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, 1997
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. [x]
The issuer's revenues for its most recent fiscal year: $28,920,000
The aggregate market value of the voting stock held by non-affiliates of
the Registrant at March 16, 1998 was $33,259,000.
The number of shares of the Registrant's common stock outstanding on March
16, 1998 was 2,400,749.
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
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BNCCORP, INC.
ANNUAL REPORT ON FORM 10-KSB
FOR FISCAL YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
Page
PART I
Item 1. Description of Business............................................... 1
Item 2. Description of Property............................................... 7
Item 3. Legal Proceedings..................................................... 7
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..................................................37
Item 8. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure..............................................67
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act ....................67
Item 10. Executive Compensation...............................................67
Item 11. Security Ownership of Certain Beneficial Owners and Management.......67
Item 12. Certain Relationships and Related Transactions.......................67
Item 13. Exhibits and Reports on Form 8-K.....................................67
<PAGE>
PART I
Item 1. Description of Business
General
BNCCORP, Inc. ("BNCCORP"), a Delaware corporation, is a multibank holding
company registered under the Bank Holding Company Act of 1956 (the "BHCA")
headquartered in Bismarck, North Dakota. BNCCORP (together with its consolidated
subsidiaries, "BNC" or the "Company") provides a broad range of banking and
financial services to small and mid-size businesses, private banking clients and
consumers through its 15 facilities in North Dakota and Minnesota. BNCCORP
operates primarily through its two commercial banking subsidiaries, BNC National
Bank ("BNC--North Dakota"), which is headquartered in Bismarck and has 12
additional offices in North Dakota, and BNC National Bank of Minnesota
("BNC--Minnesota," together with BNC--North Dakota, the "Banks"), which is
located in Minneapolis, Minnesota. In addition, the Company provides asset-based
commercial financing through its non-bank subsidiary, BNC Financial Corporation
("BNC Financial"), located in St. Cloud, Minnesota.
Growth Strategy
BNCCORP was formed in 1987 with the objective of acquiring and improving the
performance of strategically located banks in North Dakota. Since that time, the
banking industry has undergone rapid change. Many non-bank competitors have
entered into the banking business. The proliferation of non-bank competitors has
resulted in the availablilty of a multitude of financial products and services.
Technological advances have improved delivery systems and given customers
immediate access to these products and services. To remain competitive in this
rapidly changing environment, BNCCORP has expanded its objective. The Company's
objective is to build a growing, profitable financial services network.
BNC aims to achieve this objective through expanded product and service
offerings and an emphasis on customer service and local relationship banking
with small and mid-size businesses, private banking clients and consumers.
Management believes that the Company's entrepreneurial approach to banking and
the introduction of new products and services will continue to attract small and
mid-size businesses which often are not of sufficient size to be of interest to
the larger banks in its market areas. See "--Market Areas." Such businesses
frequently have difficulty finding banking services that meet their specific
needs and have sought, and management believes will continue to seek, banking
institutions that are more relationship-oriented. BNC offers a wide range of
banking and finance-related products and services, including trust services,
asset management, retirement planning, tax planning and preparation, insurance
and other private banking services. See "--Products and Services."
Acquisitions have played an important role in BNC's growth strategy. The Company
has completed several bank and nonbank acquisitions. The largest of these
acquisitions was the Company's July 1995 acquisition of seven North Dakota
branches, with aggregate deposits of approximately $104.8 million, from First
Bank fsb. See Note 2 to the Consolidated Financial Statements included under
Item 7 of Part II for a summary of mergers and acquisitions consummated during
the three year period ended December 31, 1997.
Management believes that its increased product and service offerings and
acquisitions have generated significant growth for the Company. BNC's total
assets have increased from $118.0 million at December 31, 1992 to $360.1 million
at December 31, 1997. The Company's goal continues to be the creation of a
well-capitalized $500 million to $1 billion financial services organization
focused on local relationship banking. Efforts are ongoing to ensure that the
executive management team and operating systems are in place to achieve this
goal. BNC will continue to emphasize internally-generated growth. The Company
will also seek growth opportunities through acquisition of financial services
companies or de novo branching in North and South Dakota, Minnesota and,
possibly, Iowa, Nebraska and Wisconsin.
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Market Areas
BNC's primary market areas are the Bismarck/Mandan (North Dakota) metropolitan
area, the Minneapolis/ St.Paul (Minnesota) metropolitan area, and the rural
communities surrounding the branch offices of BNC--North Dakota (Linton,
Ellendale, Garrison, Stanley, Kenmare, Crosby and Watford City, North Dakota).
The asset-based lending activities of BNC Financial have been conducted
primarily in Minnesota. A substantial majority of the Company's total
consolidated net loans are attributable to customers located in the North Dakota
market area, although during 1997, BNC--Minnesota and BNC Financial continued to
experience significant loan growth in the Minnesota market area. See Note 4 to
the Consolidated Financial Statements included under Item 7 of Part II.
Generally, each branch draws most of its deposits from its general market area.
The following table presents certain information about each of BNC's geographic
locations:
December 31, 1997
-----------------------------
Year Opened Total
Location or Acquired Deposits Gross Loans
- ---------------------------------- ----------- ------------ -------------
(in thousands)
BNC--North Dakota
Bismarck........................ 1990 $ 93,806 $ 154,312
Linton.......................... 1987 47,065 10,367
Ellendale....................... 1995 11,209 1,544
Garrison........................ 1995 14,995 543
Stanley......................... 1995 15,438 319
Kenmare......................... 1995 18,133 217
Crosby.......................... 1995 18,157 92
Watford City.................... 1995 16,011 169
BNC--Minnesota..................... 1996 28,010 52,342
BNC Financial..................... 1996 -- 15,116
BNCCORP (parent company).......... 1987 -- 499
------------ -------------
Total..................... $ 262,824 $ 235,520
============ =============
Products and Services
Loans. The Company's loans primarily consist of commercial and industrial loans,
agricultural loans, real estate mortgage loans, real estate construction loans,
consumer loans and lease financing. In allocating its assets among loans,
investments and other earning assets, BNC attempts to maximize return while
managing risk at acceptable levels. BNC's primary lending focus is on commercial
loans and owner-occupied real estate loans to small and mid-size businesses and
professionals. The Company offers a broad range of commercial and retail lending
services, including commercial revolving lines of credit, residential and
commercial real estate mortgage loans, consumer loans and equipment financing.
For more information on the lending activities of the Company, see "Management's
Discussion and Analysis or Plan of Operation--Financial Condition--Loan
Portfolio" included under Item 6 of Part II.
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, 1997,
approximately 67 percent of the loans in BNC's portfolio had interest rates that
float with BNC's base rate or some other reference rate.
The Company also offers asset-based commercial financing through BNC Financial,
the Company's non-bank subsidiary which was acquired in 1996. BNC Financial
provides asset-based working capital and term financing to small and mid-size
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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, and has
adopted policies and procedures to address the risks associated with,
asset-based lending. Asset-based lending often involves higher risk than loans
traditionally extended by banks, but often involves higher returns.
Deposits. Each of BNC's bank branches offers the usual and customary range of
depository products provided by commercial banks, including checking, savings
and money market deposits and certificates of deposit. Deposits are insured by
the Federal Deposit Insurance Corporation ("FDIC") up to statutory limits. The
Banks also purchase brokered deposits from time to time when such transactions
are beneficial to the Banks. See "Management's Discussion and Analysis or Plan
of Operation--Financial Condition--Deposits" included under Item 6 of Part II.
Trust, Personal Banking, Investment and Insurance Products. Since January 1997,
BNC--North Dakota's Financial Services division has been providing a wide array
of trust, personal banking, investment and insurance services for corporations
and individuals. These services range 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 and insurance
services of all types. These services provide opportunities to solidify customer
relationships by meeting more of the banking and financial needs of the
Company's current customer base. They also present opportunities to establish
new customer relationships in the markets served by BNC. The January 1998
business combination with Lips and Lahr, Inc. ("Lips & Lahr") has significantly
increased the level and nature of insurance activities conducted by BNC. See
Note 2 to the Consolidated Financial Statements included under Item 7 of Part
II.
Consulting Services. In addition to its asset-based lending program, BNC
Financial manages a consulting services division which provides a number of
services including pre-funding due diligence, collateral review, problem loan
consulting, bankruptcy support and asset valuation.
Investment Portfolio. The purpose of the Company's investment portfolio is to
provide a source of earnings and manage liquidity. Investments are centrally
managed in order to aid in compliance with federal laws and regulations, which
place certain restrictions on the amounts and types of investments BNC may hold.
BNC maintains an investment grade portfolio oriented toward U.S. Treasury
securities, U.S. government agencies 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. See "Management's Discussion
and Analysis or Plan of Operation--Financial Condition--Investment Securities"
included under Item 6 of Part II.
Distribution Methods
BNC offers its banking and financial products and services through traditional
industry distribution methods including its network of bank, branch and other
offices. In addition, the Company offers 24-hour telephone banking services
through its voice response system, BNC Bankline. The Company also provides cash
management services to its commercial customers through its Xpress Cash
Management system. This system allows customers to process funds transfers,
wires, automated clearing house (ACH) transactions, stop payments and account
history inquiries using their office computers and modems. The Company has also
established an internet web site which is currently being used to provide
corporate financial information, current investment news and stock prices. The
Company is currently considering offering full internet banking in order to
provide online banking to customers at any time and from any location.
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The Year 2000 Issue
Computers are heavily relied upon in the financial services industry where much
of the business transacted is date sensitive (for example the calculation of
interest receivable on a bank's loans and investments or interest payable on its
deposits or borrowings). The Year 2000 Issue results from a computer's inability
to process year- date data accurately beyond the year 1999. Except in recently
introduced year 2000 compliant programs, computer programmers have consistently
abbreviated dates by eliminating the first two digits of the year, with the
assumption that these two digits would always be 19. Unless corrected, this
situation is expected to create widespread problems on January 1, 2000. On that
date, some computer programs may recognize the date as January 1, 1900, and
process data inaccurately or stop processing altogether. Complications could
also arise before January 1, 2000 when systems attempt to perform calculations
into the year 2000. In addition, some software programs use several dates in the
year 1999 to mean something other than the date. As systems process information
using these dates, they may produce erratic results or stop functioning.
Finally, the algorithm used in some computers for calculating leap years is
unable to detect that the year 2000 is a leap year. This would cause date
calculations to be incorrect because the computers would not register the
additional day in the year 2000.
The Company is fully aware of these problems and has taken steps to identify,
modify and test all systems that could be negatively affected by the Year 2000
Issue. BNC has also taken steps to ensure that its customers and others with
whom it exchanges date-dependent information are aware of the potential problems
and are taking appropriate action to ensure that their systems become year 2000
compliant. See "Management's Discussion and Analysis or Plan of
Operation--Results of Operations--Noninterest Expenses--Year 2000 Issue"
included under Item 6 of Part II for more detailed information regarding the
Company's status and estimated costs relating to the Year 2000 Issue. See
"Management's Discussion and Analysis or Plan of Operation--Financial
Condition--Loan Portfolio--Customer Year 2000 Issues" included under Item 6 of
Part II for a discussion of the potential impact of customer year 2000 readiness
on the Company's credit quality and allowance for loan losses.
Risk Management
The uncertainty of whether events, expected or otherwise, will have an adverse
impact on the Company's capital or earnings is an inevitable component of the
business of banking. To ensure that the risks inherent in BNC's business are
identified, measured, controlled and monitored, the Company has established a
risk management committee composed of senior management from across the
organization (the "Risk Committee"). The Risk Committee is responsible for
determining the desired risk profile of the Company, allocating resources to the
lines of business, approving major investment programs that are consistent with
strategic priorities and risk appetite and making capital management decisions
to appropriately fund the Company's portfolio of investments. The Risk Committee
addresses each of the major risk categories identified by the banking
regulators, if applicable, as well as any additional identified risks inherent
in the Company's business. Such risks include, but are not limited to, credit,
liquidity, interest rate, transaction, compliance, strategic, and reputation
risk. In each identified risk area, the Risk Committee measures the level of
risk to the Company based on the business it conducts and develops plans to
bring risks within acceptable tolerances. See "Management's Discussion and
Analysis or Plan of Operation--Financial Condition--Loan Portfolio and
- --Liquidity, Market and Credit Risk" included under Item 6 of Part II for
further discussion of credit, liquidity and interest rate risk.
Competition
The deregulation of the banking industry, the increasing number of state laws
that permit multi-bank holding companies, and the increasing availability of
nationwide interstate banking have heightened the level of competition in an
already intensely competitive market. The North Dakota and Minnesota market
areas are highly competitive banking environments. Competition is encountered in
seeking deposits, obtaining loan customers and in providing all of the other
banking and financial products and services offered by BNC. Principal
competitors include multi-regional financial institutions such as Norwest
Corporation, U.S. Bancorp and Community First Bankshares, Inc. as well as large
and small thrifts, independent banks, credit unions and many national and
regional brokerage houses. BNC also competes with other non-bank financial
institutions,
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including retail stores that maintain their own credit programs and government
agencies that make low cost or guaranteed loans available to certain borrowers.
Some of these competitors have substantially greater resources and lending
limits than BNC, and may offer certain services that BNC does not provide. In
addition, some of the non-bank financial institutions that compete with BNC are
not subject to the extensive federal regulations that govern BNC. Management
believes that many competitors have emphasized retail banking and financial
services, leaving the small and mid-size business market underserved. This has
allowed BNC to compete effectively by emphasizing customer service, establishing
long-term customer relationships and providing services meeting the needs of
such businesses and the individuals associated with them. The banking business
is highly competitive, and the future profitability of the Company will depend
on its ability to continue to compete successfully in its market areas.
Supervision and Regulation
General. BNCCORP and the Banks are extensively regulated under federal and state
laws and regulations. These laws and regulations are primarily intended to
protect depositors and the federal deposit insurance funds, not investors in the
securities of BNCCORP. The following information briefly summarizes certain
material statutes and regulations affecting BNCCORP and the Banks and is
qualified in its entirety by reference to the particular statutory and
regulatory provisions. Any change in applicable laws, regulations or regulatory
policies may have a material effect on the business, operations and prospects of
BNCCORP and the Banks. The Company is unable to predict the nature or extent of
the effects that fiscal or monetary policies, economic controls or new federal
or state legislation may have on its business and earnings in the future.
Primary Regulators. BNCCORP is a bank holding company registered under the BHCA,
and is subject to regulation, supervision and examination by the Board of
Governors of the Federal Reserve System ("FRB"). BNCCORP is required to file
periodic reports with the FRB and such other reports as the FRB may require
pursuant to the BHCA. As a nonbank subsidiary, BNC Financial is also subject to
regulation by the FRB. The Banks are national banking associations and are
subject to supervision, regulation and examination by the Office of the
Comptroller of the Currency ("OCC"). Since the deposits of the Banks are insured
by the FDIC, the Banks are also subject to regulation and supervision by the
FDIC. See "--Deposit Insurance." Additionally, the Banks are members of the
Federal Reserve System.
Acquisitions and Permissible Activities. As a registered bank holding company,
BNCCORP 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.
Transactions with Affiliates. 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 BNCCORP 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 other of the Banks' transactions with their affiliates.
Anti-Tying Restrictions. Bank holding companies and their affiliates are
prohibited from tying the provision of certain services, such as extensions of
credit, to other services offered by a holding company or its affiliates.
Restrictions on Loans to One Borrower. 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. The Banks
seek participations to accommodate borrowers whose financing needs exceed their
lending limits.
Loans to Executive Officers, Directors and Principal Stockholders. Certain
limitations and reporting requirements are also placed on extensions of credit
by the Banks to principal stockholders of BNCCORP and to directors and certain
executive officers of the Banks (and BNCCORP and its nonbank subsidiaries
provided certain criteria are met) and to "related interests" of such principal
stockholders, directors and officers. In addition, any director or officer of
BNCCORP or the Banks or principal stockholder of BNCCORP may be
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limited in his or her ability to obtain credit from financial institutions with
which the Banks maintain correspondent relationships.
Interstate Banking and Branching. Interstate banking and branching provisions of
federal and state laws may place certain limitations on expansion by bank
holding companies or banks.
Capital Adequacy. The capital adequacy of BNCCORP 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 BNCCORP
or the Banks to supervisory or enforcement actions. In addition, BNCCORP could
be required to guarantee a capital restoration plan of one or more of its Banks,
should such Banks become "undercapitalized" under capital guidelines. See Note
10 to the Consolidated Financial Statements included under Item 7 of Part II.
Dividend Restrictions. Federal rules also limit a bank's ability to pay
dividends to its parent bank holding company in excess of certain amounts or if
the payment would result in the bank being considered "undercapitalized" under
capital guidelines.
Community Reinvestment Act. 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.
Deposit Insurance. 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 Banks also pay additional assessments that are
used to pay certain Financing Corporation ("FICO") obligations issued between
1987 and 1989 to resolve failed savings and loan associations.
Cross-Guarantee. 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 bank 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.
Support of Banks. 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.
Conservator and Receivership Powers. Federal banking regulators have broad
authority to place depository institutions into conservatorship or receivership
to include, among other things, appointment of the FDIC as conservator or
receiver of an undercapitalized institution under certain circumstances. If
either of the Banks was placed into conservatorship or receivership, because of
the cross-guarantee provisions of the Federal Deposit Insurance Act, as amended,
BNCCORP, as the sole stockholder of the Bank, would likely lose its investment
in the Bank.
Consumer Laws and Regulations. In addition to the laws and regulations discussed
herein, the Banks are also subject to certain consumer laws and regulations that
are designed to protect customers in transactions with banks. These include, but
are not limited to, the Truth in Lending Act, the Truth in Savings Act, the
Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal
Credit Opportunity Act and the Fair Housing Act. These laws mandate certain
disclosure requirements and regulate the manner in which financial institutions
must deal with customers when taking deposits or making loans to such customers.
Changing Regulatory Structure. The FRB, OCC and FDIC have extensive authority to
police unsafe or unsound practices and violations of applicable laws and
regulations by depository institutions and their holding
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companies. The agencies' authority has been expanded by federal legislation in
recent years. In addition, the North Dakota Department of Banking and Financial
Institutions and the Minnesota Department of Commerce possess significant
authority to address violations of their respective state's banking laws by
banks operating in their respective states by enforcement and other supervisory
actions.
The laws and regulations affecting banks and bank holding companies have changed
significantly in recent years, and there is reason to expect that changes will
continue in the future, although it is difficult to predict the outcome of these
changes. From time to time, various bills are introduced in the United States
Congress with respect to regulation of financial institutions. Certain of these
proposals, if adopted, could significantly change the regulation of banks and
the financial services industry. BNC cannot predict whether any of these
proposals will be adopted or, if adopted, how these proposals would affect BNC.
Monetary Policy. The monetary policy of the FRB has a significant effect on the
operating results of bank holding companies and their subsidiaries. The FRB uses
the various means at its disposal to influence overall growth and distribution
of bank loans, investments and deposits, and interest rates charged on loans or
paid on deposits. FRB monetary policies have materially affected the operations
of commercial banks in the past and are expected to continue to do so in the
future. The nature of future monetary policies and the effect of such policies
on the business and earnings of BNCCORP and its subsidiaries cannot be
predicted.
Employees
At December 31, 1997, BNC had approximately 148 employees, including 129
full-time equivalent employees. None of BNC's employees is covered by a
collective bargaining agreement and management believes that its relationship
with its employees is good.
Item 2. Description of Property
The principal offices of BNCCORP 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 branch offices at 219
South 3rd Street and 807 East Century Avenue and an additional office building
at 116 North 4th Street in Bismarck. It also owns its banking facilities in
Linton, Crosby, Ellendale, Kenmare and Stanley, North Dakota.
BNC--North Dakota's facilities at 100 West Main Street (Mandan), 500 North 9th
Street (Bismarck), Watford City and Garrison, North Dakota and the land at South
3rd Street (Bismarck) are leased. The facilities occupied by BNC--Minnesota at
333 South Seventh Street, Minneapolis, Minnesota and the facilities housing BNC
Financial at 4150 South 2nd Street, St. Cloud, Minnesota are also leased.
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 15 to the
Consolidated Financial Statements included under Item 7 of part II for
additional information concerning lease commitments.
Item 3. Legal Proceedings
BNC National Bank v. Debra J. Gronlie and Paul Andahl, Civ. No. 97-C-2020 (South
Central Jud. Dist. Burleigh Co. ND). On July 21, 1997, BNC--North Dakota (the
"Bank") filed suit against a terminated loan officer and her husband alleging
misrepresentations, reliance on misrepresentations and breaches of fiduciary
responsibilities and conflicts of interest and seeking monetary damages against
the loan officer and equitable relief by way of the imposition of a constructive
trust against the loan officer and her husband.
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The Bank filed suit as a result of irregularities discovered during an
exhaustive review of the loan portfolio of the former loan officer who was
dismissed during the second quarter of 1997, and the special $1.9 million loan
loss provision charged to operations during the quarter ended June 30, 1997, all
of which related to her lending activities.
In December 1997, following negotiations with its fidelity bond carrier, the
carrier made a payment of $762,000 to be applied against any covered losses of
the Bank's. Approximately $690,000 of this payment was credited to the Bank's
allowance for loan losses. The remaining $72,000 was credited to noninterest
income to cover a portion of the costs the Bank has incurred in resolving this
matter. A final settlement of covered losses with the fidelity bond carrier has
not been reached and negotiations with the carrier are continuing. While there
can be no assurances concerning the amount of final recovery on the claim,
Company management anticipates that final settlement of the claim will result in
an additional payment by the carrier. See "Management's Discussion and Analysis
or Plan of Operation" included under Item 6 of Part II and Note 4 to the
Consolidated Financial Statements included under Item 7 of Part II.
The Company is currently not a party to any additional 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, 1997.
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PART II
Item 5. Market for Common Equity and Related Stockholder Matters
BNCCORP's common stock, $.01 par value ("Common Stock"), is traded on the Nasdaq
National Market under the symbol "BNCC".
The following table lists the high and low sales prices of the Common Stock for
the periods indicated as reported by the Nasdaq National Market. The quotes
represent "inter-dealer" prices without adjustment or mark-ups, mark-downs or
commissions and may not represent actual transactions.
For the Years Ended December 31,
---------------------------------------------
1997 1996
--------------------- ---------------------
Period High Low High Low
--------- -------- --------- ---------
First Quarter...........$ 13.50 $ 11.75 $ 10.38 $ 9.25
Second Quarter..........$ 12.75 $ 10.50 $ 10.25 $ 8.00
Third Quarter...........$ 17.00 $ 11.00 $ 11.50 $ 9.00
Fourth Quarter..........$ 17.00 $ 14.50 $ 12.50 $ 10.50
On March 16, 1998, there were 104 record holders and approximately 1,400
beneficial owners of the Company's Common Stock.
BNCCORP's policy is to retain its earnings to support the growth of its
business. The board of directors of BNCCORP has never declared cash dividends on
its Common Stock and does not plan to do so in the foreseeable future. The
ability of BNCCORP 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--Dividend
Restrictions" included under Item 1 of Part I.
During February 1998, the Company issued 63,406 shares of Common Stock to
shareholders of Lips & Lahr in a private offering believed to be exempt under
the Securities Act of 1933 and the regulations and rules thereunder. The
issuance was in conjunction with the business combination with Lips & Lahr. See
Note 2 to the Consolidated Financial Statements.
Item 6. Management's Discussion and Analysis or Plan of Operation
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, 1997, 1996 and 1995 are derived from the historical audited
consolidated financial statements of the Company. The Consolidated Balance
Sheets as of December 31, 1997 and 1996 and the related Consolidated Statements
of Income, Stockholders' Equity and Cash Flows for each of the three years in
the period ended December 31, 1997 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.
9
<PAGE>
Selected Financial Data
For the Years Ended December 31,
------------------------------------
1997 1996 1995
-------- --------- --------
(dollars in thousands except share data)
Income Statement Data:
Gross interest income.......................$ 26,541 $ 20,957 $ 15,283
Gross interest expense...................... 13,915 11,107 8,542
---------- ----------- ----------
Net interest income......................... 12,626 9,850 6,741
Provision for loan losses................... 2,619 739 168
Noninterest income (1)...................... 2,443 2,096 1,736
Noninterest expense......................... 9,894 8,213 6,511
Provision for income taxes.................. 1,044 1,147 641
---------- ------------ ---------
Net income..................................$ 1,512 $ 1,847 $ 1,157
========== =========== ==========
Balance Sheet Data: (at end of period)
Total assets................................$ 360,121 $ 288,558 $ 240,399
Investments and federal funds sold.......... 94,624 66,391 97,366
Loans....................................... 235,200 202,997 120,683
Allowance for loan losses................... 3,069 1,594 1,048
Total deposits.............................. 262,824 239,770 211,048
Short-term borrowings....................... 46,503 11,437 1,000
Long-term borrowings........................ 21,812 10,615 3,354
Stockholders' equity........................ 24,274 22,635 20,887
Book value per common share outstanding.....$ 10.38(2)$ 9.68(2) $ 8.93(2)
Earnings Performance Data:
Return on average total assets.............. .48% .71% .59%
Return on average stockholders' equity...... 6.47% 8.53% 8.11%
Net interest margin......................... 4.31% 4.09% 3.71%
Net interest spread......................... 3.85% 3.63% 3.27%
Basic earnings per share.................... $0.65 $0.79 $0.67
Diluted earnings per share.................. $0.64 $0.79 $0.67
Balance Sheet and Other Key Ratios:
Nonperforming assets to total assets........ .42% .15% .20%
Nonperforming loans to total loans.......... .64% .14% .40%
Net loan charge-offs to average loans....... (.51)% (.11)% (.03)%
Allowance for loan losses to total loans.... 1.30% .78% .87%
Allowance for loan losses to nonperforming
loans.................................. 205% 555% 218%
Average stockholders' equity to average
total assets........................... 7.41% 8.34% 8.69%
- --------------------
(1) Includes recognizable loan fees of $1.0 million, $1.3 million and $559,000
for the years ended December 31, 1997, 1996 and 1995, respectively.
(2) Based on total common shares outstanding of 2,338,720.
10
<PAGE>
Overview
Net income for 1997 was $1.5 million, or basic earnings per share of $0.65,
compared with $1.8 million, or basic earnings per share of $0.79, in 1996 and
$1.2 million, or basic earnings per share of $0.67, in 1995. The Company's
performance for 1997 was impacted by a $1.9 million increase in its loan loss
provision resulting from questionable loan practices by a loan officer dismissed
during 1997. See Item 3 of Part I, "Legal Proceedings."
In addition to the increased loan loss provision, the Company's 1997 results
reflected the following highlights:
o Net interest income grew 28 percent and net interest margin improved 22
basis points, to 4.31 percent, primarily as a result of loan growth and
improved loan yields.
o Noninterest income grew 17 percent. The increase was primarily attributable
to fee income from BNC--North Dakota's Financial Services division.
o Noninterest expenses grew 20 percent due to increases in salaries and
benefits, depreciation and amortization and occupancy costs related to
acquisitions in late 1996 and 1997.
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 liabilities.
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 costs 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.
11
<PAGE>
<TABLE>
<CAPTION>
Analysis of Average Balances, Interest and Yields/Rates
For the Years ended December 31,
-----------------------------------------------------------------------------------------
1997 1996 1995
----------------------------- ---------------------------- ----------------------------
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................ $ 5,650 $ 306 5.42% $ 2,714 $ 145 5.34% $11,348 $ 651 5.74%
Taxable investments............... 64,778 4,132 6.38% 66,547 4,359 6.55% 52,154 3,213 6.16%
Tax-exempt investments............ 1,196 100 8.36% 1,090 70 6.42% 1,705 134 7.86%
Loans (1)......................... 223,486 22,003 9.85% 171,780 16,383 9.54% 117,773 11,285 9.58%
Allowance for loan losses........ .(2,298) -- (1,265) - (1,117) -
------- ------- -------- ------ ------- ------
Total interest-earning assets(2) 292,812 26,541 9.06% 240,866 20,957 8.70% 181,863 15,283 8.40%
Noninterest-earning assets:
Cash and due from banks......... 6,039 5,240 5,290
Other........................... 16,196 13,393 10,095
------- -------- -------
Total assets.................. $315,047 $259,499 $197,248
======== ======== ========
Liabilities and Stockholders' Equity
Deposits:
NOW and money market accounts... $50,582 $ 1,580 3.12% $38,920 $1,004 2.58% $38,941 $1,187 3.05%
Savings......................... 8,904 206 2.31% 8,498 196 2.31% 7,598 217 2.86%
Certificates of deposit:
Under $100,000.................. 127,092 7,110 5.59% 124,682 7,055 5.66% 93,983 5,456 5.81%
$100,000 and over............... 41,581 2,386 5.74% 25,499 1,483 5.82% 15,486 942 6.08%
------- ------- -------- ------ ------- ------
Total interest-bearing deposits... 228,159 11,282 4.95% 197,599 9,738 4.93% 156,008 7,802 5.00%
Short-term borrowings:
Securities and loans sold under
agreements to repurchase and
federal funds purchased....... 7,262 413 5.69% 7,340 408 5.56% 3,546 172 4.85%
FHLB notes payable.............. 15,468 881 5.70% 7,192 406 5.65% 3,483 231 6.63%
Long-term borrowings.............. 16,062 1,339 8.34% 7,027 555 7.90% 3,499 337 9.63%
------- ------- -------- ------ ------- ------
Total interest-bearing liabilities 266,951 13,915 5.21% 219,158 11,107 5.07% 166,536 8,542 5.13%
Noninterest-bearing demand accounts.. 20,357 15,147 13,233
------- -------- -------
Total deposits and interest-bearing
liabilities................ 287,308 234,305 179,769
Other noninterest-bearing liabilities 4,392 3,539 3,208
------- -------- -------
Total liabilities............. 291,700 237,844 182,977
Stockholders' equity................. 23,347 21,655 14,271
------- -------- -------
Total liabilities and stockholders'
equity................... $315,047 $259,499 $197,248
======== ======== ========
Net interest income.................. $12,626 $9,850 $6,741
======= ====== ======
Net interest spread.................. 3.85% 3.63% 3.27%
====== ====== ======
Net interest margin.................. 4.31% 4.09% 3.71%
====== ====== ======
Ratio of average interest-earning assets
to average interest-bearing
liabilities....................... 109.69% 109.91% 109.20%
======= ======== =======
</TABLE>
- --------------------
(1) Interest income does not include loan origination fees other than those
amortized and included as an adjustment to loan yield as required under
Statement of Financial Accounting Standards No. 91, "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans
and Initial Direct Costs of Leases." Average nonaccrual loans are included
in average loans outstanding.
(2) Yields do not include adjustments for tax exempt interest because such
interest is not material.
