table lists the high and low sales prices of the Common Stock for
the periods indicated as reported by the Nasdaq National Market. The quotes
represent "inter-dealer" prices without adjustment or mark-ups, mark-downs or
commissions and may not represent actual transactions.
For the Year Ended December 31,
--------------------------------------
1996 1995
------------------ ------------------
Period High Low High Low
-------- ------- ------- --------
First Quarter.......$ 10.38 $ 9.25 N/A N/A
Second Quarter......$ 10.25 $ 8.00 N/A N/A
Third Quarter.......$ 11.50 $ 9.00 $ 10.75 $ 9.75
Fourth Quarter......$ 12.50 $ 10.50 $ 12.00 $ 9.75
On March 1, 1997, there were 113 record holders of the Company's Common Stock.
BNC's policy is to retain its earnings to support the growth of its business.
The board of directors of BNC has never declared cash dividends on its Common
Stock and does not plan to do so in the foreseeable future. The ability of BNC
to pay cash dividends largely depends on the amount of cash dividends paid to it
by the Banks. Capital distributions, including dividends, by the Banks are
subject to federal regulatory restrictions tied to each institution's earnings
and capital See "Supervision and Regulation" included under Item 1 of Part I.
Item 6. Management's Discussion and Analysis or Plan of Operation
Management's discussion and analysis analyzes the major elements of the
Company's statements of financial condition and income. This section should be
read in conjunction with the Company's Consolidated Financial Statements and
notes therewith and other detailed information appearing elsewhere herein.
Selected Financial Data
The selected consolidated financial data presented below under the caption
"Income Statement Data" and "Balance Sheet Data" for and as of the years ended
December 31, 1996, 1995 and 1994 are derived from the historical audited
consolidated financial statements of the Company. The Consolidated Statements of
Condition 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 were audited by Arthur Andersen LLP,
independent public accountants. The financial data below should be read in
conjunction with and are qualified by the Consolidated Financial Statements and
the notes thereto included under Item 7 below.
9
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Selected Financial Data
For the Years Ended December 31,
----------------------------------
1996 1995 1994
--------- -------- --------
(in thousands except share data)
Income Statement Data:
Gross interest income........................$ 20,957 $ 15,283 $ 10,263
Gross interest expense....................... 11,107 8,542 4,411
--------- -------- --------
Net interest income.......................... 9,850 6,741 5,852
Provision for loan losses.................... 739 168 179
Noninterest income (1)....................... 2,096 1,736 1,399
Noninterest expense.......................... 8,213 6,511 5,202
Provision for income taxes................... 1,147 641 679
--------- -------- --------
Net income...................................$ 1,847 $ 1,157 $ 1,191
========= ======== ========
Balance Sheet Data: (at end of period)
Total assets.................................$ 288,558 $240,399 $147,645
Investments and federal funds sold........... 66,391 97,366 25,161
Loans........................................ 202,997 120,683 110,471
Allowance for loan losses.................... 1,594 1,048 1,021
Total deposits............................... 239,770 211,048 124,649
Short-term borrowings........................ 11,437 1,000 7,360
Long-term borrowings......................... 10,615 3,354 3,570
Stockholders' equity......................... 22,635 20,887 9,540
Book value per common share outstanding......$ 9.68(2) $ 8.93(2)$ 7.87(2)
Earnings Performance Data:
Return on average total assets............... .71% .59% .87%
Return on average stockholders' equity....... 8.53% 8.11% 12.34%
Net interest margin.......................... 4.09% 3.71% 4.70%
Net interest spread.......................... 3.63% 3.27% 4.34%
Earnings per share........................... $ .79 $ .67 $ .98
Balance Sheet and Other Key Ratios:
Nonperforming assets to total assets......... .15% .20% .44%
Nonperforming loans to total loans........... .14% .40% .49%
Net loan (charge-offs) recoveries to
average loans .......................... (.11)% (.03)% .13%
Allowance for loan losses to total loans..... .78% .87% .92%
Allowance for loan losses to nonperforming
loans .................................. 555% 218% 188%
Average stockholders' equity to average
total assets ........................... 8.34% 8.69% 6.46%
- --------------------
(1) Includes recognizable loan fees of $1.3 million, $559,000 and $650,000 for
the years ended December 31, 1996, 1995 and 1994, respectively.
(2) Based on total common shares outstanding of 2,338,720 at December 31, 1996
and 1995 and 1,212,720 at December 31, 1994.
10
<PAGE>
Overview
For the year ended December 31, 1996, net income was $1.8 million, compared with
$1.2 million for the year ended December 31, 1995. This strong earnings growth
was due primarily to a sharp increase in net interest income which was driven by
strong loan growth and an increase in non-interest income.
Loans totaled $203.0 million at December 31, 1996, an increase of $82.3 million,
or 68%, from December 31, 1995. Total assets increased $48.2 million, or 20%, to
$288.6 million as of December 31, 1996 compared to $240.4 million at December
31, 1995. Total deposits increased $28.8 million, or 14%, to $239.8 million at
December 31, 1996 compared to $211.0 million at December 31, 1995.
Results of Operations
Net Interest Income. Net interest income, the difference between total interest
income earned on earning assets and total interest expense paid on
interest-bearing liabilities, is the Company's 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.
1996 vs. 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 twelve months ended December 31, 1996
as compared to $181.9 million for the same period in 1995. The yield on average
earning assets increased 30 basis points 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
twelve months ended December 31, 1996 as compared to $8.5 million for the same
period in 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 twelve months ended December 31,
1996 as compared to the same period in 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 the year ended December
31, 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 then
65% for the same period in 1995. This mix change was caused primarily by the
deposit acquisition in 1995; over 80% of the $94.2 million in acquired and
retained deposits were time deposits (a portion of the acquired deposits were
sold along with Farmers & Merchants Bank of Beach ("FMB") in October 1995;
see below and Note 2 to the Consolidated Financial Statements included under
Item 7 below).
11
<PAGE>
1995 vs 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 (the Consolidated Statement of Cash
Flows in the Consolidated Financial Statements included under Item 7 below
provides details of the cash flows relating to the corporate transactions noted
above).
Net interest expense increased $4.1 million, or 94%, to $8.5 million for the
twelve months ended December 31, 1995 as compared to $4.4 million for the same
period in 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 the year ended December 31, 1994. Average interest-bearing
deposits and borrowings increased $52.6 million and $1.0 million, or 51% and
10%, respectively, for the twelve months ended December 31, 1995 as compared to
the same period in 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 Borrowered Funds" below).
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.
12
<PAGE>
Analysis of Average Balances, Interest and Yields/Rates
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------------------------------------------
1996 1995 1994
--------------------------- ----------------------------- -----------------------------
Interest Average Interest Average Interest Average
Average earned yield or Average earned yield or Average earned yield or
balance or paid cost balance or paid cost balance or paid cost
------- ------- ----- --------- ------- ------ ------- ------- ------
(dollars in thousands)
<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 $136,610
======== ======== ========
Liabilities and Stockholders' Equity
Deposits:
NOW and money market accounts .....$ 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 l1,107 5.07% 166,536 8,542 5.13% 112,950 4,411 3.90%
Noninterest-bearing demand accoounts... 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 $5,852
====== ====== ======
Net interest spread.................... 3.63% 3.27% 4.34%
===== ===== =====
Net interest margin.................... 4.09% 3.71% 4.70%
===== ===== =====
Ratio of average interest-earning
assets to average interest-bearing
liabilities.......................... 109.91% 109.20% 110.24%
======= ======= =======
</TABLE>
- --------------------
(1) Interest income does not include loan origination fees other than those
amortized and included as an adjustment to loan yield as required under
Statement of Financial Accounting Standards No. 91, "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans
and Initial Direct Costs of Leases". Average nonaccrual loans are included
in average loans outstanding.
(2) Yields do not include adjustments for tax exempt interest because such
interest is not material.
13
<PAGE>
The following table illustrates, for the periods indicated, the dollar amount of
changes in BNC's interest income and interest expense for the major components
of interest earning assets and interest bearing liabilities and distinguishes
between the increase related to higher outstanding balances and the volatility
of interest rates. Changes in net interest income due to both volume and rate
have been included in the changes due to rate:
Analysis of Changes in Net Interest Income
For the Years Ended December 31,
--------------------------------------------
1996 Compared to 1995 1995 Compared to 1994
--------------------- ----------------------
Change Due to Change Due to
-------------- --------------
Volume Rate Total Volume Rate Total
------- ------ ------ ------- ------ -------
(in thousands)
Interest-Earning Assets
Federal funds sold...............$ (496) $ (10) $(506) $ 196 $ 345 $ 541
Investments...................... 856 226 1,082 1,821 215 2,036
Loans............................ 5,175 (77) 5,098 1,703 740 2,443
------- ------ ------ ------- ------ -------
Total increase in interest
income.................... 5,535 139 5,674 3,720 1,300 5,020
------- ------ ------ ------- ------ -------
Interest-Bearing Liabilities
NOW and money market accounts.... (1) (182) (183) 68 129 197
Savings.......................... 26 (47) (21) 11 17 28
Certificates of Deposit:
Under $100,000................ 1,782 (183) 1,599 1,981 1,198 3,179
$100,000 and over............. 609 (68) 541 306 148 454
Short-term borrowings:
Securities and loans sold
under agreements to
repurchase and federal
funds purchcased............. 184 52 236 3 109 112
FHLB notes payable............ 246 (71) 175 40 61 101
Long-term borrowings............. 340 (122) 218 (2) 62 60
------- ------ ------ ------- ------ -------
Total increase (decrease)
in interest expense ........ 3,186 (621) 2,565 2,407 1,724 4,131
------- ------ ------ ------- ------ -------
Increase (decrease) in net
interest income $ 2,349 $ 760 $3,109 $ 1,313 $ (424) $ 889
======= ====== ====== ======= ====== =======
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 which 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 for the twelve months ended December 31, 1996 was
$739,000, an increase of $571,000, or 340%, over the provision for the same
period in 1995. The provision for loan losses was $168,000 in 1995, 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 losses in the loan portfolio at December 31, 1996. 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 (see Note 2 to the
Consolidated Financial
14
<PAGE>
Statements included under Item 7 below) 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 $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 $1.6 million as of December 31, 1996 and $1.0 million as of
December 31, 1995 and 1994. 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:
Noninterest Income
For the Years Ended December 31,
---------------------------------
1996 1995 1994
--------- -------- --------
(in thousands)
Loan fees ....................... $ 1,276 $ 559 $ 650
Service charges.................. 418 401 259
Rental income.................... 34 37 126
Net gain (loss) on sales of
securities ................... 19 (18) 28
Other noninterest income......... 349 757 336
--------- -------- --------
Total noninterest income......... $ 2,096 $ 1,736 $ 1,399
========= ======== ========
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 $1.3 million for the twelve month period ended December
31, 1996, 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 is 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 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 $418,000 for the year ended December 31, 1996 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 the
same period in 1994 is due primarily to volume-related increases in service
charge income on commercial transaction accounts coupled with increases in fees
charged for certain account activity.
15
<PAGE>
Rental income was $34,000, $37,000 and $126,000 for the years ended December 31,
1996, 1995 and 1994, respectively. The decrease in rental income in 1996 and
1995 as compared to 1994 is attributable to the growth the Company has
experienced. 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 gains were $19,000 for the year ended December 31,
1996 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 $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 is
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 is 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:
Noninterest Expense
For the Years Ended December 31,
--------------------------------
1996 1995 1994
-------- -------- --------
(in thousands)
-------- --------
Salaries and employee benefits....... $ 4,311 $ 3,352 $ 2,990
Depreciation and amortization........ 980 619 444
Occupancy............................ 675 413 305
Office supplies, telephone and
postage........................... 505 521 227
Professional services................ 360 246 236
Marketing and promotion.............. 352 424 211
FDIC and other assessments........... 239 296 308
Other................................ 791 640 481
-------- -------- --------
Total noninterest expense............ $ 8,213 $ 6,511 $ 5,202
======== ======== ========
Efficiency ratio (1)................. 68.75% 76.81% 71.74%
- --------------------
(1) Noninterest expense divided by an amount equal to net interest income plus
noninterest income.
16
<PAGE>
Total noninterest expense for the year ended December 31, 1996 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 result from the growth and expansion the Company experienced
during this two year period (see Note 2 to the Consolidated Financial Statements
included under Item 7 below).
Salaries and employee benefits represent the largest category of noninterest
expense at 52%, 51% and 57% of total noninterest expense for the years ended
December 31, 1996, 1995 and 1994, respectively. Salaries and benefits totaled
$4.3 million for the year ended December 31, 1996, an increase of $959,000, or
29%, as compared to the same period in 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. 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 incentives totaled $3.7
million, $3.0 million and $2.4 million for the years ended December 31, 1996,
1995 and 1994, respectively. Officer and employee insurance expenses totaled
$215,000, $132,000 and $140,000 for the years ended December 31, 1996, 1995 and
1994, respectively. These increases are attributable to the Company's expansion
which resulted in average full-time equivalent employees of 105, 68 and 54 for
the years ended December 31, 1996, 1995 and 1994, respectively.
Depreciation and amortization expense totaled $980,000 for the year ended
December 31, 1996, 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 twelve month periods ending December
31, 1996, 1995 and 1994 was $499,000, $377,000 and $348,000, respectively, the
increases resulting from additions to premises, leasehold improvements and
equipment of $1.4 million, $2.0 million and $345,000 for the twelve month
periods ending December 31, 1996, 1995 and 1994, respectively. Amortization
expense on intangible assets totaled $481,000, $242,000 and $96,000 for the
twelve month periods ending December 31, 1996, 1995 and 1994, respectively. The
increased expense is attributable to intangible assets recorded on acquisitions
during 1995 and 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 (see Note 2 to the Consolidated
Financial Statements included under Item 7 below).
Occupancy expense 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
expense 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 is 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 Part I, Item 2, "Description of Property"). The remainder of
the $262,000 increase consists 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.
17
<PAGE>
Total office supplies, telephone and postage expense 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. 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 expense 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
expense of $360,000, $246,000 and $236,000 was recorded 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.
The Company's marketing and promotion expense totaled $352,000, $424,000 and
$211,000 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 relating to the 1995 branch acquisitions and merger of BNC's two
subsidiary banks (and related name change of the surviving bank) (see Note 1 to
the Consolidated Financial Statements included under Item 7 below).
FDIC and other assessments expense includes FDIC deposit insurance premiums and
OCC assessments. Total FDIC and OCC assessments were $239,000, $296,000 and
$308,000 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 was
paying FDIC assessments of 23 basis points annually on its BIF insured deposits.
In 1995, the Company acquired approximately $94 million of SAIF insured
deposits. 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 BNC's banks and an FDIC 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 further decline in 1997 as BNC's
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 $791,000, $640,000 and $481,000 for 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 is attributable to small
increases in several of the categories mentioned above. The increase of $159,000
for 1995 as compared to 1994 is also caused by small increases in many of the
categories mentioned above.
Income Taxes. 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 is a result of an increase in the percentage of taxable
income on municipal bonds. Consolidated federal income tax returns were filed
for all of the periods presented.
18
<PAGE>
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 maximize compliance (federal laws and regulations place certain
restrictions on the amounts and types of investments BNC may hold) and
effectiveness of overall investing activities. BNC's liquidity is monitored and
managed and the maturity dates of the Company's investments are structured to
maintain necessary liquidity (see "Liquidity" below). 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" below).