12
<PAGE>
The following table illustrates, for the periods indicated, the dollar amount of
changes in BNC's interest income and interest expense for the major components
of interest-earning assets and interest-bearing liabilities and distinguishes
between the increase related to higher outstanding balances and the volatility
of interest rates. Changes in net interest income due to both volume and rate
have been included in the changes due to rate:
Analysis of Changes in Net Interest Income
For the Years Ended December 31,
----------------------------------------------
1997 Compared to 1996 1996 Compared to 1995
---------------------- ---------------------
Change Due to Change Due to
------------- -------------
Volume Rate Total Volume Rate Total
------- ------ ------- -------- ------- -----
(in thousands)
------- ------ ------- -------- ------- -----
Interest-Earning Assets
Federal funds sold............$ 157 $ 4 $ 161 $ (496) $ (10) $ (506)
Investments................... (109) (88) (197) 856 226 1,082
Loans......................... 4,931 689 5,620 5,175 (77) 5,098
------ ----- ------ ------ ------ -------
Total increase in interest
income................. 4,979 605 5,584 5,535 139 5,674
------ ----- ------ ------ ------ -------
Interest-Bearing Liabilities
NOW and money market
accounts................. 301 275 576 (1) (182) (183)
Savings..................... 9 1 10 26 (47) (21)
Certificates of Deposit:
Under $100,000........... 136 (81) 55 1,782 (183) 1,599
$100,000 and over........ 935 (32) 903 609 (68) 541
Short-term borrowings:
Securities and loans sold
under agreements to
repurchase and federal
funds purchased....... (4) 9 5 184 52 236
FHLB notes payable....... 467 8 475 246 (71) 175
Long-term borrowings........ 714 70 784 340 (122) 218
------ ----- ------ ------ ------ ------
Total increase (decrease)
in interest expense... 2,558 250 2,808 3,186 (621) 2,565
------ ----- ------ ------ ------ ------
Increase (decrease) in net
interest income....... $ 2,421 $ 355 $ 2,776 $ 2,349 $ 760 $ 3,109
====== ===== ====== ====== ====== ======
Year ended December 31, 1997 compared to year ended December 31, 1996. Net
interest income increased $2.7 million, or 27 percent, to $12.6 million as
compared to $9.9 million. Net interest spread and net interest margin improved
22 basis points to 3.85 and 4.31 percent, respectively. The following condensed
information summarizes the major factors combining to create this improvement in
net interest income, spread and margin. Lettered explanations following the
summary describe causes of the changes in these major factors:
13
<PAGE>
Net Interest Income Analysis
For the Years Ended
December 31, Change
----------------- --------------_
1997 1996 Amount %
------- ------- ------- ------
(amounts in
millions)
Total interest income increased.............. $ 26.5 $ 21.0 $ 5.5 26%
Due to:
Increase in average earning assets...... $ 292.8 $ 240.9 $ 51.9 22%
Improved yield on earning assets........ 9.06% 8.70% 0.36% 4%
Driven by:
Increase in average loans (a)........... $ 223.5 $ 171.8 $ 51.7 30%
Improved yield on loans (b)............. 9.85% 9.54% 0.31% 3%
Mix change in earning asset portfolio --
Average loans as a percent of total
interest-earning assets (c)...... 76% 71% 5% 7%
Total interest expense increased............. $ 13.9 $ 11.1 $ 2.8 25%
Due to:
Increase in average interest-bearing
liabilities.......................... $ 267.0 $ 219.2 $ 47.8 22%
Increased cost on interest-bearing
liabilities.......................... 5.21% 5.07% 0.14% 3%
Driven by:
Increase in average interest-bearing
deposits(d).......................... $ 228.2 $ 197.6 $ 30.6 15%
Increase in cost of interest-bearing
deposits (e)......................... 4.95% 4.93% 0.02% 0%
Increase in average borrowings (f)...... $ 38.8 $ 21.6 $ 17.2 80%
Increase in cost of borrowings (g)...... 6.79% 6.35% 0.44% 7%
Mix change in interest-bearing liability
portfolio --
Average borrowings as a percent of
total interest-bearing
liabilities (h).................. 15% 10% 5% 50%
- --------------------
(a) Loan growth primarily attributable to loans made to customers in the
Minnesota market area.
(b) 25 basis point increase in prime rate in early 1997 and increased volume in
asset-based loans at BNC Financial.
(c) Loan growth caused a larger percentage of the earning asset portfolio to be
comprised of loans which have higher yields than investments.
(d) Deposit growth from both BNC--North Dakota and BNC--Minnesota, primarily
money market deposit accounts.
(e) Decreased costs on time certificates of deposit (caused by lower renewal
rates) were offset by increased costs on interest-bearing checking and
money market deposit accounts (caused by increased volume in higher
tier/higher rate, primarily commercial, money market deposit accounts).
(f) The Company relied more heavily on borrowings to fund growth, including
increased Federal Home Loan Bank ("FHLB") borrowings. Increase also
reflects issuance of the Company's 8 5/8 percent subordinated notes (the
"Subordinated Notes") in May 1997. See Note 8 to the Consolidated
Financial Statements included under Item 7.
(g) Higher overall average costs on federal funds purchased and FHLB borrowings
coupled with higher costs on long-term borrowings due to increase in prime
rate and the issuance of the Subordinated Notes. See (f).
(h) Increased reliance on borrowings caused higher percentage of
interest-bearing liabilities portfolio to be comprised of borrowings with
higher average costs than interest-bearing deposits.
14
<PAGE>
Although costs on interest-bearing liabilities increased slightly, the Company's
cost of total deposits, with noninterest-bearing deposits included, decreased 4
basis points to 4.54 percent due to an increase in the ratio of
noninterest-bearing deposits to total deposits. See "--Financial
Condition--Deposits."
Year ended December 31, 1996 compared to year ended December 31, 1995. Net
interest income increased $3.2 million, or 48 percent, to $9.9 million as
compared to $6.7 million. Net interest spread and net interest margin improved
36 and 38 basis points to 3.63 and 4.09 percent, respectively. The following
condensed information summarizes the major factors combining to create this
improvement in net interest income, spread and margin. Lettered explanations
following the summary describe causes of the changes in these major factors:
Net Interest Income Analysis
For the Years Ended
December 31, Change
---------------- ---------------
1996 1995 Amount %
------- ------ ------- ------
(amounts in
millions)
Total interest income increased.............. $ 21.0 $ 15.3 $ 5.7 37%
Due to:
Increase in average earning assets...... $ 240.9 $ 181.9 $ 59.0 32%
Improved yield on earning assets........ 8.70% 8.40% 0.30% 4%
Driven by:
Increase in average loans (a)........... $ 171.8 $ 117.8 $ 54.0 46%
Improved yield on investments (b)....... 6.55% 6.21% 0.34% 5%
Mix change in earning asset portfolio --
Average loans as a percent of total
interest-earning assets (c)..... 71% 65% 6% 9%
Total interest expense increased............. $ 11.1 $ 8.5 $ 2.6 31%
Due to:
Increase in average interest-bearing
liabilities.......................... $ 219.2 $ 166.5 $ 52.7 32%
Offset by decrease in cost of interest-
bearing liabilities.................. 5.07% 5.13% (0.06)% (1)%
Driven by:
Increase in average interest-bearing
deposits (d)......................... $ 197.6 $ 156.0 $ 41.6 27%
Decrease in cost of interest-bearing
deposits (e)......................... 4.93% 5.00% (0.07)% (1)%
Increase in average borrowings (f)...... $ 21.6 $ 10.5 $ 11.1 106%
Decrease in cost of borrowings (g)...... 6.35% 7.03% (0.68)% (10)%
Mix change in interest-bearing liability
portfolio --
Average time deposits as a percent
of total interest-bearing
deposits (h)....................... 76% 70% 6% 9%
Average borrowings as a percent of
total interest-bearing
liabilities (i).................... 10% 6% 4% 67%
- --------------------
(a) Loan growth attributable to loans made to customers in the Minnesota and
North Dakota market areas.
(b) Higher average yields on securities available for sale in 1996,
particularly U.S. government agencies securities, mortgage-backed
securities and collateralized mortgage obligations.
(c) Loan growth caused a larger percentage of the earning asset portfolio to be
comprised of loans which have higher yields than investments.
15
<PAGE>
(d) Deposit increase at BNC--North Dakota due to internal deposit growth during
1996 and branch acquisition in August 1995 ($104.8 million in deposits
acquired), offset by deposits sold with Farmers & Merchants Bank of Beach
("FMB") in October 1995 ($39.3 million). See Note 2 to the Consolidated
Financial Statements included under Item 7.
(e) Rates on savings, interest-bearing checking and money market deposits were
reduced during 1996. Lower average costs were also recorded on time
deposits due to decreased renewal rates on time deposits acquired in the
August 1995 branch acquisition. See (d).
(f) The Company relied more heavily on borrowings to fund growth, including
loan growth at BNC Financial.
(g) Decrease primarily attributable to lower cost on long-term borrowings
during 1996.
(h) The majority of the deposits acquired in the August 1995 branch acquisition
were time deposits causing a mix change in the deposit portfolio. See (d).
This mix change reduced the impact of the quite significant cost decreases
realized in the various deposit categories.
(i) Increased borrowings during 1996 caused a higher percentage of the
interest-bearing liabilities portfolio to be comprised of borrowings with
higher average costs than interest-bearing deposits. This also reduced the
impact of the significant cost decreases realized in the various deposit
categories.
Although costs on interest-bearing deposits decreased 7 basis points, the
Company's cost on total deposits, with noninterest-bearing deposits included,
decreased only 3 basis points to 4.58 percent due to a decrease in the ratio of
noninterest-bearing deposits to total deposits. See "--Financial
Condition--Deposits."
Management cannot predict, with any degree of certainty, prospects for net
interest income in future periods. Intense competition for bank customers can
squeeze bank net interest margins. In addition, the monetary policies of the FRB
and other factors can impact interest rates which can materially affect the
operating results of commercial banks. See "Supervision and Regulation--Monetary
Policy" included under Item 1 of Part I and "--Financial Condition--Liquidity,
Market and Credit Risk." BNC will continue to focus on expansion of its product
and service offerings in order to supplement earnings from core banking
activities. See "--Noninterest Income."
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 year ended December 31, 1997 was $2.6
million as compared to $739,000 in 1996 and $168,000 in 1995. The increased loan
loss provision in 1997 was attributable to questionable loan practices by a
former loan officer at BNC--North Dakota. See Item 3 of Part I, "Legal
Proceedings." The increase in the loan loss provision in 1996 as compared to
1995 was attributable to loan growth. The provision was increased so that the
Company's allowance for loan losses would keep pace with the increase in
outstanding loans. Management believes the allowance for loan losses is adequate
to cover anticipated losses in the loan portfolio at December 31, 1997. See
"--Financial Condition--Loan Portfolio--Allowance for Loan Losses."
16
<PAGE>
Noninterest Income. The following table presents, for the periods indicated, the
major categories of the Company's noninterest income as well as the amount and
percent of change between each of the periods presented. Related information and
material changes are discussed in lettered explanations following the table:
Noninterest Income
Increase (Decrease)
-------------------------------
For the Years Ended
December 31, 1997 - 1996 1996 -1995
---------------------- --------------- ---------------
1997 1996 1995 $ % $ %
------- ------- ------ ------- ------ ----- -------
(in thousands)
Loan fees ............... $ 1,018 $ 1,276 $ 559 $ (258) (20)%(a) $717 128%(a)
Service charges.......... 471 418 401 53 13% 17 4%
Rental income............ 56 34 37 22 65% (3) (8)%
Net gain (loss) on sales
of securities (b)..... 8 19 (18) (11) (58)% 37 206%
Other noninterest income. 890 349 757 541 155%(c) (408) (54)%(d)
-------- ------- ------- ------ ----
Total noninterest income.$ 2,443 $ 2,096 $1,736 $ 347 17% $360 21%
======== ======= ======= ====== =====
- --------------------
(a) The Company recognized fees on several large commercial loans originated
and sold without recourse during 1996. A significant portion of the loan
fee income recognized by the Company results from the origination and
subsequent sale, without recourse, of large commercial loans. 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.
(b) For the year ended December 31, 1997, proceeds from sales of securities
available for sale were $27.2 million with resultant gross gains and losses
of $40,000 and $32,000, respectively. In 1996, the proceeds from sales of
securities available for sale were $48.7 million with resultant gross gains
and losses of $32,000 and $13,000, respectively. In 1995, the proceeds from
sales of securities available for sale were $89.1 million with resultant
gross gains and losses of $5,000 and $23,000, respectively.
(c) A number of factors combined to cause this increase. The most significant
were as follows:
(i) Approximately $242,000 was attributable to the activities of
BNC--North Dakota's Financial Services division which recorded
$370,000 from commission income on the sale of nondeposit investments,
trust fee income, tax preparation and other activities in 1997 as
compared to $128,000 in commission income on the sale of nondeposit
investments in 1996. Additional increases in noninterest income for
this division are expected during 1998 due to the recent business
combination with Lips & Lahr. See Note 2 to the Consolidated Financial
Statements included under Item 7.
(ii) $79,000 was attributable to increased income from automated teller
machines ("ATMs"). The Company was operating more ATMs during 1997
than in previous years.
(iii)$72,000 represents a portion of the payment of $762,000 received from
the Company's fidelity bond carrier. See Item 3 of Part I, "Legal
Proceedings" and "--Noninterest Expense."
(iv) $49,000 was attributable to a gain on the sale of farmland held as
other real estate owned.
Items (iii) and (iv) could be considered to be nonrecurring in nature.
(d) The total for 1995 included a $316,000 gain on the sale of FMB.
Additionally, commission income on sales of nondeposit investments
decreased $135,000 in 1996 as compared to 1995 because of a reduction in
staffing in the nondeposit investment sales area during 1996. These items
were offset by smaller increases in other miscellaneous fee income and
income derived from the consulting activities of BNC Financial (acquired in
May 1996).
17
<PAGE>
Noninterest Expense. The following table presents, for the periods indicated,
the major categories of the Company's noninterest expense as well as the amount
and percent of change between each of the periods presented. Related information
and material changes are discussed in lettered explanations below the table:
Noninterest Expense
Increase (Decrease)
-------------------------------
For the Years Ended
December 31, 1997 - 1996 1996 - 1995
----------------------- --------------- ---------------
1997 1996 1995 $ % $ %
------- ------- ------- ------ -------- ------ --------
(in thousands)
Salaries and employee
benefits............. $ 5,234 $ 4,311 $ 3,352 $ 923 21%(a) $ 959 29%(a)
Depreciation and
amortization......... 1,217 980 619 237 24%(b) 361 58%(b)
Occupancy............... 888 675 413 213 32%(c) 262 63%(c)
Office supplies,
telephone and
postage ............. 575 505 521 70 14%(d) (16) (3)%
Professional services... 528 360 246 168 47%(e) 114 46%(f)
Marketing and promotion 356 352 424 4 1% (72) (17)%(g)
FDIC and other
assessments.......... 171 239 296 (68)(28)%(h) (57) (19)%(h)
Other................... 925 791 640 134 17%(i) 151 24%(i)
------ ------ ------ ------- ------
Total noninterest
expense.............. $ 9,894 $ 8,213 $ 6,511 $1,681 20% $ 1,702 26%
====== ======= ======= ====== =======
Efficiency ratio (j).... 65.66% 68.75% 76.81% (3.09)% (8.06)%
- --------------------
(a) Increases in salaries and employee benefits expense over the three year
period are attributable primarily to growth in the number of employees. The
Company's average full-time equivalent employees was 124 for 1997 as
compared to 105 and 68 for 1996 and 1995, respectively. Additional
increases in this category are expected for 1998 due to the recent business
combination with Lips & Lahr. See Note 2 to the Consolidated Financial
Statements included under Item 7 for a summary of mergers and acquisitions
consummated during the three year period ended December 31, 1997. As of
March 16, 1998, the Company had 165 full-time equivalent employees.
(b) Depreciation and amortization expenses were as follows for the years ended
December 31:
1997 1996 1995
------- ------- --------
(in thousands)
Depreciation and amortization on premises,
leaseholdimprovements and equipment.... $ 676 $ 499 $ 377
Amortization on deferred charges and
intangible assets...................... 541 481 242
------- ------- -------
Total............................... $ 1,217 $ 980 $ 619
======= ======= =======
Increases over the three year period for both depreciation and amortization
are attributable to growth and acquisitions. Total premises, leasehold
improvements and equipment being depreciated/amortized were $10.7, $8.3 and
$7.0 million as of December 31, 1997, 1996 and 1995, respectively. Total
deferred charges and intangible assets being amortized were $5.8, $5.1, and
$4.4 million, respectively, as of the same dates. See Note 2 to the
Consolidated Financial Statements included under Item 7 for a summary of
mergers and acquisitions consummated during the three year period ended
December 31, 1997.
(c) Increases in occupancy expenses are also growth-related. During 1997, the
Company operated 12 facilities for the full year (and one additional for a
portion of the year) as compared to ten for the full year (and two
additional for a portion of the year) in 1996 and three for the full year
(and eight additional for a portion of the year) in 1995. As of March 1998,
the Company is operating 15 facilities.
(d) Increases in office supplies, telephone and postage are growth-related and
can be expected to increase in future periods due to the recent business
combination with Lips & Lahr. See Note 2 to the Consolidated Financial
Statements included under Item 7.
(e) This increase was mainly attributable to increased legal fees and
repossession and collection expenses incurred by BNC--North Dakota.
Approximately $139,000 in legal fees and repossession and collection
expenses incurred during 1997 were directly related to proceedings against
the loan officer dismissed during 1997 and resolution of related loans. See
(i) below and Item 3 of Part I, "Legal Proceedings." The Company also
incurred smaller additional increases in other items in this category
including software support fees and other consulting fees.
18
<PAGE>
(f) Increase was attributable to increased legal fees and increased audit fees.
(g) Increase was mainly attributable to ad campaigns relating to the 1995
branch acquisition and the merger of BNCCORP's two subsidiary banks,
Bismarck National Bank and First National Bank of Linton (and the related
name change of the surviving bank, BNC National Bank). See Note 2 to the
Consolidated Financial Statements included under Item 7.
(h) The reduction in 1996 (as compared to 1995) was caused by the FDIC's
reduction in 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 percent of insured deposits. The deposits acquired by
BNC--North Dakota in the 1995 branch acquisition are SAIF-insured deposits.
See Note 2 to the Consolidated Financial Statements included under Item 7.
The reduction in this category for 1997 was expected because the Banks are
currently being assessed only for interest payable on FICO bonds.
(i) This category of expenses includes directors fees, blanket bond and other
insurance expense, education and development expense, correspondent
charges, travel, dues, conventions and other miscellaneous expenses.
Increases in each of the two years are primarily growth-related and involve
many of the categories in this classification, however, none of the
increases in any individual item was of a material nature. Approximately
$22,000 of expenses in this category for 1997 were directly related to
resolution of matters involving the loan officer dismissed during 1997. In
total, the Company incurred approximately $161,000 in expenses related to
this matter ($124,000 legal, $15,000 repossession and collection and
$22,000 other miscellaneous expenses). See (e) above.
(j) Noninterest expense divided by an amount equal to net interest income plus
noninterest income.
Year 2000 Issue. As with other entities in the financial services industry, the
Company recognizes the critical importance of its computer program applications
and operating systems in conducting business, and is taking steps to mitigate
any potential disruption as a result of Year 2000 Issues. The Company has
developed a year 2000 plan and expects to have the awareness and assessment
phases completed by March 31, 1998, with renovation occurring the remainder of
1998. Validation is currently underway and will continue rigorously through the
year 2000, with specific compliance benchmarks/targets achieved by December 31,
1998. A separate testing/training facility will be completed by May 31, 1998 and
will be utilized extensively for validation purposes. The Company is also
communicating with vendors, regulatory agencies and peers in coordinating year
2000 conversion efforts.
The Company has not incurred significant costs prior to December 31, 1997 other
than internal costs to begin evaluation of the extent of year 2000 compliance
issues and developing a remediation plan. Total year 2000 project costs are
estimated to be $200,000 to $400,000 and are expected to be incurred during the
period beginning January 1, 1998 and continuing into the year 2000. Applicable
costs will be expensed as incurred, unless new software is purchased which will
be capitalized.
The costs of the year 2000 project and the date on which the Company plans to
complete year 2000 phases and modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future events
including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ materially from
those plans.
Income Taxes. The following table presents, for the periods indicated, the
Company's income before income taxes, applicable income taxes, and effective tax
rates:
For the Years Ended December 31,
---------------------------------------------
1997 1996 1995
----------- ----------- ------------
(in thousands)
Income before income taxes........ $ 2,556 $ 2,994 $ 1,798
Applicable income taxes........... 1,044 1,147 641
Effective tax rates................ 40.8% 38.3% 35.7%
Tax expense for 1997 includes more expense related to taxable income derived
from BNC--Minnesota. BNC--Minnesota is subject to higher state tax rates and is
disallowed the state deduction for federal taxes.
The tax expense for 1995 included a more significant benefit for tax-exempt
income.
19
<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 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,
Market and Credit Risk--Liquidity Risk Management." 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 "--Liquidity, Market and Credit Risk--Interest Rate
Risk Management."
The following table presents the composition of the investment portfolio by
major category as of the dates indicated:
Investment Portfolio Composition
December 31,
-----------------------------------------------------
1997 1996 1995
----------------- ----------------- -----------------
Estimated Estimated Estimated
Fair Fair Fair
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
-------- -------- -------- -------- -------- --------
(in thousands)
Available for Sale:
U.S. Treasury securities...$ 12,489 $ 12,532 $ 13,814 $ 13,856 $ 25,041 $ 25,101
U.S. government agency
mortgage-backed
securities.............. 32,136 32,236 9,555 9,559 4,798 4,843
U.S. government agencies
securities.............. 20,039 20,006 3,633 3,642 7,513 7,520
Collateralized mortgage
obligations............. 21,291 21,325 23,898 23,855 44,800 44,803
State and municipal bonds.. 1,166 1,289 759 800 1,162 1,264
Equity securities.......... 7,236 7,236 7,773 7,779 10,882 10,885
-------- -------- -------- -------- -------- ------
Total investments..........$ 94,357 $ 94,624 $ 59,432 $ 59,491 $ 94,196 $94,416
======== ======== ======== ======== ======== =======
20
<PAGE>
The following table presents maturities for all securities available for sale
(other than equity securities) and yields for all securities in the Company's
investment portfolio at December 31, 1997:
Investment Portfolio -- Maturity and Yields
<TABLE>
<CAPTION>
Maturing
After 1 but After 5 but
Within 1 year within 5 years within 10 years After 10 years Total
-------------- -------------- --------------- ---------------- --------------------
Amount Yield(1)Amount Yield(1)Amount Yield(1) Amount Yield(1) Amount Yield(1)
------ ------ ------- ------ ------ ------ ------- ------- ------- ------
Available for Sale: (2) (dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities...$2,502 6.12% $ 9,987 5.88% $ -- -- % $ -- -- % $12,489 5.93%
U.S. government agency
mortgage-backed
securities (3)........... 1,056 6.45% 2,500 6.84% 5,543 6.45% 23,037 7.18% 32,136 7.00%
U.S. government agencies
securities...............10,429 5.48% 9,610 6.77% -- -- % -- -- % 20,039 6.10%
Collateralized mortgage
obligations (3).......... -- -- % 1,258 5.70% 5,456 6.11% 14,577 6.42% 21,291 6.30%
State and municipal bonds.. 45 7.05% 145 8.43% 628 11.52% 348 5.46% 1,166 9.15%
------ ------ ------- ------ ------ ------ ------- ------- ------- ------
Total book value of
investment securities $14,032 5.67% $23,500 6.35% $11,627 6.56% $37,962 6.87% $87,121 6.50%
====== ====== ======= ====== ====== ====== ======= ======= ------- ------
Unrealized holding gain on
securities available for
sale.................... 267
Equity securities.......... $ 7,236 6.89%
------- ------
Total investment in securities
available for sale and held to
maturity.............. $94,624 6.51%(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, 1997, BNC had $94.6 million of securities in the investment
portfolio as compared to $59.5 and $94.4 million for the years ended December
31, 1996 and 1995, respectively. During 1997, the Company increased its holdings
in U.S. government agencies securities by $16.4 million. As part of its interest
rate risk management strategy, the Company also purchased $18.8 million of
long-term Government National Mortgage Association ("GNMA") securities. See
"--Liquidity, Market and Credit Risk--Interest Rate Risk Management." The
decrease in investment securities in 1996 (as compared to 1995) 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 "--Loan Portfolio." Investments accounted for 26, 21 and 39
percent of total assets as of December 31, 1997, 1996 and 1995, respectively.
At December 31, 1997, BNC held no securities of any single issuer, other than
the U.S. Treasury and U.S. government agencies securities, that exceeded ten
percent of stockholders' equity. A significant portion of the Company's
investment securities portfolio (approximately 85 percent at December 31, 1997)
is pledged as collateral for public deposits and borrowings, including
borrowings with the FHLB.
Loan Portfolio. 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
$30.7 million, or 15
21
<PAGE>
percent, to $232.1 million at December 31, 1997 as compared to $201.4 million at
December 31, 1996. In 1996, net loans increased $81.8 million, or 68 percent, as
compared to December 31, 1995. The following table presents the composition of
the Company's loan portfolio as of the dates indicated:
Loan Portfolio Composition
<TABLE>
<CAPTION>
December 31,
1997 1996 1995 1994 1993
------------------ ---------------- ------------------ ------------------- ------------------
Amount % Amount % Amount % Amount % Amount %
-------- -------- ------- ------- -------- -------- --------- -------- --------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and industrial(1) $111,429 48.0 $94,701 47.0 $41,639 34.8 $ 39,218 35.9 $ 23,011 27.8
Agricultural............ 21,064 9.1 20,673 10.3 18,046 15.1 22,144 20.2 16,101 19.5
Real estate-mortgage.... 56,875 24.5 47,451 23.6 36,606 30.6 32,805 30.0 31,655 38.2
Real estate-construction 18,215 7.8 8,806 4.4 5,884 4.9 3,992 3.6 4,462 5.4
Consumer................ 18,726 8.0 18,734 9.3 9,960 8.3 9,331 8.5 4,937 6.0
Lease financing......... 9,211 4.0 12,970 6.4 8,660 7.2 3,076 2.8 3,324 4.0
-------- -------- ------- ------- -------- -------- --------- --------- --------- --------
Total face amount of loans 235,520 101.4 203,335 101.0 120,795 100.9 110,566 101.0 83,490 100.9
Deferred loan fees and costs (320) (0.1) (338) (0.2) (112) (0.1) (95) (0.1) -- --
-------- -------- ------- ------- -------- -------- --------- --------- --------- --------
Loans................... 235,200 101.3 202,997 100.8 120,683 100.8 110,471 100.9 83,490 100.9
Less allowance for loan
losses............... (3,069) (1.3) (1,594) (0.8) (1,048) (0.8) (1,021) (0.9) (713) (0.9)
-------- -------- ------- ------- -------- -------- --------- --------- --------- --------
Net loans............... $232,131 100.0 $201,403 100.0 $119,635 100.0 $109,450 100.0 $ 82,777 100.00
======== ======== ======= ======= ======== ======== ========= ========= ========= ========
</TABLE>
- --------------------
(1) The commercial and industrial loan category includes asset-based loans
totaling $15.1 and $5.6 million at December 31, 1997 and 1996, respectively.
The following table presents, for the periods indicated, the amount and percent
of change in each category of loans in the Company's loan portfolio. Material
changes are discussed in lettered explanations below the table:
Change in Loan Portfolio Composition
Increase (Decrease)
-----------------------------------------------
1997 - 1996 1996 - 1995
-------------------- -----------------------
$ % $ %
--------- ---------- ---------- -----------
(dollars in thousands)
Commercial and industrial........$ 16,728 18% (a) $ 53,062 127% (a)
Agricultural..................... 391 2% 2,627 15%
Real estate--mortgage............ 9,424 20% (b) 10,845 30% (b)
Real estate--construction........ 9,409 107% (c) 2,922 50%
Consumer......................... (8) 0% 8,774 88% (d)
Lease financing.................. (3,759) (29)% 4,310 50%
------- ---------
Total face amount of loans....... 32,185 16% 82,540 68%
Deferred loan fees and costs..... 18 5% (226) (202)%
------- ---------
Loans............................ 32,203 16% 82,314 68%
Allowance for loan losses........ (1,475) (93)% (546) (52)%
------- ---------
Net Loans........................ $30,728 15% $ 81,768 68%
======= =========
- --------------------
22
<PAGE>
(a) Commercial and industrial - Increases are attributable to commercial loan
volume generated out of both the North Dakota and Minnesota market areas
during 1996 and primarily the Minnesota market area during 1997.
(b) Real estate--mortgage - Increases are attributable to loan volume generated
out of both the North Dakota and Minnesota market areas during 1996 and
primarily the North Dakota market area during 1997.
(c) Real estate--construction - Increase is attributable primarily to
construction loan volume generated out of the Minnesota market area during
1997.
(d) Consumer - Increase is attributable to consumer loan volume generated out of
both the North Dakota and Minnesota market areas during 1996.
While prospects for continued loan growth appear favorable, particularly in the
Minnesota market, 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, Executive Vice President for Banking
Operations, Chief Credit Officer, and/or other officers as deemed appropriate
(the "Loan Committee")). The loan policy is reviewed and reaffirmed by the Board
at least annually. Underwriting criteria are based upon the risks associated
with each type of credit offered, the related borrowers and types of collateral.
The Company delegates lending decision authority among various lending officers
and the Loan Committee based on the size of the customer's credit relationship
with BNC. The following table summarizes the current levels of lending authority
at each of the Banks and BNC Financial:
Lending Authority Limits
BNC--North
Dakota BNC--Minnesota BNC Financial
---------- ------------- -------------
(in thousands)
Individual officers (maximums)........ $ 100 $ 300 --
Senior lenders........................ 500 500 $ 750
Combination of two senior lenders..... 1,000 -- --
BNCCORP's Executive Vice President
for Banking Operations.............. -- 1,000 --
BNCCORP's Chief Credit Officer........ 2,000 2,000 1,000
BNC Financial's internal loan
committee...................... -- -- 1,500
Executive Loan Committee (approves
credits exceeding).................. 2,000 2,000 1,500
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.
23
<PAGE>
Loan Participations. Pursuant to BNC's lending policy, loans may not exceed 85
percent of bank legal lending limits (except to the extent collateralized by
U.S. Treasury securities or bank deposits and, accordingly, excluded from the
bank's legal lending limit). To accommodate customers whose financing needs
exceed lending limits and internal loan restrictions relating primarily to
industry concentration, the Banks sell loan participations to outside
participants without recourse. Loan participations sold on a nonrecourse basis
to outside financial institutions were as follows as of the dates indicated:
Loan Participations Sold
December 31,
---------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(in thousands)
BNC--North Dakota........... $ 55,500 $ 54,100 $ 35,000 $ 23,400 $ 10,600
BNC--Minnesota.............. 10,300 3,200 -- -- --
--------- --------- --------- --------- ---------
Total.................... $ 65,800 $ 57,300 $ 35,000 $ 23,400 $ 10,600
========= ========= ========= ========= =========
The Banks generally retain the right to service the loans as well as the right
to receive a portion of the interest income on the loans. The vast majority of
the loans sold by the Banks are commercial lines of credit for which balances
and related payment streams cannot be reasonably estimated in order to determine
the fair value of the servicing rights and/or future interest income retained by
the Banks. See Note 1 to the Consolidated Financial Statements included under
Item 7. Management cannot reliably predict BNC's ability to continue to generate
or sell loan participations or the terms of any such sales.
Concentrations of Credit. The Company's credit policies emphasize
diversification of risk among industries, geographic areas and borrowers. For
purposes of the analysis of concentrations of credit as of December 31, 1997,
total outstanding loans as well as all outstanding loan commitments were
included. As of December 31, 1997, the Company identified one concentration of
loans exceeding ten percent of total loans and loan commitments outstanding.
This concentration was in the construction industry and represented 15.7 percent
of total loans and loan commitments outstanding. Loans and commitments in this
category were extended to 109 customers who are located in Minnesota, Iowa and
North and South Dakota and who can be generally categorized as indicated below:
Percent of total
outstanding
Number of loans and loan
Customers commitments
--------------- ----------------
General building contractors............... 52 8.2%
Heavy construction, excluding building..... 21 5.1%
Special trade contractors.................. 36 2.4%
--------------- ----------------
Total................................. 109 15.7%
=============== ================
The contractors are involved in various aspects of the construction industry
including highway and street construction, water/sewer drilling, plumbing,
heating and air conditioning, commercial painting, electrical, concrete and
excavating and foundation contractors. Loans in this category are secured, in
many cases, by construction equipment.
The Company continually monitors industry and other credit concentrations as
part of its credit risk management strategies. In cases where significant
concentrations exist without sufficient diversification and other mitigating
factors, BNC generally sells loans without recourse to outside financial
institutions. See "--Loan Participations."
24
<PAGE>
Loan Maturities. The following table sets forth the remaining maturities of
loans in each major category of BNC's portfolio as of December 31, 1997. 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. $ 47,648 $ 15,927 $ 43,114 $ 1,717 $ 3,023 $111,429
Agricultural............... 10,772 2,323 2,158 1,467 4,344 21,064
Real estate-mortgage....... 5,708 6,792 8,466 13,348 22,561 56,875
Real estate-construction... 7,005 147 1,782 2,443 6,838 18,215
Consumer................... 10,204 6,940 964 609 9 18,726
Lease financing............ 2,618 6,538 -- 55 -- 9,211
-------- -------- -------- ------- -------- --------
Total face amount of loans.$ 83,955 $ 38,667 $ 56,484 $ 19,639 $ 36,775 $235,520
======== ======== ======== ======== ======== ========
- --------------------
(1) Maturities are based upon contractual maturities. Floating rate loans
include loans that would reprice prior to maturity if base rates change. See
"--Liquidity, Market and Credit Risk--Interest Rate Risk Management " 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 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
$100,000 and a sampling of smaller loans.