The following tables present the composition and maturities of the investment
portfolio by major category as of the periods indicated:
<TABLE>
<CAPTION>
Investment Portfolio Composition
December 31,
-----------------------------------------------------------------------
1996 1995 1994
--------------------- --------------------- ---------------------
Estimated Estimated Estimated
Amortized Fair Market Amortized Fair Market Amortized Fair Market
Cost Value Cost Value Cost Value
-------- --------- -------- --------- -------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Available for Sale:
U.S. Treasury securities..... $ 13,814 $ 13,856 $ 25,041 $ 25,101 $ 8,973 $ 8,860
U.S. government agency
mortgage-backed
securities................ 9,555 9,559 4,798 4,843 5,205 5,102
U.S. government agencies
securities................ 3,633 3,642 7,513 7,520 7,363 7,263
Collateralized mortgage
obligations............... 23,898 23,855 44,800 44,803 1,881 1,734
Other securities............. 7,773 7,779 10,882 10,885 1,004 1,004
State and municipal bonds.... 759 800 1,162 1,264 -- --
-------- --------- -------- --------- -------- ---------
Total........................ 59,432 59,491 94,196 94,416 24,426 23,963
-------- --------- -------- --------- -------- ---------
Held to Maturity:
State and municipal bonds.... -- -- -- -- 1,148 1,195
-------- --------- -------- --------- -------- ---------
Total........................ 0 0 0 0 1,148 1,195
-------- --------- -------- --------- -------- ---------
Total investments............ $ 59,432 $ 59,491 $ 94,196 $ 94,416 $ 25,574 $ 25,158
======== ========= ======== ========= ======== =========
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Investment Portfolio -- Maturity and Yields (as of December 31, 1996)
Maturing
--------------------------------------------------------------------
After 1 but After 5 but
Within 1 year within 5 years within 10 years After 10 years Total
--------------- -------------- ---------------- -------------- --------------
(1) (1) (1) (1)
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------- ----- ------ ----- ------- ----- ------ ----- ------ -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Available for Sale: (2)
U.S. Treasury securities..... $ 4,799 5.97% $9,015 6.06% $ -- -- % $ -- -- % $13,814 6.03%
U.S. government agency
mortgage-backed
securities (3)............. -- -- % 1,897 6.86% 7,303 6.53% 355 7.76% 9,555 6.64%
U.S. government agencies
securities................. -- -- % 3,633 7.17% -- -- % -- -- % 3,633 7.17%
Collateralized mortgage
obligations (3)............ -- -- % 317 6.03% 11,470 6.11% 12,111 6.28% 23,898 6.20%
Other securities............. 6,682 7.02% -- -- % -- -- % 1,091 6.27% 7,773 6.92%
State and municipal bonds.... 50 6.06% 200 8.25% 161 7.50% 348 5.47% 759 6.67%
------- ----- ------ ----- ------- ----- ------ ----- ------ -----
Total book value of
investment securities..... $11,531 6.58% $15,062 6.46% $18,934 6.28% $13,905 6.30% $59,432 6.39%
======= ===== ======= ===== ======= ===== ======= ===== ------- -----
Unrealized holding gain on
securities available for
sale ...................... 59
------
Total investment in securities
(at estimated fair market
value)..................... $59,491 6.38%(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/book value.
(3)Maturities of mortgage-backed securities and collateralized mortgage
obligations are based on contractual maturities.
(4)Yield reflects changes in fair value that are reflected as a separate
component of stockholders equity.
As of December 31, 1996, BNC had $59.5 million of securities in the investment
portfolio as compared to $94.4 million and $25.1 million for the years ended
December 31, 1995 and 1994, respectively. The increase in investment securities
at December 31, 1995 as compared to one year earlier is a result of having
invested the funds received in the August 1995 branch acquisition (see Note 2 to
the Consolidated Financial Statements included under Item 7 below). The decrease
in investment securities in 1996 resulted from the transfer of funds from
investments to loans as the company funded the significant loan growth
experienced during 1996 (see "Results of Operations -- Net Interest Income" and
"Financial Condition -- Loan Portfolio"). Investments accounted for 21%, 39% and
17% of total assets as of December 31, 1996, 1995 and 1994, respectively.
At December 31, 1996, BNC held no securities of any single issuer, other than
the U.S. Treasury and U.S. government agencies securities, that exceeded 10% of
stockholders' equity. A significant portion of the Company's investment
securities portfolio (approximately 59% at December 31, 1996) is used as
collateral for public funds time deposits, securities sold under agreements to
repurchase and other BNC borrowings.
20
<PAGE>
Loan Portfolio. The following table presents the composition of the Company's
loan portfolio at the end of the periods indicated:
<TABLE>
<CAPTION>
Loan Portfolio Composition
December 31,
----------------------------------------------------------
1996 1995 1994
----------------- ------------------ -----------------
Amount % Amount % Amount %
-------- ------ --------- ------ -------- ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial and industrial(1).... $ 94,701 47.0 $ 41,639 34.8 $ 39,218 35.9
Agricultural.................... 20,673 10.3 18,046 15.1 22,144 20.2
Real estate-mortgage............ 47,451 23.6 36,606 30.6 32,805 30.0
Real estate-construction........ 8,806 4.4 5,884 4.9 3,992 3.6
Consumer........................ 18,734 9.3 9,960 8.3 9,331 8.5
Lease financing................. 12,970 6.4 8,660 7.2 3,076 2.8
-------- ------ --------- ------ -------- ------
Total face amount of loans...... 203,335 101.0 120,795 100.9 110,566 101.0
Deferred loan fees and costs.... (338) (0.2) (112) (0.1) (95) (0.1)
-------- ------ --------- ------ -------- ------
Loans........................... 202,997 100.8 120,683 100.8 110,471 100.9
Less allowance for loan losses.. (1,594) (0.8) (1,048) (0.8) (1,021) (0.9)
-------- ------ --------- ------ -------- ------
Net loans....................... $201,403 100.0 $119,635 100.0 $109,450 100.0
======== ====== ========= ====== ======== ======
</TABLE>
- --------------------
(1) The commercial and industrial loan category includes asset based loans
totaling $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 high quality loans
outstanding to increase net interest income. 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 (see Note 2 to the Consolidated Financial Statements included under
Item 7 below)).
BNC's significant loan growth is attributable in part to each of its
subsidiaries. BNC -- North Dakota had continued growth mainly in the commercial
and industrial loan category but also in each other loan category presented
above. BNC -- Minnesota added significant growth particularly in the commercial
and industrial category. BNC Financial had $5.6 million of asset based
commercial and industrial loans as of December 31, 1996. While prospects for
continued loan growth appear favorable, management cannot predict with any
degree of certainty the Company's future loan growth potential.
Credit Policy and Approval Procedures. BNC follows a uniform credit policy that
sets forth underwriting and loan administration criteria. The loan policy,
including lending guidelines for the various types of credit offered by the
Company, is established by the Board of Directors (the "Board") based upon the
recommendations of senior lending management and the executive credit committee
(comprised of BNCCORP's President and Executive Vice President for Business
Development, BNC -- Minnesota's Chief Executive Officer and two of BNC -- North
Dakota's Executive Vice Presidents (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.
21
<PAGE>
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 BNC 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. Relationships over $500,000 and up to the bank's legal lending
limit must be approved by the Loan Committee. The Executive Vice President of
Credit Administration 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 BNCCORP's President
and Executive Vice President for Business Development, BNC -- Minnesota's 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.
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 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 December 31, 1996 loan participations sold to outside banks
totaled $54.1 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, the largest component of the Company's loan
portfolio in each of the years presented, increased to $94.7 million at December
31, 1996, an increase of $53.1 million, or 127% from December 31, 1995.
Commercial and industrial loans represented 47%, 35% and 36% of the Company's
loan portfolio at December 31, 1996, 1995 and 1994, respectively. As of December
31, 1996, commercial and industrial loans totaled $65.5 million, $23.6 million
and $5.6 million at BNC -- North Dakota, BNC -- Minnesota and BNC Financial,
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 Borrowings" for further
discussion regarding anticipated funding for the Company's asset based loans).
Agricultural loans 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 10% of the Company's loan portfolio at December 31, 1996 as
compared to 15% and 20% at December 31, 1995 and 1994, respectively.
Real estate mortgage loans 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%, 31% and 30% of the total loan
portfolio at December 31, 1996, 1995 and 1994, respectively. A large portion
of these loans (approximately 42% at December 31, 1996) were 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.
22
<PAGE>
Real estate construction loans 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 4% of the Company's loan portfolio at December
31, 1996 as compared to 5% and 4% at December 31, 1995 and 1994, respectively.
Consumer loans increased $8.7 million, or 88%, to $18.7 million at December 31,
1996 as compared to $10 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%, 8% and 9% of the Company's loan
portfolio at December 31, 1996, 1995 and 1994, respectively.
Financing leases increased $4.3 million, or 50%, to $13 million at December 31,
1996 as compared to $8.7 million at December 31, 1995. These leases represented
6% of the Company's loan portfolio at December 31, 1996 as compared to 7% and 3%
as of December 31, 1995 and 1994, respectively.
There was no concentration of loans to any single industry exceeding 10% of
total loans (other than those listed above) nor were there any loans classified
as highly leveraged transactions as of December 31, 1996.
The following table sets forth the remaining maturities of loans in each major
category of BNC's portfolio. Actual maturities may differ from the contractual
maturities shown below as a result of renewals and prepayments. Loan renewals
are evaluated in the same manner as new credit applications:
Maturities of Loans (1)
Over 1 Year
Through 5 years Over 5 Years
-------------------- ------------------
Less than Fixed Floating Fixed Floating
one year Rate Rate Rate Rate Total
-------- -------- --------- --------- -------- ---------
(in thousands)
Commercial and
industrial......$ 30,810 $ 18,347 $ 35,949 $ 4,971 $ 4,624 $ 94,701
Agricultural....... 9,974 2,226 3,220 1,527 3,726 20,673
Real estate-
mortgage........ 4,257 8,638 4,435 11,153 18,968 47,451
Real estate-
construction.... 8,545 37 -- -- 224 8,806
Consumer........... 7,599 7,772 2,778 575 10 18,734
Lease financing.... 3,428 9,480 -- 62 -- 12,970
-------- -------- --------- --------- -------- ---------
Total face amount
of loans........$ 64,613 $ 46,500 $ 46,382 $ 18,288 $ 27,552 $ 203,335
======== ======== ========= ========= ======== =========
- --------------------
(1)Maturities are based upon contractual maturities. Floating rate loans include
loans that would reprice prior to maturity if base rates change. See
"Asset/Liability Management" below for further discussion regarding repricing
of loans and other assets.
Nonperforming Loans and Assets. BNC's lending personnel are responsible for
continuous monitoring of the quality of the loan portfolio. Officer compensation
depends, to a substantial extent, on maintaining loan quality and dealing with
credit issues in a timely and proactive manner. Lenders are not compensated for
growth at the expense of credit quality. Loan officers are responsible for
ongoing and regular review of past due loans in their respective portfolios. The
loan portfolio is also monitored regularly and examined by the Company's loan
review personnel. Loans demonstrating weaknesses are downgraded in a timely
fashion and the board of directors 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.
23
<PAGE>
The following table sets forth the amounts of nonperforming loans and other
assets at the ends of the periods indicated:
Nonperforming Assets
December 31,
---------------------------
1996 1995 1994
------- -------- -------
(dollars in thousands)
Nonperforming loans:
Loans 90 days or more delinquent and still
accruing interest............................. $ 129 $ 290 $ 39
Nonaccrual loans (1) (2)......................... 22 71 248
Restructured loans (1) (2)....................... 136 119 257
------- -------- -------
Total nonperforming loans..................... 287 480 544
Real estate acquired by foreclosure................. 159 - 100
------- -------- -------
Total nonperforming assets....................... $ 446 $ 480 $ 644
======= ======== =======
Allowance for loan losses........................... $ 1,594 $ 1,048 $ 1,021
======= ======== =======
Ratio of total nonperforming loans to total loans... l.14% .40% .49%
Ratio of total nonperforming assets to total assets. .15% .20% .44%
- --------------------
(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. The loans 90 days
or more delinquent and still accruing interest category 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.
24
<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 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 other real estate owned or properties acquired in in-substance
foreclosures as of December 31, 1995.
Potential Problem Loans. In addition to the loans presented above, management
has identified, through its internal loan monitoring activities, approximately
18 loans with stated balances totaling $2.8 million at December 31, 1996 which
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" discussed earlier). 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 Company's board of directors.
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.
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, the ratio
of net charge-offs to average total loans, the ratio of the allowance to total
loans at the end of each period, and the ratio of the allowance to nonperforming
loans:
25
<PAGE>
Analysis of Allowance for Loan Losses
Year ended December 31,
------------------------------
1996 1995 1994
-------- -------- --------
(dollars in thousands)
Balance of allowance for loan losses at
beginning of period .......................... $ 1,048 $ 1,021 $ 713
-------- -------- --------
Charge-offs:
Commercial and industrial..................... 104 114 22
Agricultural.................................. 22 130 --
Real estate-mortgage.......................... -- -- --
Real estate-construction...................... -- -- --
Consumer...................................... 6 4 1
Lease financing............................... 218 -- --
-------- -------- --------
Total charge-offs.......................... 350 248 23
-------- -------- --------
Recoveries:
Commercial and industrial..................... 5 116 147
Agricultural.................................. 146 84 --
Real estate-mortgage.......................... 6 3 --
Real estate-construction...................... -- -- --
Consumer...................................... -- 4 5
Lease financing............................... -- -- --
-------- -------- --------
Total recoveries........................... 157 207 152
-------- -------- --------
Net (charge-offs) recoveries..................... (193) (41) 129
Provision for loan losses charged to operations.. 739 168 179
Allowance attributable to FMB.................... -- (100) (1) --
-------- -------- --------
Balance of allowance for loan losses at end
of period .................................... $ 1,594 $ 1,048 $ 1,021
======== ======== ========
Ratio of net (charge-offs) recoveries to
average loans................................. (.11%) (.03%) .13%
======== ======== ========
Average gross loans outstanding during
the period.................................... $171,780 $117,773 $ 98,749
======== ======== ========
Ratio of allowance for loan losses to total
loans......................................... .78% .87% .92%
======== ======== ========
Ratio of allowance for loan losses to
nonperforming loans........................... 555.00% 218.00% 188.00%
======== ======== ========
- --------------------
(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
$9.2 million of loans originated by FMB, was transferred to Community
First Bancshares, Inc.
26
<PAGE>
Management regards the allowance for loan losses as a general reserve which is
available to absorb losses from all loans. However, for purposes of complying
with disclosure requirements of the Securities and Exchange Commission, the
table below presents an allocation of the allowance for loan losses among the
various loan categories and sets forth the percentage of loans in each category
to gross loans. The allocation of the allowance for loan losses as shown in the
table should neither be interpreted as an indication of future charge-offs, nor
as an indication that charge-offs in future periods will necessarily occur in
these amounts or in the indicated proportions.
<TABLE>
<CAPTION>
Allocation of the Allowance for Loan Losses
December 31,
----------------------------------------------------------------------------
1996 1995 1994
---------------------- ----------------------- -------------------------
Loans in Loans in Loans in
category as a category as a category as a
Amount percentage Amount percentage Amount percentage
of of total of of total of of total
allowance gross loans allowance gross loans allowance gross loans
--------- ----------- --------- ----------- --------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial and industrial......$ 721 47% $ 355 31% $ 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 4% -- --
Unallocated.................... 174 0% 22 7% 18 3%
--------- ----------- --------- ----------- --------- -----------
Total..........................$ 1,594 100% $ 1,048 100% $ 1,021 100%
========= =========== ========= =========== ========= ===========
</TABLE>
Deposits and Borrowed Funds. BNC's core deposits consist of noninterest- and
interest-bearing demand deposits, savings deposits, certificates of deposit
under $100,000, certain certificates of deposit of $100,000 and over and public
funds. These deposits, along with other borrowed funds are used by the Company
to support its asset base.
The following tables set 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:
27
<PAGE>
<TABLE>
<CAPTION>
Average Deposits and Deposit Costs
For the Years Ended December 31,
----------------------------------------------------------------------------------
1996 1995 1994
--------------------------- -------------------------- -------------------------
Percent Wgtd. Percent Wgtd. Percent Wgtd.