25
<PAGE>
The following table sets forth, as of the dates indicated, the amounts of
nonperforming loans and other assets, the allowance for loan losses and certain
related ratios:
Nonperforming Assets
December 31,
1997 1996 1995 1994 1993
------- -------- ------- ------- -------
(dollars in thousands)
Nonperforming loans:
Loans 90 days or more delinquent
and still accruing interest....$ 1,016 $ 129 $ 290 $ 39 $ 87
Nonaccrual loans (1) (2).......... 376 22 71 248 1,338
Restructured loans (1) (2)........ 104 136 119 257 188
------- ------- ------- ------- ------
Total nonperforming loans...... 1,496 287 480 544 1,613
Real estate acquired by foreclosure... -- 159 -- 100 193
------- ------- ------- ------- ------
Total nonperforming assets........$ 1,496 $ 446 $ 480 $ 644 $ 1,806
======= ======= ======= ======= =======
Allowance for loan losses.............$ 3,069 $ 1,594 $ 1,048 $ 1,021 $ 713
======= ======= ======= ======= =======
Ratio of total nonperforming
loans to total loans............... .64% .14% .40% .49% 1.93%
Ratio of total nonperforming
assets to total assets............. .42% .15% .20% .44% 1.47%
- --------------------
(1) If the Company's nonaccrual and restructured loans had been current in
accordance with their original terms, additional interest income would have
been recognized into earnings in the amount of $30,000 for the year ended
December 31, 1997.
(2) The interest income on nonaccrual and restructured loans actually included
in the Company's net income was $26,000 for the year ended December 31,
1997.
The increases in the Company's nonperforming loans at December 31, 1997 are
largely attributable to the lending activities of the loan officer dismissed
during 1997. See Item 3 of Part I, "Legal Proceedings."
Loans 90 days or more delinquent and still accruing interest include loans over
90 days past due which management believes, based on its specific analysis of
the 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 include loans on which the accrual of interest has been
discontinued. Accrual of interest is discontinued when management believes,
after considering economic and business conditions and collection efforts, that
the borrower's financial condition is such that the collection of interest is
doubtful. A delinquent loan is generally placed on nonaccrual status when it
becomes 90 days or more past due unless the loan is well- secured and in the
process of collection. When a loan is placed on nonaccrual status, accrued but
uncollected interest income applicable to the current reporting period is
reversed against interest income of the current period. Accrued but uncollected
interest income applicable to previous reporting periods is charged against the
allowance for 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 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.
26
<PAGE>
Other real estate owned represents properties acquired through, or in lieu of,
loan foreclosure. Such properties are included in other assets in the balance
sheets. They are initially recorded at fair value at the date of acquisition
establishing a new cost basis. Write-downs to fair value at the time of
acquisition are charged to the allowance for loan losses. After foreclosure,
valuations are periodically performed by management and the real estate is
carried at the lower of carrying amount or fair value less cost to sell.
Write-downs, revenues and expenses incurred subsequent to foreclosure are
charged to operations as recognized / incurred. There were no such properties
held at December 31, 1997 or 1995. At December 31, 1996, the Company's
investment in such properties was $159,000. That property was sold during 1997
and resulted in a gain of $49,000. See "Results of Operations--Noninterest
Income."
Potential Problem Loans. In accordance with accounting standards, the Company
identifies loans considered impaired and the valuation allowance attributable to
these loans. Impaired loans generally include loans on which management
believes, based on current information and events, it is probable that the
Company will not be able to collect all amounts due in accordance with the terms
of the loan agreement and which are analyzed for a specific reserve allowance.
BNC generally considers all loans risk-graded 6 (Substandard) and 7 (Doubtful)
as well as nonaccrual and restructured loans as impaired. Impaired loans at
December 31, 1997, not including the past due, nonaccrual and restructured loans
reported above, totaled $11.2 million. A significant portion of these loans are
not in default but may 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 and interest payments. The
ultimate resolution of these credits is subject to changes in economic
conditions and other factors. These loans are closely monitored to ensure that
the Company's position as creditor is protected to the fullest extent possible.
Customer Year 2000 Issues. The Company is aware that it could expect increases
in problem loans and credit losses in future years if some borrowers,
particularly businesses, fail to bring their computer systems into compliance
with year 2000 requirements. See "Description of Business--The Year 2000 Issue"
included under Item 1 of Part I. BNC has communicated with its customers
regarding the importance of the Year 2000 Issue. The Company is also including a
year 2000 assessment as part of its credit granting and renewal procedures. At
the present time, however, the Company cannot reasonably establish whether its
customers will be ready and, as a result, cannot rule out a material adverse
impact on the Company.
Allowance for Loan Losses. An allowance for loan losses has been established to
provide for those loans which may not be repaid in their entirety. It represents
management's recognition of the risks of extending credit and its evaluation of
the quality of the loan portfolio. Loan losses are primarily created from the
loan portfolio, but may also be generated from other sources, such as
commitments to extend credit, guarantees, and standby letters of credit. The
allowance for loan losses is increased by provisions charged to expense and
decreased by charge-offs, net of recoveries. See "Results of
Operations--Provision for Loan Losses." Although a loan is charged-off by
management when deemed uncollectible, collection efforts continue and future
recoveries may occur.
The allowance is maintained at a level considered adequate to provide for
anticipated loan losses based on past loss experience, general economic
conditions, information about specific borrower situations including their
financial position, collateral values, and other factors and estimates which are
subject to change over time. Customer readiness for the year 2000 is an
additional consideration in the analysis of the adequacy of the Company's
allowance for loan losses. See "--Customer Year 2000 Issues." 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. 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
27
<PAGE>
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:
Analysis of Allowance for Loan Losses
For the Years ended December 31,
--------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- -------
(dollars in thousands)
Balance of allowance for loan losses
at beginning period of.............$ 1,594 $ 1,048 $ 1,021 $ 713 $1,088
-------- -------- -------- ------- -------
Charge-offs:
Commercial and industrial....... 1,319 104 114 22 641
Agricultural.................... -- 22 130 -- --
Real estate-mortgage............ 24 -- -- -- --
Real estate-construction........ -- -- -- -- --
Consumer........................ 107 6 4 1 17
Lease financing................. 471 218 -- -- --
-------- ------- -------- ------- -------
Total charge-offs............ 1,921 350 248 23 658
-------- ------- -------- ------- -------
Recoveries:
Commercial and industrial....... 744 5 116 147 192
Agricultural.................... -- 146 84 -- --
Real estate-mortgage............ 9 6 3 -- --
Real estate-construction........ -- -- -- -- --
Consumer........................ 24 -- 4 5 2
Lease financing................. -- -- -- -- --
-------- ------- -------- ------- -------
Total recoveries............. 777 157 207 152 194
-------- ------- -------- ------- -------
Net (charge-offs) recoveries........ (1,144) (193) (41) 129 (464)
Provision for loan losses charged
to operations.................... 2,619 739 168 179 89
Allowance attributable to FMB....... -- -- (100)(a) -- --
-------- ------- --------- ------- -----
Balance of allowance for loan
losses at end of period......... $ 3,069 $ 1,594 $ 1,048 $ 1,021 $ 713
======== ======= ======= ======== =====
Ratio of net (charge-offs)
recoveries to average
loans........................... (.51%) (.11%) (.03%) .13% (.62%)
======== ======= ======== ======== ======
Average gross loans
outstanding during the
period.......................... $223,486 $ 171,780 $117,773 $98,749 $75,171
======== ========= ======== ======== ======
Ratio of allowance for loan
losses to total loans........... 1.30% .78% .87% .92% .85%
======== ========= ======== ======== ======
Ratio of allowance for loan
losses to nonperforming
loans........................... 205.00% 555.00% 218.00% 188.00% 44.00%
======== ========= ======== ======== ======
- --------------------
(a) In connection with the sale of FMB in October 1995, $100,000 of the
Company's allowance for loan and lease losses, together with approximately
$9.2 million of loans originated by FMB, was transferred to Community First
Bankshares, Inc.
The increases in the Company's provision for loan losses, charge-offs and
recoveries for the year ended December 31, 1997 are primarily attributable to
the activities of the loan officer dismissed during 1997. See Item 3 of Part I,
"Legal Proceedings." A special $1.9 million provision for loan losses,
approximately $1.7 million in loan charge-offs and a recovery of approximately
$690,000 included in the 1997 data above relate exclusively to the lending
activities of the dismissed officer.
28
<PAGE>
Management regards the allowance for loan losses as a general reserve which is
available to absorb losses from all loans. However, for purposes of complying
with disclosure requirements of the Securities and Exchange Commission, the
table below presents, for the periods indicated, an allocation of the allowance
for loan losses among the various loan categories and sets forth the percentage
of loans in each category to gross loans. The allocation of the allowance for
loan losses as shown in the table should neither be interpreted as an indication
of future charge-offs, nor as an indication that charge-offs in future periods
will necessarily occur in these amounts or in the indicated proportions.
<TABLE>
<CAPTION>
Allocation of the Allowance for Loan Losses
December 31,
-------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------------- ---------------------- -------------------- ---------------------- ---------------------
Loans in Loans in Loans in Loans in Loans in
category as category as category as category as category as
a a a a a
Amount percentage Amount percentage Amount percentage Amount percentage Amount percentage
of of total of of total of of total of of total of of total
allowance gross loans allowance gross loans allowance gross loans allowance gross loans allowance gross loans
-------- ----------- --------- ----------- --------- ----------- --------- ----------- --------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and industrial$ 1,078 47% $ 721 47% $ 355 31% $ 265 35% $ 96 28%
Agricultural...... 139 9% 176 10% 318 15% 395 20% 357 19%
Real estate-mortgage 444 24% 306 24% 213 30% 267 30% 169 38%
Real estate-construction 311 8% 57 4% 41 5% 24 4% 33 5%
Consumer.......... 174 8% 97 9% 58 8% 52 8% 30 6%
Leasing........... 136 4% 63 6% 41 4% -- -- -- --
Unallocated....... 787 0% 174 0% 22 7% 18 3% 28 4%
-------- --------- -------- --------- -------- --------- -------- -------- -------- ---------
Total............. $ 3,069 100% $ 1,594 100% $ 1,048 100% $ 1,021 100% $ 713 100%
======== ========= ======== ========= ======== ========= ======== ======== ======== =========
</TABLE>
Deposits. 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. See "--Borrowed Funds."
29
<PAGE>
The following table sets forth, for the periods indicated, the distribution of
BNC's average deposit account balances and average cost of funds rates on each
category of deposits. See "Results of Operations--Net Interest Income" for an
explanation of changes in deposit volume and costs during the periods presented:
Average Deposits and Deposit Costs
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------- ----------------------------- -------------------------------
Percent Wgtd. Percent Wgtd. Percent Wgtd.
Average of Avg. Average of Avg. Average of Avg.
Balance Deposits Rate Balance Deposits Rate Balance Deposits Rate
--------- --------- -------- --------- -------- -------- ---------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing demand
deposits............... $50,582 20.36% 3.12% $ 38,920 18.29% 2.58% $ 38,941 23.01% 3.05%
Savings deposits........... 8,904 3.58% 2.31% 8,498 3.99% 2.31% 7,598 4.49% 2.86%
Time deposits ("CDs"):
CDs under $100,000 ....... 127,092 51.14% 5.59% 124,682 58.61% 5.66% 93,983 55.53% 5.81%
CDs $100,000 and over...... 41,581 16.73% 5.74% 25,499 11.99% 5.82% 15,486 9.15% 6.08%
--------- --------- --------- -------- ---------- --------
Total time deposits........ 168,673 67.87% 5.63% 150,181 70.60% 5.69% 109,469 64.68% 5.84%
--------- --------- --------- -------- ---------- --------
Total interest-bearing
deposit................. 228,159 91.81% 4.95% 197,599 92.88% 4.93% 156,008 92.18% 5.00%
Noninterest-bearing demand
deposits................ 20,357 8.19% -- 15,147 7.12% -- 13,233 7.82% --
--------- --------- --------- -------- ---------- --------
Total deposits.............$ 248,516 100.0% 4.54% $ 212,746 100.0% 4.58% $ 169,241 100.0% 4.61%
========= ========= ========= ======== ========== ========
</TABLE>
In recent years, earning asset growth has outpaced core deposit growth resulting
in the use of brokered and out of market certificates of deposit and other
borrowed funds. See "--Borrowed Funds." This trend has been common in the
banking industry because of the proliferation of non-bank competitors and the
multitude of financial and investment products available to customers. As of
December 31, 1997, BNC held a total of $7.5 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, 1997. See Note 10 to the Consolidated Financial Statements
included under Item 7.
Time deposits in denominations of $100,000 and more totaled $36.3 million at
December 31, 1997 as compared to $39.7 and $16.6 million at December 31, 1996
and 1995, respectively. The following table sets forth the amount and maturities
of time deposits of $100,000 or more as of December 31, 1997:
Time Deposits of $100,000 and Over
(in thousands)
Maturing in:
3 months or less...........................$ 17,720
Over 3 months through 6 months............. 5,687
Over 6 months through 12 months............ 6,837
Over 12 months............................. 6,090
------------
Total..................................$ 36,334
============
From time to time the company may use off-balance-sheet instruments, principally
interest rate swaps, to adjust the interest rate sensitivity of on-balance-sheet
items, including deposits. During 1997, the Company purchased two such swaps to
adjust the interest rate sensitivity of $10 million of two year fixed rate time
deposits. The terms of the contracts were as follows:
30
<PAGE>
Interest Rate Swaps
Variable
Notional Fixed-Rate Rate Paid Variable
Amount Term Maturity Received (as of 9/30/97) (1) Rate Index
- ---------- ------- ------------ -------------- ------------------- -------------
$5 million 2 years 3/10/99 6.25% 5.72% 3-Month Libor
$5 million 2 years 4/28/99 6.95% 5.72% 3-Month Libor
- --------------------
(1) The swaps were sold in October and November 1997. Gains recognized upon sale
of the swaps are being amortized as a reduction of interest expense over the
remaining lives of the original swap contracts. See "--Liquidity, Market and
Credit Risk--Interest Rate Risk Management" and Note 1 to the Consolidated
Financial Statements included under Item 7 for further discussion relating
to the use of interest rate swaps and the Company's accounting policies
relating to such instruments.
Borrowed Funds. 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, 1997, short-term borrowings were $46.5 million, or
14 percent of total liabilities as compared to $11.4 million, or 4 percent of
total liabilities, at December 31, 1996 and $1.0 million, or 1 percent of total
liabilities, at December 31, 1995. See Note 8 to the Consolidated Financial
Statements included under Item 7 for a listing of borrowings outstanding at
December 31, 1997 and 1996, including interest rates and terms.
The following table provides a summary of the Company's short-term borrowings
and related cost information as of, or for the periods ended, December 31:
Short-Term Borrowings
1997 1996 1995
-------- ------- --------
(dollars in thousands)
Short-term borrowings outstanding at period end $46,503 $11,437 $ 1,000
Weighted average interest rate at period end .. 5.77% 5.60% 6.69%
Maximum month-end balance during the period ... $46,503 $23,416 $34,648
Average borrowings outstanding for the period . $22,730 $14,532 $ 7,029
Weighted average interest rate for the period . 5.69% 5.60% 5.74%
As of December 31, 1997, the Company's outstanding long-term debt totaled $21.8
million and included a $3.0 million term loan and $4.4 million on a $12.0
million revolving line of credit from Firstar Bank Milwaukee, N.A. ("Firstar"),
the Subordinated Notes ($15.0 million less unamortized discount of $705,000) and
an $82,000 capital lease. BNC was in compliance with all related debt covenants
at December 31, 1997. See Notes 1 and 8 to the Consolidated Financial Statements
included under Item 7 for more details regarding the Company's borrowings, debt
covenants and the use of interest rate swaps to adjust the interest rate
sensitivity of long-term debt. See also "--Liquidity, Market and Credit
Risk--Interest Rate Risk Management."
The Company's increased usage of long-term borrowings ($21.8 million at December
31, 1997 as compared to $10.6 and $3.4 million at December 31, 1996 and 1995,
respectively) has been primarily for the purpose of funding the asset-based
lending at BNC Financial. As of December 31, 1997, BNC Financial had outstanding
loans of $15.1 million. Management anticipates loan growth at BNC Financial
could approximate $15 to $20 million during 1998.
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
31
<PAGE>
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 10 to the Consolidated Financial Statements included under Item 7 includes
a summary of the risk-based and leverage capital ratios of BNC and its
subsidiary banks as of December 31, 1997 and 1996. As of each of those dates,
BNCCORP and the Banks exceeded capital adequacy requirements and the Banks were
considered "well capitalized" under prompt corrective action provisions.
During 1997, the Company completed the remodeling of its Centennial Plaza office
building at 116 North 4th Street and construction on a branch office in north
Bismarck. There are no major capital expenditures for additional facilities
currently planned for 1998.
Liquidity, Market and Credit Risk
The Company's business activities generate, in addition to other risks,
significant liquidity, market and credit risks. Liquidity risk is the
possibility of being unable to meet all present and future financial obligations
in a timely manner. Market risk arises from changes in interest rates, exchange
rates, commodity prices and equity prices and represents the possibility that
changes in future market rates or prices will have a negative impact on the
Company's earnings or value. The Company's principal market risk is interest
rate risk. Credit risk is the possibility of loss from the failure of a customer
to perform according to the terms of a contract. BNC is a party to transactions
involving financial instruments that create risks that may or may not be
reflected on a traditional balance sheet. These financial instruments can be
subdivided into three categories:
Cash financial instruments, generally characterized as on-balance-sheet
items, include investments, loans, mortgage-based securities, deposits and
other debt obligations.
Credit-related financial instruments, generally characterized as
off-balance-sheet items, include such instruments as commitments to extend
credit and standby letters of credit.
Derivative financial instruments, also generally characterized as
off-balance-sheet items, include such instruments as interest rate, foreign
exchange, commodity price and equity price contracts, including forwards,
swaps and options.
The Company's risk management policies are intended to monitor and limit
exposure to liquidity, market and credit risks that arise from each of these
financial instruments. See "--Loan Portfolio" for a discussion of the Company's
credit risk management strategies.
Liquidity Risk Management. Liquidity risk management encompasses the Company's
ability to meet all present and future financial obligations in a timely manner.
The objectives of liquidity management policies are to maintain adequate liquid
assets, liability diversification among instruments, maturities and customers
and a presence in both the wholesale purchased funds market and the retail
deposit market.
The Consolidated Statements of Cash Flows in the Consolidated Financial
Statements included under Item 7 present data on cash and cash equivalents
provided by and used in operating, investing and financing activities. In
addition to liquidity from core deposit growth, together with repayments and
maturities of loans and investments, 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 ten years and
beyond. Borrowings from the FHLB are collateralized by the Bank's mortgage loans
and various securities from the Company's investment portfolio. See
"--Investment Securities" and Note 8 to the Consolidated Financial Statements
included under Item 7. The Company has also obtained funding, primarily for the
purpose of funding asset-based loans at BNC Financial, through long-term
borrowings and the issuance of its Subordinated Notes. See "--Borrowed Funds"
and Note 8 to the Consolidated Financial Statements included under Item 7.
32
<PAGE>
The following table sets forth, for the periods indicated, a summary of the
Company's major sources and (uses) of funds. This summary information is derived
from the Consolidated Statements of Cash Flows included under Item 7:
Major Sources and Uses of Funds
For the Years Ended December 31,
----------------------------------
1997 1996 1995
-------- --------- -----------
(in thousands)
Proceeds from sales and maturities
of investment securities...................$ 39,226 $ 57,553 $ 62,763
Net increase in deposits...................... 23,054 28,722 20,924
Increase (decrease) in short-term borrowings.. 35,066 10,437 (6,360)
Net change in long-term borrowings............ 11,151 7,261 (216)
Deposits acquired in branch acquisition (1)... -- -- 104,770
Proceeds from issuance of stock (2)........... -- -- 9,717
Purchases of investment securities........... (74,121) 22,575) (138,385)
Net increase in loans......................... (34,124) (82,664) (20,272)
Deposits sold with FMB (1).................... -- -- (39,295)
- --------------------
(1) See Note 2 to the Consolidated Financial Statements included under Item 7.
(2) See Note 9 to the Consolidated Financial Statements included under Item 7.
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. Management believes that its prudent management
policies and guidelines will ensure adequate levels of liquidity to fund
anticipated needs of on- and off-balance-sheet items. In addition, a contingency
funding plan identifies actions to be taken in response to an adverse liquidity
event.
Interest Rate Risk Management. Interest rate risk arises from changes in
interest rates. The Company has risk management policies to monitor and limit
exposure to interest rate risk. To date the Company has not conducted trading
activities as a means of managing interest rate risk. BNC's asset/liability
management process, conducted under the auspices of the Risk Committee, is
utilized to manage the Company's interest rate risk. The measurement of interest
rate risk associated with financial instruments is meaningful only when all
related and offsetting on- and off-balance-sheet transactions are aggregated,
and the resulting net positions are identified.
Movements in interest rates can create fluctuations in the Company's income and
economic value due to an imbalance in the repricing or maturity of asset,
liability and off-balance-sheet positions. Interest rate risk exposure is
actively managed with the goal of minimizing the impact of interest rate
volatility on current earnings and on the market value of equity.
In general, the assets and liabilities generated through ordinary business
activities do not naturally create offsetting positions with respect to
repricing or maturity characteristics. Access to the derivatives market can be
an important element in maintaining the Company's interest rate risk position
within policy guidelines. Using off-balance-sheet instruments, principally
interest rate swaps, the interest rate sensitivity of specific on- balance-sheet
33
<PAGE>
transactions, as well as pools of assets or liabilities, is adjusted to maintain
the desired interest rate risk profile. See "--Deposits," "--Borrowings" and
Notes 1 and 8 to the Consolidated Financial Statements included under Item 7 for
a summary of interest rate swaps entered into during 1997 and for information
relating to the Company's accounting policies pertaining to such instruments.
The Company had no interest rate swaps outstanding as of December 31, 1997.
In general, swaps used to adjust the interest rate sensitivity of specific
transactions would not need to be replaced at maturity since the corresponding
asset or liability will mature along with the swap. However, swaps against asset
and liability pools would have an impact on the overall risk position as they
mature and might need to be reissued to maintain the same interest rate risk
profile. Such swaps could create modest earnings sensitivity to changes in
interest rates.
The Company uses a variety of measurement tools to monitor and control the
overall interest rate risk exposure of both the on- and off-balance-sheet
positions, including interest rate swaps. For each measurement tool, the level
of interest rate risk created by the assets, liabilities, equity and
off-balance-sheet positions are a function primarily of their contractual
interest rate repricing dates and contractual maturity (including principal
amortization) dates.
Static gap analysis is one of the tools used for interest rate risk measurement.
The net differences between the amount of assets, liabilities, equity and
off-balance-sheet instruments repricing within a cumulative calendar period is
typically referred to as the "rate sensitivity position" or "gap position." The
following table sets forth the Company's rate sensitivity position as of
December 31, 1997. Assets and liabilities are classified by the earliest
possible repricing date or maturity, whichever occurs first:
Interest Sensitivity Gap Analysis
<TABLE>
<CAPTION>
Estimated maturity or repricing at December 31, 1997
0-3 4-12 1-5 Over
months months years 5 Years Total
--------- --------- ------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Cash equivalents .........................$ 2,231 $ -- $ -- $ -- $ 2,231
Investment securities (1) ................ 28,937 8,385 44,888 12,414 94,624
Fixed rate loans (2) ..................... 8,694 9,946 38,666 19,638 76,944
Floating rate loans (2) .................. 147,067 5,900 5,499 110 158,576
-------- --------- ------- -------- --------
Total interest-earning assets .........$186,929 $ 24,231 $89,053 $ 32,162 $332,375
======== ========= ======= ======== ========
Interest-bearing liabilities:
NOW and money market accounts ............$ 66,040 $ -- $ -- $ -- $ 66,040
Savings .................................. 9,590 -- -- -- 9,590
Time deposits under $100,000 ............. 29,958 63,241 30,703 1,163 125,065
Time deposits $100,000 and over .......... 17,720 12,524 5,985 105 36,334
Borrowings ............................... 53,950 36 34 14,295 68,315
-------- -------- ------- -------- --------
Total interest-bearing liabilities ....$177,258 $ 75,801 $36,722 $ 15,563 $305,344
======== ======== ======= ======== ========
Interest rate gap ............................$ 9,671 $(51,570) $52,331 $ 16,599 $ 27,031
======== ======== ======= ======== ========
Cumulative interest rate gap at
December 31, 1997..........................$ 9,671 $(41,899) $10,432 $ 27,031
======== ========= ======= ========
Cumulative interest rate gap to total assets . 2.69% (11.63)% 2.90% 7.51%
</TABLE>
- --------------------
(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
34
<PAGE>
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.
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.
The Company's rate sensitivity position 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.
Static gap analysis does not fully capture the impact of embedded options,
lagged interest rate changes, administered interest rate products, or certain
off-balance-sheet sensitivities to interest rate movements. Therefore, this tool
cannot be used in isolation to determine the level of interest rate risk
exposure in more complex banking institutions.
The Company performs an earnings simulation analysis to identify more dynamic
interest rate risk exposures, including embedded option positions. The earnings
simulation analysis, which is generally run monthly, estimates the effect that
specific interest rate changes would have on 12 months of pretax net interest
income. This exercise includes management assumptions regarding the level of
interest rate or balance changes on indeterminate maturity deposit products
(savings, NOW, money market and demand deposits) for a given level of market
rate changes. These assumptions have been developed through a combination of
historical analysis and future expected pricing behavior. Interest rate caps and
floors are included to the extent that they are exercised in the 12-month
simulation period. Additionally, changes in prepayment behavior of the
residential mortgage and mortgage-backed securities portfolios in each rate
environment are captured using industry estimates of prepayment speeds for
various coupon segments of the portfolio. Finally, the impact of planned growth
and anticipated new business activities is factored into the simulation model.
35
<PAGE>
The Company's general policy is to limit the change in annual net interest
income to ten percent for each 100 basis point increase or decrease in rates. As
of December 31, 1997, the Company had the following estimated earnings
sensitivity profile:
Total Change in
-----------------------------------
Amount/Frequency of Interest Rate Change Interest Rates Net Interest Income
- -------------------------------------------- -------------- ------------------
+50 basis points each quarter beginning
January 1, 1998......................... +200 +6.34%
+25 basis points April 1 and July 1, 1998.. +50 +1.86%
0.......................................... 0 --
- -25 basis points April 1 and July 1, 1998.. -50 -1.86%
- -50 basis points each quarter beginning
January 1, 1998......................... -200 -6.76%
Since there are limitations inherent in any methodology used to estimate the
exposure to changes in market interest rates, this analysis is not intended to
be a forecast of the actual effect of changes in market interest rates such as
those indicated above on the Company. Further, this analysis is based on the
Company's assets and liabilities as of December 31, 1997 (with forward
adjustments for planned growth and anticipated business activities) and does not
contemplate any actions the Company might undertake in response to changes in
market interest rates.
Forward Looking Statements
Statements included in Item 6, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," which are not historical in
nature are intended to be, and are hereby identified as "forward looking
statements" for purposes of the safe harbor provided by Section 21E of the
Securities Exchange Act of 1934, as amended. The Company cautions readers that
forward looking statements, including without limitation, those relating to the
Company's future business prospects, revenues, working capital, liquidity,
capital needs, interest costs, income and the anticipated impact of the Year
2000 Issue, are subject to certain risks and uncertainties that could cause
actual results to differ materially from those indicated in the forward looking
statements due to several important factors. These factors include, but are not
limited to: risks associated with the Company's acquisition strategy; risks of
loans and investments, including dependence on local economic conditions;
competition for the Company's customers from other providers of financial
services; possible adverse effects of changes in interest rates; risks of
unanticipated consequences related to the impact of the Year 2000 Issue on the
Company or its customers; and other risks which are difficult to predict and
many of which are beyond the control of the Company.
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.
36
<PAGE>
Recent Accounting Pronouncements
Notes 1, 16 and 17 to the Consolidated Financial Statements included under Item
7 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..................................... 38
Consolidated Balance Sheets -December 31, 1997 and 1996...................... 39
Consolidated Statements of Income - the years ended
December 31, 1997, 1996 and 1995.......................................... 40
Consolidated Statements of Stockholders' Equity - the periods
ended December 31, 1997, 1996 and 1995.................................... 41
Consolidated Statements of Cash Flows - the years ended
December 31, 1997, 1996 and 1995.......................................... 42
Notes to Consolidated Financial Statements................................... 43
37
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTS
To BNCCORP, Inc.:
We have audited the accompanying consolidated balance sheets of BNCCORP, Inc. (a
Delaware corporation) and Subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
February 18, 1998
38
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31
(In thousands, except share and per share data)
ASSETS 1997 1996
------------- -----------
CASH AND DUE FROM BANKS.............................. $ 13,058 $ 5,495
INTEREST-BEARING DEPOSITS WITH BANKS................. 2,231 865
FEDERAL FUNDS SOLD................................... -- 6,900
SECURITIES AVAILABLE FOR SALE (Note 3)............... 94,624 59,491
LOANS AND LEASES, net of allowance for loan losses
of $3,069 in 1997 and $1,594 in 1996 (Note 4).... 232,131 201,403
PREMISES, LEASEHOLD IMPROVEMENTS AND
EQUIPMENT, net (Note 5).......................... 8,500 6,657
ACCRUED INTEREST RECEIVABLE.......................... 2,865 2,442
OTHER ASSETS......................................... 2,461 1,226
DEFERRED CHARGES AND INTANGIBLE ASSETS, net (Note 6). 4,251 4,079
------------- -----------
$ 360,121 $ 288,558
============= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS:
Noninterest-bearing.............................. $ 25,795 $ 22,218
Interest-bearing--
Savings, NOW and money market................ 75,630 52,483
Time deposits $100,000 and over.............. 36,334 39,725
Other time deposits.......................... 125,065 125,344
NOTES PAYABLE (Note 8)............................... 68,315 22,052
OTHER LIABILITIES.................................... 4,708 4,101
------------- -----------
Total liabilities......................... 335,847 265,923
------------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 14 and 15)
STOCKHOLDERS' EQUITY (Note 9):
Preferred stock, $.01 par value, 2,000,000 shares
authorized; no shares issued or outstanding... -- --
Common stock, $.01 par value, 10,000,000 shares
authorized; 2,364,100 shares issued,
2,338,720 shares outstanding.................. 23 23
Capital surplus.................................. 13,768 13,768
Retained earnings................................ 10,529 9,017
Treasury stock (25,380 shares)................... (216) (216)
Unrealized holding gain on securities available
for sale, net of income tax effects of
$97 and $16 (Note 3).......................... 170 43
------------- -----------
Total stockholders' equity................ 24,274 22,635
------------- -----------
$ 360,121 $ 288,558
============= ===========
The accompanying notes are an integral part of these consolidated
financial statements.