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>
Interest-bearing demand depoists...... $ 38,920 18.29% 2.58% $ 38,941 23.01% 3.05% $36,423 31.58% 2.72%
Savings deposits...................... 8,498 3.99% 2.31% 7,598 4.49% 2.86% 7,187 6.23% 2.63%
Time deposits ("CDs"):
CDs under $100,000.................... 124,682 58.61% 5.66% 93,983 55.53% 5.81% 50,259 43.58% 4.53%
CDs $100,000 and over................. 25,499 11.99% 5.82% 15,486 9.15% 6.08% 9,523 8.26% 5.12%
-------- -------- -------- -------- ------- --------
Total time deposits................... 150,181 70.60% 5.69% 109,469 64.68% 5.84% 59,782 51.84% 4.63%
-------- -------- -------- -------- ------- --------
Total interest-bearing deposits....... 197,599 92.88% 4.93% 156,008 92.18% 5.00% 103,392 89.65% 3.81%
Noninterest-bearing demand
deposits........................... 15,147 7.12% -- 13,233 7.82% -- 11,942 10.35% --
-------- -------- -------- -------- ------- --------
Total deposits........................ $212,746 100.00% 4.58% $169,241 100.0% 4.61% $115,334 100.00% 3.42%
======== ======== ======== ======= ======= =======
</TABLE>
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 1996, average noninterest-bearing 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 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 (see Note 2 to the Consolidated Financial Statements
included under Item 7 below), coupled with the internal deposit growth the
Company has generated, have 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 (see below). As of December 31, 1996, BNC held a total of $11.5
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 December 31, 1996 (See Note 9 to
the Consolidated Financial Statements included under Item 7 below).
Time deposits in denominations of $100,000 and more totaled $39.7 million at
December 31, 1996 as compared to $16.6 million and $11.7 million at December 31,
1995 and 1994, respectively. The following table sets forth the amount and
maturities of time deposits of $100,000 or more as of December 31, 1996:
Time Deposits of $100,000 and Over
(in thousands)
Maturing in:
3 months or less....................$ 15,846
Over 3 months through 6 months...... 10,448
Over 6 months through 12 months..... 8,911
Over 12 months...................... 4,520
----------
Total............................$ 39,725
==========
28
<PAGE>
BNC uses short-term borrowings to support its asset base. These borrowings
include federal funds purchased and U.S. Treasury tax and loan note option
accounts, securities sold under agreements to repurchase, and FHLB borrowings.
At December 31, 1996, short term borrowings were $11.4 million or 4% of total
liabilities as compared to $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:
Short-Term Borrowings
Year ended December 31,
----------------------------
1996 1995 1994
------- -------- -------
(dollars in thousands)
Short-term borrowings outstanding at period end.....$11,437 $ 1,000 $ 7,360
Weighted average interest rate at period end........ 5.60% 6.69% 4.35%
Maximum month-end balance during the period.........$23,416 $ 34,648 $ 8,952
Average borrowings outstanding for the period.......$14,532 $ 7,029 $ 6,033
Weighted average interest rate for the period....... 5.60% 5.74% 3.15%
As of December 31, 1996, the Company's long-term debt included a $3 million term
loan and $7 million revolving line of credit from Firstar. $615,000 was
outstanding on a $2 million revolving line of credit with Bank Windsor (see Note
7 to the Consolidated Financial Statements included under Item 7 below). BNC was
in compliance with all related debt covenants at December 31, 1996.
During February 1997, the Company's loan agreements with Firstar were amended to
increase the revolving line of credit to $12 million and to extend the maturity
of the term loan and line of credit to February 1998.
The Company's increased usage of long-term borrowings ($10.6 milliion at
December 31, 1996 as compared to $3.4 million and $3.6 million at December 31,
1995 and 1994, respectively) has been primarily for the purpose of funding
the asset based lending at BNC Financial. As of December 31, 1996, BNC Financial
had outstanding loans of $5.6 million. Management anticipates loan growth at BNC
Financial could approximate $15 to $25 million during 1997. Funding for the
projected loan growth will be provided through additional use of the Bank
Windsor revolving line of credit, the increase in the Firstar revolving line of
credit noted above and other fund raising options the Company is presently
considering.
Capital Resources and Expenditures. BNC's management actively monitors
compliance with bank regulatory capital requirements, including risk-based and
leverage capital measures. Under the risk-based capital method of capital
measurement, the ratio computed is dependent on the amount and composition of
assets recorded on the balance sheet, and the amount and composition of
off-balance sheet items, in addition to the level of capital. Note 9 to the
Consolidated Financial Statements included under Item 7 below includes a summary
of the risk-based and leverage capital ratios of BNC and its subsidiary banks as
of December 31, 1996 and 1995.
As indicated under "Description of Property" under Item 2 above, 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 on 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.
29
<PAGE>
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.
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 is the principal source of operating cash inflows
in each of these periods.
Net cash outflows from investing activities were $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 were the largest component of cash outflow from investing activities
in 1995 as the Company invested the funds acquired in the 1995 branch
acquisition (see Note 2 to the Consolidated Financial Statements included under
Item 7 below). 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 (see
Note 2 to the Consolidated Financial Statements included under Item 7 below).
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 branch acquisition. Internal deposit growth
contributed $20.9 million of cash inflows while the Company's initial public
offering 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.
30
<PAGE>
Asset/Liability Management
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 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 asset sensitive in
the immediate short term (0 to 3 months), liability sensitive in the four to
twelve month timeframe, 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.
The following table sets forth information concerning interest rate sensitivity
of BNC's consolidated assets and liabilities as of December 31, 1996. Assets and
liabilities are classified by the earliest possible repricing date or maturity,
whichever comes first.
31
<PAGE>
Interest Sensitivity Gap Analysis
Estimated maturity or repricing at
December 31, 1996
---------------------------------------------
0-3 4-12 1-5 Over
months months years 5 Years Total
-------- -------- ------- ------- -------
(dollars in thousands)
Interest-earning assets:
Cash equivalents............... $ 865 $ -- $ -- $ -- $ 865
Federal funds sold............. 6,900 -- -- -- 6,900
Investment securities avail-
able for sale (1)........... 9,373 15,035 32,837 2,246 59,491
Fixed rate loans (2)........... 11,024 19,580 46,916 11,434 88,954
Floating rate loans (2)........ 103,481 7,487 3,412 -- 114,380
-------- -------- ------- ------- -------
Total interest-earning
assets................... $131,643 $ 42,102 $83,165 $13,680 $270,590
======== ======== ======= ======= ========
Interest-bearing liabilities:
NOW and money market accounts.. $ 43,627 $ -- $ -- $ -- $ 43,627
Savings........................ 8,856 -- -- -- 8,856
Time deposits under $100,000... 29,479 63,945 30,261 1,659 125,344
Time deposits $100,000 and
over........................ 15,846 19,359 4,520 -- 39,725
Borrowings..................... 11,437 615 10,000 -- 22,052
-------- -------- ------- ------- --------
Total interest-bearing
liabilities.............. $109,245 $ 83,919 $44,781 $ 1,659 $239,604
======== ======== ======= ======= ========
Interest rate gap................. $ 22,398 $(41,817) $38,384 $12,021 $ 30,986
======== ======== ======= ======= ========
Cumulative interest rate gap at
December 31, 1996.............. $122,398 $(19,419) $18,965 $30,986
======== ======== ======= =======
Cumulative interest rate gap to
total assets................... 7.76% (6.73)% 6.57% 10.74%
- --------------------
(1)Investment securities are generally reported in the timeframe representing
the earliest of repricing date, call date (for callable securities),
estimated life or maturity date. Estimated lives of mortgage-backed
securities and collateralized mortgage obligations are based on published
industry prepayment estimates for securities with comparable weighted average
interest rates and contractual maturities.
(2)Loans are stated gross of the allowance for loan losses and are placed in the
earliest timeframe in which maturity or repricing may occur.
The table assumes that all savings and interest-bearing demand deposits reprice
in the earliest period presented, however, BNC's management believes a
significant portion of these accounts constitute a core component and are
generally not rate sensitive. Management's position is supported by the fact
that aggressive reductions in interest rates paid on these deposits 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.
32
<PAGE>
Effects of Inflation
Unlike most industrial companies, the assets and liabilities of financial
institutions are primarily monetary in nature. Therefore, banking organizations
do not necessarily gain or lose due to the effects of inflation. Changes in
interest rates, which are a major determinant of a financial service
organization's profitability, do not necessarily correspond to changes in the
prices of goods and services. An analysis of a banking organization's asset and
liability structure provides the best indication of how the organization is
positioned to respond to changing interest rates and maintain profitability.
The financial statements and supplementary financial data have been prepared,
primarily, on a historical basis which is mandated by generally accepted
accounting principles. Fluctuations in the relative value of money due to
inflation or recession are generally not considered.
Recent Accounting Pronouncements
Notes 1 and 15 to the Consolidated Financial Statements included under Item 7
below include discussions of recent accounting pronouncements applicable to the
activities and financial reporting of BNC.
Item 7. Financial Statements
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Consolidated Financial Statements:
Report of Independent Public Accountants......................................34
Consolidated Statements of Financial Condition - December 31, 1996 and 1995...35
Consolidated Statements of Income - the years ended December 31,
1996, 1995 and 1994 .......................................................36
Consolidated Statements of Stockholders' Equity - the periods ended
December 31, 1996, 1995 and 1994...........................................37
Consolidated Statements of Cash Flows - the years ended December 31,
1996, 1995 and 1994........................................................38
Notes to Consolidated Financial Statements....................................39
33
<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
34
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
As of December 31
(In thousands, except share and per share data)
ASSETS 1996 1995
---------- ---------
CASH AND DUE FROM BANKS................................... $ 6,360 $ 11,259
FEDERAL FUNDS SOLD....................................... 6,900 2,950
SECURITIES AVAILABLE FOR SALE (Note 3)................... 59,491 94,416
LOANS, net (Note 4)...................................... 201,403 119,635
PREMISES, LEASEHOLD IMPROVEMENTS AND EQUIPMENT,
net (Note 5).......................................... 6,657 5,778
ACCRUED INTEREST RECEIVABLE.............................. 2,442 1,963
OTHER ASSETS............................................. 1,440 439
COST IN EXCESS OF NET ASSETS ACQUIRED, net............... 3,865 3,959
---------- ---------
$ 288,558 $ 240,399
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS:
Noninterest-bearing................................... $ 22,218 $ 16,874
Interest-bearing--
Savings, NOW and money market....................... 52,483 50,732
Time deposits over $100,000......................... 39,725 16,576
Other time deposits................................. 125,344 126,866
NOTES PAYABLE (Note 7)................................... 22,052 4,354
OTHER LIABILITIES........................................ 4,101 4,110
---------- ---------
Total liabilities............................... 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
Capital surplus....................................... 13,768 13,776
Retained earnings..................................... 9,017 7,170
Treasury stock (25,380 shares)........................ (216) (216)
Unrealized holding gain on securities available
for sale, net of income tax effects of $16
and $86 (Note 3)................................... 43 134
---------- ---------
Total stockholders' equity...................... 22,635 20,887
---------- ---------
$288,558 $240,399
========== =========
The accompanying notes are an integral part of these
consolidated financial statements.
35
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the Years Ended December 31
(In thousands, except per share data)
1996 1995 1994
-------- ------ -------
INTEREST INCOME:
Interest on loans...............................$ 16,383 $11,285 $8,842
Interest on investment securities--
U.S. Treasury and agency........................ 770 506 351
State and municipal............................. 70 134 100
Other........................................... 3,734 3,358 970
-------- ------ -------
Total interest income..................... 20,957 15,283 10,263
-------- ------ -------
INTEREST EXPENSE:
Deposits........................................ 9,738 7,802 3,944
Notes payable................................... 1,369 740 467
-------- ------ -------
Total interest expense.................... 11,107 8,542 4,411
-------- ------ -------
Net interest income....................... 9,850 6,741 5,852
PROVISION FOR LOAN LOSSES (Note 4)................. 739 168 179
-------- ------ -------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES..................................... 9,111 6,573 5,673
-------- ------ -------
NONINTEREST INCOME:
Fees on loans................................... 1,276 559 650
Service charges................................. 418 401 259
Rental income................................... 34 37 126
Net gain (loss) on sales of securities.......... 19 (18) 28
Other........................................... 349 757 336
-------- ------ -------
Total noninterest income.................. 2,096 1,736 1,399
-------- ------ -------
NONINTEREST EXPENSE:
Salaries and employee benefits.................. 4,311 3,352 2,990
Depreciation and amortization................... 980 619 444
Occupancy....................................... 675 413 305
Office supplies, telephone and postage.......... 505 521 227
Professional services........................... 360 246 236
Marketing and promotion......................... 352 424 211
FDIC and other assessments...................... 239 296 308
Other........................................... 791 640 481
-------- ------ -------
Total noninterest expense................. 8,213 6,511 5,202
-------- ------ -------
INCOME BEFORE TAXES................................ 2,994 1,798 1,870
INCOME TAXES (Note 6).............................. 1,147 641 679
-------- ------ -------
NET INCOME.........................................$ 1,847 $1,157 $1,191
======== ====== =======
EARNINGS PER SHARE.................................$ .79 $ .67 $ .98
======== ====== =======
The accompanying notes are an integral part of these
consolidated financial statements.
36
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31
(In thousands, except share data)
<TABLE>
<CAPTION>
Unrealized
Gain (Loss)
on Securities
Common Stock Capital Retained Treasury Available
Shares Amount Surplus Earnings Stock for Sale 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 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
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
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
========= ====== ======= ======== ====== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
37
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31
(In thousands)
1996 1995 1994
------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income...................................... $ 1,847 $ 1,157 $ 1,191
Adjustments to reconcile net income to net
cash provided by operating activities --
Provision for loan losses.................... 739 168 179
Depreciation and amortization................ 499 377 348
Amortization of intangible assets............ 481 242 96
Proceeds from loans recovered................ 157 207 152
Change in accrued interest receivable and
other assets.............................. (1,866) (935) 662
(Gain) loss on sale of bank premises and
equipment................................. (10) 23 --
(Gain) loss on sale of securities............ (19) 18 (28)
Gain on sale of Farmers & Merchants Bank
of Beach (Note 2)......................... -- (316) --
Change in other liabilities.................. (9) 1,676 766
Originations of loans to be participated..... (45,238) (44,231) (16,396)
Proceeds from participations of loans........ 45,238 44,231 16,396
------- ------- -------
Net cash provided by operating activities. 1,819 2,617 3,366
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in federal funds sold................ (3,950) (2,900) 875
Purchases of investment securities.............. (22,575) (138,385) (20,033)
Proceeds from sales of investment securities.... 48,700 89,143 17,711
Proceeds from maturities of investment
securities................................... 8,727 (26,623) 3,483
Net increase in loans........................... (82,664) (20,272) (26,530)
Additions to premises, leasehold improvements
and equipment................................ (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.... 70 112 --
------- ------- -------
Net cash used in investing activities..... (53,130) (86,202) (24,839)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand, savings,
NOW and money market accounts ................ 7,095 8,960 (2,399)
Net increase in time deposits................... 21,627 11,964 18,195
Net increase (decrease) in short-term
borrowings.................................... 10,437 (6,360) 5,109
Repayments of long-term borrowings.............. (2,604) (716) (550)
Proceeds from long-term borrowings.............. 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............................ (8) -- --
Dividends paid to minority stockholders......... -- (92) (87)
------- ------- -------
Net cash provided by financing activities. 46,412 89,448 21,538
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................... (4,899) 5,863 65
CASH AND CASH EQUIVALENTS, beginning of year....... 11,259 5,396 5,331
------- ------- -------
CASH AND CASH EQUIVALENTS, end of year............. $ 6,360 $11,259 $ 5,396
======= ======= =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid................................... $11,347 $ 6,383 $ 4,156
======= ======= =======
Income taxes paid............................... $ 934 $ 615 $ 309
======= ======= =======
The accompanying notes are an integral part of these
consolidated financial statements.
38
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
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).
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:
39
<PAGE>
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 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.
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 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.
40
<PAGE>
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.
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 $814,000 as of December 31, 1996. Goodwill
totaling $826,000 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 $169,000 as of December 31, 1996.
41
<PAGE>
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.
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.
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.
2. Acquisitions and Divestitures:
In August 1995, BNCCORP acquired seven North Dakota branches from First Bank
System, Inc. (First Bank--former Metropolitan Federal Bank, fsb branches). The
purchase price for the seven branches was 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 Bancshares, 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.
42
<PAGE>
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:
1995 1994
---------- ----------
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
========== ==========
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
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 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.
43
<PAGE>
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
----------- ----------- ----------- ----------
1996
<S> <C> <C> <C> <C>
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>
Scheduled maturities for securities available for sale were as follows as of
December 31 (in thousands):
1996 1995
------------------------ ------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
---------- ----------- ---------- -----------
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
========== =========== ========== ===========
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.
44
<PAGE>
4. Loans:
The composition of the loan portfolio was as follows as of December 31 (in
thousands):
1996 1995
---------- -----------
Commercial and industrial....... $ 94,701 $ 41,639
Agricultural.................... 20,673 18,046
Real estate:
Mortgage..................... 47,451 36,606
Construction................. 8,806 5,884
Consumer........................ 18,343 9,580
Lease financing................. 12,970 8,660
Other........................... 391 380
---------- -----------
Total........................ 203,335 120,795
Less:
Allowance for loan losses.... (1,594) (1,048)
Deferred loan fees and costs. (338) (112)
---------- -----------
$ 201,403 $ 119,635
========== ===========
Loans on a nonaccrual basis, including impaired loans, were approximately
$61,000 and $71,000 at 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.
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.
45
<PAGE>
Transactions in the allowance for loan losses were as follows for the years
ended December 31 (in thousands):
1996 1995 1994
--------- --------- ---------
Balance, beginning of year.............. $ 1,048 $ 1,021 $ 713
Provision for loan losses............ 739 168 179
Loans charged off.................... (350) (248) (23)
Loans recovered...................... 157 207 152
Allowance attributable to
subsidiary sold.................... -- (100) --
--------- --------- ---------
Balance, end of year.................... $ 1,594 $ 1,048 $ 1,021
========= ========= =========
5. Premises, Leasehold Improvements and Equipment:
Premises, leasehold improvements and equipment consisted of the following at
December 31 (in thousands):
1996 1995
---------- -----------
Land and improvements............................ $ 508 $ 264
Buildings and improvements....................... 3,346 3,364
Leasehold improvements........................... 719 336
Furniture, fixtures and equipment................ 3,701 3,047
---------- -----------
Total cost.................................... 8,274 7,011
Less accumulated depreciation and amortization... (1,617) (1,233)
---------- -----------
Net premises, leasehold improvements and
equipment................................... $ 6,657 $ 5,778
========== ===========
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.
6. Income Taxes:
The provision for income taxes consists of the following for the years ended
December 31 (in thousands):
1996 1995 1994
-------- -------- --------
Current.............................. $ 965 $ 589 $ 564
Deferred income taxes from the
following timing differences:
Provision for loan losses...... (274) (11) (105)
Depreciation................... 87 6 71
Leases......................... 129 128 118
Other.......................... 240 (71) 31
-------- -------- --------
$ 1,147 $ 641 $ 679
======== ======== ========
46
<PAGE>
The provision for federal income taxes expected at the statutory rate differs
from the actual provision as follows for the years ended December 31 (in
thousands):
1996 1995 1994
--------- --------- ---------
Tax at 34% statutory rate............... $ 1,018 $ 611 $ 636
Increase (decrease) resulting from:
State taxes, net of federal benefit.. 131 91 116
Minority interest in consolidated
earnings........................... -- 19 20
Benefit of AMT credit carryforwards.. -- (42) (42)
Tax-exempt interest.................. (27) (43) (59)
Other, net........................... 25 5 8
--------- --------- ---------
$ 1,147 $ 641 $ 679
========= ========= =========
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 as of December 31 (in
thousands):
1996 1995
-------- --------
Deferred tax asset:
Loans, primarily due to differences in
accounting for loan losses ........................ $ 577 $ 333
Other................................................. 145 41
-------- --------
Deferred tax asset.............................. 722 374
-------- --------
Deferred tax liability:
Unrealized gain on securities available for sale...... 16 86
Leases, primarily due to differences in accounting
for lease........................................... 524 385
Premises and equipment, primarily due to
differences in original cost basis and
depreciation........................................ 451 354
-------- --------
Deferred tax liability.......................... 991 825
-------- --------
Net deferred tax liability...................... $ 269 $ 451
======== ========
47
<PAGE>
7. Notes Payable:
BNCCORP's notes payable consist of the following as of December 31 (in
thousands):
1996 1995
-------- --------
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
========= ========
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 underwriters, for nominal consideration, a warrant to purchase
50,000 shares of common stock (the Warrant). 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 December 31, 1996.
48
<PAGE>
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 I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes that, as of
December 31, 1996, BNCCORP and its banks meet all capital adequacy requirements
to which they are subject.
As of December 31, 1996, 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 I risk-based and Tier I leverage ratios as set forth in the
table that follows. There are no conditions or events since that notification
that management believes have changed the institutions' categories.
Actual capital amounts and ratios of BNCCORP and its subsidiary banks as of
December 31 are also presented in the tables (dollar amounts in thousands):
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Adequacy Under Prompt Corrective
Actual Purposes Action Provisions
------------------ ------------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
--------- ----- --------- ----- --------- -----
greater greater
than than
or equal to or equal to
<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 8.0% N/A N/A
BNC National Bank of Bismarck........ 19,009 10.4 14,644 8.0 $ 18,306 10.0%
BNC National Bank of Minnesota....... 4,981 12.2 3,255 8.0 4,069 10.0
Tier I Capital (to risk weighted assets):
Consolidated......................... 18,515 8.1 9,103 4.0 N/A N/A
BNC National Bank of Bismarck........ 17,759 9.7 7,322 4.0 10,983 6.0
BNC National Bank of Minnesota....... 4,688 11.5 1,628 4.0 2,441 6.0
Tier I Capital (to average assets):
Consolidated......................... 18,515 6.7 11,112 4.0 N/A N/A
BNC National Bank of Bismarck........ 17,759 7.1 10,006 4.0 12,508 5.0
BNC National Bank of Minnesota....... 4,688 12.9 1,453 4.0 1,817 5.0
As of December 31, 1995
Total Capital (to risk weighted assets):
Consolidated......................... 17,768 12.5 11,375 8.0 N/A N/A
BNC National Bank of Bismarck........ 14,072 10.1 11,202 8.0 14,003 10.0
Tier I Capital (to risk weighted assets):
Consolidated......................... 16,720 11.8 5,688 4.0 N/A N/A
BNC National Bank of Bismarck........ 13,024 9.3 5,601 4.0 8,402 6.0
Tier I Capital (to average assets):
Consolidated......................... 16,720 7.0 9,497 4.0 N/A N/A
BNC National Bank of Bismarck........ 13,024 5.7 9,215 4.0 11,519 5.0
</TABLE>
49
<PAGE>
10.Fair Value of Financial Instruments:
The estimated fair values of BNCCORP's financial instruments are as follows as
of December 31 (in thousands):
1996 1995
----------------------- -----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
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
========== ==========
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.
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.
50
<PAGE>
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):
1996 1995
----------- -----------
Commitments to extend credit.......... $ 59,553 $ 28,034
Standby letters of credit............. 1,048 714
----------- -----------
$ 60,601 $ 28,748
=========== ===========
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.
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.
51
<PAGE>
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:
1997................. $ 227,520
1998................. 162,169
1999................. 146,072
2000................. 137,191
2001................. 86,920
Thereafter........... 93,840
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, 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
52
<PAGE>
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.
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:
1996 1995
----------- ------------
Net income:
As reported.................. $ 1,847,000 $ 1,157,000
Pro forma.................... 1,814,000 1,157,000
Primary and fully diluted EPS:
As reported.................. 0.79 0.67
Pro forma.................... 0.77 0.67
A summary of the status of the Stock Plan at December 31, 1996 and 1995 and
changes during the years then ended is presented in the table and narrative
below:
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
--------- ---------- ---------- ---------
Outstanding, beginning of year.. 30,000 $ 10 -- $ --
Granted......................... -- -- 30,000 10
--------- ---------- ---------- ---------
Outstanding, end of year........ 30,000 $ 10 30,000 $ 10
========= ========== ========== =========
Exercisable, end of year........ 12,000 $ 10 $ -- $ --
========= ========== ========== =========
Weighted average fair value of
options granted..............$ -- $ 4.50
========= ==========
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%.
53
<PAGE>
16.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
As of December 31
(In thusands, except share and per share data)
1996 1995
----------- ----------
Assets:
Cash and short-term investments................ $ 257 $ 6,074
Investment in subsidiaries..................... 27,241 16,916
Loans.......................................... 545 546
Receivable from subsidiaries................... 4,265 277
Cost in excess of net assets acquired, net..... 232 247
Other.......................................... 574 437
----------- ----------
$ 33,114 $ 24,497
=========== ==========
Liabilities and stockholders' equity:
Note payable................................... $ 10,249 $ 3,354
Accrued expenses and other liabilities......... 185 256
----------- ----------
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
Capital surplus................................ 13,768 13,776
Retained earnings.............................. 9,062 7,170
Treasury stock................................. (216) (216)
Unrealized gain on securities available for
sale........................................ 43 134
----------- ----------
22,680 20,887
----------- ----------
$ 33,114 $ 24,497
=========== ==========
54
<PAGE>
PARENT COMPANY ONLY
Condensed Statements of Income
For the Years Ended December 31
(In thousands)
1996 1995 1994
---------- ---------- ---------
Income:
Management fee income................... $ 927 $ 606 $ 753
Consulting income....................... 1 -- 18
Interest................................ 210 134 12
Other................................... 137 319 32
---------- ---------- ---------
Total income......................... 1,275 1,059 815
---------- ---------- ---------
Expenses:
Interest................................ 546 336 278
Personnel expense....................... 965 987 1,141
Legal and other professional............ 155 103 91
Depreciation and amortization........... 49 63 48
Other................................... 367 300 160
---------- ---------- ---------
Total expenses....................... 2,082 1,789 1,718
---------- ---------- ---------
Loss before income tax benefit and equity
in undistributed income of
subsidiaries............................ (807) (730) (903)
Income tax benefit......................... 281 258 344
---------- ---------- ---------
Loss before equity in undistributed
income of subsidiaries.................. (526) (472) (559)
Equity in undistributed income of
subsidiaries............................ 2,418 1,629 1,750
---------- ---------- ---------
Net income........................... $ 1,892 $ 1,157 $ 1,191
========== ========== =========
55
<PAGE>
PARENT COMPANY ONLY
Condensed Statements of Cash Flows
For the Years Ended December 31
(In thousands)
1996 1995 1994
-------- --------- --------
Cash flows from operating activities:
Net income................................ $ 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........... 25 27 9
Amortization of intangible assets....... 24 36 39
Equity in undistributed income of
subsidiaries........................ (2,418) (1,629) (1,750)
Change in prepaid expenses and other
receivables......................... (3,816) (168) 1,266
Change in accrued expenses and other
liabilities......................... (71) (228) 263
Other................................... (391) (142) (16)
-------- --------- --------
Net cash provided by (used in)
operating activities................ (4,755) (1,263) 1,002
-------- --------- --------
Cash flows from investing activities:
Net (increase) decrease in loans........... 1 (546) --
Increase in investment in subsidiaries..... (8,700) (6,796) (450)
Sale of investment in subsidiary........... -- 3,811 --
Sale (purchases) of premises, leasehold
improvements and equipment.............. 50 (108) (22)
Dividends received......................... 700 1,309 --
-------- --------- --------
Net cash used in investing
activities.......................... (7,949) (2,330) (472)
-------- --------- --------
Cash flows from financing activities:
Repayments of long-term borrowings......... (1,004) (716) (550)
Proceeds from long-term borrowings......... 7,899 500 216
(Costs) proceeds from issuance of stock.... (8) 9,717 --
Payments to repurchase stock............... -- -- (216)
-------- --------- --------
Net cash provided by (used in)
financing activities................ 6,887 9,501 (550)
-------- --------- --------
Net increase (decrease) in cash and cash
equivalents.............................. (5,817) 5,908 (20)
Cash and cash equivalents, beginning of year.. 6,074 166 186
-------- --------- --------
Cash and cash equivalents, end of year........ $ 257 $ 6,074 $ 166
======== ========= ========
Supplemental cash flow information:
Interest paid.............................. $ 524 $ 338 $ 268
======== ========= ========
Income tax payments received from
subsidiary banks, net of income taxes
paid..................................... $ 441 $ 16 $ 600
======== ========= ========
56
<PAGE>
Item 8. Changes in and Disagreements with Accountant on Accounting and
Financial Disclosure
None
PART III
Item 9. Directors, Executive Officers, Promotors and Control Persons;
Section 16(a) Beneficial Ownership Reporting Compliance
Information concerning the Company's directors and officers called for by this
item will be included in the Company's definitive Proxy Statement prepared in
connection with the 1997 Annual Meeting of Stockholders and is incorporated
herein by reference.
Item 10. Executive Compensation
Information concerning the compensation of the Company's executives called for
by this item will be included in the Company's definitive Proxy Statement
prepared in connection with the 1997 Annual Meeting of Stockholders and is
incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners and
management called for by this item will be included in the Company's definitive
Proxy Statement prepared in connection with the 1997 Annual Meeting of
Stockholders and is incorporated herein by reference.
Item 12. Certain Relationships and Transactions
Information concerning certain relationships and related transactions called for
by this item will be included in the Company's definitive Proxy Statement
prepared in connection with the 1997 Annual Meeting of Stockholders and is
incorporated herein by reference.
PART IV
Item 13. Exhibits and Reports on Form 8-K
(a)Exhibits.
Reference is made to the Exhibit Index beginning on page E-1 hereby. The
Company will furnish to any eligible stockholder, upon written request of
such stockholder, a copy of any exhibit listed upon the payment of a
reasonable fee equal to the Company's expenses in furnishing such exhibit.
(b)Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended December 31,
1996.
57
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on March 26, 1997.
Name of Issuer
By: /s/ Tracy Scott
-----------------------------------
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities indicated,
on March 26, 1997.
Chairman of the Board, Chief Executive Officer and
/s/ Tracy Scott Director
- ---------------------------- (Principal Executive Officer)
President, Chief Financial Officer and Director
/s/ Gregory K. Cleveland (Principal Financial Officer)
- ---------------------------- (Principal Accounting Officer)
/s/ John A. Malmberg Director
- ----------------------------
/s/ Thomas J. Resch Director
- ----------------------------
/s/ John A. Hipp, M.D. Director
- ----------------------------
/s/ Richard M. Johnsen, Jr. Director
- ----------------------------
/s/ John M. Schaffer Director
- ----------------------------
/s/ Jerry R. Woodcox Director
- ----------------------------
/s/ Brad J. Scott Director
- ----------------------------
58
<PAGE>
EXHIBIT INDEX
Exhibit
No. Exhibit Description
2.1 Plan of merger of BNCCORP, Inc., a North Dakota corporation into
BNCCORP, INC., a Delaware corporation, incorporated by reference to
Exhibit 2.1 to the Registrant's Registration Statement on Form SB-2
(Registration No. 33- 92369).
2.2 Branch Purchase and Assumption Agreement dated as of January 31, 1995
between Metropolitan Federal Bank, fsb and Bismarck National Bank, a
national banking association, incorporated by reference to Exhibit 2.2
to the Registrant's Registration Statement on Form SB-2 (Registration
No. 33-92369).
2.3 Stock Purchase Agreement dated as of June 7, 1995, by and among the
Company, Gregory Cleveland, Tracy Scott and Community First
Bancshares, Inc., incorporated by reference to Exhibit 2.3 to
Amendment No. 1 to the Registrant's Registration Statement on Form
SB-2 (Registration No. 33-92369).