39
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the Years Ended December 31
(In thousands, except per share data)
1997 1996 1995
---------- -------- ---------
INTEREST INCOME:
Interest on loans.......................... $ 22,003 $16,383 $ 11,285
Interest on investment securities--
Taxable................................... 3,714 3,739 2,919
Tax-exempt................................ 71 94 18
Dividends................................. 446 576 276
Other...................................... 307 165 785
---------- -------- ---------
Total interest income.............. 26,541 20,957 15,283
---------- -------- ---------
INTEREST EXPENSE:
Deposits................................... 11,282 9,738 7,802
Notes payable.............................. 2,633 1,369 740
---------- -------- ---------
Total interest expense............. 13,915 11,107 8,542
---------- -------- ---------
Net interest income................ 12,626 9,850 6,741
PROVISION FOR LOAN LOSSES (Note 4)............ 2,619 739 168
---------- -------- ---------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES............................... 10,007 9,111 6,573
---------- -------- ---------
NONINTEREST INCOME:
Fees on loans.............................. 1,018 1,276 559
Service charges............................ 471 418 401
Rental income.............................. 56 34 37
Net gain (loss) on sales of securities..... 8 19 (18)
Other...................................... 890 349 757
---------- -------- ---------
Total noninterest income........... 2,443 2,096 1,736
---------- -------- ---------
NONINTEREST EXPENSE:
Salaries and employee benefits............. 5,234 4,311 3,352
Depreciation and amortization.............. 1,217 980 619
Occupancy.................................. 888 675 413
Office supplies, telephone and postage..... 575 505 521
Professional services...................... 528 360 246
Marketing and promotion.................... 356 352 424
FDIC and other assessments................. 171 239 296
Other...................................... 925 791 640
---------- -------- ---------
Total noninterest expense.......... 9,894 8,213 6,511
---------- -------- ---------
INCOME BEFORE TAXES........................... 2,556 2,994 1,798
INCOME TAXES (Note 7)......................... 1,044 1,147 641
---------- -------- ---------
NET INCOME....................................$ 1,512 $ 1,847 $ 1,157
========== ======== =========
BASIC EARNINGS PER COMMON SHARE (Note 17).....$ 0.65 $ 0.79 $ 0.67
========== ======== =========
DILUTED EARNINGS PER COMMON SHARE (Note 17)...$ 0.64 $ 0.79 $ 0.67
========== ======== =========
The accompanying notes are an integral part of these consolidated
financial statements.
40
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(In thousands, except share data)
<TABLE>
<CAPTION>
Unrealized
Gain (Loss)
Common Stock on Securities
----------------- Capital Retained Treasury Available
Shares Amount Surplus Earnings Stock for Sale, NetTotal
------------------ -------- ------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
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
Net income....................... -- -- -- 1,512 -- -- 1,512
Change in unrealized holding gain
on securities available for sale,
net of income taxes............. -- -- -- -- -- 127 127
---------- ------- -------- ------- ------- ---------- --------
BALANCE, December 31, 1997.......... 2,364,100 $ 23 $13,768 $10,529 $ (216) $ 170 $24,274
========== ======= ======== ======= ======= ========== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
41
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31
(In thousands)
1997 1996 1995
-------- --------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income...................................... $ 1,512 $ 1,847 $ 1,157
Adjustments to reconcile net income to net
cash provided by operating activities--
Provision for loan losses................... 2,619 739 168
Depreciation and amortization............... 676 499 377
Amortization of intangible assets........... 531 481 242
Net premium amortization (discount
accretion) on securities................. (131) (110) (243)
Proceeds from loans recovered............... 777 157 207
Change in accrued interest receivable and
other assets, net........................ (2,371) (1,866) (935)
(Gain) loss on sale of bank premises and
equipment................................ (2) (10) 23
Net realized (gains) losses on sales of
securities............................... (8) (19) 18
Provision (benefit) for deferred taxes...... (367) (182) 52
Change in other liabilities, net............ 893 157 1,624
Gain on sale of Farmers & Merchants Bank
of Beach (Note 2)........................ -- -- (316)
Originations of loans to be participated.....(58,305) (45,238) (44,231)
Proceeds from participations of loans....... 58,305 45,238 44,231
-------- --------- --------
Net cash provided by operating activities. 4,129 1,693 2,374
-------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in federal funds sold................. 6,900 (3,950) (2,900)
Purchases of investment securities...............(74,121) (22,575)(138,385)
Proceeds from sales of investment securities..... 27,198 48,700 89,143
Proceeds from maturities of investment securities 12,137 8,853 (26,380)
Net increase in loans............................(34,124) (82,664) (20,272)
Additions to premises, leasehold improvements
and equipment................................. (2,598) (1,438) (1,973)
Proceeds from sale of premises and equipment..... 81 70 112
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
-------- --------- --------
Net cash used in investing activities.....(64,527) (53,004) (85,959)
-------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand, savings, NOW and money
market accounts............................... 26,724 7,095 8,960
Net increase (decrease) in time deposits......... (3,670) 21,627 11,964
Net increase (decrease) in short-term borrowings 35,066 10,437 (6,360)
Repayments of long-term borrowings...............(23,293) (1,954) (716)
Proceeds from long-term borrowings............... 34,444 9,215 500
Amortization of discount on subordinated notes... 46 -- --
Amortization of deferred charges................. 10 -- --
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)
Proceeds from issuance of stock (Note 9)........ -- -- 9,717
Stock offering costs............................ -- (8) --
Dividends paid to minority stockholders......... -- -- (92)
-------- --------- --------
Net cash provided by financing activities. 69,327 46,412 89,448
-------- --------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. 8,929 (4,899) 5,863
CASH AND CASH EQUIVALENTS, beginning of year......... 6,360 11,259 5,396
-------- --------- --------
CASH AND CASH EQUIVALENTS, end of year...............$15,289 $ 6,360 $11,259
======== ========= ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid....................................$13,657 $ 11,347 $ 6,383
======= ========= ========
Income taxes paid................................$ 1,659 $ 934 $ 615
======== ========= ========
The accompanying notes are an integral part of these consolidated
financial statements.
42
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
1. Nature of Activities and Significant Accounting Policies
The following is a summary of the nature of activities and significant
accounting and financial reporting policies followed by BNCCORP, Inc.
("BNCCORP") and its subsidiaries in preparing and presenting its consolidated
financial statements.
Nature of Activities. BNCCORP is a registered bank holding company incorporated
under the laws of Delaware. It is the parent company of BNC National Bank
("BNC--North Dakota"), BNC National Bank of Minnesota ("BNC--Minnesota")
(collectively, "the Banks"), and BNC Financial Corporation ("BNC Financial"), a
commercial finance company. Through these wholly-owned subsidiaries, which
operate out of twelve locations in North Dakota and Minnesota, BNCCORP provides
a broad range of banking and financial services to small and mid-size businesses
and individuals. An additional wholly-owned subsidiary, Bismarck Properties,
Inc., is inactive.
Principles of Consolidation. The accompanying consolidated financial statements
include the accounts of BNCCORP and its wholly-owned subsidiaries (the
"Company"). All significant intercompany transactions and balances have been
eliminated in consolidation.
Cash and Cash Equivalents. For purposes of presentation in the consolidated
statements of cash flows, cash and cash equivalents are defined as those amounts
included in the consolidated balance sheet captions "cash and due from banks"
and "interest-bearing deposits with banks" and include all cash on hand as well
as interest-bearing and noninterest-bearing amounts due from financial
institutions.
Securities. Investments are classified into three categories and accounted for
as follows:
Trading Securities. Trading securities are purchased and sold for the
purpose of generating profits on short-term differences in market prices and
are reported at fair value, with any unrealized holding gains and losses
being immediately reflected in earnings. The Company holds no securities for
trading purposes.
Held-to-Maturity. Held-to-maturity securities are securities that the
Company has the positive intent and ability to hold to maturity. All
securities in this category are reported at historical cost, adjusted for
premiums and discounts that are recognized in interest income using the
effective interest method over the period to maturity.
Available-for-Sale. All other securities not classified as trading or
held-to-maturity are classified as available-for-sale. Available-for-sale
securities are reported at fair value with any unrealized holding gains and
losses, net of tax effects, reflected as a net amount in a separate
component of stockholders' equity. Gains and losses on the sale of
available-for-sale securities are determined using the adjusted cost of
specific securities sold and are included in net gain (loss) on sales of
securities in the consolidated statements of income. Premiums and discounts
are recognized in interest income using the effective interest method over
the period to sale or maturity.
Declines in the fair value of individual held-to-maturity and available-for-sale
securities below their cost that are other than temporary could result in
write-downs of the individual securities to their fair value. Such write-downs,
should they occur, would be included in earnings as realized losses. There were
no such write-downs during 1997, 1996 or 1995.
43
<PAGE>
Loans Receivable. Loans receivable are stated at the amount of unpaid principal
net of unearned fees and costs and an allowance for loan losses.
Loans are generally placed on a nonaccrual status 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
reporting period is reversed against interest income of the current period.
Accrued but uncollected interest income applicable to previous reporting periods
is charged against the loan loss reserve as the Company 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.
Provision for Loan Losses and the Allowance for Loan Losses. The provision for
loan losses in the income statement results from the combination of an estimate
by management of loan losses that occurred during the current period and the
ongoing adjustment of prior estimates of losses.
To serve as a basis for making this provision each quarter, the Company
maintains a credit risk monitoring process that considers several factors,
including current economic conditions affecting the Company's customers, the
payment performance of individual large loans and pools of homogeneous small
loans, portfolio seasoning, changes in collateral values, and detailed reviews
of specific large loan relationships. For large loans deemed to be impaired due
to an expectation that all contractual payments will probably not be received,
impairment is measured by comparing the Company's recorded investment in the
loan to the present value of expected cash flows discounted at the loan's
effective interest rate, the fair value of the collateral or the loan's
observable market price.
The provision for loan losses increases the allowance for loan losses, a
valuation account which is netted against loans on the balance sheet. As the
specific customer and amount of a loan loss is confirmed by gathering additional
information, taking collateral in full or partial settlement of the loan,
bankruptcy of the borrower, etc., the loan is written down, reducing the
allowance for loan losses. If, subsequent to a writedown, the Company is able to
collect additional amounts from the customer or from the sale of collateral
worth more than earlier estimated, a recovery is recorded, increasing the
allowance for loan losses.
Loan Fee Income. The Company 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. A significant portion of the Company's loan fee income
is derived from loans which are originated and subsequently sold on a
non-recourse basis. Such fees are recognized in income at the time of sale.
Mortgage Servicing and Transfers of Financial Assets. The Company adopted
Statement of Financial Accounting Standards No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities ("SFAS
125") on January 1, 1997. SFAS 125 superseded Statement of Financial Accounting
Standards No. 122, "Accounting for Mortgage Servicing Rights" and established
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. The
Company also adopted Statement of Financial Accounting Standards No. 127,
"Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125"
("SFAS 127"), on January 1, 1997. SFAS 127 deferred certain provisions of SFAS
125 until January 1, 1998.
The Banks regularly sell loans to others on a non-recourse basis. Sold loans are
not included in the accompanying balance sheets. The Banks generally retain the
right to service the loans as well as the right to
44
<PAGE>
receive a portion of the interest income on the loans. At December 31, 1997 and
1996, the Banks were servicing loans for the benefit of others with aggregate
unpaid principal balances of $65.8 and $57.3 million, respectively. The vast
majority of the loans sold by the Banks are commercial lines of credit for which
balances and related payment streams cannot be reasonably estimated in order to
determine the fair value of the servicing rights and/or future interest income
retained by the banks.
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. 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. Maintenance and repairs are
charged to operations when incurred. Betterments and renewals are capitalized.
When premises, leasehold improvements or equipment are sold or otherwise
disposed of, the asset account and related accumulated depreciation account are
relieved, and any gain or loss is included in operations. See "Impairment of
Long-Lived Assets."
Other Real Estate Owned. Real estate properties acquired through, or in lieu of,
loan foreclosure are included in other assets in the balance sheet. Such
properties are initially recorded at fair value at the date of acquisition
establishing a new cost basis. Write-downs to fair value at the time of
acquisition are charged to the allowance for loan losses. After foreclosure,
valuations are periodically performed by management and the real estate is
carried at the lower of carrying amount or fair value less cost to sell.
Write-downs, revenues and expenses incurred subsequent to foreclosure are
charged to operations as recognized / incurred. There were no such properties
held at December 31, 1997. At December 31, 1996, the Company's investment in
such properties was $159,000.
Deferred Charges and Intangible Assets. Deferred charges and intangible assets
includes premiums paid for deposits assumed, goodwill, debt offering costs,
organization costs and other miscellaneous intangibles. Deposit premiums are
being amortized over their estimated lives of ten years using the straight-line
method. Goodwill represents the aggregate excess of the cost of subsidiaries
acquired over the fair value of their net assets at dates of acquisition and is
being amortized over its estimated useful life of 15 to 25 years using the
straight-line method. Debt offering costs represent legal, accounting and other
fees and expenses associated with the issuance of the Company's 8 5/8 percent
subordinated notes (see Note 8). These costs are being amortized over the term
of the notes using the effective interest rate method. Organization costs
represent incorporation, legal, accounting and other similar fees associated
with establishment of BNCCORP or its subsidiaries. Such costs are being
amortized over five years using the straight-line method. The Company's
intangible assets are monitored to assess recoverability and determine if events
and circumstances require adjustment to the recorded amounts or amortization
periods. See "Impairment of Long-Lived Assets."
Impairment of Long-Lived Assets. The Company adopted 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") on January 1,
1996. SFAS 121 establishes standards for recognizing and measuring impairment of
long-lived assets including property and equipment, certain identifiable
intangibles and goodwill. Assets subject to the provisions of SFAS 121 are
reviewed for impairment and, if such impairment is identified, written down to
their fair value. Identified impairment losses are charged to operations. No
such impairment losses were recognized during 1997 or 1996.
Securities Sold Under Agreements to Repurchase. From time to time, the Company
may enter into sales of securities under agreements to repurchase, generally for
periods of less than 90 days. Fixed coupon agreements are treated as financings,
and the obligations to repurchase securities sold are reflected as a liability
in the balance sheets. The cost of securities underlying the agreements remain
in the asset accounts.
45
<PAGE>
Fair Values of Financial Instruments. The following methods and assumptions were
used by the Company in estimating fair values of financial instruments as
disclosed herein:
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 the Company'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.
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.
Derivative Financial Instruments--Interest Rate Swaps. The Company enters into
interest rate swaps as part of its interest rate risk management program.
Interest rate swaps involve the contractual exchange of fixed and floating rate
interest payment obligations based on a notional principal amount. Interest rate
swaps subject the Company to market risk associated with changes in interest
rates, as well as the risk of default by a counterparty to the agreements. The
Company does not conduct trading activities or hold derivative financial
instruments for speculative purposes.
Pursuant to the accrual method of accounting, each amount paid or received under
an interest rate swap contract that is used in the interest rate risk management
process is recognized in earnings during the period to which the payment or
receipt relates as an adjustment to interest income or expense over the life of
the related asset or liability. Interest rate swap contracts result in gains and
losses subsequent to the date of the contract, due to interest rate movements.
The Company does not recognize changes in the market value of these contracts as
gains or losses in the period of change because the contracts qualify as hedges
of interest rate risk exposures (i.e., the designated hedged items expose the
Company to interest rate risk, and the contracts reduce the risk of exposure and
are designated as hedges of the applicable items). Gains or losses associated
with the termination of interest rate swap contracts for identified positions
(hedges) are deferred and amortized over the original life of the hedge, as an
adjustment to the yield of the hedged asset or liability, if the hedged item
remains outstanding. If the hedged item is no longer outstanding, gains or
losses resulting from the termination of a swap contract would be recognized
into income in the period of termination. Unamortized deferred gains or losses
are included in the balance sheet as deferred income or deferred charges.
The Company had no interest rate swap contracts outstanding at December 31, 1997
or 1996. At December 31, 1997, deferred gains of $423,000 resulting from the
sale of interest rate swap contracts during 1997 were included in the balance
sheet and were being amortized as a reduction of interest expense over the
original lives of the swap contracts.
Trust Fees. Trust fees are recorded on an accrual basis.
46
<PAGE>
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.
Earnings Per Common Share. The Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS 128") during the fourth quarter
of 1997. SFAS 128 supersedes Accounting Principals Board Opinion No. 15,
"Earnings per Share" ("APB 15") and replaces primary and fully diluted earnings
per share ("EPS") under APB 15 with basic and diluted EPS. For comparative
purposes, EPS for the years ended December 31, 1996 and 1995 have been
recalculated in accordance with the provisions of SFAS 128 (see Note 17).
Recently Issued Accounting Standards. The Company adopted Statement of Financial
Accounting Standards No. 129 "Disclosure of Information About Capital Structure"
("SFAS 129") during the fourth quarter of 1997. SFAS 129 summarizes disclosure
requirements pertaining to an entity's capital structure. Because SFAS 129 is a
compilation of several previously issued standards and pronouncements, adoption
of this standard has not had a material affect on the Company's consolidated
financial statements.
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"), effective for fiscal years beginning after December 15,
1997, requires that changes in the amounts of items which bypass the income
statement and are only reported with a balance in stockholders' equity be shown
in a financial statement. While SFAS 130 does not require a specific format for
the financial statement, it does require that an amount representing total
comprehensive income be reported and that prior period financial statements be
reclassified for comparative purposes. The Company adopted SFAS 130 effective
January 1, 1998 and plans to include comprehensive income disclosures in its
financial statements for the quarter ended March 31, 1998. Financial statements
will include, as a comprehensive income component, changes in the amount of
unrealized holding gains and losses on securities available for sale. The new
reporting requirement will not impact net income or earnings per share as
currently calculated and presented.
Statement of Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information", effective for fiscal years beginning after
December 15, 1997, supersedes Statement of Financial Accounting Standards No.
14, "Financial Reporting for Segments of a Business Enterprise", and requires
that companies disclose segment data based on how management makes decisions
about allocating resources to segments and measuring their performance. The
Company expects to include the required segment disclosures beginning with its
annual financial statements for the year ending December 31, 1998. Adoption of
the standard will require additional disclosures in the Company's consolidated
financial statements, however, it will not have an effect on consolidated net
income or stockholders' equity.
Regulatory Environment. BNCCORP and its subsidiaries 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, 1997, capital levels
exceed minimum capital requirements (see Note 10).
Reclassifications. Certain amounts in the financial statements for prior years
have been reclassified to conform with the current year's presentation.
47
<PAGE>
Use of Estimates. 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:
The following mergers and acquisitions were consummated during the three years
ended December 31, 1997:
In August 1995, BNC--North Dakota 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 $5.4
million. The purchase was funded with proceeds from the sale of common stock in
BNCCORP's initial public offering (July 1995). The acquisition was accounted for
using the purchase method of accounting. One of the seven branches was sold in
October 1995 along with Farmers & Merchants Bank of Beach ("FMB") (see below).
The resulting premiums paid for deposits of $3.5 million and acquisition costs
of $112,000 are being amortized over 10 and 15 years, respectively.
In October 1995, BNCCORP sold FMB to Community First Bankshares, Inc. BNCCORP
received approximately $3.8 million for its 89.6 percent interest, resulting in
a gain of $316,000. Proceeds of approximately $238,000 were also received by two
minority stockholders of FMB who are also officers and directors of the Company.
As part of the sale, the Company purchased $17.7 million in loans which had been
participated to FMB and $655,000 in previously nonperforming and restructured
loans.
The following pro forma financial information has been prepared assuming the
sale of FMB had been consummated at the beginning of the respective period.
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 year ended December 31, 1995 (in
thousands, except per share data) is as follows:
Total interest income............... $ 14,108
Total interest expense.............. 7,567
Net interest income................. 6,541
Net income.......................... 1,381
==============
Basic earnings per common share..... $ 0.80
==============
Diluted earnings per common share... $ 0.80
==============
In January 1996, BNCCORP was granted a charter for its de novo BNC--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/St. Paul area. The capital injection was funded through proceeds
from the sale of common stock in BNCCORP's initial public offering.
48
<PAGE>
In May 1996, BNCCORP acquired a nonbank commercial finance company, BNC
Financial, St. Cloud, Minnesota, for $85,000. The subsidiary 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, BNC--North Dakota 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. Goodwill of $265,000 resulting from the transaction is
being amortized over 15 years. Employees of the Firm now staff the trust and
private banking division of BNC--North Dakota.
In January 1997, BNC--North Dakota acquired the stock of J.D. Meier Insurance
Agency, Inc., Linton, North Dakota ("J.D. Meier"). Three executive officers of
the Company owned stock in J.D. Meier. The purchase price for the stock was
approximately $34,000.
In August 1997, BNC--North Dakota purchased a management agreement between
Preferred Investment Services, Inc., and Preferred Pension Investors I-87, an
Illinois Partnership (the "Agreement"). An executive officer/director of BNCCORP
owned stock in Preferred Investment Services, Inc. Under the Agreement,
BNC--North Dakota, through its trust and private banking division, will provide
administrative management services for pension assets. The purchase price was
$394,000, or 4.71 percent of total assets under management at the time of
purchase. Goodwill of $394,000 resulting from the transaction is being amortized
over 15 years.
On December 19, 1997, the Company and Lips & Lahr, Inc. ("Lips & Lahr") agreed
in principle that all of the outstanding common stock of Lips & Lahr would be
acquired by the Company in a business combination accounted for as a pooling of
interests. The transaction was finalized on January 1, 1998, and in February
1998, stockholders of Lips & Lahr received 63,406 shares of BNCCORP's common
stock. Operations of Lips & Lahr, which engages in the insurance business, were
merged into J.D. Meier, the wholly owned insurance subsidiary of BNC--North
Dakota, and the name of the combined agency was subsequently changed to BNC
Insurance, Inc. Under the provisions of the agreement and plan of merger related
to the business combination, former stockholders of Lips & Lahr have the right
to receive additional shares of BNCCORP common stock on the first anniversary of
the initial share distribution date based on a formula relating to final
resolution of contingencies pending at the consummation date. Historical
financial information presented in future reports will be restated to include
Lips & Lahr.
The following summarized operating data gives effect to the acquisition had it
occurred on January 1, 1995:
Year ended December 31,
-----------------------------------------
1997 1996 1995
------------ ------------ ------------
(In thousands)
Total revenues:
BNCCORP, Inc. and subsidiaries.... $ 28,984 $ 23,053 $ 17,019
Lips & Lahr....................... 1,682 1,644 1,667
------------ ------------ ------------
$ 30,666 $ 24,697 $ 18,686
============ ============ ============
Net income (loss):
BNCCORP, Inc. and subsidiaries.... $ 1,512 $ 1,847 $ 1,157
Lips & Lahr....................... (802) (15) 85
------------ ------------ ------------
$ 710 $ 1,832 $ 1,242
============ ============ ============
Basic earnings per common share....... $ 0.30 $ 0.78 $ 0.72
============ ============ ============
Diluted earnings per common share..... $ 0.30 $ 0.78 $ 0.72
============ ============ ============
49
<PAGE>
3. Debt and Equity Securities:
Debt and equity securities have been classified in the consolidated balance
sheets according to management's intent. The Company had no securities
designated as trading in its portfolio at December 31, 1997 or 1996.
The amortized cost, gross unrealized gains and losses, and estimated fair market
value of available-for-sale securities were as follows as of December 31 (in
thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- -------- --------- ---------
Available-for-Sale Securities
1997
U.S. Treasury securities............... $ 12,489 $ 43 $ -- $ 12,532
U.S. government agency mortgage-
backed securities.................. 32,136 100 -- 32,236
U.S. government agencies securities.... 20,039 -- (33) 20,006
Collateralized mortgage obligations.... 21,291 34 -- 21,325
State and municipal bonds.............. 1,166 123 -- 1,289
Equity securities...................... 7,236 -- -- 7,236
--------- -------- -------- --------
$ 94,357 $ 300 $ (33) $ 94,624
========= ======== ======== ========
1996
U.S. Treasury securities............... $ 13,814 $ 42 $ -- $ 13,856
U.S. government agency mortgage-
backed securities.................. 9,555 4 -- 9,559
U.S. government agencies securities.... 3,633 13 (4) 3,642
Collateralized mortgage obligations.... 23,898 -- (43) 23,855
State and municipal bonds.............. 759 41 -- 800
Equity securities...................... 7,773 13 (7) 7,779
--------- -------- -------- --------
$ 59,432 $ 113 $ (54) $ 59,491
========= ======== ======== =======
There were no held-to-maturity securities in the Company's investment portfolio
at December 31, 1997 or 1996.
The Company recognized net gains (losses) on sales of securities available for
sale of approximately $8,000, $19,000 and $(18,000) in 1997, 1996 and 1995,
respectively.
50
<PAGE>
The scheduled contractual maturities of securities available for sale (other
than equity securities) at December 31, 1997, were as follows:
Available-for-Sale
Securities
-----------------------------
Estimated
Amortized Market
Cost Value
------------ -------------
Due in one year or less................... $ 14,032 $ 14,022
Due after one year through five years..... 23,500 23,538
Due after five years through ten years.... 11,627 11,785
Due after ten years....................... 37,962 38,043
------------ -------------
Total................................. $ 87,121 $ 87,388
============ =============
Securities, carried at approximately $80.1 and $35.2 million at December 31,
1997 and 1996, respectively, were pledged as collateral for public deposits and
borrowings, including borrowings with the Federal Home Loan Bank ("FHLB").
4. Loans and Leases:
Composition of Loan and Lease Portfolio. The composition of the loan and lease
portfolio was as follows as of December 31 (in thousands):
1997 1996
------------- ------------
Commercial and industrial............. $ 111,429 $ 94,701
Agricultural.......................... 21,064 20,673
Real estate:
Mortgage........................... 56,875 47,451
Construction....................... 18,215 8,806
Consumer.............................. 18,173 18,343
Lease financing....................... 9,211 12,970
Other................................. 553 391
------------ ------------
Total............................. 235,520 203,335
Less:
Allowance for loan losses.......... (3,069) (1,594)
Deferred loan fees and costs....... (320) (338)
------------- ------------
Net loans and leases.......... $ 232,131 $ 201,403
============= ============
Geographic Location and Types of Loans. Loans were to borrowers located in the
following market areas as of December 31 (in thousands):
1997 1996
--------- ---------
North Dakota................... 52% 66%
Minnesota...................... 38 24
Other.......................... 10 10
--------- ---------
Totals................. 100% 100%
========= =========
51
<PAGE>
Commercial loan borrowers are generally small- and mid-sized corporations,
partnerships and sole proprietors in a wide variety of businesses. Loans to
consumers are both secured and unsecured. Real estate 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 the Company
holds real property as collateral. Of the $56.9 and $47.5 million real estate
mortgages as of December 31, 1997 and 1996, respectively, approximately $31 and
$20 million, respectively, 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. Single- and multi-family residential mortgage loans totaling $14.7
and $1.5 million at December 31, 1997 and 1996, respectively, were pledged as
collateral for FHLB borrowings.
The Company's credit policies emphasize diversification of risk among
industries, geographic areas and borrowers. The only concentration of loans
exceeding 10 percent of total loans at December 31, 1997 is construction loans.
Loans within this category are diversified across different types of
contractors, geographically disbursed and secured by many different types of
collateral.
Loans to Officers, Directors, Employees and Other Related Parties. Loan to
officers, directors and employees and to other related parties were as follows
as of December 31 (in thousands):
1997 1996
--------- ---------
Loans to officers, directors and employees..... $ 1,114 $ 806
Loans to other related parties................. 310 259
--------- ---------
Total loans to officers, directors and
employees and other related parties........ $ 1,424 $ 1,065
========= =========
Impaired Loans. As of December 31, the Company's recorded investment in impaired
loans and related valuation allowance were as follows (in thousands):
1997 1996
-------------------- ---------------------
Recorded Valuation Recorded Valuation
Investment Allowance Investment Allowance
---------- --------- ---------- ----------
Impaired loans --
Valuation allowance required.... $ 12,544 $ 762 $ 3,323 $ 171
No valuation allowance required. 116 -- 686 --
---------- --------- ---------- ----------
Total impaired loans........ $ 12,660 $ 762 $ 4,009 $ 171
========== ========= ========== ==========
Impaired loans generally include loans on which management believes, based on
current information and events, it is probable that the Company will not be able
to collect all amounts (i.e., contractual principal and interest) due in
accordance with the terms of the loan agreement and which are analyzed for a
specific reserve allowance. The Company generally considers all loans
risk-graded 6 (Substandard) and 7 (Doubtful) as well as nonaccrual and
restructured loans as impaired loans.
The valuation allowance on impaired loans is included in the allowance for loan
losses noted above.
52
<PAGE>
Interest payments received on impaired loans are recorded as interest income
unless collection of the remaining recorded investment is doubtful at which time
payments received are recorded as reductions of principal. The average recorded
investment in impaired loans and approximate interest income recognized for such
loans were as follows for the years ended December 31 (in thousands):
1997 1996 1995
--------- -------- --------
Average recorded investment in impaired loans... $ 7,308 $ 3,555 $ 2,061
========= ======== ========
Interest income recognized on impaired loans.... $ 747 $ 216 $ 122
========= ======== ========
Average recorded investment in impaired loans
as a percentage of average total loans...... 3.3% 2.1% 1.8%
========= ======== ========
Nonaccrual and Restructured Loans. As of December 31, 1997 and 1996, the Company
had $376,000 and $22,000, respectively, of nonaccrual loans and $104,000 and
$136,000, respectively, of restructured loans (included as impaired loans
above). The following table indicates the effect on income if interest on such
loans outstanding at year-end had been recognized at original contractual rates
during the year ended December 31 (in thousands):
1997 1996 1995
-------- ------- --------
Interest income that would have been recorded... $ 56 $ 18 $ 69
======== ======= ========
Interest income recorded........................ $ 26 $ 6 $ 46
======== ======= ========
Effect on interest income....................... $ 30 $ 12 $ 23
======== ======= ========
As of December 31, 1997, the Company had no commitments to lend additional funds
to borrowers with loans whose terms have been modified in troubled debt
restructurings.
Allowance for Loan Losses. Transactions in the allowance for loan losses were as
follows for the years ended December 31 (in thousands):
1997 1996 1995
-------- --------- --------
Balance, beginning of year...................... $ 1,594 $ 1,048 $ 1,021
Provision for loan losses................... 2,619 739 168
Loans charged off........................... (1,921) (350) (248)
Loans recovered............................. 777 157 207
Allowance attributable to subsidiary sold... -- -- (100)
-------- -------- --------
Balance, end of year............................ $ 3,069 $ 1,594 $ 1,048
======== ======== ========
The increases in the Company's provision for loan losses, loans charged off and
loans recovered for the year ended December 31, 1997 relate primarily to
questionable loan practices by a former loan officer at BNC--North Dakota.
During a routine audit of the subsidiary's loan portfolio, the Company
discovered lending practices conducted in violation of normal Company policy.
After conducting a review of the affected loans, the Company terminated the loan
officer involved and recorded a special $1.9 million provision for loan losses.
Approximately $1.7 million in loans related to the dismissed officer's
activities were charged off during 1997. On July 21, 1997, the Company filed
suit against the terminated loan officer and her husband alleging
misrepresentations, reliance on misrepresentations and breaches of fiduciary
responsibilities and conflicts of
53
<PAGE>
interest and seeking monetary damages against the loan officer and equitable
relief by way of the imposition of a constructive trust against the loan officer
and her husband.
In December 1997, following negotiations with its fidelity bond carrier, the
carrier made a payment of $762,000 to be applied against any covered losses of
the Company. Approximately $690,000 of this payment was credited to the
Company's allowance for loan losses. A final settlement of covered losses with
the fidelity bond carrier has not been reached and negotiations with the carrier
are continuing. While there can be no assurances concerning the amount of final
recovery on the claim, Company management anticipates that final settlement of
the claim will result in an additional payment by the carrier.
5. Premises, Leasehold Improvements and Equipment:
Premises, leasehold improvements and equipment consisted of the following at
December 31 (in thousands):
1997 1996
--------- ----------
Land and improvements..................................... $ 508 $ 508
Buildings and improvements................................ 4,888 3,346
Leasehold improvements.................................... 760 719
Furniture, fixtures and equipment......................... 4,628 3,701
--------- ----------
Total cost............................................ 10,784 8,274
Less accumulated depreciation and amortization............ (2,284) (1,617)
--------- ----------
Net premises, leasehold improvements and equipment.... $ 8,500 $ 6,657
========= ==========
Depreciation and amortization expense on premises, leasehold improvements and
equipment totaled approximately $676,000, $499,000, and $377,000 for the years
ended December 31, 1997, 1996 and 1995, respectively.