2.4 Agreement and Plan of Merger of the First National Bank of Linton with
and into BNC National Bank dated as of July 28, 1995, incorporated by
reference to Exhibit 2.4 to the Registrant's Form 10-KSB dated as of
March 29, 1996.
2.5 Contract for Sale of Assets dated December 31, 1996 by and between
Gregory K. Cleveland, P.C. and BNC National Bank.
2.6 Stock Purchase Agreement dated February 26, 1997 by and between BNC
National Bank and Shareholders of J.D. Meier Insurance Agency.
3.1 Certificate of Incorporation of the Company, incorporated by reference
to Exhibit 3.1 to the Registrant's Registration Statement on Form SB-2
(Registration No. 33-92369).
3.2 Bylaws of the Company, incorporated by reference to Exhibit 3.2 to the
Registrant's Registration Statement on Form SB-2 (Registration No.
33-92369).
E-1
<PAGE>
4.1 Specimen of Common Stock Certificate, incorporated by reference to
Exhibit 4 to Amendment No. 1 to the Registrant's Registration
Statement on Form SB-2 (Registration No. 33-92369).
4.2 Warrant to Subscribe for and Purchase Common Stock of BNCCORP, Inc. by
and between the Company and Dain Bosworth Incorporated, incorporated
by reference to Exhibit 4.2 to the Registrant's Form 10-KSB dated as
of March 29, 1996.
10.1 Form of Indemnity Agreement by and between the Company and each of the
Company's Directors, incorporated by reference to Exhibit 10.1 to the
Registrant's Registration Statement on Form SB-2 (Registration No.
33-92369).
10.2 Form of Employment Agreement between the Company and each of Tracy J.
Scott, Gregory K. Cleveland, and Brad J. Scott, incorporated by
reference to Exhibit 10.2 to the Registrant's Registration Statement
on Form SB-2 (Registration No. 33-92369).
10.3 Form of BNCCORP, INC. Stock Incentive Plan, incorporated by reference
to Exhibit 10.3 to the Registrant's Registration Statement on Form
SB-2 (Registration No. 33- 92369).
10.4 Employment Agreement between the Company, Bismarck National Bank and
Thomas Resch, incorporated by reference to Exhibit 10.8 to Amendment
No. 1 to the Registrant's Registration Statement on Form SB-2
(Registration No. 33-92369).
10.5 Form of Stock Option Agreement for the Grant of Non- Qualified Stock
Options Under the BNCCORP, INC. 1995 Stock Incentive Plan dated as of
June 7, 1995 between the Company and each of Tracy J. Scott, Gregory
K. Cleveland, Brad J. Scott, John Malmberg, Michael Miller, and Thomas
Resch, incorporated by reference to Exhibit 10.5 to the Registrant's
Form 10-KSB dated as of March 29, 1996.
10.6 Term Loan Agreement dated February 19, 1996 by and between Firstar
Bank Milwaukee, N.A. and BNCCORP, Inc., incorporated by reference to
Exhibit 10.6 to the Registrant's Form 10-KSB dated as of March 29,
1996.
E-2
<PAGE>
10.7 Revolving Credit Agreement dated February 19, 1996 by and between
Firstar Bank Milwaukee, N.A. and BNCCORP, Inc., incorporated by
reference to Exhibit 10.7 to the Registrant's Form 10-KSB dated as of
March 29, 1996.
10.8 Amendment to Term Loan Agreement and Term Note dated February 11, 1997
by and between Firstar Bank Milwaukee, N.A. and BNCCORP, Inc.
10.9 Amendment to Revolving Credit Agreement and Revolving Credit Note
dated February 11, 1997 by and between Firstar Bank Milwaukee, N.A.
and BNCCORP, Inc.
10.10 Revolving Credit Agreement dated September 27, 1996 by and between
BNC Financial Corporation and Bank Windsor.
21 Subsidiaries of Company.
23.1 Consent of Arthur Andersen LLP
27 Financial Data Schedule
E-3
Exhibit 2.5
CONTRACT FOR SALE OF ASSETS
THIS AGREEMENT is made and entered effective the 31st day of
December, 1996, and is an agreement being by and between GREGORY K. CLEVELAND,
P.C., a North Dakota professional corporation, which maintains its principal
place of business at 109 North 4th Street, Bismarck, North Dakota, (hereinafter
CLEVELAND); and BNC NATIONAL BANK, a federally chartered banking institution,
which maintains its principal place of business at 322 East Main, Bismarck,
North Dakota (hereinafter BNC).
RECITALS:
WHEREAS, CLEVELAND is the owner of assets and goodwill through
the operation of his accounting firm operating from its facilities in Bismarck,
North Dakota.
WHEREAS, CLEVELAND desires to sell, transfer and assign to BNC
and BNC desires to acquire from CLEVELAND, all of CLEVELAND's right, title and
interest in and to all of those assets set forth and further described in the
Exhibits which are attached hereto, said acquisition to be free from all
liability and encumbrances whatsoever, and shall include the goodwill, the
ongoing business and other assets associated therewith, whether tangible,
intangible or otherwise, with it being the intent of the parties, by this
agreement, to define the terms and conditions upon which CLEVELAND will sell and
BNC will purchase the same.
NOW, THEREFORE, in consideration of the mutual covenants and
conditions, it is agreed by and between the parties, as follows:
1.0 Incorporation of Recitals. The recitals set forth above are
incorporated herein by reference and are made a part of this
agreement as if fully set forth herein and shall constitute an
expression of the intent of the parties and as an aid in the
construction of this agreement.
1
<PAGE>
2.0 Description of Assets Sold and Purchase Price. The assets
which CLEVELAND shall sell to BNC, and which BNC shall
purchase from CLEVELAND, shall be the following assets owned
or used by CLEVELAND in conducting its accounting operations
and which are represented in the categories of assets listed
below in the paragraph 2.0 (hereinafter collectively referred
to as "PROPERTY"):
2.1 Prepaid Expenses. All of CLEVELAND's prepaid expenses
as of December 31, 1996 (PREPAID EXPENSES). PREPAID
EXPENSES shall include all right, title and interest
of CLEVELAND in and to software or other computer
components (excluding computer hardware or supplies),
whether or not the same have yet been delivered or
received. The PREPAID EXPENSES shall be separately
identified and set forth in EXHIBIT A, which is
attached hereto and incorporated by reference herein,
with the purchase price to be paid by BNC to
CLEVELAND to be the dollar amount designated therein.
2.2 Accounts Receivable. All of CLEVELAND's accounts
representing payments owing or to be owed by those
clients as hereafter identified on the client list in
the Exhibit so designated and are such sums as are
due and owing as of December 31, 1996 (ACCOUNTS
RECEIVABLE.) The ACCOUNTS RECEIVABLE shall be
separately identified and set forth in Exhibit B,
which is attached hereto and incorporated by
reference herein, with the purchase price to be paid
by BNC to CLEVELAND to be that dollar amount as
individually indicated for clients and as thereafter
totaled and set forth on Exhibit B.
2.3 Work in Process. All of the professionally related
services being provided as of the execution of this
agreement and continuing through December 31, 1996,
and as identified in Exhibit C which is attached
hereto and incorporated by reference herein (WORK IN
PROCESS). The WORK IN PROCESS shall include the
transfer and assignment of all working papers,
documents, memoranda, correspondence and other files
and information concerning each of the items set
forth in the WORK IN PROCESS, including that which
may exist as of the time of execution of the
agreement or hereinafter generated through December
31, 1996. The purchase price which BNC shall pay
CLEVELAND for WORK IN PROCESS shall be dollar amount
as set forth for each of the individual clients as
identified in Exhibit C and the amount as totaled
thereinin.
2.4 Client List. Each and every client of CLEVELAND as
the same are itemized and set forth in Exhibit D,
which is attached hereto and incorporated by
reference herein (CLIENT LIST). The parties recognize
that the CLIENT LIST identifies specific clients of
CLEVELAND as the same now exists and whether
CLEVELAND is presently actively engaged to provide
accounting services or has performed the same in the
past on a periodic basis. Based upon the appraisal as
made and provided by and between the parties, the
purchase price which BNC
2
<PAGE>
shall pay CLEVELAND for the CLIENT LIST shall be Two
Hundred Sixty-Five Thousand Dollars ($265,000). The
parties agree that as an integral part of the
consideration being paid by BNC for the CLIENT LIST
is a sum representing all goodwill associated with
the CLIENT LIST which is, by agreement of the
parties, conveyed as a portion of this agreement and,
additionally, with the sum of $1,000 out of the
consideration being paid pursuant to the terms and
conditions of this paragraph representing the
Covenant Not to Compete as more fully hereinafter
stated.
2.5 Adjustments. The parties recognize and agree that the
sums set forth in Exhibits A, B and C represent
amounts calculated through November 30, 1996 and,
further, that a final calculation for all of said
Exhibits will be made during the month of January,
1997, representing a final calculation through
December 31, 1996, with said amount then compensable
on January 31, 1997.
3.0 Payment of Purchase Price. The purchase price, as provided in
paragraph 2.0, shall be paid by BNC to CLEVELAND as follows:
3.1 The sums as set forth in Exhibits A, B and C shall be
paid, in full, at closing. The adjustment to said
sums as set forth in paragraph 2.5 shall be payable
by BNC to CLEVELAND or refundable by CLEVELAND to
BNC, based upon such adjustments, on January 31,
1997.
3.2 The sum of Two Hundred Sixty-Four Thousand Dollars
($264,000) representing the purchase price for the
CLIENT LIST and Goodwill associated therein, and as
more fully set forth in Exhibit D, and the sum of
$1,000 representing consideration for the Covenant
Not to Compete, shall be due and payable, in full, by
BNC to CLEVELAND on January 31, 1997.
3.3 Payment of the purchase price as set forth in either
paragraph 3.1 or paragraph 3.2 shall be paid to
CLEVELAND or as otherwise designated by CLEVELAND.
4.0 Closing and Contingency to Close. The parties agree as follows:
4.1 The closing of this transaction shall take place at a
location on or before December 31, 1996 and at such
time mutually agreed upon by BNC and CLEVELAND. At
the closing, CLEVELAND shall execute and deliver to
BNC such bills of sale or other instruments as may be
necessary to transfer to BNC the PROPERTY as
hereinbefore identified and defined and shall deliver
possession thereof to BNC. All such bills of sale and
other instruments will contain the usual warranties
and will effectively transfer to BNC full title to
the same, free and clear of all liens, security
interests and encumbrances.
3
<PAGE>
4.2 The transfer of assets contemplated by this agreement
is being accomplished contemporaneously with the sale
and transfer of a partnership interest by Michael
Schmitz, P.C. (SCHMITZ), to Gregory K. Cleveland,
P.C., Seller herein, in that partnership known as
Gregory K. Cleveland & Co. (the PARTNERSHIP). The
closing of this transaction is contingent upon the
accomplishment of a closing transferring any and all
interests in the PARTNERSHIP by SCHMITZ to CLEVELAND.
Documentation shall be provided BNC at the time of
the closing of the transaction represented by this
agreement substantiating that SCHMITZ has transferred
any and all interests in the PARTNERSHIP to
CLEVELAND, including the assets being conveyed
hereby.
5.0 Business Operations. The accounting operations of CLEVELAND
sold and accompanying the PROPERTY conveyed hereby shall be
surrendered and relinquished to BNC as of the close of
business December 31, 1996.
6.0 Tax Claims. CLEVELAND represents and warrants that no taxes
are outstanding against its operations, with the PROPERTY
transferred hereby and that any taxes related to its
operations including, but not limited to, sales tax, state and
federal income tax withholding, federal Social Security tax
withholding, employment taxes and business, professional or
license fees, have been paid, in full, through December 31,
1996, with CLEVELAND hereby agreeing to and hereafter
indemnifying BNC from any responsibility, liability or loss
for any such taxes not paid as a result of operations through
December 31, 1996.
7.0 Covenant Not to Compete. In consideration of the sum paid by
BNC for this covenant as hereinbefore set forth, CLEVELAND,
and its owner, Gregory K. Cleveland, individually, agree that
for a period of five (5) years from and after December 31,
1996, they will not engage in any aspect of the accounting
profession in Burleigh County, North Dakota, that in any
manner whatsoever represents competition to the accounting
purposes
4
<PAGE>
and activities of BNC as it relates to the assets including,
but not limited to, the CLIENT LIST purchased hereby, with
prohibited competition including, but not necessarily limited
to, the use of the name Gregory K. Cleveland & Co., or any
name deceptively similar thereto, and shall also include any
participation, directly or indirectly, in the ownership,
management, investing, assisting or other operation of any
accounting business that carries on any similar business
purpose or activity in Burleigh County, North Dakota, whether
that activity originates in a center of location located in
said County or is initiated outside of said County but is
carried on, to any degree, within said area of this covenant.
Notwithstanding the Covenant Not to Compete as set forth
herein, it is the express agreement of the parties that it
shall not be a violation of this covenant for Gregory K.
Cleveland, individually, or in conjunction with other persons
or legal entities, to carry on work related activities
generally associated with the accounting profession and the
assets transferred hereby, provided that such work related
activity is associated with the ongoing endeavors of BNC, the
holding company of BNC or any of the corporate affiliates
either of the holding company or BNC and with such activity is
carried out as an employee of said banking entities or on a
consulting or other business relationship. The Covenant Not to
Compete as set forth herein and including the exclusion to the
same shall be binding upon and the exception applicable to
Michael Schmitz who, by his signature appearing herein, agrees
to this covenant and the exclusion recognizing and
representing that the goodwill paid hereunder is, in part, the
consideration for the goodwill being sold in that
contemporaneous transaction between SCHMITZ and CLEVELAND.
5
<PAGE>
8.0 Employees. The parties agree as follows:
8.1 BNC has and may continue to elect to employ all of
the present employees of CLEVELAND. By such acts, BNC
is not binding itself to continue the employ of such
persons or restricting itself from assigning other
duties and responsibilities to any or all of such
persons as it, in its sole discretion, sees fit. Any
salaries, bonuses, commissions or other remuneration
owing to any employees as of December 31, 1996, shall
be and remain the sole and separate obligation of
CLEVELAND, who shall indemnify and hold BNC harmless
from any liability or loss occasioned thereby
including, but not limited to, payroll taxes and the
like. BNC shall be responsible to and hereby does
assume the obligation to provide employee benefits to
those employees of CLEVELAND that shall continue in
the employ of BNC after the closing of this
transaction, with that responsibility and assumption
being as to any and all benefits in the form of
vacation, sick leave, personal leave and the like,
with such assumption and responsibility being for the
same as they otherwise exist on the books and records
of CLEVELAND as of December 31, 1996, with BNC
thereafter entitled to modify any employment policies
related to the same and as they affect the employees
from and after January 1, 1997, other than benefits
accrued through year end.
8.2 CLEVELAND maintains for the benefit of its employees
a plan or plans of deferred compensation, 401(k), or
the like. After January 1, 1997, BNC shall provide
notice to CLEVELAND and the employees of CLEVELAND
that shall become employed by BNC of the options
concerning rollover of any presently existing
deferred benefits. BNC shall be required to accept
any rollover of such benefits as requested by the
employees. The terms and conditions of any rollover
shall be as reasonably required by BNC, with BNC
thereafter entitled to provide deferred compensation
benefits to such employees as it, in its sole
discretion, sees fit.
9.0 Representations by Cleveland. CLEVELAND makes the following
representations and warranties to BNC, all of which shall
survive the closing:
9.1 CLEVELAND is a duly recognized legal professional
entity in the State of North Dakota operating as a
professional accounting firm and has full power and
authority to execute this agreement and carry out all
terms and provisions as set forth herein.
9.2 CLEVELAND is the owner of and has good and marketable
title to the PROPERTY conveyed hereby, free of all
debts, liens, security interests and encumbrances,
and shall be conveyed free of the same to BNC
hereunder at closing.
6
<PAGE>
9.3 There are no judgments, liens, actions, or
proceedings pending or threatened against the assets
of CLEVELAND being conveyed hereby.
9.4 CLEVELAND has complied with the laws, rules and
regulations relating to the business and PROPERTY and
being conveyed hereby.