6. Deferred Charges and Intangible Assets:
Deferred charges and intangible assets consisted of the following at December 31
(in thousands):
1997 1996
-------- --------
Premiums paid for deposits assumed........................ $ 4,022 $ 4,022
Goodwill.................................................. 1,182 826
Debt offering costs....................................... 161 --
Organization costs and other miscellaneous intangibles.... 477 282
-------- --------
Total costs........................................... 5,842 5,130
Less accumulated amortization ............................ (1,591) (1,051)
-------- --------
Net deferred charges and intangible assets............ $ 4,251 $ 4,079
======== ========
Amortization expense charged to operations was $541,000, $481,000 and $242,000
for the years ended December 31, 1997, 1996 and 1995, respectively.
54
<PAGE>
7. Income Taxes:
The provision for income taxes consists of the following for the years ended
December 31 (in thousands):
1997 1996 1995
--------- ---------- ---------
Current...................................$ 1,411 $ 1,329 $ 589
Deferred income taxes from the following
timing differences:
Provision for loan losses........ (570) (274) (11)
Depreciation..................... 42 87 6
Leases........................... 18 129 128
Other............................ 143 (124) (71)
--------- ---------- ---------
$ 1,044 $ 1,147 $ 641
========= ========= =========
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):
1997 1996 1995
------- ------- -------
Tax at 34% statutory rate........................... $ 869 $ 1,018 $ 611
Increase (decrease) resulting from:.................
State taxes (net of federal benefit)............ 169 131 91
Minority interest in consolidated earnings...... -- -- 19
Benefit of AMT credit carryforwards............. -- -- (42)
Tax-exempt interest............................. (20) (27) (43)
Other, net...................................... 26 25 5
------- -------- ------
$ 1,044 $ 1,147 $ 641
======= ======== ======
Temporary differences between the financial statement carrying amounts and tax
bases of assets and liabilities that result in significant portions of the
Company's deferred tax assets and liabilities are as follows as of December 31
(in thousands):
1997 1996
--------- ---------
Deferred tax asset:
Loans, primarily due to differences in
accounting for loan losses..................... $ 1,207 $ 577
Other............................................. 106 145
-------- --------
Deferred tax asset......................... 1,313 722
-------- --------
Deferred tax liability:
Unrealized gain on securities available for sale.. 97 16
Leases, primarily due to differences in accounting
for leases..................................... 542 524
Premises and equipment, primarily due to
differences in original cost basis and depreciation 493 451
Other.......................................... 83 0
-------- --------
Deferred tax liability................... 1,215 991
-------- --------
Net deferred tax asset (liability)..........$ 98 $ (269)
======== =========
55
<PAGE>
8. Notes Payable:
The Company's notes payable consist of the following as of December 31 (in
thousands):
1997 1996
--------- ---------
BNCCORP:
Notes payable to Firstar Bank Milwaukee, N.A.
("Firstar") including a term note for$3 million
and a revolving line of credit up to $12 million,
interest payable quarterly at either the prime
rate or 90 day LIBOR rate plus 2.00% at BNCCORP's
option (7.88% and 7.50% at December 31, 1997 and
1996, respectively), secured by stock of subsidiary
banks................................................ $7,435 $ 10,000
8 5/8% subordinated notes, due May 31, 2004, interest
payable monthly (plus unamortized discount of $705
at December 31, 1997--effective rate approximately
9.64%), unsecured(see below)......................... 14,295 --
-------- --------
Total BNCCORP............................. 21,730 10,000
Subsidiaries:
Federal funds purchased and U. S. Treasury tax and
loan note option accounts............................. 5,504 1,437
Floating rate advances from FHLB, callable quarterly,
principal due October 1998 and July 1998, interest
payable monthly at the one-month LIBOR rate
minus .16% and .09%(5.81% and 5.88% at December 31,
1997 and 5.59% at December 31, 1996), secured by
mortgage loans and government agency securities...... 25,000 9,000
Fixed rate advances from FHLB, callable quarterly,
principal due July 2000, interest payable
monthly at 5.51% and 5.54%, secured by mortgage
loans and government agency..........................
securities........................................... 15,000 1,000
Other.................................................... 1,081 615
--------- ---------
Total.................................... $ 68,315 $ 22,052
========= =========
There were no notes payable to officers, directors or employees or to other
affiliates at December 31, 1997 and 1996.
In January 1998, BNC--North Dakota borrowed an additional $4.0 million in the
form of fixed rate advances from FHLB. The borrowings, which are callable
quarterly, mature in January 2008 and bear interest, payable monthly, at 4.75
and 4.79 percent.
The Firstar notes were renewed in February 1998 and mature in 1999. Collateral,
interest rates and timing of payments on the notes are as indicated above.
In May 1997, BNCCORP sold $15.0 million of 8 5/8 percent subordinated notes
pursuant to a public offering (the "Subordinated Notes" or "Notes"). The net
proceeds of the offering of $14.3 million were used to repay approximately $9.6
million of indebtedness then outstanding under revolving lines of credit and for
general corporate purposes. BNCCORP has since borrowed additional funds under
its revolving line of credit which remains available as a source of additional
working capital for general corporate purposes, including the funding of loans
at BNC Financial. The Subordinated Notes, which qualify as Tier 2 capital up to
a certain limit under the Federal Reserve Board's risk-based capital guidelines
(69 percent at December 31, 1997), are considered unsecured general obligations
of BNCCORP. They are redeemable, at the option of BNCCORP, at par plus accrued
interest to the date of redemption, beginning on May 31, 2000. Payment of
principal of the Notes may be accelerated only in the case of certain events
relating to bankruptcy, insolvency or reorganization of
56
<PAGE>
BNCCORP. A discount of $750,000 is being amortized to interest expense over the
term of the Notes using the effective interest rate method. Related debt
offering costs of $161,000 have been deferred and are being amortized. See Note
1, "Deferred Charges and Intangible Assets" and Note 6.
BNCCORP's loan agreements and the indenture pursuant to which the Subordinated
Notes were issued contain covenants which, among other matters, restrict or
limit the ability of BNCCORP and its subsidiaries, under certain circumstances,
to pay cash dividends, redeem or repurchase stock or make other capital
distributions, incur indebtedness, allow liens or other encumbrances on property
owned or acquired, or guarantee obligations of others (other than in the
ordinary course of banking business). BNCCORP and its subsidiaries must also
maintain certain ratios regarding capital, nonperforming loans, loan loss
reserve coverage, and other matters. At December 31, 1997 and 1996, BNCCORP and
its subsidiaries were in compliance with all material debt covenants.
The Company manages interest rate risk associated with its borrowings as part of
its overall interest rate risk management program. Accordingly, the Company
entered into an interest rate swap agreement during 1997 which effectively
converted its fixed rate Subordinated Notes into variable-rate borrowings (the
"Swap Agreement"). No premium was paid or received in connection with the Swap
Agreement. Under the Swap Agreement, the Company received a fixed rate of
interest of 6.6650 percent on the notional amount of $15 million and paid a
variable rate based on 3-month LIBOR. The swap was sold on October 30, 1997. The
resulting gain of $372,000 was deferred and is being amortized as a reduction of
interest expense over the remaining life of the original swap contract. At
December 31, 1997, the Company had no outstanding interest rate swaps.
9. Stockholders' Equity:
BNCCORP and its subsidiary banks are subject to certain minimum capital
requirements (see Note 10). 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 in July 1995. The stock split has been retroactively reflected
in the financial statements.
In its initial public offering, BNCCORP sold 1,106,000 shares of common stock
(including 106,000 shares sold pursuant to the underwriters' over allotment
option) at $10.00 per share. Net proceeds from the offering of approximately
$9.7 million were received by BNCCORP. A portion of the proceeds was used in
January 1996 to capitalize BNC--Minnesota and to inject additional capital into
BNC--North Dakota, with 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 16).
Also in connection with its initial public offering, 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, 1997.
In February 1998, 63,406 shares of BNCCORP common stock were issued in
connection with the business combination with Lips & Lahr (see Note 2).
57
<PAGE>
10. 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, 1997, BNCCORP and its banks meet all capital adequacy requirements
to which they are subject.
As of December 31, 1997, the most recent notifications from the Office of the
Comptroller of the Currency ("OCC") categorized BNCCORP's subsidiary banks as
well capitalized under the regulatory framework for prompt corrective action. To
be categorized as well capitalized, the banks must maintain minimum total risk-
based, Tier 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 or than or
equal to equal to
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997
Total Capital (to risk-weighted assets):
Consolidated....................... $ 32,849 12.2 % $ 21,551 8.0 % N/A N/A
BNC--North Dakota................... 21,535 10.8 16,014 8.0 $ 20,017 10.0%
BNC--Minnesota...................... 5,742 10.2 4,482 8.0 5,603 10.0
Tier I Capital (to risk-weighted assets):
Consolidated....................... 19,853 7.4 10,776 4.0 N/A N/A
BNC--North Dakota................... 19,168 9.6 8,007 4.0 12,010 6.0
BNC--Minnesota...................... 5,191 9.3 2,241 4.0 3,362 6.0
Tier I Capital (to average assets):
Consolidated....................... 19,853 5.9 13,380 4.0 N/A N/A
BNC--North Dakota................... 19,168 6.8 11,238 4.0 14,047 5.0
BNC--Minnesota...................... 5,191 9.4 2,200 4.0 2,750 5.0
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--North Dakota................... 19,009 10.4 14,644 8.0 18,306 10.0
BNC--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--North Dakota................... 17,759 9.7 7,322 4.0 10,983 6.0
BNC--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--North Dakota................... 17,759 7.1 10,006 4.0 12,508 5.0
BNC--Minnesota...................... 4,688 12.9 1,453 4.0 1,817 5.0
</TABLE>
58
<PAGE>
11. Fair Value of Financial Instruments:
The estimated fair values of the Company's financial instruments are as follows
as of December 31 (in thousands):
1997 1996
-------------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- --------- --------- ---------
Assets:
Cash, due from banks and federal
funds sold....................$ 15,289 $ 15,289 $ 13,260 $ 13,260
Securities available for sale..... 94,624 94,624 59,491 59,491
Loans, net........................ 232,131 232,329 201,403 200,669
--------- --------- --------- ---------
342,044 $ 342,185 274,154 $ 273,420
========= =========
Other assets...................... 18,077 14,404
--------- ---------
$ 360,121 $ 288,558
========= =========
Liabilities:..........................
Deposits, noninterest-bearing.....$ 25,795 $ 25,795 $ 22,218 $ 22,218
Deposits, interest-bearing........ 237,029 237,493 217,552 217,684
Notes payable..................... 68,315 68,833 22,052 22,060
--------- --------- --------- ---------
331,139 $ 332,121 261,822 $ 261,962
========= =========
Other liabilities................ 4,708 4,101
Stockholders' equity............. 24,274 22,635
--------- ---------
$ 360,121 $ 288,558
========= =========
12. Financial Instruments With Off-Balance-Sheet Risk:
The Company 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 letters of credit. These
instruments involve, to varying degrees, elements of credit risk in excess of
the amount recognized in the consolidated balance sheets. The contract or
notional amounts of these instruments reflect the extent of involvement the
Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party for commitments to extend credit and letters of credit is
represented by the contractual or notional amount of those instruments. The
Company 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):
1997 1996
------------- -------------
Commitments to extend credit.................. $ 52,168 $ 59,553
Letters of credit............................. 1,418 1,048
------------- -------------
$ 53,586 $ 60,601
============= =============
59
<PAGE>
13. Related-Party Transactions:
The Company has entered into transactions with its stockholders, directors,
officers and other affiliates including the accounting firm, insurance agency,
and management agreement purchases discussed in Note 2. In the opinion of
management, such transactions have been fair and reasonable to the Company and
have been entered into under terms and rates substantially the same as those
offered by the Company in the ordinary course of business.
14. 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 15 percent of compensation each year (10 percent prior to 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 percent of
employee deferrals up to a maximum employer contribution of 5 percent of
compensation. The Company made matching contributions of $112,000, $79,000, and
$65,000 in 1997, 1996 and 1995, respectively. Under the investment options
available under the 401(k) plan, employees may elect to invest their salary
deferrals in BNCCORP stock.
15. Commitments and Contingencies:
Employment Agreements. The Company has entered into three-year employment
agreements with its chief executive officer, chief operating officer, executive
vice president and the chief executive officer of BNC--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. The Company has entered into operating lease agreements for certain
facilities and equipment used in its operations. Rent expense for the years
ended December 31, 1997, 1996 and 1995, was $318,000, $331,000, and $100,000,
respectively. Minimum annual base lease payments for operating leases with
remaining terms of greater than one year are as follows:
1998...................... $ 364,205
1999...................... 353,320
2000...................... 335,968
2001...................... 272,891
2002...................... 201,892
Thereafter................ 327,491
Legal Proceedings. The Company has filed suit against a former loan officer at
BNC--North Dakota and her husband. See Note 4, "Loans and Leases--Allowance for
Loan Losses." The Company is currently not a party to any additional material
legal proceedings. Periodically, and in the ordinary course of business, various
claims and lawsuits which are incidental to the Company's business may be
brought against or by the Company, such as claims to enforce liens, condemnation
proceedings on properties in which the Company holds security interests, claims
involving the making and servicing of real property loans and other issues
incidental to the Company's business.
60
<PAGE>
16. Stock-Based Compensation:
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), was adopted by the Company on January 1, 1996. SFAS
123 allows two alternative methods of accounting for employee stock options or
similar instruments. 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.
The Company 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 the Company. 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, the Company may grant employees
incentive stock options, nonqualified stock options, restricted stock, stock
awards or any combination thereof. The Committee establishes the exercise price
of any stock options granted under the Stock Plan provided that the exercise
price may not be less than the fair market value of a share of common stock on
the date of grant. As of December 31, 1997, 20,000 restricted shares and 30,000
options had been awarded under the Stock Plan. The restricted stock vests in 33
1/3 percent increments during 1998, 1999 and 2000. All of the options are
exercisable at a price of $10 per share and vest/vested in 20 percent increments
on January 18, 1996 and July 18, 1996, 1997, 1998 and 1999. The options expire
on July 18, 2005. 2,074 unexercised stock options were forfeited during 1997 and
none of the remaining 27,926 outstanding stock options had been exercised as of
December 31, 1997.
Had compensation cost for the plan been determined consistent with SFAS 123,
BNCCORP's net income and earnings per share would have been reduced to the
following pro forma amounts:
1997 1996
-------------- ---------------
Net Income:
As Reported....................... $ 1,512,000 $ 1,847,000
Pro Forma......................... 1,496,000 1,814,000
Basic EPS:
As Reported....................... 0.65 0.79
Pro Forma......................... 0.63 0.77
Diluted EPS:
As reported....................... 0.64 0.79
Pro Forma......................... 0.63 0.77
61
<PAGE>
A summary of the status of the Stock Plan at December 31, 1997 and 1996 and
changes during the years then ended is presented in the table and narrative
below:
1997 1996
------------------- ----------------------
Options Weighted Options Weighted
to Average to Average
Purchase Exercise Purchase Exercise
Shares Price Shares Price
--------- -------- --------- ----------
Outstanding, beginning of year.... 30,000 $ 10 30,000 $ 10
Forfeited......................... 2,074 10 -- --
--------- -------- --------- ----------
Outstanding, end of year.......... 27,926 $ 10 30,000 $ 10
========= ======== ========= ==========
Exercisable, end of year.......... 16,756 $ 10 $ 12,000 $ 10
========= ======== ========= ==========
Weighted average fair value of
options forfeited............. $ 4.50 $ --
========= ==========
The fair value of option grants is estimated on the date of grant using the
Black-Scholes option pricing model. The following assumptions were used in
calculating the fair value of the stock options granted in 1995: risk-free
interest rate of 6.08 percent; expected dividend yields of 0.0 percent; expected
lives of seven years; and expected volatility of 28.7 percent.
The Company issued 142,200 stock options to its managers and employees in
January 1998. These options are exercisable at a price of $17 per share and vest
in 20 percent increments on January 2, 1999, 2000, 2001, 2002 and 2003. The
options expire on January 2, 2008.
17. Earnings Per Common Share:
The following table shows the amounts used in computing EPS and the effect on
weighted average number of shares of potential dilutive common stock issuances:
Net
Income Shares Per-Share
Numerator) (Denominator) Amount
----------- ---------- ----------
1997
Basic earnings per share:
Income available to common stockholders...... $ 1,512,000 2,338,720 $ 0.65
=========
Effect of dilutive shares
Options.................................. 5,831
Warrants................................. 4,791
---------
Diluted earnings per share:
Income available to common stockholders...... $ 1,512,000 2,349,342 $ 0.64
=========== ========= =========
62
<PAGE>
Net
Income Shares Per-Share
(Numerator)(Denominator) Amount
----------- --------- -----------
1996
Basic earnings per share:
Income available to common stockholders...... $ 1,847,000 2,338,720 $ 0.79
==========
Effect of dilutive shares
Options.................................. 1,027
Warrants................................. --
----------
Diluted earnings per share:
Income available to common stockholders...... $ 1,847,000 2,339,747 $ 0.79
=========== ========== ==========
1995
Basic earnings per share:
Income available to common stockholders...... $ 1,157,000 1,720,030 $ 0.67
==========
Effect of dilutive shares
Options.................................. 426
Warrants................................. --
---------
Diluted earnings per share:
Income available to common stockholders...... $ 1,157,000 1,720,456 $ 0.67
=========== ========= ==========
Warrants to purchase 50,000 shares of common stock at $12 per share were
outstanding during 1996 and the second half of 1995 but were not included in the
computation of diluted EPS for those periods because the exercise price of the
warrants was greater than the average market price of the common shares for the
period. The warrants, which expire on July 18, 2000, were included in the
computation of diluted EPS for 1997 and were still outstanding at the end of
1997 (see Note 9).
The following transactions occurred after December 31, 1997, which, had they
taken place during fiscal 1997, would have changed the number of shares used in
the EPS computations: (1) 63,406 shares of BNCCORP common stock were issued in
the business combination of BNCCORP and Lips & Lahr (see Note 2); (2) options to
purchase 142,200 shares of common stock were issued to Company managers and
employees under BNCCORP's Stock Incentive Plan (see Note 16); and (3) 1,377
shares of nonvested restricted stock were retired due to termination of
employment of the awardee.
Earnings per share amounts for the years 1996 and 1995 have been restated to
give effect to the application of SFAS 128 which was adopted by the Company
during the fourth quarter of 1997. Because of the number of common stock
equivalents outstanding and the average market prices of the common shares for
those periods, however, basic and diluted EPS under SFAS 128 are equal to
primary and fully diluted EPS as previously reported.
63
<PAGE>
18. Condensed Financial Information--Parent Company Only:
Condensed financial information of BNCCORP on a parent company only basis is as
follows:
Parent Company Only
Condensed Balance Sheets
As of December 31
(In thousands, except share and per share data)
1997 1996
----------- ---------
Assets:
Cash and short-term investments...................... $ 1,068 $ 257
Investment in subsidiaries........................... 29,973 27,241
Loans................................................ 499 545
Receivable from subsidiaries......................... 14,248 4,265
Deferred changes and intangible assets, net.......... 407 232
Other................................................ 699 574
---------- ---------
$ 46,894 $ 33,114
========== =========
Liabilities and stockholders' equity:
Notes payable........................................ $ 21,979 $ 10,249
Accrued expenses and other liabilities............... 641 185
---------- ---------
22,620 10,434
---------- ---------
Preferred stock, $.01 par value, 2,000,000 shares
authorized; no shares issued or outstanding...... -- --
Common stock, $.01 par value, 10,000,000 shares
authorized; 2,364,100 shares issued, 2,338,720
shares outstanding............................... 23 23
Capital surplus...................................... 13,768 13,768
Retained earnings.................................... 10,529 9,062
Treasury stock (25,380 shares)....................... (216) (216)
Unrealized holding gain on securities available
for sale........................................... 170 43
---------- ---------
24,274 22,680
---------- ---------
$ 46,894 $ 33,114
========== =========
64
<PAGE>
Parent Company Only
Condensed Statements of Income
For the Years Ended December 31
(In thousands)
1997 1996 1995
--------- ------- --------
Income:
Management fee income........................$ 965 $ 927 $ 606
Interest..................................... 847 210 134
Other........................................ 9 138 319
--------- ------- -------
Total income............................. 1,821 1,275 1,059
--------- ------- -------
Expenses:
Interest..................................... 1,348 546 336
Personnel expense............................ 849 965 987
Legal and other professional................. 103 155 103
Depreciation and amortization................ 58 49 63
Other........................................ 370 367 300
--------- ------- -------
Total expenses........................... 2,728 2,082 1,789
--------- ------- -------
Loss before income tax benefit and equity in
undistributed income of subsidiaries......... (907) (807) (730)
Income tax benefit............................... 282 281 258
--------- ------- -------
Loss before equity in undistributed income of
subsidiaries.................................. (625) (526) (472)
Equity in undistributed income of subsidiaries... 2,092 2,418 1,629
--------- ------- --------
Net income...............................$ 1,467 $ 1,892 $ 1,157
========= ======= ========
65
<PAGE>
Parent Company Only
Condensed Statements of Cash Flows
For the Years Ended December 31
(In thousands)
1997 1996 1995
-------- ------- -------
Cash flows from operating activities:
Net income.......................................$ 1,467 $ 1,892 $ 1,157
Adjustments to reconcile net income to net
cash used in operating activities --
Gain on sale of subsidiary.................... -- -- (316)
Depreciation and amortization................. 20 25 27
Amortization of intangible assets............. 28 24 36
Equity in undistributed income of
subsidiaries............................... (2,092) (2,418) (1,629)
Change in prepaid expenses and other
receivables................................(10,174) (3,816) (168)
Change in accrued expenses and other
liabilities................................ 456 (71) (228)
Other......................................... 63 (391) (142)
------- ------- ------
Net cash used in operating activities......(10,232) (4,755) (1,263)
------- ------- ------
Cash flows from investing activities:
Net increase (decrease) in loans.................. (46) 1 (546)
Increase in investment in subsidiaries ........... (640) (8,700) (6,796)
Sale of investment in subsidiary.................. -- -- 3,811
Sale (purchases) of premises, leasehold
improvements and equipment.................... (12) 50 (108)
Dividends received................................ -- 700 1,309
------- ------ ------
Net cash used in investing activities...... (698) (7,949) (2,330)
------- ------ ------
Cash flows from financing activities:
Repayments of long-term borrowings................(21,190) (1,004) (716)
Proceeds from long-term borrowings................ 32,875 7,899 500
Amortization of discount on subordinated notes.... 46 -- --
Amortization of deferred charges.................. 10 -- --
(Costs) proceeds from issuance of stock........... -- (8) 9,717
------- ------ -----
Net cash provided by financing activities.. 11,741 6,887 9,501
------- ------ -----
Net increase (decrease) in cash and cash equivalents.. 811 (5,817) 5,908
Cash and cash equivalents, beginning of year.......... 257 6,074 166
------- ------ -----
Cash and cash equivalents, end of year................$ 1,068 $ 257 $ 6,074
======= ====== ======
Supplemental cash flow information:
Interest paid.....................................$ 1,262 $ 524 $ 338
======= ====== ======
Income tax payments received from subsidiary
banks, net of income taxes paid...............$ 322 $ 441 $ 16
======= ====== =======
66
<PAGE>
Item 8. Changes in and Disagreements with Accountants 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 1998 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 1998 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 1998 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 1998 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,
1997.
67
<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 25, 1998.
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 25, 1998.
Chairman of the Board, Chief Executive Officer and
/s/ Tracy Scott Director
- ---------------------------- (Principal Executive Officer)
President, Chief Operating 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
- ----------------------------
68
<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
Bankshares, 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, incorporated by
reference to Exhibit 2.5 to the Registrant's Form 10-KSB dated as of
March 26, 1997.
2.6 Stock Purchase Agreement dated February 26, 1997 by and between BNC
National Bank and Shareholders of J.D. Meier Insurance Agency,
incorporated by reference to Exhibit 2.6 to the Registrant's Form
10-KSB dated as of March 26, 1997.
2.7 Amended and Restated Agreement and Plan of Merger dated December 19,
1997 among BNCCORP, Inc., J.D. Meier Insurance Agency, Inc. and Lips
& Lahr, Inc., William Wade, Dale Ely, Laif Olson, Richard Lahr and
David Clausnitzer.
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).
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.
E - 1
<PAGE>
Exhibit
No. Exhibit Description
========== =====================================================================
4.3 Form of Indenture by and between BNCCORP, Inc. and Firstar Trust
Company, as Trustee, incorporated by reference to Exhibit 4.1 to the
Registrant's Registration Statement on Form SB-2 (Registration No.
333-26703).
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) as amended by Amendment dated
June 1, 1996.
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, 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.
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.,
incorporated by reference to Exhibit 10.8 to the Registrant's Form
10-KSB dated as of March 26, 1997.
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., incorporated by reference to Exhibit 10.9 to the
Registrant's Form 10-KSB dated March 26, 1997.
E - 2
<PAGE>
Exhibit
No. Exhibit Description
========== =====================================================================
10.10 Revolving Credit Agreement dated September 27, 1996 by and between
BNC Financial Corporation and Bank Windsor, incorporated by reference
to Exhibit 10.10 to the Registrant's Form 10-KSB dated March 26,
1997.
10.11 Second Amendment to Term Loan Agreement and Term Note dated July 16,
1997 by and between Firstar Bank Milwaukee, N.A. and BNCCORP, Inc.,
incorporated by reference to Exhibit 10.11 to the Registrant's Form
10-QSB dated August 13, 1997.
10.12 Second Amendment to Revolving Credit Agreement and Revolving Credit
Note dated July 16, 1997 by and between Firstar Bank Milwaukee, N.A.
and BNCCORP, Inc., incorporated by reference to Exhibit 10.12 to the
Registrant's Form 10-QSB dated August 13, 1997.
10.13 Third Amendment to Term Loan Agreement and Term Note dated February
19,1998 by and between Firstar Bank Milwaukee, N.A. and BNCCORP, Inc.
10.14 Third Amendment to Revolving Credit Agreement and Revolving Credit
Note dated February 19, 1998 by and between Firstar Bank Milwaukee,
N.A. and BNCCORP, Inc.
10.15 Form of Stock Option Agreement for the Grant of Incentive Stock
Options Under the BNCCORP, Inc. 1995 Stock Incentive Plan dated as of
January 2, 1998.
10.16 Contract of Sale dated as of August 29, 1997, by and between BNC
National Bank and Preferred Investment Services, Inc.
10.17 Assignment Agreement dated as of August 29, 1997, by and between
Preferred Investment Services, Inc. and BNC National Bank.
21 Subsidiaries of Company.
23.1 Consent of Arthur Andersen LLP
27 Financial Data Schedule
E - 3
Exhibit 2.7
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
Among
BNCCORP, INC.
J.D. MEIER INSURANCE COMPANY
and
LIPS & LAHR, INC.
WILLIAM WADE
DALE ELY
LAIF OLSON
RICHARD LAHR
DAVID CLAUSNITZER
Dated as of December 19, 1997
COR\60713.4
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE 1 - THE MERGER; THE SURVIVING CORPORATION............................1
Section 1.1 The Merger.................................................1
Section 1.2 The Effective Time of the Merger...........................1
Section 1.3 The Surviving Corporation..................................2
Section 1.4 The Closing................................................2
ARTICLE 2 - CONVERSION OF SHARES.............................................2
Section 2.1 Conversion of Shares.......................................2
Section 2.2 Delivery of Certificates...................................3
Section 2.3 Distributions with Respect to Unsurrendered Certificates...3
Section 2.4 No Further Rights in L&L Common Stock......................3
Section 2.5 No Fractional Shares.......................................3
Section 2.6 Further Assurances.........................................3
Section 2.7 Stock Transfer Books.......................................4
ARTICLE 3 - REPRESENTATIONS AND WARRANTIES
OF L&L AND THE STOCKHOLDERS............................................4
Section 3.1 Investment Representation..................................4
Section 3.2 Organization; Qualification................................5
Section 3.3 Capital Stock; Subsidiaries................................6
Section 3.4 Corporate Authorization; Enforceability....................6
Section 3.5 No Conflict................................................7
Section 3.6 Consent....................................................7
Section 3.7 L&L Financial Statements; Undisclosed Liabilities..........7
Section 3.8 Accounts Receivable........................................7
Section 3.9 Absence of Certain Changes.................................8
Section 3.10Material Contracts.........................................8
Section 3.11Real Property..............................................8
Section 3.12Real Property Leases.......................................9
Section 3.13Personal Property..........................................9
Section 3.14Compliance with Laws......................................10
Section 3.15Permits...................................................10
Section 3.16Litigation................................................10
Section 3.17Environmental Compliance..................................11
Section 3.18ERISA and Related Matters.................................11
Section 3.19Taxes.....................................................13
Section 3.20Customers.................................................15
Section 3.21Insurance.................................................16
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Section 3.22Safety and Health.........................................16
Section 3.23Labor Matters.............................................16
Section 3.24Transactions with Certain Persons.........................17
Section 3.25Propriety of Past Payments................................17
Section 3.26Intellectual Property.....................................17
Section 3.27Bank Accounts; Powers of Attorney.........................18
Section 3.28Director and Officer Indemnification......................18
Section 3.29Brokers' and Finders' Fee.................................18
Section 3.30Documents and Written Materials...........................18
Section 3.31Effectiveness of Representations and Warranties...........18
ARTICLE 4 - REPRESENTATIONS AND WARRANTIES OF
BNC AND J.D. MEIER ..................................................18
Section 4.1 Organization..............................................18
Section 4.2 Capital Stock: ....................................18
Section 4.3 Authority; Enforceability.................................19
Section 4.4 No Conflicts..............................................19
Section 4.5 Consent...................................................19
Section 4.6 Brokers' and Finders' Fee.................................20
Section 4.7 Effectiveness of Representations and Warranties...........20
ARTICLE 5 - PRE-CLOSING COVENANTS...........................................20
Section 5.1 Legal Requirements........................................20
Section 5.2 Access to Properties and Records..........................20
Section 5.3 Conduct of Business By Both Parties Prior to
the Closing Date ......................................20
Section 5.4 Conduct of Business By L&L Prior to the Closing Date......21
Section 5.5 Public Statements.........................................23
Section 5.6 No Solicitation...........................................23
Section 5.7 Update Information........................................23
Section 5.8 Consultation and Reporting................................23
ARTICLE 6 - CLOSING CONDITIONS..............................................24
Section 6.1 Conditions Applicable to all Parties......................24
Section 6.2 Conditions to Obligations of BNC and J.D. Meier .........24
Section 6.3 Conditions to Obligations of L&L and the Stockholders.....25
ARTICLE 7 - TERMINATION AND AMENDMENT.......................................26
Section 7.1 Termination...............................................26
Section 7.2 Effect of Termination.....................................26
Section 7.3 Extension; Waiver.........................................26
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ARTICLE 8 - INDEMNIFICATION; REMEDIES.......................................26
Section 8.1 Indemnification by Stockholders...........................26
Section 8.2 Indemnification by BNC....................................27
Section 8.3 Notice and Defense of Third Party Claims..................27
Section 8.4 Survival of Representations and Warranties................28
ARTICLE 9 - DEFINED TERMS...................................................28
Section 9.1 Definitions...............................................28
ARTICLE 10 - MISCELLANEOUS..................................................32
Section 10.1Confidentiality...........................................32
Section 10.2Remedies..................................................32
Section 10.3Notices...................................................33
Section 10.4Interpretation; Schedules.................................33
Section 10.5Headings; Gender..........................................33
Section 10.6Entire Agreement; No Third Party Beneficiaries............34
Section 10.7Governing Law.............................................34
Section 10.8Assignment................................................34
Section 10.9Severability..............................................34
Section 10.10Counterparts.............................................34
Section 10.11Amendment................................................34
LIST OF EXHIBITS
A - Merger Consideration
B - Form of Articles of Merger
C - Form of Employment Agreement
D - Disclosure Schedule of L&L and the Stockholders
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AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
This AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER, dated as of
December 19, 1997 (this "Agreement"), is by and among BNCCORP, Inc., a Delaware
corporation ("BNC"), and its wholly-owned subsidiary, J.D. Meier Insurance
Company, a North Dakota corporation ("J.D. Meier"), on the one hand, and Lips &
Lahr, Inc., a North Dakota corporation ("L&L"), and William Wade, Dale Ely, Laif
Olson, Richard Lahr and David Clausnitzer (collectively, the "Stockholders"), on
the other.