9.5 CLEVELAND has paid, or will pay, in full all
liability incurred by it through December 31, 1996,
of state and federal employee income tax withholding,
federal social security tax withholding, employment
taxes, unemployment insurance, sales and use taxes,
business or license fees and any other business
related taxes or governmental charges.
9.6 CLEVELAND states that, in its opinion, consideration
be paid hereunder represents the reasonable fair
market value of the assets transferred hereunder and
that the appraisal obtained for the value of the
assets transferred represents a free and voluntary
opinion expressed by the individual performing the
same.
9.7 CLEVELAND, and its principals, shall use their best
efforts to assist BNC in keeping and promoting (i)
the clients and continuing work represented thereby
as set forth in Exhibit D; and (ii) continuing and
collecting all accounts receivable and WORK IN
PROCESS as represented by Exhibits B and C,
respectively.
9.8 The PROPERTY being sold hereby and as set forth
herein and in the Exhibits attached hereto includes,
but is not necessarily limited to, all records,
files, client materials and other documents or
records associated with the CLIENT LIST and the
clients represented therein. It excludes any and all
corporate records and documents provided,
nevertheless, that BNC shall have access to the same
upon advance notice to CLEVELAND and for reasonable
business purposes.
10.0 Representations by BNC. BNC makes the following
representations and warranties to CLEVELAND, all of which
shall survive the closing:
10.1 BNC is a duly recognized, federally chartered banking
institution, lawfully carrying out its business in
the State of North Dakota and has full power and
authority to execute this agreement and carry out all
terms and provisions as set forth herein including,
but not limited to, continuation of the business
associated with the assets being purchased hereby.
10.2 From and after the date of closing, BNC shall be
responsible for and shall pay all advertising costs
associated with any telephone yellow page advertising
or other advertising presently in place and
previously arranged by CLEVELAND.
7
<PAGE>
10.3 BNC has received and reviewed a report of appraisal
valuing the CLIENT LIST represented by Exhibit D and
it is satisfied that the appraisal was freely and
voluntarily completed and that the consideration
being paid hereunder is consistent therewith and is
appropriate in amount.
10.4 BNC shall be solely responsible for obtaining
necessary consents to assignment of software and
other computer related requirements involving
copyright, tradenames, registration names or the like
and, additionally, for purging and eliminating any
software or aspects of computer operations being
received from CLEVELAND that would otherwise
represent copyright infringement, registration
violations or the like.
10.5 The Covenant Not to Compete as it affects Michael
Schmitz shall terminate and no longer be of any force
and effect in the event BNC, in its discretion,
terminates his employment.
10.6 LaRoy Baird, P.C., Attorneys at Law, have been
retained by BNC and do operate on its behalf in all
aspects of preparation and closing of this agreement.
10.7 BNC and the officer of it executing this agreement
have full power and authority granted by the Board of
Directors through resolution duly made and adopted
consenting to and approving the transaction
represented hereby, including the consideration to be
paid.
10.8 The assets, including the CLIENT LIST and clients
represented therein being purchased hereby represents
assimilation of a professional accounting practice to
the extent that it is associated with the assets
transferred and BNC shall use reasonable business
efforts to continue servicing said clientele and
promoting and furthering the name and reputation of
CLEVELAND as associated therewith.
10.9 The assets being transferred does not include any
audit or review of clients, with BNC representing
that it is aware that said audit or review clients
are being sold and transferred by separate agreement
to a third party.
11.0 Risk of Loss. CLEVELAND assumes all risk of loss due to fire,
theft or other casualty up to and through December 31, 1996,
with BNC assuming and responsible for the same from and after
said date. In the event of any such loss prior to such date,
the obligation to close and fulfill all duties and
responsibilities hereunder shall continue and remain in full
force and effect provided, nevertheless, any and all insurance
coverage provided for such loss shall belong to and become the
property of BNC.
8
<PAGE>
12.0 Indemnity. As this agreement only provides for a purchase of
assets, upon execution of this agreement, CLEVELAND, and its
principal, individually, and its successors and assigns, agree
to a and shall defend, indemnify and hold BNC, and its
successors and assigns, harmless from any claims, demands,
losses, and/or any lawsuits by any party as a result of any
activity of CLEVELAND prior to December 31, 1996. As BNC shall
continue providing professional accounting services to the
CLIENT LIST of clients identified therein and as set forth
herein from and after December 31, 1996, it, as well as its
successors and assigns, agree to and shall defend, indemnify
and hold CLEVELAND and its successors and assigns, harmless
from any claims, demands, losses, and/or any lawsuits by any
party as a result of any activity of BNC after December 31,
1996.
13.0 Intent of Agreement. This agreement is not intended to create
a partnership, joint venture or other type of business
relationship between CLEVELAND and BNC.
14.0 Construction. This agreement contains the entire agreement of
the parties and the matters discussed herein, with the
Recitals as set forth at the beginning of this agreement
becoming an integral part of the contractual relationship
between the parties. Any matters pertaining to the
construction and application hereof shall be governed by the
laws of the State of North Dakota.
15.0 Entire Agreement. This agreement sets forth the entire
understanding of the parties and it may not be changed except
in writing and signed by both parties.
9
<PAGE>
16.0 Binding Effect. This agreement shall be binding upon and inure
to the benefit of, the parties hereto, and CLEVELAND, if not
executed as an individual, then in all individuals that are
partners, shareholders, directors or officers of CLEVELAND,
and all of the respective successors and assigns of all
parties hereto.
IN WITNESS WHEREOF, the parties have signed this agreement in
duplicate originals effective the day and date first above written,
notwithstanding execution at some later date.
GREGORY K. CLEVELAND, P.C. BNC NATIONAL BANK
By: /s/ Gregory K. Cleveland By: /s/ Tracy Scott
------------------------------ --------------------------------
Its: President Its: Chairman/CEO
------------------------------ --------------------------------
*************************
The undersigned consents and agrees to accept all terms and
conditions as set forth herein and to be bound to all obligations and remedies
as provided herein or otherwise allowed by law.
Dated: December 31 , 1996. /s/ Gregory K. Cleveland
---------------- ---------------------------------------
GREGORY K. CLEVELAND
**************************
The undersigned has read the foregoing and consents and agrees
to be bound by the terms and conditions therein as they apply to him,
individually, representing and agreeing that goodwill payable hereunder is
equivalent to and as a result of goodwill paid to him under separate agreement
referenced herein and as executed contemporaneously herewith, and further
consenting to the Covenant Not to Compete as set forth.
Dated: December 31, 1996. /s/ Michael Schmitz
--------------- --------------------------------------
MICHAEL SCHMITZ
10
Exhibit 2.6
STOCK PURCHASE AGREEMENT
THIS AGREEMENT is made and entered effective this 1st day of
January , 1997, by and between BNC National Bank, which maintains a principal
banking house at 322 East Main Street, Bismarck, ND 58501 (hereinafter referred
to as "BNC"); and the shareholders of J.D. Meier Insurance Agency, Inc.
(hereinafter referred to as "AGENCY"), which maintains an agency headquarters in
Linton, North Dakota, with the shareholders consisting of GREGORY K. CLEVELAND,
TRACY SCOTT, DAVID ERICKSON and TRI-COUNTY INSURANCE & LEASING, INC.
(hereinafter collectively referred to as "SHAREHOLDERS", unless otherwise
individually identified).
WHEREAS, SHAREHOLDERS desire to sell and BNC desires to
acquire all of the outstanding shares of the AGENCY;
WHEREAS, the parties desire to enter into this Agreement for
the purpose of effectuating the sale and exchange of such shares.
NOW, THEREFORE, in consideration of the mutual covenants and
conditions as set forth herein, it is agreed as follows:
1.0 The SHAREHOLDERS will sell to BNC the issued and outstanding
capital stock of the AGENCY held by the individual
SHAREHOLDERS as indicated below, with the transfer being free
of all liens and encumbrances and representing all of the
AGENCY's issued and outstanding capital stock owned, held or
controlled by said individual SHAREHOLDERS, with BNC to
purchase the shares subject to the provisions of this
Agreement as follows:
1
<PAGE>
GREGORY K. CLEVELAND
Stock Certificate No(s): 1
Total Shares: 1,000
TRACY SCOTT
Stock Certificate No(s): 2
Total Shares: 1,000
DAVID ERICKSON
Stock Certificate No(s): 5
Total Shares: 1,000
TRI-COUNTY INSURANCE & LEASING, INC.
Stock Certificate No(s): 6
Total Shares: 1,000
2.0 The purchase price shall be Eight Dollars and Fifty-Seven
Cents ($8.57) per share, for a total purchase price for all
outstanding capital stock of the AGENCY being in the amount of
Thirty-Four Thousand Two Hundred Seventy-Eight Dollars and
Thirty Cents ($34,278.30).
3.0 The entire purchase price shall be paid to the individual
shareholders based upon the number of shares being transferred
by each of the individuals.
4.0 To induce BNC to purchase their stocks, SHAREHOLDERS jointly
and severally represent and warrant the following:
4.1 The AGENCY is a business corporation organized in
accordance with the laws of the State of North Dakota
and is authorized to engage in the business of a
general insurance agency.
4.2 The AGENCY is in good standing, with all taxes
currently due, including income, employee, franchise
or other taxes, having been paid and with no pending
actions or proceedings to limit or impair the
AGENCY's power to engage in business or otherwise to
carry out the general affairs of a corporation within
the State of North Dakota.
2
<PAGE>
4.3 SHAREHOLDER's shares constitute all of the issued and
outstanding shares of the AGENCY's stock, with all
shares having been properly issued and are fully paid
and nonassessable.
4.4 SHAREHOLDER's shares are free of any liens,
encumbrances or agreements of any kind, including
stockholder's agreements, voting trusts, buy-sell
agreements or other limitations or restrictions.
4.5 The AGENCY has previously caused to be provided to
BNC a list of all corporate assets to be disclosed
and the AGENCY is the sole owner of all of such
assets, none of which are subject to any liens or
encumbrances.
4.6 The AGENCY has previously caused to be provided to
BNC a list of description of any and all debts or
liabilities as may have then existed or as are
anticipated through the effective date of this
Agreement, including the name and address of any such
creditors, the amount owed to each and the general
terms and conditions of such obligations.
4.7 The AGENCY has previously caused to be provided to
BNC the most recent financial statement for the
AGENCY and there will be no changes in the AGENCY's
financial condition as previously disclosed to BNC
between the date of said documentation and the
closing of this transaction, except for those changes
that would otherwise normally occur in the regular
course of the AGENCY's business.
4.8 There are no actions at law or equity or
administrative proceedings pending against the AGENCY
or in which the AGENCY is a plaintiff, defendant,
petitioner or respondent and the AGENCY will not
commence an action at law or equity or in an
administrative proceeding in which it would be a
plaintiff or petitioner and there have been no
demands, communications or advice that any actions at
law or equity or administrative proceedings that will
be or may be brought in which it would otherwise be
anticipated that the AGENCY will be named as a
defendant or otherwise join or be joined as a party.
4.9 The Board of Directors of the AGENCY have not
declared any dividends and there are no dividends
unpaid that were declared in an earlier period nor
will there be any such declarations of dividends
before the closing of this transaction.
4.10 From the effective date of this Agreement to the
closing, the AGENCY will not increase any employee's
salary or hire any new employees without first
obtaining the written consent of BNC.
4.11 None of the individual SHAREHOLDERS have any contract
of employment with the AGENCY other than has been
expressly disclosed to BNC nor do any of the
individual SHAREHOLDERS have any contract, agreement,
understanding or otherwise with the AGENCY as to any
compensation due or to be paid as a result of any
dealings with the AGENCY other than compensation in
the ordinary course of business, including director's
fees.
3
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4.12 TRI-COUNTY INSURANCE AND LEASING, INC. is a validly
formed and existing North Dakota corporation and the
undersigned individual is duly authorized by the
corporation to enter into this agreement and transfer
all shares of stock as set forth herein.
5.0 BNC represents and warrants that BNC has inspected the
AGENCY's premises, inventory, furnishings, fixtures, equipment
or other physical assets, further representing and warranting
that BNC has examined the AGENCY's books of account and other
business records and is satisfied that they properly reflect
the AGENCY's past and present earnings and financial
condition.
6.0 The representations and warranties set forth herein shall
survive the closing.
7.0 At the closing, SHAREHOLDERS shall deliver to BNC the
following:
7.1 Stock Certificates; and
7.2 Certificates representing all of the outstanding
shares of the AGENCY's capital stock, endorsed for
transfer in blank.
7.3 The AGENCY's corporate books of account and business
records, minute book, stock transfer book, blank
stock certificates and seal.
7.4 Any resignation as an officer or director of the
corporation as BNC shall demand.
8.0 The closing shall take place at the banking house of BNC
located in Bismarck, North Dakota on March 15, 1997 at 4:00
p.m., or such other time or place prior to such date as the
parties may otherwise agree.
9.0 This Agreement is binding upon and shall inure to the benefit
of the various parties' heirs, executors, administrators,
representatives, successors and assigns.
4
<PAGE>
10.0 This Agreement represents the full and complete agreement of
the parties, may not be modified or amended except in a
writing signed by all parties, with this Agreement to be
construed in accordance with the laws of the State of North
Dakota.
BNC NATIONAL BANK
Dated: February 26 , 1997. By: /s/ Gregory K. Cleveland
------------------- -----------------------------------
Its: Secretary
SHAREHOLDERS:
Dated: February 26 , 1997. /s/ Gregory K. Cleveland
------------------- ---------------------------------------
GREGORY K. CLEVELAND
Dated: February 26 , 1997. /s/ Tracy Scott
------------------- ---------------------------------------
TRACY SCOTT
Dated: February 22 , 1997. /s/ David Erickson
------------------- ---------------------------------------
DAVID ERICKSON
Dated: February 25 , 1997. TRI-COUNTY INSURANCE & LEASING, INC.
-------------------
By: /s/ Duane Huber
-----------------------------------
Its: Director
-----------------------------------
5
Exhibit 10.8
AMENDMENT TO TERM LOAN AGREEMENT
AND TERM NOTE
This Amendment, dated as of the date set forth below, is by and between
the bank (the "Bank") and the borrower (the "Borrower") identified below.
RECITALS
The Bank and Borrower acknowledge the following:
A. The Bank and the Borrower have executed a Term Loan Agreement (the
"Agreement", and the Borrower has executed a Term Note (the "Note") both dated
February 19, 1996, and the Borrower has executed certain other related documents
(collectively the "Loan Documents") setting forth the terms and conditions upon
which the Borrower may obtain a term loan from the Bank in an amount of
$3,000,000.
B. The Bank and the Borrower now wish to amend the Agreement pursuant
to the terms and provisions of this Amendment to Term Loan Agreement (the
"Amendment"),
AGREEMENTS
NOW, THEREFORE, in consideration of the recitals and mutual agreements
which follow and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Bank and the Borrower agree as
follows:
1. Extension of Maturity Date. The reference to "February 19, 1997"
in the Note as the maturity date of the loan is hereby deleted and replaced with
"February 19, 1998."
2. Bank Name. The references to "BNC National Bank, Minnesota" in the
Agreement and the Note are deleted and replaced with "BNC National Bank of
Minnesota."
3. Primary Capital to Assets. Paragraph 4.15 (a) is deleted and
replaced with the following:
(a) Primary Capital to Assets of at least 7%.
4. Return on Assets. Paragraph 4.15 (d) of the Agreement is deleted
and replaced with the following:
(d) an average return on Assets for BNC National Bank of at
least .75%; and an average return on Assets of BNC National Bank of
Minnesota of at least .25%.
5. Effectiveness of Prior Documents. Except as specifically amended
hereby, the Agreement shall remain in full force and effect in accordance with
its terms. All warranties and representations contained therein are hereby
reconfirmed. All collateral previously given to secure the Agreement continues
as security and all guarantees remain in full force and effect. This is an
amendment, not a novation.