W I T N E S S E T H:
WHEREAS, on October 29, 1997, the parties hereto executed that certain
Agreement and Plan of Merger pursuant to which L&L was to be merged with and
into J.D. Meier;
WHEREAS, the parties hereto desire to amend the Agreement and Plan of
Merger and, as amended, to restate it in its entirety;
WHEREAS, it is the parties' mutual intent that the Merger constitute a
reorganization under Section 368 of the Code and that this Agreement constitute
a plan of reorganization thereunder;
WHEREAS, it is the parties mutual intent that the goodwill of L&L be and
will be acquired by J.D. Meier and BNC pursuant to and upon consummation of the
Merger; and
WHEREAS, the parties hereto desire to set forth herein certain
representations, warranties and covenants made by each to the other as an
inducement to the consummation of the Merger.
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements herein contained, the parties hereto agree as follows:
ARTICLE 1
THE MERGER; THE SURVIVING CORPORATION
Section 1.1 The Merger. Upon the terms and subject to the conditions
hereof and in accordance with Section 10-19.1-96 of the NBCA, at the Closing,
L&L shall be merged with and into J.D. Meier pursuant to the Articles of Merger.
As a result, the separate existence of L&L shall thereupon cease and J.D. Meier
shall be the surviving corporation (the "Surviving Corporation") of the Merger
with the effects set forth in Section 10-19.1-102 of the NBCA.
Section 1.2 The Effective Time of the Merger. The Merger shall become
effective when the properly executed Articles of Merger are filed with the
Secretary of State of North Dakota, which filing shall be made as soon as
practicable after the satisfaction or, to the extent permitted hereunder, waiver
of all of the conditions to each party's obligation to consummate the Merger
contained in Article 6. When used in this Agreement, the term "Effective Time"
shall mean the date and time at which the Merger is consummated.
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Section 1.3 The Surviving Corporation.
(a) Following the Merger, J.D. Meier shall be the Surviving
Corporation and shall be a wholly-owned subsidiary of BNC.
(b) The Articles of Incorporation and By-laws of the J.D. Meier in
effect at the Effective Time shall be the Articles of Incorporation and By-laws
of the Surviving Corporation.
(c) The directors of J.D. Meier at the Effective Time shall be the
initial directors of the Surviving Corporation and shall hold office from the
Effective Time until their respective successors are duly elected or appointed
and qualified in the manner provided in the Articles of Incorporation and
By-laws of the Surviving Corporation or as otherwise provided by Applicable Law.
(d) The officers of J.D. Meier at the Effective Time shall be the
initial officers of the Surviving Corporation and shall hold office from the
Effective Time until their respective successors are duly elected or appointed
and qualified in the manner provided in the Articles of Incorporation and
By-laws of the Surviving Corporation or as otherwise provided by Applicable Law.
Section 1.4 The Closing. Unless this Agreement shall have been terminated
pursuant to the provisions hereof, and subject to satisfaction or waiver of the
conditions specified in Article 6 hereof, the Closing shall take place
immediately prior to the filing of the Articles of Merger at the offices of BNC
in Bismarck, North Dakota (or such other place as the parties may agree),
commencing at 10:00 a.m., local time, on the Closing Date.
ARTICLE 2
CONVERSION OF SHARES
Section 2.1 Conversion of Shares. (a) At the Effective Time, by virtue of
the Merger and without any further action on the part of BNC, J.D. Meier, L&L or
the Surviving Corporation, or any holder of the following securities:
(i) each issued share of L&L Common Stock that is held in treasury
by L&L or held by any subsidiary of L&L shall be cancelled and no stock of BNC
or other consideration shall be delivered in exchange therefrom;
(ii) each share of L&L Common Stock, issued and outstanding at the
Effective Time shall be converted into (A) the right to receive the number of
shares of BNC Common Stock calculated in accordance with the procedures set
forth on Exhibit "A" attached hereto (the "Primary Shares") and (B) the right to
receive an additional number of shares of BNC Common Stock to be determined in
accordance with the procedures set forth on Exhibit "A-1" attached hereto (the
"Additional Shares," and together with the Primary Shares, the "Merger
Consideration").
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(b) Upon conversion of the shares of L&L Common Stock into the Merger
Consideration in the manner described in Section 2.1(a)(ii) above, each record
holder of issued and outstanding L&L Common Stock immediately prior to the
Effective Time shall have the right to receive, in accordance with Section 2.2
hereof, certificates representing such whole number of shares of BNC Common
Stock calculated in accordance with Section 2.1(a)(ii).
Section 2.2 Delivery of Certificates. Following the Effective Time, the
holders of L&L Common Stock shall deliver to BNC all certificates formerly
representing shares of L&L Common Stock. Provided such certificates have been
delivered to BNC, upon the preparation and delivery (the "Primary Share Delivery
Date"), to BNC of the balance sheet and related statements of operations,
stockholders' equity and cash flow and the related notes thereto of L&L as of
and for the fiscal year ended December 31, 1997 BNC shall deliver to or as
directed by each such former stockholder a certificate representing the number
of Primary Shares of BNC Common Stock specified in Section 2.1(a)(ii)(A) and a
check for any amount due to such Stockholder pursuant to Section 2.5. Until so
delivered, each certificate which, before the Effective Time, represented shares
of L&L Common Stock shall be deemed for all purposes to represent the
consideration into which the shares of L&L Common Stock theretofore represented
thereby shall have been converted. On the first anniversary of the Primary Share
Delivery Date, BNC shall deliver to or as directed by each such former
shareholder a certificate representing the number of Additional Shares of BNC
Common Stock specified in Section 2.1(a)(ii)(B) and a check for any amount due
to such Stockholder pursuant to Section 2.5.
Section 2.3 Distributions with Respect to Unsurrendered Certificates. No
dividends or other distributions declared or made after the Effective Time with
respect to BNC Common Stock with a record date after the Effective Time shall be
paid to the holder of any unsurrendered certificate formerly representing L&L
Common Stock with respect to the shares of BNC Common Stock the holder thereof
is entitled to receive upon surrender thereof, and no cash payment in lieu of
any fractional shares shall be paid to any such holder pursuant to Section 2.5
until the holder of such certificate shall surrender such certificate.
Section 2.4 No Further Rights in L&L Common Stock. All shares of BNC
Common Stock issued or cash paid upon conversion of the shares of L&L Common
Stock in accordance with the terms hereof (including any cash paid pursuant to
Section 2.5) shall be deemed to have been issued in full satisfaction of all
rights pertaining thereto.
Section 2.5 No Fractional Shares. No certificates or scrip representing
fractional shares of BNC Common Stock shall be issued pursuant to Section 2.2,
and such fractional share interests will not entitle the owner thereof to vote
or to any other rights of a stockholder of BNC. Each holder of a fractional
share interest shall be paid an amount calculated in accordance with the
procedures specified on Exhibits "A" and "A-1" attached hereto. As promptly as
practicable after the determination of the amount of cash, if any, to be paid to
holders of fractional share interests, BNC shall forward payments to such
holders of fractional share interests subject to and in accordance with the
terms of this Section 2.
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Section 2.6 Further Assurances. (a) At the Effective Time, the Surviving
Corporation shall assume those certain Employment Agreements dated January 22,
1996 between L&L and each of Gary E. Lahr and Bradley Charnholm (the "Lahr and
Charnholm Agreements"), and BNC shall issue to each of such employees a
guarantee of the Surviving Corporation's obligations under each such Employment
Agreement.
(b) If, at any time after the Effective Time, the Surviving Corporation
shall consider or be advised that any deeds, bills of sale, assignments,
assurances or any other actions or things are necessary or desirable to vest,
perfect or confirm of record or otherwise in the Surviving Corporation its
right, title or interest in, to or under any of the rights, properties or assets
of L&L acquired by the Surviving Corporation as a result of, or in connection
with, the Merger or otherwise to carry out this Agreement, the officers of the
Surviving Corporation shall be authorized to execute and deliver, in the name
and on behalf of L&L or otherwise, all such deeds, bills of sale, assignments
and assurances and to take and do, in such names and on such behalves or
otherwise, all such other actions and things as may be necessary or desirable to
vest, perfect or confirm any and all right, title and interest in, to and under
such rights, properties or assets in the Surviving Corporation or otherwise to
carry out the purposes of this Agreement.
Section 2.7 Stock Transfer Books. At the Effective Time, the stock
transfer books of L&L shall be closed and there shall be no further registration
of transfers of shares of L&L Common Stock thereafter on the records of L&L.
From and after the Effective Time, the holders of certificates representing
shares of L&L Common Stock shall cease to have any rights with respect to any
such shares, except as otherwise provided herein or by law.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
OF L&L AND THE STOCKHOLDERS
The Stockholders severally represent to BNC and J.D. Meier as to Section
3.1 and L&L and the Stockholders, jointly and severally, represent and warrant
to BNC and J.D. Meier as to Sections 3.2 through 3.30 that, except as set forth
in the Disclosure Schedule:
Section 3.1 Investment Representation.
(a) Stockholder is acquiring BNC Common Stock for investment for his
own account and not with a view to, or for sale or other disposition in
connection with, any distribution of all or any part thereof except (i) in an
offering covered by a registration statement filed with the Securities and
Exchange Commission under the Securities Act covering BNC Common Stock acquired
by Stockholder or (ii) pursuant to an applicable exemption under the Securities
Act. In receiving BNC Common Stock, Stockholder is not offering or selling, and
will not offer and sell, for BNC in connection with any distribution of such BNC
Common Stock, and Stockholder does not have any contract, undertaking, agreement
or arrangement with any person for the distribution of BNC Common Stock and will
not participate in any undertaking or in any underwriting of such an undertaking
except in compliance with Applicable Law.
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(b) Stockholder represents that he is an "accredited investor" as
that term is defined in Regulation D under the Securities Act and that he is
able to fend for himself and can bear the economic risk of his investment in the
BNC Common Stock.
(c) Stockholder has such knowledge and experience in financial and
business matters that he is capable of evaluating the merits and risks of an
investment in BNC Common Stock.
(d) Stockholder has also been afforded access to information about
BNC and BNC's financial position, results of operation, business, property and
management sufficient to enable him to evaluate an investment in BNC Common
Stock, and has had the opportunity to ask questions of and has received
satisfactory answers from BNC concerning the foregoing matters.
(e) Stockholder understands that the BNC Common Stock acquired
pursuant hereto has not been registered under the Securities Act on the basis
that the sale provided for in this Agreement and the issuance of BNC's Common
Stock hereunder is exempt from registration under the Securities Act, and that
BNC's reliance on such exemption is based, in part, upon Stockholder's
representations set forth herein.
(f) Stockholder understands that the shares of BNC Common Stock will
not be registered under the Securities Act, that such shares will be "restricted
securities" as that term is defined in Rule 144 promulgated by the Securities
and Exchange Commission under the Securities Act, and that Stockholder cannot
transfer such shares unless they are subsequently registered under the
Securities Act and under any applicable state securities law or are transferred
in a transfer that, in the opinion of counsel satisfactory to BNC, is exempt
from such registration. Stockholder further understands that BNC will, as a
condition to the transfer of any such shares, require that the request for
transfer be accompanied by an opinion of counsel, in form and substance
satisfactory to BNC, to the effect that the proposed transfer does not result in
a violation of the Securities Act or any applicable state securities law, unless
such transfer is covered by an effective registration statement. Stockholder
understands that such shares of BNC Common Stock may not be sold publicly in
reliance on the exemption from registration under the Securities Act afforded by
Rule 144 unless and until the minimum holding period (currently one year) and
other requirements of Rule 144 have been satisfied.
(g) Stockholder understands and agrees that all certificates
evidencing the shares of BNC Common Stock issued hereunder will bear restrictive
legends in substantially the following form:
The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended (the
"Act"), or any applicable state law, and may not be
transferred without registration under the Act and any such
state law or an opinion of counsel satisfactory to the
corporation that registration is not required.
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Section 3.2 Organization; Qualification. L&L is a corporation duly
organized, validly existing and in good standing under the laws of North Dakota
and has the requisite corporate power and authority to own its property and to
carry on its business as it is now being conducted. No actions or proceedings to
dissolve L&L are pending. Section 3.2 of the Disclosure Schedule sets forth the
jurisdictions in which L&L is qualified to do business as a foreign corporation.
Copies of the articles of incorporation and by-laws of L&L, with all amendments
to the date hereof, have been furnished to BNC or its representatives, and such
copies are accurate and complete as of the date hereof. L&L has made available
to BNC accurate and complete copies of the minutes of all meetings of its board
of directors, any committees of the board and stockholders (and all consents in
lieu of such meetings). Such records, minutes and consents accurately reflect
all actions taken by its board of directors, committees and stockholders. L&L is
not in violation of any provision of its articles of incorporation or by-laws.
Section 3.3 Capital Stock; Subsidiaries. (a) The authorized capital stock
of L&L consists of 10,000 shares of capital stock, of which 1,776.18 shares of
L&L Common Stock are issued and outstanding and 3,223.82 shares of L&L Common
Stock are held in its treasury, and no shares of preferred stock, $.10 par value
per share, have been issued. All issued and outstanding shares of L&L Common
Stock have been duly authorized and are validly issued, fully paid and
non-assessable. All outstanding L&L Common Stock are held of record and
beneficially by the Persons set forth in Section 3.3 of the Disclosure Schedule
in the amounts set forth opposite their respective names.
(b) There are no outstanding stock options or other rights to
acquire any shares of the capital stock of L&L or any security convertible into
L&L Common Stock and L&L has no obligation or other commitment to issue, sell or
deliver any of the foregoing or any other shares of its capital stock. All
shares of L&L Common Stock have been issued in compliance with all legal
requirements and without violation of any pre-emptive or similar rights.
(c) L&L owns, directly or indirectly, no interest in any Person.
Section 3.4 Corporate Authorization; Enforceability.
(a) The execution, delivery and performance of this Agreement has
been duly authorized by the board of directors of L&L and all of the holders of
L&L Common Stock entitled to vote or consent to the transactions contemplated by
this Agreement. To the extent applicable, the execution and delivery of this
Agreement and its obligations hereunder has been duly authorized by all
necessary corporate action of L&L and no further vote or consent of stockholders
or directors of L&L and no further corporate acts or other corporate proceedings
are required of L&L for the due and valid authorization, execution, delivery and
performance of this Agreement or the consummation of the Merger.
(b) This Agreement constitutes the legal, valid and binding
obligation of L&L enforceable against L&L in accordance with its terms, except
that enforcement may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium and other similar laws affecting
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creditors' rights generally and equitable principles which may limit the
availability of certain equitable remedies in certain instances.
(c) The Employment Agreements, when executed by the respective
Stockholders in accordance with the terms hereof, will be the legal, valid and
binding obligation of the Stockholders enforceable against each of them in
accordance with their terms, except that enforcement may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium and other similar
laws affecting creditors' rights generally and equitable principles which may
limit the availability of certain equitable remedies in certain instances.
Section 3.5 No Conflict. Neither the execution and the delivery of this
Agreement or the Employment Agreements by L&L or the Stockholders, as the case
may be, nor the consummation of the transactions contemplated hereby or thereby,
nor compliance with any of the terms hereof or thereof, do or will (a) conflict
with or result in any breach of the provisions of the articles of incorporation
or by-laws of L&L, (b) result in the violation or breach of, or constitute (with
or without due notice or the lapse of time or both) a default (or give rise to
any right of termination, cancellation or acceleration) under, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, or any material
license, contract, agreement or other instrument or obligation to which any of
L&L or the Stockholders is a party or by which any of them or their respective
properties or assets may be bound, or (c) violate any order, writ, injunction,
decree, statute, rule or regulation applicable to any of L&L or the Stockholders
or any of their respective properties or assets.
Section 3.6 Consent. Section 3.6 of the Disclosure Schedule sets forth a
true and complete list of each consent, approval, order or authorization of, or
declaration, filing or registration with, any Governmental Entity or other
Person that is required to be obtained or made by L&L or the Stockholders in
connection with the execution, delivery or performance by L&L or the
Stockholders of this Agreement or the consummation by L&L or the Stockholders of
the transactions contemplated hereby.
Section 3.7 L&L Financial Statements; Undisclosed Liabilities.
(a) The L&L Annual Financial Statements have been prepared in
accordance with generally accepted accounting principles and present fairly the
financial position of L&L at such dates and the results of operations and cash
flows for the periods then ended.
(b) The L&L Interim Financial Statements have been prepared in
accordance with generally accepted accounting standards on a basis consistent
with the prior periods and reflect all adjustments, consisting only of normal
recurring adjustments, that are necessary for a fair statement of the results
for the interim period presented therein. Except as disclosed in Section 3.7 of
the Disclosure Schedule, neither L&L nor any of its assets are subject to any
liability, commitment, debt or obligation which would be required to be
disclosed in financial statements prepared in accordance with generally accepted
accounting principles, except (i) as and to the extent reflected on the L&L
Interim Financial Statements, or (ii) as may have been incurred or may have
arisen since the date of
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the L&L Interim Financial Statements in the ordinary course of business and that
are permitted by this Agreement.
Section 3.8 Accounts Receivable. All of the accounts receivable reflected
on the L&L Interim Financial Statements or created thereafter have arisen only
from bona fide transactions in the ordinary course of business, represent valid
obligations owing to L&L and have been accrued in accordance with generally
accepted accounting principles. Section 3.8 of the Disclosure Schedule sets
forth a summary listing of all accounts receivable of L&L as of the date
specified therein and reflects receivables aged less than 90 days from the date
of invoice as a group and sets forth all receivables aged more than 90 days
individually by customer, invoice and amount.
Section 3.9 Absence of Certain Changes.
(a) Since June 30, 1997, L&L has operated in the ordinary course of
business consistent with past practice and there has been no event or condition
of any character that has had, or can reasonably be expected to have, a Material
Adverse Effect.
(b) Since June 30, 1997, L&L has not, except as set forth on
Schedule 3.9 of the Disclosure Schedule, taken any actions of a type referred to
in Sections 5.3 and 5.4 that would have required the consent of BNC if such
action were to have been taken during the period between the date hereof and the
Closing Date.
Section 3.10Material Contracts. (a) Section 3.10 of the Disclosure
Schedule contains a list and brief description (including the names of the
parties and the date and nature of the agreement) of each Material Contract to
which L&L is a party. BNC has been provided a complete and accurate copy of each
Material Contract listed on Section 3.10 of the Disclosure Schedule. Except as
set forth in Section 3.10 of the Disclosure Schedule, each Material Contract to
which L&L is a party is a legal, valid, binding and enforceable obligation of
L&L, except to the extent that enforcement may be limited by (i) bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to or
affecting the enforcement of creditors' rights generally and (ii) general
equitable principles.
(b) L&L is not in material breach of or default (and no event has
occurred which, with due notice or lapse of time or both, may constitute such a
breach or default) under any Material Contract, and no party to any Material
Contract has given L&L written notice of or made a claim in writing with respect
to any breach or default under any such Material Contract.
Section 3.11Real Property.
(a) Section 3.11 of the Disclosure Schedule sets forth a true and
complete list of all real property owned by L&L (collectively, the "Owned
Properties"). Except as set forth in Section 3.11 of the Disclosure Schedule,
L&L has good and marketable title in fee simple to all Owned Properties. Except
as disclosed in Section 3.11 of the Disclosure Schedule, none of the Owned
Properties is subject to any Liens, except for (i) Liens that collateralize
indebtedness that is reflected in the L&L Interim Financial Statements, (ii)
Permitted Liens for amounts not yet due or
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which are being contested in good faith and (iii) easements, rights of way,
encroachments or other restrictions or matters affecting title which do not
prevent the Owned Properties from being used for the purpose for which they are
currently being used or otherwise materially impair L&L's current operations.
(b) Except as set forth in Section 3.11 of the Disclosure Schedule,
all improvements on the Owned Properties and the operations therein conducted
conform in all material respects to all applicable health, fire, safety, zoning
and building laws, ordinances and administrative regulations, except for
possible nonconforming uses or violations which do not materially interfere with
the present use, operation or maintenance thereof or access thereto by L&L.
(c) Except as set forth on Section 3.11 of the Disclosure Schedule,
the buildings, driveways and all other structures and improvements upon the
Owned Properties are all within the boundary lines of such Owned Property or the
benefit of valid easements, and there are no encroachments thereof which would
materially affect the use thereof. There are no outstanding requirements by any
insurance company which has issued a title policy covering any such property
which is a condition to continued coverage under such policy at the current
insurance premium.
(d) Except as set forth on Section 3.11 of the Disclosure Schedule,
each Owned Property has unrestricted access to and from public roads and streets
and each Owned Property is designated with one or more separate and exclusive
tax lots.
Section 3.12Real Property Leases.
(a) Section 3.12 of the Disclosure Schedule sets forth a list of all
Leases with respect to all real properties in which L&L has a leasehold,
subleasehold, or other occupancy interest (the "Leased Properties"). Complete
and accurate copies of all Leases and all amendments thereto have been provided
to BNC. Except as set forth in Section 3.12 of the Disclosure Schedule, all of
the Leases for the Leased Properties are valid and effective in accordance with
their respective terms, except that the enforcement thereof may be subject to
(i) bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting or relating to enforcement of creditors' rights generally and (ii)
general equitable principles.
(b) L&L is not in material breach of or default (and no event has
occurred, which, with due notice or lapse of time or both, may constitute such a
breach or default) under any Lease, and no party to any Lease has given L&L
written notice with respect to any breach or default.
(c) Except as set forth in Section 3.12 of the Disclosure Schedule,
no Leased Property is subject to any sublease, license or other agreement
granting to any Person any right to the use, occupancy or enjoyment of Leased
Property or any portion thereof through L&L.
Section 3.13Personal Property.
(a) Except as set forth in Section 3.13 of the Disclosure Schedule
and Section 3.12(b), L&L has good title to all Personal Property, free and clear
of all Liens other than (i) Liens
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for taxes and assessments not yet due or otherwise being contested in good faith
and (ii) Permitted Liens for amounts not yet due or which are being contested in
good faith.
(b) Except as set forth in Section 3.13 of the Disclosure Schedule,
L&L holds valid leaseholds in all of the Personal Property leased by it, which
leases are enforceable in accordance with their respective terms, except that
enforcement thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting creditors' rights
generally and equitable principles which may limit the availability of certain
equitable remedies in certain instances.
(c) Except as set forth in Section 3.13 of the Disclosure Schedule,
L&L is not in material breach of or default (and no event has occurred which,
with due notice or lapse of time or both, may constitute such a lapse or
default) under any lease of any item of Personal Property leased by it.
(d) Except as set forth in Section 3.13 of the Disclosure Schedule,
the Personal Property now owned, leased or used by L&L is sufficient and
adequate to carry on its business as presently conducted.
Section 3.14Compliance with Laws. (a) Except as set forth in Section 3.14
of the Disclosure Schedule, the business of L&L is being conducted, in all
material respects, with all Applicable Laws, including insurance laws, and L&L
has not received notice of any violation by it of any Applicable Law, nor is it
in default with respect to any order, writ, judgment, award, injunction or other
decree of any Governmental Entity applicable to it or any of its respective
assets, properties or operations.
(b) L&L has made available for inspection by BNC complete copies of
all material registrations, filings and submissions made since January 1, 1995
by L&L with any Governmental Entity and any reports of examinations issued since
January 1, 1995 by any such Governmental Entity that relate to L&L. L&L has
filed all reports, statements, documents, registrations, filings or submissions
required to be filed by it with any Governmental Entity, except where the
failure to file, in the aggregate, would not reasonably be expected to have a
Material Adverse Effect; and all such reports, statements, documents,
registrations, filings or submissions were in all material respects true,
complete and accurate when filed.
Section 3.15Permits. (a) Except as set forth in Section 3.15 of the
Disclosure Schedule, L&L has all necessary permits, insurance and other licenses
and governmental authorizations which are material and which are required for
the lease, ownership, occupancy or operation of its properties and assets and
the carrying on of its business.
Section 3.16Litigation.
(a) Except as set forth in Section 3.16 of the Disclosure Schedule,
there are no Proceedings pending or, to the knowledge of the Stockholders,
threatened, against L&L or any of its officers, directors, employees, agents or
Affiliates which are not covered by insurance and, to the
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knowledge of the Stockholders, there have been no events and there are no facts
or circumstances that could result in any Proceedings.
(b) Except as set forth in Section 3.16 of the Disclosure Schedule,
neither L&L nor any of its assets or properties is subject to any order, writ,
judgment, award, injunction or decree of any Governmental Entity.
Section 3.17Environmental Compliance.
(a) Except as set forth in Section 3.17 of the Disclosure Schedule,
L&L possesses all necessary licenses, permits and other approvals and
authorizations that are required under, and at all times in the past has been,
in compliance with, all Environmental Laws, including all Environmental Laws
governing the generation, use, collection, treatment, storage, transportation,
recover, removal, discharge or disposal of hazardous substances or wastes, and
all Environmental Laws imposing record-keeping, maintenance, testing,
inspection, notification and reporting requirements with respect to hazardous
substances or wastes. For purposes of this Agreement, "hazardous substances" and
"hazardous wastes" are materials defined as "hazardous substances," "hazardous
wastes," or "hazardous constituents" in (i) the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, 42 U.S.C. Sections 9601-9675,
as amended by the Superfund Amendments and Reauthorization Act of 1986, and any
amendments thereto and regulations thereunder; (ii) the Resource Conservation
and Recovery Act of 1976, 42 U.S.C. Sections 6901-6992, as amended by the
Hazardous and Solid Waste Amendments of 1984, and any amendments thereto and
regulations thereunder; (iii) the Oil Pollution Act of 1990, 33 U.S.C. Sections
2701-2761, and any amendments thereto and regulations thereunder; and (iv) any
other applicable federal, state, local or foreign environmental law or
regulation.
(b) Except as set forth in Section 3.17 of the Disclosure Schedule,
L&L has not been subject to any administrative or judicial proceeding pursuant
to, or has received any notice of any violation of, or claim alleging liability
under, any Environmental Laws. To the knowledge of the Stockholders, no facts or
circumstances exist that would be likely to result in a claim, citation or
allegation against L&L for a violation of, or alleging liability under any
Environmental Laws.
(c) There are no underground tanks of any type (including tanks
storing gasoline, diesel fuel, oil or other petroleum products) or disposal
sites for hazardous substances, hazardous wastes or any other regulated waste,
located on or under the Owned Properties or Leased Properties.
(d) Except in the ordinary course of business, and in all cases in
material compliance with all Environmental Laws, L&L has not engaged any third
party to handle, transport or dispose of hazardous substances or wastes
(including for this purpose, gasoline, diesel fuel, oil or other petroleum
product) on its behalf.
Section 3.18ERISA and Related Matters.
(a) Section 3.18 of the Disclosure Schedule lists each Employee Plan
that L&L maintains, administers, contributes to, or has any contingent liability
with respect thereto. BNC has
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been provided a true and complete copy of each Employee Plan, current summary
plan description, (and, if applicable, related trust documents) and all
amendments thereto and written interpretations thereof together with: (i) all
annual reports, if any, that have been prepared in connection with each such
Employee Plan within the last three years; (ii) all material communications
relating to any such Employee Plan received from or sent to the Internal Revenue
Service or the Department of Labor within the last three years (including a
written description of any oral communications); and (iii) the most recent
Internal Revenue Services determination letter with respect to each Employee
Plan and the most recent application for a determination letter.
(b) Section 3.18 of the Disclosure Schedule identifies each Benefit
Arrangement that L&L maintains or administers. Except as set forth in Section
3.18 of the Disclosure Schedule, L&L has made all contributions to and has no
contingent liability with respect to any of its Benefit Arrangements. BNC has
been furnished copies or descriptions of each Benefit Arrangement. Each Benefit
Arrangement has been maintained in substantial compliance with its terms and
with the requirements prescribed by any and all statutes, orders, rules and
regulations which are applicable to such Benefit Arrangement.
(c) Benefits under any Employee Plan or Benefit Arrangement are as
represented in the documents provided to BNC and have not been increased or
modified (whether written or not written) subsequent to the dates of such
documents. L&L has not communicated to any employee or former employee any
intention or commitment to modify any Employee Plan or Benefit Arrangement or to
establish or implement any other employee or retiree benefit or compensation
arrangement.
(d) Each Employee Plan that is intended to be qualified under
Section 401(a) of the Code is so qualified and has been so qualified during the
period from its adoption to date, and, no event has occurred since such adoption
that would materially adversely affect such qualification, and each trust
created in connection with each such Employee Plan forming a part thereof is
exempt from tax pursuant to Section 501(a) of the Code. Each Employee Plan has
been maintained and administered in compliance with its terms and with the
requirements prescribed by any and all applicable statutes, orders, rules and
regulations, including but not limited to ERISA and the Code.
(e) Full payment has been made of all amounts which L&L is or has
been required to have paid as contributions to any Employee Plan or Benefit
Arrangement under applicable law or under the terms of any such plan or any
arrangement.
(f) Neither L&L nor any of its stockholders, directors, officers or
employees has engaged in any transaction with respect to an Employee Plan that
could subject L&L to a tax, penalty or liability for a prohibited transaction,
as defined in Section 406 of ERISA or Section 4975 of the Code.
(g) L&L has no liability in respect of post-retirement or
post-employment welfare benefits for retired, current or former employees except
to the extent otherwise required by the continuation requirements of Section
4980B(f) of the Code and Section 601 of ERISA. No medical
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benefits have been provided under any Benefit Arrangement to any person who is
not an employee or former employee of L&L or a dependent thereof.
(h) There is no litigation, administrative or arbitration proceeding
or other dispute pending or, to the knowledge of the Stockholders, threatened,
that involves any Employee Plan or Benefit Arrangement which could reasonably be
expected to result in a liability to L&L, any employees or directors of L&L, or
any fiduciary (as defined in ERISA Section 3(21)) of such Employee Plan or
Benefit Arrangement.
(i) No employee or former employee of L&L will become entitled to
any bonus, retirement, severance, job security or similar benefit or enhanced
benefit (including acceleration of compensation, an award, vesting or exercise
of an incentive award) or any fee or payment of any kind solely as a result of
any of the transactions contemplated hereby.
(j) L&L is not a party to any agreement, contract, arrangement or
plan that has resulted or would result, separately or in the aggregate, in the
payment of any "excess parachute payments" within the meaning of Section 280G of
the Code (i.e., a golden parachute).
(k) Neither L&L nor the Stockholders maintains or has ever
maintained an "employee benefit plan" (as defined in Section 3(3) of ERISA)
which is or was (i) a plan subject to Title IV of ERISA or (ii) a "multiemployer
plan" (as defined in Section 3(37) of ERISA). Neither L&L nor the Stockholders
know of any facts or circumstances that might give rise to any liability to the
Pension Benefit Guaranty Corporation under Title IV of ERISA.
Section 3.19Taxes.
(a) All Returns required to be filed by or on behalf of L&L have
been duly filed and such Returns (including all attached statements and
schedules) are true, complete and correct. All Taxes due have been paid in full
on a timely basis, and no other Taxes are payable by L&L with respect to items
or periods covered by such Returns (whether or not shown on or reportable on
such Returns) or with respect to any period prior to the Closing Date.
(b) L&L has withheld and paid over all Taxes required to have been
withheld and paid over (including any estimated taxes), and has complied in all
material respects with all information reporting and backup withholding
requirements, including maintenance of required records with respect thereto, in
connection with amounts paid or owing to any employee, creditor, independent
contractor, or other third party.
(c) There are no Liens on any of the assets of L&L with respect to
Taxes, other than Liens for Taxes not yet due and payable or for Taxes that are
being contested in good faith through appropriate proceedings and for which
appropriate reserves have been established.
(d) L&L has furnished or made available to BNC true and complete
copies of: (i) all federal and state income and franchise tax returns of L&L for
all periods beginning on or after January 1, 1994, and (ii) all tax audit
reports, work papers statements of deficiencies, closing or other
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agreements received by L&L or on their behalf relating to Taxes for all periods
beginning on or after January 1, 1994.
(e) Except as disclosed in Section 3.19 of the Disclosure Schedule:
(i) The Returns of L&L have never been audited by a
governmental or taxing authority, nor is any such audit in process, pending or,
to the knowledge of the Stockholders, threatened (formally or informally).
(ii) No deficiencies exist or have been asserted (either in
writing or verbally, formally or informally) or, to the knowledge of the
Stockholder, are to be asserted with respect to Taxes of L&L, and no notice
(either formal or informal) has been received by L&L that it has not filed a
Return or paid Taxes required to be filed or paid by it.
(iii) L&L is not a party to any pending action or proceeding
for assessment or collection of Taxes, nor has such action or proceeding been
asserted or, to the knowledge of the Stockholders, threatened (either formally
or informally), against it or any of its assets.
(iv) Except as reflected in the Returns, no waiver or
extension of any statute of limitations is in effect with respect to Taxes or
Returns of L&L.
(v) There are no requests for rulings, subpoenas or requests
for information pending with respect to L&L.
(vi) No power of attorney has been granted by L&L with respect
to any matter relating to Taxes.
(vii) The amount of liability for unpaid Taxes of L&L for all
periods ending on or before the Closing Date will not, to the knowledge of the
Stockholders, in the aggregate, exceed the amount of the current liability
accruals for Taxes (excluding reserves for deferred taxes), as such accruals are
reflected on the consolidated balance sheet of L&LL&L as of the Closing Date.
(f) Except as disclosed in Section 3.19 of the Disclosure Schedule:
(i) L&L has not issued or assumed any indebtedness that is
subject to section 279(b) of the Code.
(ii) L&L has not entered into any compensatory agreements with
respect to the performance of services which payment thereunder would result in
a nondeductible expense pursuant to Section 280G of the Code or an excise tax to
the recipient of such payment pursuant to Section 4999 of the Code.
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(iii) No election has been made under Section 338 of the Code
with respect to L&L and no action has been taken that would result in any income
tax liability to L&L as a result of deemed election within the meaning of
Section 338 of the Code.
(iv) No consent under Section 341(f) of the Code has been
filed with respect to L&L.
(v) L&L has not agreed, nor is it required to make, any
adjustment under Code Section 481(a) by reason of change in accounting method or
otherwise.
(vi) L&L has not disposed of any property that has been
accounted for under the installment method.
(vii) L&L has not made any of the foregoing elections and is
not required to apply any of the foregoing rules under any comparable state or
local income tax provisions.
(g) J.D. Meier will acquire at least 90% of the fair market value of
the net assets and at least 70% of the fair market value of the gross assets
held by L&L immediately prior to the Merger. For purposes of this
representation, amounts paid by L&L to its stockholders, assets of L&L used to
pay its reorganization expenses, and all redemptions and distributions (except
for regular, normal dividends) made by L&L immediately preceding the Merger,
will be included as assets of L&L held immediately prior to the Merger.
(h) The liabilities of L&L assumed by the J.D. Meier and the
liabilities to which the transferred assets of L&L are subject were incurred by
L&L in the ordinary course of its business.
(i) L&L is not an investment company. For purposes of this
representation, the term "investment company" means a regulated investment
company, a real estate investment trust, or a corporation 50% or more of the
value of whose total assets are stock and securities and 80% or more of the
value of whose total assets are assets held for investment. In making the 50%
and the 80% determinations under the preceding sentence, stock and securities in
any subsidiary corporation will be disregarded and the parent corporation will
be deemed to own its ratable share of the subsidiary's assets.
(j) L&L is not under the jurisdiction of a court in a Title 11 or
similar case within the meaning of Section 368(a)(3)(A) of the Code.
Section 3.20Customers. Section 3.20 of the Disclosure Schedule sets forth
a complete and correct list of: (a) all customers whose purchases exceeded 5% of
the aggregate net sales of L&L for the fiscal year ended December 31, 1996; and
(b) all customers who have delivered a notice of cancellation or default with
respect to any agreement, contract or other arrangement with L&L since January
1, 1996 involving an amount in excess of $20,000 or with whom L&L has delivered
a formal notice of a default with respect to, any agreement, contract or other
arrangement since January 1,
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1996, involving an amount in excess of $20,000, in each case with or without
cause, prior to the stated expiration thereof.
Section 3.21Insurance.
(a) Section 3.21 of the Disclosure Schedule sets forth a true and
complete list of all policies of insurance, increased value, protection and
indemnity, title insurance, liability and casualty insurance, property
insurance, auto insurance, business interruption insurance, tenant's insurance,
workers' compensation, life insurance, disability insurance, excess or umbrella
insurance and any other type of insurance insuring the properties, assets,
employees or operations of L&L (collectively the "Policies"). L&L has made
available to BNC a true, complete and accurate copy of all Policies.
(b) All Policies are in full force and effect. L&L shall maintain
the coverage under all Policies in full force and effect through the Closing
Date.
(c) Except as set forth in Section 3.21 of the Disclosure Schedule,
there is no claim by L&L or any other Person pending under any of the Policies
as to which coverage has been denied or disputed by the underwriters or issuers
of such Policies. L&L has not received any notice of default and L&L is not in
default under any provision of the Policies.
(d) Except as set forth in Section 3.21 of the Disclosure Schedule,
L&L has not since January 1, 1997 received any written notice from or on behalf
of any insurance carrier or other issuer issuing such Policies that insurance
rates or other annual premium or fee in effect as of the date hereof will
hereafter be materially increased, that there will be a non-renewal,
cancellation or increase in a deductible (or a material increase in premiums in
order to maintain an existing deductible) of any of the Policies in effect as of
the date hereof, or that material alteration of any equipment or any
improvements to any of the Owned Properties or the Leased Properties, purchase
of additional material equipment, or material modification of any of the methods
of doing business of L&L will be required after the date hereof.
Section 3.22Safety and Health. The property and assets of L&L have been
and are being operated in compliance in all respects with all Applicable Laws
designed to protect safety or health, or both, including without limitation, the
Occupational Safety and Health Act, and the regulations promulgated pursuant
thereto, except for any violations or deficiency which would not result in a
Material Adverse Effect. Except as set forth in Section 3.22 of the Disclosure
Schedule, L&L has not received any written notice of any violations, deficiency,
investigation or inquiry from any Governmental Entity, employer or third party
under any such law and, to the knowledge of the Stockholders, no such
investigation or inquiry is planned or threatened.
Section 3.23Labor Matters.
(a) Set forth in Section 3.23 of the Disclosure Schedule is a list
of all: (i) outstanding employment, consulting or management agreements or
contracts with officers, directors or employees of L&L that are not terminable
on no more than 30 days notice, or that provide for the
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payment of any bonus or commission; and (ii) agreements, policies or practices
that require L&L to pay termination or severance pay to salaried, non-exempt or
hourly employees in excess of 30 days' salary and benefits to any employee upon
termination of such employee's employment (other than as required by law). L&L
has made available to BNC complete and correct copies of all such employment and
labor agreements. Except as set forth in Section 3.23 of the Disclosure
Schedule, L&L has not breached or otherwise failed to comply in any material
respect with any provisions of any employment and labor agreement, and there are
no grievances outstanding thereunder.
(b) Except as set forth in Section 3.23 of the Disclosure Schedule:
(i) L&L is in compliance in all material respects with all Applicable Laws
relating to employment and employment practices, wages, hours, and terms and
conditions of employment; (ii) there is no unfair labor practice charge or
complaint against L&L pending before any Governmental Entity; (iii) there is no
representation claim or petition pending before any Governmental Entity; (iv)
there are no charges with respect to or relating to L&L pending before any
Governmental Entity responsible for the prevention of unlawful employment
practices; and (v) L&L has not had formal notice from any Governmental Entity
responsible for the enforcement of labor or employment laws of an intention to
conduct an investigation of L&L and, to the knowledge of the Stockholders, no
such investigation is in progress.
Section 3.24Transactions with Certain Persons. Except as set forth in
Section 3.24 of the Disclosure Schedule, no director, officer or employee of
L&L, L&L or any of their respective Affiliates is presently a party to any
transaction with L&L, including any contract, agreement or other arrangement
providing for the furnishing of services by or the rental of real or personal
property from any such Person or from any of its Affiliates.
Section 3.25Propriety of Past Payments. Except as set forth in Section
3.25 of the Disclosure Schedule, to the knowledge of the Stockholders, (a) no
funds or assets of L&L have been used for illegal purposes; (b) no unrecorded
funds or assets of L&L have been established for any purpose; (c) no
accumulation or use of L&L's corporate funds or assets has been made without
being properly account for on the books and records of L&L; (d) all payments by
or behalf of L&L have been duly and properly recorded and accounted for in its
respective books and records; (e) no fraudulent entry has been made in the books
and records of L&L for any reason; (f) no payment has been made by or on behalf
of L&L with the understanding that any part of such payment is to be used for
any purpose other than that described in the documents supporting such payment;
and (g) L&L has not made, directly or indirectly, any illegal contributions to
any political party or candidate.
Section 3.26Intellectual Property. L&L either owns or has valid licenses
to use all patents, copyrights, trademarks, software, databases, and other
technical information used in its business as presently conducted, subject to
limitations contained in the agreements governing the use of same, which
limitations are customary for companies engaged in businesses similar to L&L.
L&L is in compliance with all such licenses and agreements and there are no
pending or, to the knowledge of the Stockholders, threatened, Proceedings
challenging or questioning the validity or effectiveness of any license or
agreement relating to such property or the right of L&L to use, copy, modify or
distribute the same.
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Section 3.27Bank Accounts; Powers of Attorney. Section 3.27 of the
Disclosure Schedule sets forth with respect to each bank account or cash account
maintained by L&L at any bank, brokerage or other financial firm, the name of
the institution at which such account is maintained, the number of the account,
and the names of the individuals having authority to withdraw funds from such
account.
Section 3.28Director and Officer Indemnification. The directors, officers
and employees of L&L are not entitled to indemnification by L&L, except to the
extent that indemnification rights are provided for generally by Applicable Law
or such corporation's charter or by-laws and there are no pending claims for
indemnification by any such director, officer or employee.
Section 3.29Brokers' and Finders' Fee. No agent, broker, person or firm
acting on behalf of L&L or the Stockholders is or will be entitled to any
commission or brokers' or finders' fees payable by L&L in connection with any of
the transactions contemplated herein.
Section 3.30Documents and Written Materials. Originals or true and
complete copies of all documents or other written materials underlying items
listed in the Disclosure Schedule have been furnished or made available to BNC
in the form in which each of such documents is in effect.
Section 3.31Effectiveness of Representations and Warranties. All of the
representations and warranties of L&L and the Stockholders in this Agreement
shall be true in all material respects on the Closing Date and shall be deemed
to have been made again by L&L and the Stockholders on and as of the Closing
Date.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF
BNC AND J.D. MEIER
BNC and the J.D. Meier jointly and severally represent and warrant to and
agree with L&L and the Stockholders as follows:
Section 4.1 Organization. Each of BNC and the J.D. Meier is a corporation
duly organized, validly existing and in good standing under the laws of the
state of its incorporation and has all requisite corporate power and authority
to own its properties and carry on its business as it is now being conducted. No
actions or proceedings to dissolve either BNC or the J.D. Meier are pending.
Each of BNC and the J.D. Meier is duly qualified or licensed to do business and
is in good standing in each jurisdiction in which the property owned, leased or
operated by it or the conduct of its business requires such a qualification or
licensing. Neither BNC nor J.D. Meier is in violation of any provision of its
certificate or articles of incorporation or by-laws.
Section 4.2 Capital Stock: (a) The authorized capital stock of BNC
consists of 10,000,000 shares of BNC Common Stock, of which 2,338,720 shares are
issued and outstanding and 25,380 are held in its treasury, and 2,000,000 shares
of preferred stock, $.01 par value per share,
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none of which is issued and outstanding. All issued and outstanding shares of
BNC Common Stock have been duly authorized and are validly issued, fully paid
and non-assessable.
(b) Except for the options granted under BNC's incentive
compensation programs, an option granted to Dain Bosworth Incorporated in July
1995 and as specified in this Agreement, there are no outstanding stock options
or other rights to acquire any shares of the capital stock of BNC or any
security convertible into common stock and BNC does not have any obligation or
other commitment to issue, sell or deliver any of the foregoing or any shares of
its capital stock. All shares of BNC Common Stock have been issued in compliance
with all legal requirements and without violation of any pre-emptive or similar
rights.
(c) The shares of BNC Common Stock to be issued hereby, when issued
in accordance with the terms of this Agreement, will be validly issued, fully
paid and non-assessable.
Section 4.3 Authority; Enforceability. Each of BNC and the J.D. Meier has
the requisite corporate power and authority to execute and deliver this
Agreement and the Employment Agreements, as the case may be, and to carry out
its obligations hereunder and thereunder. The execution, delivery and
performance of this Agreement and the Employment Agreements, and the
consummation of the transactions contemplated hereby and thereby have been duly
authorized by all necessary corporate action on the part of each of BNC and J.D.
Meier , as appropriate, and no other corporate proceedings on the part of either
BNC or J.D. Meier are necessary to authorize this Agreement or the Employment
Agreements or to consummate the transactions contemplated hereby and thereby.
This Agreement has been, and the Employment Agreements, when executed and
delivered in accordance with the terms hereof will be, duly executed and
delivered by each of BNC and the J.D. Meier , as the case may be, and constitute
valid and binding obligations of each of BNC and the J.D. Meier , as the case
may be, enforceable against each of them in accordance with its terms, except as
may be limited by applicable bankruptcy, insolvency, reorganization, moratorium
and similar laws affecting the enforcement of creditors' rights generally and
equitable principles which may limit the availability of certain equitable
remedies in certain instances.
Section 4.4 No Conflicts. Neither the execution and the delivery of this
Agreement or the Employment Agreements by BNC or J.D. Meier, nor the
consummation of the transactions contemplated hereby or thereby, nor compliance
with any of the terms hereof or thereof, do or will (a) conflict with or result
in any breach of the provisions of the certificate or articles of incorporation
or by-laws of BNC or J.D. Meier, (b) result in the violation or breach of, or
constitute (with or without due notice or the lapse of time or both) a default
(or give rise to any right of termination, cancellation or acceleration) under,
any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, license, contract, agreement or other instrument or obligation to
which either BNC or J.D. Meier is a party or by which any of them or their
respective properties or assets may be bound, or (c) violate any order, writ,
injunction, decree, statute, rule or regulation applicable to either BNC or the
J.D. Meier or any of their respective properties or assets.
Section 4.5 Consent. No consent, approval, order or authorization of, or
declaration, filing or registration with, any Governmental Entity or other
Person is required to be obtained or made by BNC or J.D. Meier in connection
with the execution, delivery or performance by BNC or J.D.
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Meier of this Agreement or the Employment Agreements or the consummation by any
of them of the transactions contemplated hereby or thereby.
Section 4.6 Brokers' and Finders' Fee. No Person acting on behalf of BNC
or J.D. Meier is or will be entitled to any commission or brokers' or finders'
fees payable by BNC or J.D. Meier in connection with any of the transactions
contemplated herein.
Section 4.7 Effectiveness of Representations and Warranties. All of the
representations and warranties of BNC and J.D. Meier in this Agreement shall be
true in all material respects on the Closing Date and shall be deemed to have
been made again by BNC and J.D. Meier on and as of the Closing Date.
ARTICLE 5
PRE-CLOSING COVENANTS
Section 5.1 Legal Requirements.
(a) Subject to the conditions set forth in Section 6 and to the
other terms and provisions of this Agreement, each of the parties to this
Agreement agrees to take, or cause to be taken, all reasonable actions necessary
to comply promptly with all legal requirements applicable to it with respect to
the transactions contemplated by this Agreement and will promptly cooperate with
and furnish information to each other in connection with any such requirements
imposed upon any of them. Each of L&L, the Stockholders, BNC and J.D. Meier will
take all reasonable actions necessary to obtain, and will cooperate with each
other in obtaining, any consent, authorization, order or approval of, or any
exemption by, any Governmental Entity or other public or private party, required
to be obtained or made by it or the taking or any action contemplated by this
Agreement in order to effect the Merger in accordance with this Agreement at the
earliest practicable date.
Section 5.2 Access to Properties and Records. Until the Closing Date, L&L
shall allow BNC and its authorized representatives full access, during normal
business hours and on reasonable notice, to all of L&L's properties, offices,
equipment, inventory and other assets, documents, files, books and records, in
order to allow BNC a full opportunity to make such investigation and inspection
as its desires of L&L's business and assets. L&L shall further use its best
efforts to cause its employees, counsel and independent public accountants to be
available upon reasonable notice to answer questions of BNC's representatives
concerning the business and affairs of L&L, and shall further use its best
efforts to cause them to make available all relevant books and records in
connection with such inspection and examination, including, without limitation,
work papers for all audits and reviews of financial statements of L&L.
Section 5.3 Conduct of Business By Both Parties Prior to the Closing Date.
During the period from the date of this Agreement to the Effective Time, L&L and
BNC shall each use its reasonable best efforts to preserve the goodwill of
suppliers, customers and others having business relations with it and its
subsidiaries and to do nothing knowingly to impair its ability to keep and
preserve its business as it exists on the date of this Agreement. Without
limiting the generality of
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the foregoing, during the period from the date of this Agreement to the
Effective Time neither BNC (and BNC shall cause its subsidiaries not to) nor L&L
shall (and L&L shall without the prior written consent of the other:
(a) declare, set aside, increase or pay any dividend including any
stock dividend, or declare or make any distribution on, or directly or
indirectly combine, redeem, reclassify, purchase, or otherwise acquire, any
shares of its capital stock.
(b) amend its articles of incorporation or by-laws, or adopt or
amend any resolution or agreement concerning indemnification of its directors,
officers, employees or agents;
(c) commit or omit to do any act which act or omission would cause a
breach of any covenant contained in this Agreement or would cause any
representation or warranty contained in this Agreement to become untrue in any
material respect, as if each such representation and warranty were continuously
made from and after the date hereof;
(d) violate any applicable law, statute, rule, governmental
regulation or order that would have a Material Adverse Effect on such party;
(e) fail to maintain its books, accounts and records in the usual
manner on a basis consistent with that heretofore employed;
(f) fail to pay, or to make adequate provision in all material
respects for the payment of, all Taxes, interest payments and penalties due and
payable (for all periods up to the Effective Time, including that portion of its
fiscal year to and including the Effective Time) to any city, parish, state, the
United States, foreign or any other taxing authority, except those being
contested in good faith by appropriate proceedings and for which sufficient
reserves have been established, or make any elections with respect to Taxes; or
(g) authorize any of, or agree or commit to do any of, the foregoing
actions.
Section 5.4 Conduct of Business By L&L Prior to the Closing Date. During
the period from the date of this Agreement to the Effective Time, in addition to
its covenants set forth in Section 5.3, L&L shall use its best efforts to
preserve the possession and control of all of its assets other than those
permitted to be disposed of pursuant to the terms of this Agreement, shall
conduct its business only in the ordinary course consistent with past practice,
and, except as otherwise provided herein, shall not without the prior written
consent of BNC:
(a) make any material change in the conduct of its businesses and
operations or enter into any transaction other than in the ordinary course of
business consistent with past practices;
(b) issue any additional shares of capital stock or equity
securities or grant any option, warrant or right to acquire any capital stock or
equity securities; issue any security convertible into or exchangeable for its
capital stock; alter any material term of any of its outstanding
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securities or make any change in its outstanding shares of capital stock or
other ownership interests or its capitalization, whether by reason of exchange
or readjustment of shares, stock dividend or otherwise;
(c) incur, assume or guarantee any indebtedness for borrowed money,
issue any notes, bonds, debentures or other corporate securities or grant any
option, warrant or right to purchase any thereof;
(d) make any sale, assignment, transfer, abandonment or other
conveyance of any of its material assets or any part thereof, except
transactions pursuant to existing contracts set forth in the Disclosure Schedule
and dispositions of worn-out or obsolete equipment for fair or reasonable value
in the ordinary course of business consistent with past practices;
(e) subject any of its assets or properties to a Lien other than a
Permitted Lien;
(f) acquire any assets or properties, or enter into any other
transactions, other than in the ordinary course of business;
(g) make or commit to make any capital expenditure not disclosed in
Section 5.4 of the Disclosure Schedule;
(h) pay, loan or advance any amount to, or sell, transfer or lease
any properties or assets to, or enter into any agreement or arrangement with,
any of its Affiliates;
(i) guarantee any indebtedness for borrowed money or any other
obligation of any other Person;
(j) fail to keep in full force and effect insurance comparable in
amount and scope to coverage maintained by it (or on behalf of it) on the date
hereof;
(k) take any other action that would cause any of the
representations and warranties made by L&L in this Agreement not to remain true
and correct in all material respects;
(l) make any loan, advance or capital contribution to or investment
in any Person;
(m) make any change in any method of accounting or accounting
principle, method, estimate or practice except for any such change required by
reason of a concurrent change in generally accepted accounting principles or
write-down the value of any inventory or write-off as uncollectible any accounts
receivable except in the ordinary course of business consistent with past
practices;
(n) enter into or modify any employment, severance or similar
agreement or arrangement with any director or employee, or grant any increase in
the rate of wages, salaries, bonuses or other compensation or benefits of any
executive officer or other employee other than
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increases in wages, salaries, bonuses, compensation or benefits to field or
operating employees made in the ordinary course of business;
(o) enter into any new line of business;
(p) make any tax election that is inconsistent with any
corresponding election made on a prior return or settle or compromise any income
tax liability for an amount in excess of the liability therefor that is
reflected on the L&L Financial Statements; or
(q) authorize any of, or agree or commit to do any of, the foregoing
actions.
Section 5.5 Public Statements. Prior to the Closing Date, none of the
parties to this Agreement shall, and each party shall use its best efforts so
that none of its advisors, officers, directors or employees shall, except with
the prior written consent of the other parties, publicize, announce or describe
to any third person, except their respective advisors and employees, the
execution or terms of this Agreement, the parties hereto or the transactions
contemplated hereby, except as required by law or as required pursuant to this
Agreement to obtain the consent of such third person; provided, in any case,
that BNC may make such disclosures and announcements as it is advised by counsel
are necessary under applicable securities laws.
Section 5.6 No Solicitation. The Stockholders and L&L will not prior to
the earlier of the Closing Date or the termination of this Agreement pursuant to
Section 7.1, (nor will they permit any of their Affiliates or any of L&L's
officers, directors or agents to) directly or indirectly solicit or participate
or engage in or initiate any negotiations or discussions, or enter into or
authorize any agreement or agreements in principle, or announce any intention to
do any of the foregoing, with respect to any offer or proposal to acquire all or
any significant part of L&L's business and properties or any L&L Common Stock or
other capital stock or securities, whether by merger, exchange, consolidation,
purchase of assets, purchase of stock or otherwise. The Stockholders and L&L
will notify BNC promptly upon receipt of any inquiry, offer or other
communication from any third party regarding any such activities.
Section 5.7 Update Information. Each party hereto will promptly disclose
to the other any information contained in its representations and warranties and
on the related section of the Disclosure Schedule that because of an event
occurring after the date hereof is incomplete or no longer correct; provided,
however, that none of such disclosures will be deemed or modified, amend, or
supplement the representations and warranties of such party, unless the other
party consents to such modification, amendment, or supplement in writing.
Section 5.8 Consultation and Reporting. During the period from the date of
this Agreement to the Closing Date, L&L will, subject to any applicable legal or
contractual restrictions, confer on a regular and frequent basis with BNC to
report material operational matters and to report on the general status of
ongoing operations. L&L will notify BNC of any unexpected emergency or other
change in the normal course of its business or in the operation of its
properties and of any governmental complaints, investigations, adjudicatory
proceedings, or hearings (or communications indicating that the same may be
contemplated) and will keep the other fully informed of such events
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and permit its representatives prompt access to all materials prepared by or on
behalf of such party or served on them, in connection therewith.
ARTICLE 6
CLOSING CONDITIONS
Section 6.1 Conditions Applicable to all Parties. The respective
obligations of each party to consummate the transactions contemplated by this
Agreement shall be subject to the satisfaction or, where permissible, waiver by
such party of the following conditions at or prior to the Closing Date:
(a) No statute, rule, regulation, executive order, decree,
preliminary or permanent injunction or restraining order shall be in effect by
any court of competent jurisdiction or other Governmental Entity which prohibits
or restricts the consummation of the transactions contemplated by this
Agreement, and no action, suit, claim or proceeding by a Governmental Entity
before any court or other Governmental Entity shall have been commenced and be
pending which seeks to prohibit or restrict the consummation of the transactions
contemplated by this Agreement; and
(b) All consents and approvals of any Governmental Entity necessary
for consummation of the transactions contemplated hereby shall have been
obtained.
Section 6.2 Conditions to Obligations of BNC and J.D. Meier . The
obligations of BNC and J.D. Meier to consummate the transactions contemplated by
this Agreement are subject to the satisfaction of the following conditions,
unless waived by BNC and J.D. Meier :
(a) The representations and warranties of L&L and the Stockholders
set forth in this Agreement shall be true and correct in all material respects
as of the date of this Agreement and as of the Closing Date as though made on
and as of the Closing Date, except as otherwise contemplated by this Agreement,
and L&L and the Stockholders shall have performed in all material respects all
obligations required to be performed by them under this Agreement at or prior to
the Closing Date.
(b) All consents and approvals of third parties necessary for
consummation of the transactions contemplated by this Agreement shall have been
obtained.
(c) Each of the Stockholders shall have executed and delivered to
BNC an Employment Agreement in the form attached hereto as Exhibit "C."
(d) BNC shall have received a certificate, dated the Closing Date,
of the president of L&L and each of the Stockholders certifying as to the
matters specified in Section 6.2(a).
(e) L&L will have delivered to BNC, each dated as of a date not
earlier than five days prior to the Closing Date, (i) copies of the articles of
incorporation certified by the appropriate government official of L&L, (ii)
certificates from the appropriate governmental official to the effect
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that L&L is in good standing in L&L's jurisdiction of incorporation and listing
all organizational documents on file, (iii) a certificate from the appropriate
governmental official in each jurisdiction in which L&L is qualified to do
business to the effect that it is in good standing in such jurisdiction and (iv)
certificates as to the tax status of L&L in its jurisdiction of organization and
each jurisdiction in which it is qualified to do business.
(f) BNC shall have received a certificate of a duly authorized
officer of L&L, dated the Closing Date, certifying as to the incumbency of any
person executing this Agreement or any certificate or other document delivered
in connection with this Agreement and certifying as to such other matters as BNC
shall reasonably request.
(g) BNC shall have received a letter from Arthur Andersen LLP, its
independent public accountants, stating that the Merger qualifies as a pooling
of interests under generally accepted accounting principles.
(h) Any and all changes made to the Disclosure Schedule shall be
satisfactory in all respects to BNC.
Section 6.3 Conditions to Obligations of L&L and the Stockholders. The
obligations of L&L and the Stockholders to consummate the transactions
contemplated by this Agreement are subject to the satisfaction of the following
conditions, unless waived by L&L and the Stockholders:
(a) The representations and warranties of BNC and J.D. Meier set
forth in this Agreement shall be true and correct in all material respects as of
the date of this Agreement and as of the Closing Date as though made on and as
of the Closing Date, except as otherwise contemplated by this Agreement, and BNC
and J.D. Meier shall have performed in all material respects all obligations
required to be performed by them under this Agreement at or prior to the Closing
Date.
(b) BNC shall have the Merger Consideration available for delivery
pursuant to Section 2.
(c) BNC shall have executed and delivered to each of the
Stockholders an Employment Agreement.
(d) L&L shall have received a certificate, dated the Closing Date,
of the president of BNC and J.D. Meier certifying as to the matters specified in
Section 6.3(a).
(e) All governmental and other third-party consents and approvals,
if any, necessary to permit the consummation of the transactions contemplated by
this Agreement will have been received.
(f) The Lahr and Charnholm Agreements shall have been amended to
incorporate the following changes:
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(i) employment term: from the effective date of the Merger
until termination on December 31, 2000.
(ii) salary: $100,000 per calendar year commencing January 1,
1998; no commissions.
(iii) health insurance: Employee and his spouse shall be
entitled to coverages equal to the benefits provided by BNC to its management
level employees as of January 1, 1998, and until the employee and his spouse,
respectively, are eligible for benefits under the Federal Medicare System;
provided that the employee remains employed by BNC or one of its subsidiaries.
After employee is no longer employed by BNC or one of its subsidiaries, the
employee will reimburse BNC for the costs of insurance coverage for himself and
his spouse.
(g) BNC shall have executed guarantee agreements with respect to the
Lahr and Charnholm Agreements.
ARTICLE 7
TERMINATION AND AMENDMENT
Section 7.1 Termination. This Agreement may be terminated and may be
abandoned at any time prior to the Closing Date:
(a) by mutual consent of BNC, L&L and the Stockholders ;
(b) by BNC, L&L or the Stockholders, as the case may be, if
(a) there shall have been a material breach of any representation, warranty,
covenant or agreement on the part of L&L or the Stockholders or on the part of
BNC or J.D. Meier, as the case may be, which breach shall not have been cured
prior to the earlier of (i) 10 days following notice of such breach and (ii) the
Closing Date; or (b) any permanent injunction or other order of a court or other
competent Governmental Entity preventing the transactions contemplated by this
Agreement shall have become final and nonappealable; or
(c) by BNC or L&L if the transactions contemplated by this
Agreement shall not have been consummated on or before January 31, 1998;
provided, that the right to terminate this Agreement under this Section 7.1(c)
shall not be available to any party whose breach of its representations and
warranties in this Agreement or whose failure to perform any of its covenants
and agreements under this Agreement has resulted in the failure of the
transactions contemplated by this agreement to occur on or before such date.
Section 7.2 Effect of Termination. In the event of a termination of this
Agreement as provided in Section 7.1, this Agreement shall forthwith become void
and there shall be no liability or obligation under any provisions hereof on the
part of BNC, L&L or the Stockholders, except (a) pursuant to the covenants and
agreements contained in Section 10.1 and this Section 7.2 and (b) to the extent
that such termination results from the willful material breach by a party hereto
of any of
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its representations, warranties, covenants or agreements set forth in this
Agreement, in which case the non-breaching party shall have a right to recover
its damages caused thereby.
Section 7.3 Extension; Waiver. At any time prior to the Closing Date, the
parties hereto may, in their respective sole discretion and to the extent
legally allowed, (a) extend the time for the performance of any of the
obligations or other acts of the other parties hereto; (b) waive any
inaccuracies in the representations and warranties contained herein or in any
document delivered pursuant thereto; and (c) waive compliance with any of the
agreements or conditions contained herein. Any agreement on the part of a party
hereto to any such extension or waiver shall be valid only if set forth in a
written instrument signed by or on behalf of such party.
ARTICLE 8
INDEMNIFICATION; REMEDIES
Section 8.1 Indemnification by Stockholders. Except as otherwise expressly
provided in ------------------------------- this Article 8, from and after the
Closing Date the Stockholders shall defend, indemnify and hold harmless BNC and
each of BNC's officers, directors, employees, Affiliates, successors and assigns
(BNC and such persons, collectively, "BNC's Indemnified Persons"), and shall
reimburse BNC's Indemnified Persons, for, from and against each and every
demand, claim, action, loss, liability, judgment, damage, cost and expense
(including, without limitation, interest, penalties, costs of preparation and
investigation, and the reasonable fees, disbursements and expenses of attorneys,
accountants and other professional advisors) (collectively, "Losses") imposed on
or incurred by BNC's Indemnified Persons, directly or indirectly, relating to,
resulting from or arising out of: (a) any inaccuracy in any representation or
warranty of L&L or the Stockholders in this Agreement or any certificate,
document or other instrument delivered or to be delivered pursuant hereto in any
respect whether or not BNC's Indemnified Persons relied thereon or had knowledge
thereof or (b) any breach or nonperformance of any covenant, agreement or other
obligation of L&L or the Stockholders under this Agreement or any certificate,
document or other instrument delivered pursuant hereto..