6. Preconditions to Effectiveness. This Amendment shall only become
effective upon execution by the Borrower and Bank, and approval by all
guarantors (if any) and any other third party required by the Bank.
1
<PAGE>
7. No Waiver of Defaults; Warranties. This Amendment shall not be
construed as or be deemed to be a waiver by the Bank of Existing defaults by the
Borrower, whether known or undiscovered. All agreements, representations and
warranties made herein shall survive the execution of this Amendment.
8. Counterparts. This Amendment may be signed in any number of
counterparts, each of which shall be considered an original, but when taken
together shall constitute one document.
9. Authorization. The Borrower and all guarantors (if any) represent
and warrant that the execution, delivery and performance of this Amendment and
the documents referenced herein are within the corporate or partnership powers
(as applicable) of the Borrower and all corporate or partnership guarantors, and
have been duly authorized by all necessary corporate or partnership action.
Dated as of February 11, 1997.
BNCCORP, INC.,
A Delaware corporation
By: /s/ Gregory K. Cleveland
--------------------------------------
Name and Title: President
---------------------
FIRSTAR BANK MILWAUKEE, N.A. (Bank)
By: /s/ Stephen J. Moore
--------------------------------------
Stephen J. Moore, Vice President
2
Exhibit 10.9
AMENDMENT TO REVOLVING CREDIT AGREEMENT
AND REVOLVING CREDIT NOTE
This Amendment, dated as of the date specified below, is by and between
the borrower (the "Borrower") and the bank (the "Bank") identified below.
RECITALS
A. The Borrower and the Bank have executed a Revolving Credit Agreement
(the "Agreement") and the Borrower has executed a Revolving Credit Note (the
"Note"), both dated February 19, 1996, and the Borrower (and if applicable,
certain third parties) have executed the documents identified in Article III of
the Agreement and certain other related documents (collectively the "Loan
Documents"), setting forth the terms and conditions upon which the Borrower may
obtain loans from the Bank from time to time in the aggregate amount not to
exceed $7,000,000.
B. The Borrower has requested that the Bank permit certain
modifications to the Agreement and the Note as described below.
C. The Bank has agreed to such modifications, but only upon the terms
and conditions outlined in this Amendment.
TERMS OF AGREEMENT
In consideration of the mutual covenants contained herein, and for
other good and valuable consideration, the Borrower and the Bank agree as
follows:
1. Bank Name. The references to "BNC National Bank, Minnesota" in the
Agreement and the Note are deleted and replaced with "BNC National Bank of
Minnesota."
2. Revolving Credit Facility. Paragraph 2.1 of the Agreement is
deleted and replaced with the following:
2.1 Revolving Credit Facility. From time to time prior to
February 19, 1998 or the earlier termination hereof pursuant to Article
VI, Borrower may borrow from the Bank for the purposes provided in
Section 4.6 up to the aggregate principal amount outstanding at any one
time of up to $12,000,000. All revolving loans hereunder will be
evidenced by a single promissory note of the Borrower payable to the
order of the Bank in the principal amount of $12,000,000 (the "Note").
Although the Note will be expressed to be payable in the amount of
$12,000,000, the Borrower will be obligated to pay only the amount of
loans actually disbursed hereunder together with accrued interest on
the outstanding balance at the rates and on the dates specified therein
and such other charges provided for herein.
3. Extension of Maturity Date. All references to "February 19, 1997"
in the Note and the Agreement as the maturity date of the loan are hereby
deleted and replaced with "February 19, 1998."
4. Loan Amount. The reference in Paragraph 2.4 (i) of the Agreement to
"$7,000,000" is deleted and replaced with "$12,000,000."
1
<PAGE>
5. Restrictions on Proceeds. The last sentence of Paragraph 4.6 of the
Agreement is deleted in its entirety.
6. Primary Capital to Assets. Paragraph 4.15 (a) is deleted and
replaced with the following:
(a) Primary Capital to Assets of at least 7%.
7. Return on Assets. Paragraph 4.15 (d) of the Agreement is deleted
and replaced with the following:
(d) an average return on Assets for BNC National Bank of at
least .75%; and an average return on Assets of BNC National Bank of
Minnesota of at least .25%.
8. Effectiveness of Prior Documents. Except as specifically amended
hereby, the Agreement, the Note and the other Loan Documents shall remain in
full force and effect in accordance with their respective terms. All warranties
and representations contained in the Agreement and the other Loan Documents are
hereby reconfirmed as of the date hereof. All collateral previously provided to
secure the Agreement and/or the Note continues as security, and all guaranties
guaranteeing obligations under the Loan Documents remain in full force and
effect. This is an amendment, not a novation.
9. Preconditions of Effectiveness. This Amendment shall only become
effective upon execution by the Borrower and the Bank, and approval by all
guarantors (if any) and any other third party required by the Bank.
10. No Waiver of Defaults; Warranties. This Amendment shall not be
construed as or be deemed to be a waiver by the Bank of existing defaults by the
Borrower, whether known or undiscovered. All agreements, representations and
warranties made herein shall survive the execution of this Amendment.
11. Counterparts. This Amendment may be signed in any number of
counterparts, each of which shall be considered an original, but when taken
together shall constitute one document.
12. Authorization. The Borrower and all guarantors (if any) represent
and warrant that the execution, delivery and performance of this Amendment and
the documents referenced herein are within the corporate or partnership powers
(as applicable) of the Borrower and all corporate or partnership guarantors, and
have been duly authorized by all necessary corporate or partnership action.
Dated as of February 11, 1997.
BNCCORP, INC.,
A Delaware corporation
By: /s/ Gregory K. Cleveland
--------------------------------------
Name and Title: President
--------------------------
FIRSTAR BANK MILWAUKEE, N.A. (Bank)
By: /s/ Stephen J. Moore
--------------------------------------
Stephen J. Moore, Vice President
2
Exhibit 10.10
REVOLVING CREDIT AGREEMENT
Dated as of September 27, 1996
BNC Financial Corporation, a Delaware corporation (the "Borrower"),
located at 4150 South Second Street, Suite 350, St. Cloud, MN 56310 and Bank
Windsor, a Minnesota banking corporation (the "Bank"), located at 740 Marquette
Avenue, Minneapolis, Minnesota 55402, agree as follows:
ARTICLE I.
DEFINITIONS
Section 1.1. Definitions. As used in this Agreement the following terms
shall have the following meanings (such meanings to be equally applicable to
singular and plural forms of the terms defined):
(a) "Affiliate" shall mean any of the following Persons:
(i) any director, officer or employee of the Borrower;
(ii) any erson who, individually or with his immediate
family beneficially owns or holds 5% or more of
voting interest of the Borrower; or
(iii) any company in which any Person described above owns
a 5% or greater equity interest.
(b) "Borrowing Base" shall mean an amount equal to 50% of the Value of
Eligible Loans.
(c) "Business Day" shall mean any day other than a Saturday, Sunday or
a public holiday or the equivalent under the laws of the State of
Minnesota or the United States of America.
(d) "Debt" shall mean (i) indebtedness for borrowed money or for the
deferred purchase price of property or services, (ii) obligations as
lessee under leases which shall have been or should be, in accordance
with generally accepted accounting principles, recorded as capital
leases, (iii) obligations under direct or indirect guaranties in
respect of, and obligations (contingent or otherwise) to purchase or
otherwise acquire, or otherwise to assure a creditor against loss in
respect of, indebtedness or obligations of others of the kinds referred
to in clause (I) or (ii) above, and (iv) liabilities in respect of
unfunded vested benefits under plans covered by Title IV of ERISA.
(e) "Event of Default" shall mean one of the events specified in
Section 6.1.
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<PAGE>
(f) "Loan Documents" shall mean this Agreement, the Note, the Security
Agreement, the Guaranty and all other documents to be executed in
connection with this Agreement.
(g) "Loan Party" shall mean any Person obligated under any Loan
Document.
(h) "Note" shall mean the Revolving Note described in Section 2.2.
(i) "Person" shall mean an individual, corporation, partnership, joint
venture, trust or unincorporated organization or governmental agency or
political subdivision thereof.
(j) "Reference Rate" shall mean the rate established by First Bank
National Association from time to time as its reference rate.
(k) "Subsidiary" shall mean any corporation of which more than 50% of
the outstanding capital stock having ordinary voting power to elect a
majority of the Board of Directors of such corporation (irrespective of
whether or not at the time capital stock or any other class or classes
of stock of such corporation shall or might have voting power upon the
occurrence of any contingency) is at the time directly or indirectly
owned by the Borrower, by the Borrower and one or more other
Subsidiaries, or by one or more other Subsidiaries.
(l) "Value of Eligible Loans" shall mean the aggregate net unpaid
amount then due and owing under those commercial loans made by the
Borrower that: (I) have been approved by the Bank in writing to be
included in the Borrowing Base; (ii) are not in default; and (iii) are
subject to a perfected security interest in favor of only the Bank as
required by this Agreement.
Section 1.2. Accounting and Other Terms. All accounting terms not
specifically defined in this Agreement shall be construed in accordance with
generally accepted accounting principles consistently applied as such principles
may change from time to time. Other terms defined herein shall have the meanings
ascribed to them herein.
ARTICLE II.
REVOLVING LOAN
Section 2.1. Commitment for Revolving Loan. The Bank agrees, in
accordance with the terms of this Agreement, to make advances (the "Advances")
to the Borrower from time to time from the date hereof to and including
September 30, 1997 (the "Termination Date") or the earlier termination of the
Commitment under the terms of this Agreement, in an aggregate amount not to
exceed $2,000,000.00 (the "Commitment"); provided, however, that the aggregate
amount of Advances outstanding shall not at any time exceed the lesser of (i)
the Commitment or (ii) the Borrowing Base. Each Advance shall be in an amount of
not less than $10,000.00. Within the limits of the Commitment the Borrower may
borrow, prepay pursuant to Section 2.5 and reborrow under this Section 2.1.
2
<PAGE>
Section 2.2. The Note. The Advances made by the Bank shall be evidenced
by a promissory note (the "Note") which is in substantially the form of Exhibit
A attached hereto and is delivered to the Bank pursuant to Article III.
Section 2.3. Making of Advances. Borrower may request Advances under
this Agreement by giving notice to the Bank, specifying the date of the
requested Advance and the amount thereof. Any request for an Advance shall be
deemed to be a representation that the Borrower's representations and warranties
contained in Section 4.1 are true and correct as of the date of the Advance as
though made on and as of such date and that no event has occurred and is
continuing, or will result from such Advance, which constitutes an Event of
Default or would constitute an Event of Default but for the requirement that
notice be given or time elapse or both. The Bank may disburse each requested
Advance by crediting immediately available funds in the amount of the Advance to
Borrower's demand deposit account maintained with the Bank.
Section 2.4. Interest and Payments. The Borrower shall repay, and shall
pay interest on, the aggregate unpaid principal amount of all Advances in
accordance with the Note. All payments of principal and interest under this
Agreement shall be made when due to the Bank in immediately available funds. All
computations of interest shall be made by the Bank on the basis of the actual
number of days elapsed in a year of 360 days. Whenever any such payment shall be
due on a non- Business Day, such payment shall be made on the next succeeding
Business Day, and such extension of time shall be included in the computation of
interest, as the case may be. The Bank is expressly authorized to charge any
principal or interest payment, when due, to Borrower's demand deposit account
maintained at the Bank, or, if that account shall not contain sufficient funds,
to any other account maintained by Borrower at the Bank.
Section 2.5. Voluntary Prepayment. The Borrower may prepay the Note in
whole or in part; provided, however, that each partial prepayment shall be in a
principal amount of not less than $10,000.00.
Section 2.6. Mandatory Prepayment. In the event that the aggregate
outstanding principal amount of the Note shall exceed the Borrowing Base as
shown on the Borrowing Base Certificate most recently delivered to the Bank
pursuant to Section 5.1(a), the Borrower shall pay to the Bank the amount of
such excess together with the amount of accrued interest to the date of such
prepayment on the amount prepaid.
Section 2.7. Use of Proceeds. The proceeds of the Advances from the
Bank shall be used to fund the Borrower's lending activities and to re-pay not
more than $1,000,000.00 of Debt owed to the Guarantor.
ARTICLE III.
CONDITIONS OF LENDING
Section 3.1. Conditions Precedent to Initial Advance. The Bank shall
have no obligation to make the initial Advance hereunder unless the Bank shall
have received on or before the date of such Advance the following documents:
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<PAGE>
(a) The Note, properly executed and delivered on behalf of the Borrower
(b) A security agreement (the "Security Agreement"), in a form
acceptable to the Bank properly executed and delivered on behalf of the
Borrower, granting to the Bank a security interest in all of the
Borrower's accounts and notes receivable, and all collateral for such
accounts and notes receivable and other property described therein as
security for the performance of the Borrower's obligations under this
Agreement and the Note, together with any UCC-I Financing Statement or
other document deemed necessary or desirable by the Bank to perfect the
security interest granted by the Security Agreement.
(c) A certified copy of the resolutions of the Board of Directors of
the Borrower, approving the execution and delivery of the Loan
Documents to which it is a party and approving all other matters
contemplated by this Agreement.
(d) A certificate by the Secretary or any Assistant Secretary of the
Borrower certifying the names of the officer or officers of the
Borrower authorized to sign the Loan Documents to which it is a party,
together with a sample of the true signature of such office.
(e) A guaranty and subordination agreement (the "Guaranty") of BNCCORP,
lnc. (the "Guarantor"), in a form satisfactory to the Bank, securing
the Borrower's obligations under this Agreement and the Note and
subordinating the Borrower's Debt owed to the Guarantor.
(f) An opinion of Guarantor's counsel in a form acceptable to the Bank
stating that the Guarantor's execution and delivery of the Guaranty has
been authorized by all necessary corporate action and that all
approvals and consents required from any third party or any regulatory
agency have been obtained.
Section 3.2. Conditions Precedent to Each Advance. The obligation of
the Bank to make each Advance (including the initial Advance) shall be subject
to the further conditions precedent, that on the date of such Advance:
(a) The representations and warranties contained in Section 4.1 of this
Agreement are correct on and as of the date of such Advance as though
made on such date; and
(b) No event has occurred and is continuing, or will result from such
Advance, which constitutes an Event of Default or would constitute an
Event of Default but for the requirement that notice be given or time
elapse or both.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES
Section 4.1. Representations and Warranties of the Borrower. To induce
the Bank to make Advances, the Borrower represents and warrants as follows:
4
<PAGE>
(a) Existence of Borrower. The Borrower is a corporation duly
incorporated, validly existing and in good standing under the laws of
the state indicated at the beginning of this Agreement and is qualified
to conduct its business in Minnesota and in all other States in which
it conducts its business.
(b) Authority to Execute. The execution, delivery and performance by
the Borrower of the Loan Documents to which it is a party are within
the Borrower's corporate powers, have been duly authorized by all
necessary corporate action, do not and will not conflict with any
provision of law or of the charter or bylaws of the Borrower or of any
agreement or contractual restriction binding upon or affecting the
Borrower or any of its property, and need no further shareholder or
creditor consent.
(c) Binding Obligation. This Agreement is, and the-other Loan Documents
when delivered hereunder will be, legal, valid and binding obligations
of the Loan Parties enforceable against such Persons in accordance with
their respective terms.
(d) Governmental Approval. No consent of, or filing with, any govern-
mental authority is required on the part of any Loan Party in
connection with the execution, delivery or performance of any Loan
Documents.
(e) Financial Statements. The unaudited financial statements of the
Borrower as of August 31, 1996, copies of which have been furnished to
the Bank, have been prepared in conformity with generally accepted
accounting principles consistently applied and present fairly the
financial condition of the Borrower as of such date, and the results of
the operations of the Borrower for the financial period then ended, and
since such date, there has been no materially adverse change in such
financial condition.
(f) Litigation. No litigation or governmental proceeding is pending or
threatened against the Borrower which may have a materially adverse
effect on the financial condition or operations of the Borrower.
(g) Title to Assets. Borrower has good and marketable title to all
assets used in connection with its trades or businesses, and none of
such assets is subject to any mortgage, pledge, lien, security interest
or encumbrance of any kind, except for current taxes not delinquent,
and except as has been disclosed in writing to the Bank
contemporaneously with this Agreement.
(h) Taxes. The Borrower has filed all federal and state income and
excess profits tax returns which are required to be filed, and has paid
all taxes shown on such returns to be due and all other tax assessments
received by it to the extent that such assessments have become due.
(i) ERISA. No plan (as that term is defined in the Employee Retirement
Income Security Act of 1974 ("ERISA")) of Borrower (a "Plan") which is
subject to Part 3 of Subtitle B of Title 1 of ERISA had an accumulated
funding deficiency (as such term is defined in ERISA)
5
<PAGE>
as of the last day of the most recent fiscal year of such Plan ended
prior to the date hereof, or would have had such an accumulated funding
deficiency on such date if such year were the first year of such Plan,
and no material liability to the Pension Benefit Guaranty Corporation
has been, or is expected by the Borrower to be, incurred with respect
to any such Plan. No Reportable Event (as defined in ERISA) has
occurred and is continuing in respect to any such Plan.
(j) Defaults. The Borrower is not in default in the payment of
principal or interest on any indebtedness for borrowed money and is not
in default under any instrument or agreement under or subject to which
any indebtedness for borrowed money has been issued, and no event has
occurred and is continuing which. with or without the lapse of time or
the giving of notice, or both, constitutes or would constitute an event
of default under any such instrument or agreement or an Event of
Default hereunder.
(k) Subsidiaries. Borrower has no Subsidiaries.
ARTICLE V.
COVENANTS OF THE BORROWER
Section 5.1 Affirmative Covenants. So long as the Note shall remain
unpaid or the Bank shall have a Commitment hereunder, the Borrower will, unless
the Bank shall give its prior written consent:
(a) Financial Reporting. Furnish to the Bank: (i) as soon as available
and in any event within 30 days after the end of each month of each
fiscal year of the Borrower, balance sheets of the Borrower as of the
end of such month and statements of income and retained earnings of the
Borrower for the period commencing at the end of the previous fiscal
year and ending with the end of such month, certified by the chief
financial officer of the Borrower; (ii) as soon as available and in any
event within 45 days after the end of each quarter of each fiscal year
of the Guarantor, balance sheets of the Guarantor as of the end of such
quarter and statements of income and retained earnings of the Guarantor
for the period commencing at the end of the previous fiscal year and
ending with the end of such quarter, certified by the chief financial
officer of the Guarantor; (iii) as soon as available and in any event
within 90 days after the end of each fiscal year of the Borrower and of
the Guarantor, a copy of the annual report for such year for the
Borrower and for the Guarantor, containing financial statements for
such year certified in a manner acceptable to the Bank by independent
public accountants acceptable to the Bank; (iv) promptly upon the
sending or filing thereof copies of all public reports issued by the
Borrower or the Guarantor to any of its security holders, to the
Securities and Exchange Commission or to any national securities
exchange; (v) promptly upon the filing or receiving thereof, copies of
all reports which the Borrower or the Guarantor files under ERISA or
which the Borrower or the Guarantor receives from the Pension Benefit
Guaranty Corporation if such report shows any material violation or
potential violation by the Borrower or the Guarantor of its obligations
under ERISA; (vi) such other information concerning the conditions or
operations, financial or otherwise, of the Borrower and the Guarantor
as the Bank from time to time may reasonably request; (vii)
6
<PAGE>
within 30 days after the end of each month, a Borrowing Base
Certificate for the month most recently ended, together with such
information as the Bank shall request about the loans included in the
Value of Eligible Loans in that Borrowing Base Certificate.
(b) Visitation Rights. At any reasonable time and from time to time,
permit the Bank or any agents or representatives thereof, to examine
and make copies of and abstracts from the records and books of account
of, and visit the properties of, the Borrower, and to discuss the
affairs, finances and accounts of the Borrower with any of its officers
or directors. The Borrower will reimburse the Bank for its reasonable
costs and expenses of conducting such periodic examinations.
(c) Notification of Default. Etc. Notify the Bank as promptly as
practicable (but in any event not later than 5 Business Days) after
Borrower obtains knowledge of: (I) the occurrence of any event which
constitutes an Event of Default or which would constitute an Event of
Default with the passage of time or the giving of notice or both; or
(ii) the commencement of any litigation or governmental proceedings of
any type which could materially adversely affect the financial
condition or business operations of the Borrower.
(d) Keeping of Financial Records and Books of Account. Maintain proper
financial records in accordance with generally accepted accounting
principles consistently applied which fully and correctly reflect all
financial transactions and all assets and liabilities of the Borrower.
(e) Maintenance of Insurance. Maintain such insurance with reputable
insurance carriers as is normally carried by companies engaged in
similar businesses and owning similar property.
(f) Payment of Taxes. Pay all taxes, assessments and governmental
charges of any kind payable by it as such taxes, assessments and
charges become due and before any penalty shall be imposed, except as
Borrower shall contest in good faith and by appropriate proceedings
providing such reserves as are required by generally accepted
accounting principles.
(g) Compliance with ERISA. Cause each benefits plan of the Borrower
that is subject to the provisions of ERISA to comply and be
administered in accordance with those provisions of ERISA which are
applicable to such plan.
(h) Maintenance of Accounts. Maintain corporate bank accounts at the
Bank except for such incidental accounts that reasonable business
judgment requires to be maintained elsewhere.
(i) Preservation of Corporate Existence. Etc. Preserve and maintain its
corporate existence, rights, franchises and privileges in the juris-
diction of its incorporation, and qualify and remain qualified, as a
foreign corporation in each jurisdiction in which such qualification is
necessary or desirable in view of its business and operations or the
ownership of its properties.
7
<PAGE>
Section 5.2. Negative Covenants. So long as the Note shall remain
unpaid or the Bank shall have a Commitment here under, the Borrower will not,
unless the Bank shall give its prior written consent:
(a) Liens. Create or suffer to exist any mortgage, pledge, lien,
security interest or other encumbrance with respect to any assets now
owned or hereafter acquired by Borrower except those encumbrances made
in favor of the Bank.
(b) Debt. Create or suffer to exist any Debt except the Debt under this
Agreement or the Note or Debt owed to the Guarantor which is
subordinated to the Note pursuant to the Guaranty.
(c) Merger, Etc. Merge or consolidate with any other Person; sell,
transfer, convey, lease or otherwise dispose of (whether in one
transaction or in a series of transactions) all or a substantial
portion of its assets (whether now owned or hereafter acquired) to any
other Person.
(d) Compensation. Pay a salary or other compensation to any of its
officers, directors, employees or stockholders in an amount which is in
excess of a reasonable salary or other compensation paid for similar
services by similar businesses.
(e) Transactions with Affiliates. Engage in any transaction (including,
without limitation, loans or financial accommodations of any kind) with
any Affiliate provided that such transactions are permitted if they are
on terms no less favorable to the Borrower than would be obtainable if
no such relationship existed.
(f) Change in Nature of Business. Make any material change in the
nature of the business of the Borrower, taken as a whole, as carried on
at the date hereof.
(g) Dividends. Etc. Purchase or redeem any of its capital stock,
declare or pay any dividends (other than stock dividends) thereon, make
any cash or property distribution to shareholders, or set aside any
funds for such purpose.
ARTICLE VI.
DEFAULT
Section 6.1 . Events of Default. "Events of Default" in this AgreemenT
means any of the following events:
(a) Failure of the Borrower to pay the principal of the Note when due
or, if payable on demand, upon demand;
(b) Failure of the Borrower to pay any interest required to be paid
hereunder or under the Note when due;
8
<PAGE>
(c) Any representation or warranty made by, or on behalf of, any Loan
Party in, or pursuant to, any Loan Document shall prove to have been
incorrect in any material respect when made;
(d) Default in performance of any other covenant or agreement of any
Loan Party in, or pursuant to, any Loan Document and continuance of
such default or breach for a period of 30 days after written notice
thereof to such Person by the Bank;
(e) Any Loan Party shall generally not pay its or his debts as such
debts become due, or shall admit in writing its or his inability to pay
its or his debts generally, or shall make a general assignment for the
benefit of creditors; or any proceeding shall be instituted by or
against any Loan Party seeking to adjudicate it or him a bankrupt or
insolvent, or seeking liquidation, winding up, reorganization,
arrangement, adjustment, custodianship, protection, relief, or
composition of it or him or its or his debts under any law relating to
bankruptcy, insolvency or reorganization or relief of debtors, or
seeking the entry of an order for relief, or the appointment of a
receiver, custodian, trustee, or other similar official for it or him
or for any substantial part of its or his property; or any Loan Party
shall take any corporate action to authorize any of the actions set
forth above in this subsection; and in the case of a proceeding of the
type described in this paragraph commenced against any Loan Party, that
proceeding shall not be dismissed within 60 days or that Loan Party
shall consent to that proceeding;
(f) The Borrower shall fail to pay any Debt (but excluding Debt
evidenced by the Note) of the Borrower or any interest or premium
thereon, when due (whether by scheduled maturity, required prepayment,
acceleration, demand or otherwise) and such failure shall continue
after the applicable grace period, if any, specified in the agreement
or instrument relating to such Debt; or any other default under any
agreement or instrument relating to any such Debt, or any other event,
shall occur and shall continue after the applicable grace period, if
any, specified in such agreement or instrument, if the effect of such
default or event is to accelerate, or to permit the acceleration of,
the maturity of such Debt; or any such Debt shall be declared to be due
and payable, or required to be prepaid (other than by a regularly
scheduled required prepayment), prior to the stated maturity thereof;
(g) The Guaranty shall be repudiated or revoked, or purported to be
repudiated or revoked;
(h) The entry against any Loan Party of a final judgment, decree or
order for the payment of money in excess of $100,000.00 and the
continuance of such judgment, decree or order unsatisfied for a period
of 30 days without a stay of execution;
(i) Any Reportable Event (as defined in ERISA) shall have occurred and
continue for 30 days under a Plan; or any Plan shall have been
terminated by Borrower or the Guarantor not in compliance with ERISA,
or a trustee shall have been appointed by a court to administer any
Plan, or the Pension Benefit Guaranty Corporation shall have instituted
proceedings to terminate any Plan or to appoint a trustee to administer
any Plan;
9
<PAGE>
(j) Jeffrey A. Reed shall cease, for any reason, to be the chief
executive officer of the Borrower;
(k) The Bank shall at any time have reasonable grounds to believe that
the prospect of due and punctual payment of any of the obligations of
the Borrower now or hereafter existing under, or pursuant to, this
Agreement is impaired.
Section 6.2 Rights and Remedies. If any Event of Default shall occur
and be continuing, the Bank may exercise any or all of the following rights and
remedies:
(a) By written notice to the Borrower, suspend or terminate the Commit-
ment, whereupon the same shall forthwith be suspended or terminated;
(b) Declare the Note, all interest thereon, and all other obligations
under, or pursuant to, any Loan Document to be immediately due and
payable, and upon such declaration such Note, interest and other
obligations shall immediately be due and payable, without presentment,
demand, protest or any notice of any kind, all of which are expressly
waived;
(c) Exercise any right or remedy under the Security Agreement, or any
other right or remedy of a secured party under the Uniform Commercial
Code as in effect in Minnesota;
(d) Exercise any other right or remedy available to the Bank at law or
in
ARTICLE VII.
MISCELLANEOUS
Section 7.1. No Waiver; Cumulative Remedies. No failure or delay on the
part of the Bank in exercising any right or remedy under, or pursuant to, any
Loan Document shall operate as a waiver thereof, nor shall any single or partial
exercise of any such right, remedy or power preclude other or further exercise
thereof, or the exercise of any other right, remedy or power. The remedies in
the Loan Documents are cumulative and are not exclusive of any remedies provided
by law.
Section 7.2. Amendments and Waivers. No amendment or waiver of any
provision of any Loan Document shall be effective unless such amendment or
waiver is in writing and is signed by the Bank, and such amendment or waiver
shall be effective only in the specific instance and for the specific purpose
for which it was given.
Section 7.3. Notices. Etc. All notices and other communications
provided for hereunder shall be in writing (including telecopier communication)
and mailed or telecopied or delivered, if to the Borrower, at its address stated
in the preamble hereof, Attention: Jeffrey A. Reed; and if to the Bank, at its
address stated in the preamble hereof, Attention: David Richards; or, as to each
party, at such other address as shall be designated by such party in a written
notice to the other party. All such notices and communications shall, when
mailed or telecopied, be effective when deposited in the mails or transmitted by
telecopier, respectively, addressed as aforesaid, except that notices to the
Bank pursuant to the provisions of Article II shall not be effective until
received by the Bank.
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<PAGE>
Section 7.4. Costs and Expenses. The Borrower agrees to pay on demand
all costs and expenses of the Bank in connection with the preparation of the
Loan Documents, including reasonable attorneys fees and legal expenses, as well
as all costs and expenses of the Bank, including reasonable attorneys fees and
expenses, in connection with the administration and enforcement of the Loan
Documents (whether suit is commenced or not).
Section 7.5. Right of Set-off. Upon the occurrence and during the
continuance of any Event of Default the Bank is hereby authorized at any time
and from time to time, to the fullest extent permitted by law, to set off and
apply any and all deposits (general or special, time or demand, provisional or
final) at any time held and other indebtedness at any time owing by the Bank to
or for the credit or the account of the Borrower or the Guarantor against any
and all of the obligations of the Borrower now or hereafter existing under any
Loan Document, irrespective of whether or not the Bank shall have made any
demand under any Loan Document and although such obligations may be unmatured.
The Bank agrees promptly to notify the Borrower after any such set-off and
application, provided that the failure to give such notice shall not affect the
validity of such set-off and application. The rights of the Bank under this
Section are in addition to other rights and remedies (including, without
limitation, other rights of set-off) which the Bank may have.
Section 7.6. Governing Law. All Loan Documents shall be governed by the
laws of the State of Minnesota. Any term used in this Agreement and not
otherwise defined shall have the definition given that term in the Uniform
Commercial Code as in effect in the State of Minnesota from time to time. If any
term in this Agreement shall be held to be illegal or unenforceable, the
remaining portions of this Agreement shall not be affected, and this Agreement
shall be construed and enforced as if this Agreement did not contain the term
held to be illegal or unenforceable. The Borrower hereby irrevocably submits to
the jurisdiction of the Minnesota District Court, Fourth District, and the
Federal District Court, District of Minnesota, Fourth Division, over any action
or proceeding arising out of or relating to this Agreement and agrees that all
claims in respect of such action or proceeding may be heard and determined in
any such court.
Section 7.7. Binding Effect; Assignment. All Loan Documents shall be
binding upon and inure to the benefit of the Loan Parties and the Bank and their
respective successors and assigns. No Loan Party shall have the right to assign
its rights or interest under any such agreement without the prior written
consent of the Bank.
11
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IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized officers as of the date first above written.
BNC Financial Corporation
By /s/ Jeffrey Reed
-----------------------------------------
Its President
-----------------------------------------
Bank Windsor
By /s/ David Richards
-----------------------------------------
Its Senior Vice President
-----------------------------------------
Exhibit 21
SUBSIDIARIES OF BNCCORP, INC.
The following is a list of all subsidiaries of the Company, including their
state of incorporation or organization.
Name Incorporated In
BNC National Bank of Bismarck North Dakota
Bismarck Properties, Inc. North Dakota
BNC National Bank of Minnesota Minnesota
BNC Financial Corporation Minnesota
1
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report in this Form 10-KSB into the Company's previously filed Registration
Statement File No. 333-3512.
ARTHUR ANDERSEN LLP
/s/ Arthur Andersen LLP
-----------------------------------
Minneapolis, Minnesota,
March 28, 1997
1
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
statement of condition dated 12/31/96 and statement of income for the twelve
months ended 12/31/96 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<CIK> 0000945434
<NAME> BNCCORP, INC.
<MULTIPLIER> 1000
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0
0
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</TABLE>