Section 8.2 Indemnification by BNC. Except as otherwise expressly provided
in this Article 8, from and after the Closing Date BNC shall defend, indemnify
and hold harmless the Stockholders and each of their respective Affiliates,
successors and assigns (such persons, collectively, "L&L's Indemnified
Persons"), and shall reimburse L&L's Indemnified Persons, for, from and against
all Loses imposed on or incurred by L&L's Indemnified Persons, directly or
indirectly, relating to, resulting from or arising out of: (a) any inaccuracy in
any representation or warranty of BNC or the J.D. Meier in this Agreement or any
certificate, document or other instrument delivered pursuant hereto in any
respect whether or not L&L's Indemnified Persons relied thereon or had knowledge
thereof or (b) any breach or nonperformance of any covenant, agreement or other
obligation of BNC or J.D. Meier under this Agreement or any certificate,
document or other instrument delivered pursuant hereto.
Section 8.3 Notice and Defense of Third Party Claims. If any third party
demand, claim, action or proceeding shall be brought or asserted under this
Article 8 against an indemnified party
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or any successor thereto (the "Indemnified Person") in respect of which
indemnity may be sought under this Article 8 from an indemnifying person or any
successor thereto (the "Indemnifying Person"), the Indemnified Person shall give
prompt written notice thereof to the Indemnifying Person who shall have the
right to assume its defense, including the hiring of counsel reasonably
satisfactory to the Indemnified Person and the payment of all expenses; except
that any delay or failure to so notify the Indemnifying Person shall relieve the
Indemnifying Person of its obligations under this Article 8 only to the extent,
if at all, that it is prejudiced by reason of such delay or failure. The
Indemnified Person shall have the right to employ separate counsel in any of the
foregoing actions, claims or proceedings and to participate in the defense
thereof, but the fees and expenses of such counsel shall be at the expense of
the Indemnified Person unless both the Indemnified Person and the Indemnifying
Person are named as parties and the Indemnified Person shall in good faith
determine that representation by the same counsel is inappropriate. In the event
that the Indemnifying Person, within ten days after notice of any such action or
claim, does not assume the defense thereof, the Indemnified Personal shall have
the right to undertake the defense, compromise or settlement of such action,
claim or proceeding for the account of the Indemnifying Person, subject to the
right of the Indemnifying Person to assume the defense of such action, claim or
proceeding with counsel reasonably satisfactory to the Indemnified Person at any
time prior to the settlement, compromise or final determination thereof.
Anything in this Article 8 to the contrary notwithstanding, the Indemnifying
Person shall not, without the Indemnified Person's prior consent, settle or
compromise any action or claim or consent to the entry of any judgment with
respect to any action, claim or proceeding for anything other than money damages
paid by the Indemnifying Person. The Indemnifying Person may, without the
Indemnified Person's prior consent, settle or compromise any such action, claim
or proceeding or consent to entry of any judgment with respect to any such
action or claim that requires solely the payment of money damages by the
Indemnifying Person and that includes as an unconditional term thereof the
release by the claimant or the plaintiff of the Indemnified Person from all
liability in respect of such action, claim or proceeding.
Section 8.4 Survival of Representations and Warranties.
(a) The obligation of the Stockholders to indemnify BNC's
Indemnified Persons pursuant to Section 8.1 shall survive the consummation of
the transactions contemplated by this Agreement.
(b) The obligation of BNC to indemnify L&L's Indemnified Persons
pursuant to Section 8.2 shall survive the consummation of the transactions
contemplated by this Agreement.
(c) The provisions of this Article 8 shall apply to any claim of
Loss resulting or arising from any untruth or inaccuracy of any representation
or warranty of any party to this Agreement which gives rise to an indemnity to
one party from another party or parties, with the intent that all such claims
shall be subject to the procedures, limitations and other provisions contained
in this Article 8. The indemnification provided by Sections 8.1 and Section 8.2
shall be the sole and exclusive remedy available to the parties hereto for any
breach or inaccuracy of any of the representations or warranties by a party set
forth in this Agreement. Notwithstanding the foregoing, the provisions of this
Article 8 shall not be deemed to preclude an action by any party for,
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or a recovery pursuant to a final decision of a court of competent jurisdiction
against any party for, actual, and not negligent or unintentional, fraud.
ARTICLE 9
DEFINED TERMS
Section 9.1 Definitions. In addition to the other defined terms used
herein, as used in this Agreement, the following terms when capitalized have the
meanings indicated.
"Affiliate" has the meaning ascribed by Rule 12b-2 promulgated under the
Exchange Act.
"Agreement" means this Agreement and Plan of Merger, including the
Exhibits hereto and the Disclosure Schedule, all as amended or otherwise
modified from time to time.
"Applicable Law" means any statute, law, rule or regulation or any
judgement, order, writ, injunction or decree of any Governmental Entity to which
a specified Person or its property is subject.
"Benefit Arrangement" means any employment, severance or similar contract,
or any other contract, plan, policy or arrangement (whether or not written)
providing for compensation, bonus, profit-sharing, stock option or other stock
related rights or other forms of incentive or deferred compensation, vacation
benefits, insurance coverage (including any self-insured arrangement), health or
medical benefits, disability benefits, severance benefits and post-employment or
retirement benefits (including compensation, pension, health, medical or life
insurance benefits), other than the Employee Plans, that (a) is maintained,
administered or contributed to by the employer and (b) covers any employee or
former employee of the employer.
"Additional Shares" has the meaning ascribed to it in Section 2.1.
"Articles of Merger" means the Articles of Merger in the form attached
hereto as Exhibit "B."
"Closing" means the consummation of the Merger and the other transactions
contemplated by this Agreement.
"Closing Date" means the date on which the Closing occurs.
"Code" means the Internal Revenue Code of 1986, as amended.
"Disclosure Schedule" means the disclosure schedules and other documents
attached hereto as Exhibit "D" prepared by L&L and the Stockholders in
accordance with the applicable provisions of this Agreement.
"Effective Time" has the meaning ascribed to it in Section 1.2.
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"Employee Plan" means a plan or arrangement as defined in Section 3(3) of
ERISA, that (a) is subject to any provision of ERISA, (b) is maintained,
administered or contributed to by the employer and (c)covers any employee or
former employee of the employer.
"Employment Agreement" means an agreement in the form attached as Exhibit
"C" hereto to be entered into between BNC and each of the Stockholders.
"Environmental Laws" means all federal, state, local and foreign laws,
common law duties, ordinances, codes and regulations relating to pollution or
the protection of the environment.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and the rules and regulations promulgated thereunder.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Governmental Entity" means any court or tribunal in any jurisdiction or
any public, governmental or regulatory body, agency, department, commission,
board, bureau or other authority or instrumentality.
"Indemnified Person" has the meaning ascribed to it in Section 8.3.
"Indemnifying Person" has the meaning ascribed to it in Section 8.3.
"knowledge" whenever the term "knowledge" or "to the knowledge," or words
of similar import are used herein, the same shall mean and include any fact or
circumstance to which the affected Person either (a) had actual knowledge of, or
(b) should have had knowledge of, based upon reasonable inquiry made.
"Lahr and Charnholm Agreements" has the meaning ascribed to it in Section
2.6.
"L&L Annual Financial Statements" means the balance sheets and related
statements of operations, stockholders' equity and cash flows, and the related
notes thereto of L&L as of and for the fiscal years ended December 31, 1996 and
1995.
"L&L Common Stock" means the common stock of L&L.
"L&L Financial Statements" means the L&L Annual Financial Statements and
the L&L Interim Financial Statements, collectively.
"L&L Indemnified Persons" has the meaning ascribed to it in Section 8.2.
"L&L Interim Financial Statements" means the unaudited balance sheet and
the related unaudited statements of income and cash flows of L&L as of and for
the nine-month period ended September 30, 1997.
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"Leases" means any executory lease to which L&L is subject having future
rental payments of more than $20,000 in the aggregate.
"Leased Properties" has the meaning ascribed to it in Section 3.11.
"Liens" means pledges, liens, defects, leases, licenses, equities,
conditional sales contracts, charges, claims, encumbrances, security interests,
easements, restrictions, chattel mortgages, mortgages or deeds of trust, of any
kind or nature whatsoever.
"Material Adverse Effect" means any fact, circumstance, event or condition
which has or would have a material adverse effect on the business, operations,
assets, financial condition of or prospects of L&L.
"Material Contract," with respect to any Person, means any executory
contract, agreement or other understanding, whether or not reduced to writing,
to which such Person or its respective property is subject, including, without
limitation, (a) contracts, agreements and commitments not made in the ordinary
course of business involving an amount in excess of $20,000; (b) purchase
contracts and supply contracts involving an amount in excess of $20,000 on an
annual basis; (c) contracts, loan agreements, repurchase agreements, mortgages,
security agreements, trust indentures, promissory notes and other documents or
arrangements relating to the borrowing of money or for lines of credit; (d) any
hedge, swap, exchange, futures or similar agreements or contracts; (e)
agreements and other arrangements for the sale of any assets other than in the
ordinary course of business or for the grant of any options or preferential
rights to purchase any assets, property or rights involving an amount in excess
of $20,000; (f) any joint venture, partnership or similar contract involving
sharing revenues, expenses or profits; (g) any non-disclosure agreement,
non-competition agreement, tax indemnity, tax sharing or tax allocation
agreement; (h) documents granting any power of attorney to any Person; (i)
suretyship contracts, working capital maintenance or other forms of guaranty
agreements other than bonds and letters of credit executed or obtained in
connection with the submission of bids to contracting parties; (j) contracts or
commitments limiting or restraining such Person from engaging or competing in
any lines of business or with any Person; or (k) stockholder agreements or
agreements relating to the sale issuance or other transfer of any securities.
"Merger" means, the merger of L&L with and into J.D. Meier pursuant to this
Agreement and the Articles of Merger.
"Merger Consideration" has the meaning ascribed to it in Section 2.1.
"Multiemployer Plan" means a plan or arrangement as defined in Section
4001(a)(3) and 3(37) of ERISA.
"NBCA" means the North Dakota Business Corporation Act, as amended from
time to time.
"Owned Properties" has the meaning ascribed to it in Section 3.10.
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"Permitted Liens" means any mechanic's, worker's, materialmen's,
operator's, maritime or other liens arising as a matter of law in the ordinary
course of business.
"Personal Property" means all machinery, equipment, furniture, fixtures
and other corporeal or incorporeal (tangible and intangible) personal property
used by L&L to carry on its business as presently conducted.
"Person" means an individual, firm, corporation, general or limited
partnership, limited liability company, limited liability partnership, joint
venture, trust, governmental authority or body, association, unincorporated
organization or other entity.
"Policies" has the meaning ascribed to it in Section 3.21.
"Pre-Closing Periods" means all Tax periods ending at or before the
Closing Date and, with respect to any Tax period that includes but does not end
at the Closing Date, the portion of such period that ends at and includes the
Closing Date.
"Primary Share Delivery Date" has the meaning ascribed to it in Section
2.2.
"Primary Shares" has the meaning ascribed to it in Section 2.1.
"Proceedings" means any suit, action, proceeding, dispute or claim before
or investigation by any Governmental Entity.
"Returns" means all returns, reports, estimates, declarations and
statements of any nature regarding Taxes for any Pre-Closing Period required to
be filed by the taxpayer relating to its income, properties or operations.
"Securities Act" means the Securities Act of 1933, as amended.
"Surviving Corporation" has the meaning ascribed to it in Section 1.1.
"Taxes" means any federal, state, local, foreign or other taxes
(including, without limitation, income, alternative minimum, franchise,
property, sales, use, lease, excise, premium, payroll, wage, employment or
withholding taxes), fees, duties, assessments, withholdings or governmental
charges of any kind whatsoever (including interest, penalties and additions to
tax).
"BNC Common Stock" means the common stock, $.01 par value per share, of
BNC.
"BNC's Indemnified Persons" has the meaning ascribed to it in Section 8.1.
-32-
COR\60713.4
<PAGE>
ARTICLE 10
MISCELLANEOUS
Section 10.1Confidentiality.
(a) Until the Closing Date and subsequent to the termination of this
Agreement pursuant to Section 7.1, BNC will not utilize (except in evaluating
the transactions contemplated by this Agreement) and will keep confidential and
will not disclose to any third party any information obtained by it from L&L or
its representatives in connection with this Agreement except (a) that
information may be disclosed by BNC to its advisors in connection with the
negotiation of and the activities conducted pursuant to this Agreement, or (b)
to the extent that such information is or becomes generally available to the
public through no act or omission of BNC in violation of this Agreement.
(b) Until the Closing Date and subsequent to the termination of this
Agreement pursuant to Section 7.1, L&L and the Stockholders will not utilize
(except in evaluating the transactions contemplated by this Agreement) and will
keep confidential and will not disclose to any third party any information
obtained by it from BNC or its representatives in connection with this Agreement
except (a) that information may be disclosed by BNC to its advisors in
connection with the negotiation of and the activities conducted pursuant to this
Agreement, or (b) to the extent that such information is or becomes generally
available to the public through no act or omission of L&L or the Stockholders in
violation of this Agreement.
Section 10.2Remedies. Any party having any rights under any provisions of
this Agreement will have all rights and remedies set forth in this Agreement and
all rights and remedies which such party may have been granted at any time under
any other effective agreement or contract and all of the other rights which such
party may have under any Applicable Law. Any party having any rights or remedies
under this Agreement will be entitled to enforce such rights specifically,
without posting a bond or other security, to recover damages by reason of any
breach of any provision of this Agreement and to exercise all other rights
granted by law.
Section 10.3Notices. All notices hereunder must be in writing and shall be
deemed to have given upon receipt of delivery by: (a) personal delivery to the
designated Person, (b) certified or registered mail, postage prepaid, return
receipt requested, (c) a nationally recognized overnight courier service
(against a receipt therefor) or (d) facsimile transmission with confirmation of
receipt. All such notices must be addressed as follows or such other address as
to which any party hereto may have notified the other in writing:
If to BNC or J.D. Meier , to:
322 East Main
Bismarck, North Dakota 58501
Attention: Tracy J. Scott
Gregory K. Cleveland
Facsimile transmission No.: 701-222-3653
-33-
COR\60713.4
<PAGE>
if to L&L or the Stockholders, to:
500 North Ninth Street
Bismarck, North Dakota 58501
Attention: Gary E. Lahr
Facsimile transmission No.: 701-223-8522
Section 10.4Interpretation; Schedules. (a) When a reference is made in
this Agreement to a section or exhibit, such reference shall be to a section of,
or an exhibit to, this Agreement unless otherwise indicated. The table of
contents and headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement. Whenever the words "include," "includes" or "including" are used in
this Agreement, they shall be deemed to be followed by the words "without
limitation."
(b) The information set forth in the Disclosure Schedule to this
Agreement is qualified in its entirety by reference to the specific provisions
of this Agreement, and is not intended to constitute, and shall not be construed
as constituting, separate representations or warranties of the party to which
the Disclosure Schedule relates except as and to the extent provided in this
Agreement. Inclusion of information in the Disclosure Schedule shall not be
construed as an admission that such information is material for purposes of the
specific provisions of this Agreement to which such information relates.
Information included in the Disclosure Schedule that is not required to be so
included under the specific provisions of this Agreement shall be deemed to be
included for informational purposes only.
Section 10.5Headings; Gender. When a reference is made in this Agreement
to a section, exhibit or schedule, such reference shall be to a section, exhibit
or schedule of this Agreement unless otherwise indicated. The table of contents
and headings contained in this Agreement are for reference purposes only and
shall not affect in any way the meaning or interpretation of this Agreement. All
personal pronouns used in this Agreement shall include the other genders,
whether used in the masculine, feminine or neuter gender, and the singular shall
include the plural and vice versa, whenever and as often as may be appropriate.
Section 10.6Entire Agreement; No Third Party Beneficiaries. This Agreement
(including the documents, exhibits and instruments referred to herein) (a)
constitutes the entire agreement and supersedes all prior agreements, and
understandings and communications, both written and oral, among the parties with
respect to the subject matter hereof, and (b) is not intended to confer upon any
person other than the parties hereto any rights or remedies hereunder.
Section 10.7Governing Law. This Agreement shall be governed and construed
in accordance with the laws of the State of North Dakota without regard to any
applicable principles of conflicts of law.
Section 10.8Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto (whether by operation of law or otherwise) without the prior written
consent of the other parties.
-34-
COR\60713.4
<PAGE>
Section 10.9Severability. If any term or other provision of this Agreement
is held by a court of competent jurisdiction to be invalid, illegal or incapable
of being enforced by reason of any rule of law or public policy, all other
conditions and provisions of this Agreement shall nevertheless remain in full
force and effect so long as the economic or legal substance of the transactions
contemplated hereby is not affected in any adverse manner to either party. Upon
such determination that any term or other provision is invalid, illegal or
incapable of being enforced, the parties hereto shall negotiate in good faith to
modify this Agreement so as to effect the original intent of the parties as
closely as possible in an acceptable manner to the end that the transactions
contemplated hereby are fulfilled to the extent possible, and in any case such
term or provision shall be deemed amended to the extent necessary to make it no
longer invalid, illegal or unenforceable.
Section 10.1Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original and all of which taken
together shall constitute one and the same document.
Section 10.1Amendment. This Agreement may not be amended except by an
instrument in writing signed by each of the parties hereto.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed themselves or by their respective duly authorized officers as of the date
first written above.
BNCCORP., INC.
By:/s/ Gregory K. Cleveland
Gregory K. Cleveland
President
J.D. MEIER INSURANCE COMPANY
By:/s/ James Bierdeman
James Bierdeman
President
LIPS & LAHR, INC.
By:/s/ Gary E. Lahr
Gary E. Lahr
President
-35-
COR\60713.4
<PAGE>
STOCKHOLDERS:
/s/ William Wade
William Wade
/s/ Dale Ely
Dale Ely
/s/ Laif Olson
Laif Olson
/s/ Richard Lahr
Richard Lahr
/s/ David Clausnitzer
David Clausnitzer
-36-
COR\60713.4
<PAGE>
EXHIBIT A
MERGER CONSIDERATION
PRIMARY SHARES
The information set forth below is intended only to demonstrate the
calculation of the number of Primary Shares to be distributed to the
Stockholders on the Primary Share Delivery Date. The numbers included herein
will be adjusted to reflect the financial statements of L& L as of and for the
year ended December 31, 1997, when such financial statements delivered to BNC.
The price per share of BNC Common Stock and the commission multiple, $15 and
1.75, respectively, contained herein, will not, however, be adjusted.
Capitalized terms are used herein as defined in the Agreement to which this
exhibit is attached.
Purchase Price
1995 Gross commission income $ 1,621,352
1996 Gross commission income 1,606,177
1997 Gross commission income (Ann) 1,582,155
------------
TOTAL $ 4,809,684
============
AVERAGE OF THREE YEARS $ 1,603,228
============
Average @ 1.75 $ 2,805,649
Less
Liabilities assumed
Gary Volk contract 251,211
Daniel Halvorson contract 275,786
Evan Lips contract 127,776
Gary Lahr contract 578,576
Brad Charnholm contract 578,576
Bank note payable 102,616
Accounts payable 3,237
Accrued expenses 76,158
Insurance company payables 347,044
Other liabilities 0
------------
Total liabilities 2,340,980
Assets acquired
Cash (126,841)
Accounts receivable (142,907)
Notes Receivable (44,025)
Less Bad Debt Reserve & W/O's 77,863
Land (0)
L/H improvements, net of accum. deprec. (0)
F&Fixtures, net of accum deprec. (105,223)
Other assets (0)
Great West Profit Sharing Receivable (72,566)
Cash Surrender Value of Life Insurance (51,368)
Prepaid Federal Income Tax (15,680)
Prepaid State Income Tax (5,760)
-------------
Total assets (486,506)
Excess of liabilities over assets (1,854,474)
--------------
Purchase price $ 951,175
=============
BNC shares issued @ $15/share 63,412
=============
Fractional
Lips & Lahr Shareholders L&L Shares BNC Shares Cash
- ------------------------------------- ---------- ---------- -----------
William Wade/Susan Becker 396.62 14,158 $26.84
Dale Ely 344.89 12,312 $14.53
Laif Olson 344.89 12,312 $14.53
Rich Lahr 344.89 12,312 $14.53
David Clausnitzer 344.89 12,312 $14.53
---------- ---------- -----------
1776.18 63,406 $84.96
-37-
COR\60713.4
<PAGE>
EXHIBIT A-1
MERGER CONSIDERATION
ADDITIONAL SHARES
The information set forth below is intended only to demonstrate the
calculation of the number of Additional Shares to be distributed to the
Stockholders on the first anniversary of the Primary Share Delivery Date. The
numbers included herein will be adjusted to reflect the actual notes and
accounts receivable balances of L & L as of December 31, 1997 and the actual
amount accrued by L & L at December 31, 1997 for profit sharing payments from
certain insurance companies to be received in 1998 for business transacted in
1997 (the "Contingency Payment Accrual"). The price per share of BNC Common
Stock of $15 and the total reserve for notes and accounts receivable of
$100,000, contained herein, will not, however, be adjusted. Capitalized terms
are used herein as defined in the Agreement to which this exhibit is attached.
On the first anniversary of the Primary Share Delivery Date, the
Stockholders will be entitled to receive the number of shares of BNC Common
Stock calculated in accordance with the following equation: (A + B + C + D)
divided by $15 and, pursuant to Section 2.5 of the Agreement, a check for any
amount representing a fractional share both allocated to the Stockholders in the
same proportions as the shares delivered on the Primary Share Delivery Date.
WHEREIN:
"A" is equal to the amount collected on the M. G. Fleck Trucking note
receivable exceeding $16,353.00 (12/31/97 note balance of $46,353 less reserve
of $30,000);
"B" is equal to the amount collected on the Moos Trucking LLC note receivable
exceeding $0.00 (12/31/97 note balance of $22,137 less reserve of $22,137);
"C" is equal to the amount collected on all accounts receivable exceeding
$167,472.00 (12/31/97 total trade accounts receivable of $215,335.00 less
remaining reserve of $47,863.00 ($100,000 total agreed-upon reserve less amounts
reserved for M.G. Fleck Trucking and Moos Trucking LLC notes receivable)); and
"D" is equal to the amount collected in 1998 for profit sharing payments from
certain insurance companies for business transacted in 1997 less the Contingency
Payment Accrual made by L & L as of December 31, 1997.
-38-
COR\60713.4
<PAGE>
EXHIBIT B
ARTICLES OF MERGER
of
Lips & Lahr, Inc.
(a North Dakota corporation)
with and into
J. D. Meier Insurance Agency, Inc.
(a North Dakota corporation)
(filed pursuant to Section 10-19.1-58 of the
North Dakota Business Corporation Act)
In order to effect the merger of Lips & Lahr, Inc., a North Dakota
corporation ("L & L"), with and into J. D. Meier Insurance Agency, Inc., a North
Dakota corporation ("J. D. Meier"), each of J. D. Meier and L & L certifies
that:
First: The Amended & Restated Agreement and Plan of Merger between L & L
and J. D. Meier (the "Agreement"), providing for the merger of L & L with and
into J. D. Meier (the "Merger") has been duly approved by the shareholders of L
& L and J. D. Meier entitled to vote on such matters in accordance with the
requirements of Section 10-19.1-98 of the North Dakota Business Corporation Act.
Second: A copy of the Agreement is attached hereto and made a part hereof.
Third: These Articles of Merger shall be effective on the date filed and
recorded with the Secretary of State of North Dakota.
IN WITNESS WHEREOF, these Articles of Merger have been executed on this
1st day of January, 1998 by J. D. Meier and L & L, each acting through its
President and Secretary.
J. D. MEIER INSURANCE AGENCY, INC.
Attest: a North Dakota Corporation
By: /s/ Gregory K. Cleveland By:/s/ James Bierdeman
Secretary President
-39-
COR\60713.4
<PAGE>
LIPS & LAHR, INC.
Attest: a North Dakota Corporation
By: /s/ Dale Ely By: /s/ Gary Lahr
Secretary President
-40-
COR\60713.4
Exhibit 10.13
THIRD 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 the 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 Agreement and the Note were amended on February 11,1997 and on July
16,1997.
C. The Bank and the Borrower now wish to further amend the Agreement and
the Note pursuant to the terms and provisions of this Third Amendment to Term
Loan Agreement and Term Note (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, 1998" in the
Note as the maturity date of the loan is hereby deleted and replaced with
"February 19, 1999."
2. Primary Capital to Assets. Paragraph 4.15 (d) is deleted and replaced
with the following:
(d) Primary Capital to Assets for BNC National Bank as follows: at
least 6.25% measured as of March 31, 1998: at least 6.50% measured as of
June 30, 1998; at least 6.75% measured as of September 30, 1998; and at
least 7.00% measured as of December 31, 1998. Primary Capital to Assets
for BNC National Bank of Minnesota of at least 7.0% measured as of each
March 31, 1998, June 30, 1998, September 30, 1998 and December 31, 1998.
3. Return on Assets. Paragraph 4.15 (c) of the Agreement is deleted and
replaced with the following:
<PAGE>
(c) an average return on Assets for BNC National Bank of at least
.70% measured as of March 31, 1998; at least .75% measured as of each June
30, 1998 and September 30, 1998 and at least .85% measured as of December
31, 1998. An average return on Assets of BNC National Bank of Minnesota of
at least 1.00% measured as of each March 31, 1998, June 30, 1998,
September 30, 1998 and December 31, 1998.
4. 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.
5. Preconditions to 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.
6. 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.
7. 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.
8. 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 19, 1998.
BNCCORP, INC.,
a Delaware corporation
By: /s/ Gregory K. Cleveland
Gregory K. Cleveland, President
FIRSTAR BANK MILWAUKEE, N.A.
(Bank)
By: /s/ Lynn F. Hebel
Lynn F Hebel, Vice President
Exhibit 10.14
THIRD AMENDMENT TO REVOLVING CREDIT AGREEMENT
AND REVOLVING CREDIT NOTE
This Third Amendment to Revolving Credit Agreement and Revolving Credit
Note, dated as of the date specified below (the "Amendment"), 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"), selling 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 Agreement and the Note were amended on February 11,1997 and July
16,1997, and the Note was increased to $12,000,000.
C. The Borrower has requested that the Bank permit certain additional
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 Agreement.
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. Extension of Maturity Date. All references to "February 19, 1998" in the
Note and the Agreement as the maturity date of the loan are hereby deleted and
replaced with "February 19, 1999."
2. Primary Capital to Assets. Paragraph 4.15 (a) is deleted and replaced
with the following:
(a) Primary Capital to Assets for BNC National Bank as follows: at
least 6.25% measured as of March 31, 1998; at least 6.50% measured as of
June 30, 1998; at least 6.75% measured as of September 30, 1998; and at
least 7.00% measured as of December 31, 1998. Primary Capital to Assets
for BNC National Bank of Minnesota of at least 7.0% measured as of each
March 31, 1998, June 30, 1998, September 30, 1998 and December 31, 1998.
<PAGE>
3. 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 .70%
measured as of March 31, 1998; at least .75% measured as of each June 30,
1998 and September 30, 1998; and at least .85% measured as of December 31,
1998. An average return on Assets of BNC National Bank of Minnesota of at
least 1.00% measured as of each March 31, 1998, June 30, 1998, September
30, 1998 and December 31, 1998.
4. 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.
5. Preconditions to 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.
6. 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.
7. 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.
8. 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 19, 1998.
BNCCORP, INC.,
a Delaware corporation
By: /s/Gregory K. Cleveland
Gregory K. Cleveland, President
FIRSTAR BANK MILWAUKEE N.A. (Bank)
By: /s/ Lynn F. Hebel
Lynn F Hebel, Vice President
Exhibit 10.15
STOCK OPTION AGREEMENT
FOR THE GRANT OF
INCENTIVE STOCK OPTIONS UNDER THE
BNCCORP, INC.
1995 STOCK INCENTIVE PLAN
THIS AGREEMENT is entered into as of January 2,1998, by and between
BNCCORP, INC., a Delaware corporation (the "Company"), and Name ("Optionee").
WHEREAS Optionee is a key employee of the Company and the Company considers
it desirable and in its best interest that Optionee be given an inducement to
acquire a proprietary interest in the Company and an incentive to advance the
interests of the Company by possessing an option to purchase shares of the
common stock of the Company, $.01 par value per share (the "Common Stock") in
accordance with the BNCCORP, Inc. 1995 Stock Incentive Plan (the "Plan").
NOW, THEREFORE, in consideration of the premises, it is agreed by and
between the parties as follows:
I.
Grant of Option
The Company hereby grants to Optionee effective January 2, 1998 (the "Date
of Grant") the right, privilege and option to purchase Shares shares of Common
Stock (the "Option") at an exercise price equal to the closing price of BNCCORP,
Inc. common stock as listed on the NASDAQ at the close of the market on January
2, 1998 of $17.00. The Option shall be exercisable at the time specified in
Section II below. The Option is an incentive stock option under Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code") and shall not be
treated as a non-qualified stock option.
II.
Time of Exercise
2.1 Subject to the provisions of the Plan and the other provisions of this
Section II, and provided that the Optionee remains employed by the Company on
the dates the Option becomes exercisable, the Optionee shall be entitled to
exercise the Option as follows:
a. During the period beginning on the Date of Grant and ending one
year after the Date of Grant, Optionee is not entitled to exercise any
portion of the Option.
b. During the period beginning one year after the Date of Grant and
ending two years after the Date of Grant, Optionee is entitled to exercise
the Option to purchase 20% of the total number of shares covered by the
Option.
<PAGE>
c. During the period beginning two years after the Date of Grant and
ending three years after the Date of Grant, Optionee is entitled to
exercise the Option to purchase 40% of the total number of shares covered
by the Option, less any shares previously purchased.
d. During the period beginning three years after the Date of Grant
and ending four years after the Date of Grant, Optionee is entitled to
exercise the Option to purchase 60% of the total number of shares covered
by the Option, less any shares previously purchased.
e. During the period beginning four years after the Date of Grant
and ending five years after the Date of Grant, Optionee is entitled to
exercise the Option to purchase 80% of the total number of shares covered
by the Option, less any shares previously purchased.
f. During the period beginning five years after the Date if Grant
and ending ten years after the Date of Grant, Optionee is entitled to
exercise the Option to purchase 100% of the total number of shares covered
by the Option, less any shares previously purchased.
The Option shall expire and may not be exercised later than ten years after the
Date of Grant.
2.2 During Optionee's lifetime, the Option may be exercised only by him or
his guardian if he has been declared incompetent. If Optionee's employment is
terminated, other than as a result of death, disability or retirement, the
Option must be exercised, to the extent exercisable at the time of termination
of employment, within 30 days of the date on which he ceases to be an employee,
except that the Committee may upon request extend the period after termination
of employment during which the Option may be exercised, but in no event later
than ten years after the date of grant.
2.3 If an Optionee ceases to be an employee because of disability within
the meaning of Section 22(e)(3) of the Code, the Option must be exercised, to
the extent otherwise exercisable, within one year from the date on which he
ceases to be an employee, but in no event later than ten years after the date of
grant.
2.4 In the event of Optionee's death while employed by the Company, the
Option must be exercised by his estate, or by the person to whom such right
evolves from him by reason of his death, to the extent otherwise exercisable,
within one year from the date of death, but in no event later than ten years
after the date of grant.
2.5 In the event of the Optionee's retirement from the employ of the
Company, the Option must be exercised, to the extent otherwise exercisable,
within one year from the date of retirement, but in no event later than ten
years after the date of grant.
III.
Method of Exercise of Option
3.1 Optionee may exercise all or a portion of the Option by delivering to
the Company a signed written notice of his intention to exercise the Option,
specifying therein the number of shares to be purchased. Upon receiving such
notice, and after the Company has received full payment of the
<PAGE>
Exercise Price, the appropriate officer of the Company shall cause the transfer
of title of the shares pur chased to Optionee on the Company's stock records and
cause to be issued to Optionee a stock certificate for the number of shares
being acquired. Optionee shall not have any rights as a shareholder until the
stock certificate is issued to him.
3.2 The Option may be exercised by the payment of the Exercise Price in
cash, in shares of Common Stock held for six months or in a combination of cash
and shares of Common Stock held for six months. The Optionee may also pay the
Exercise Price by delivering a properly executed exercise notice together with
irrevocable instructions to a broker approved by the Compensation Committee
(with a copy to the Company) to promptly deliver to the Company the amount of
sale or loan proceeds to pay the Exercise Price.
IV.
No Contract of Employment Intended
Subject to the terms of any Employment Agreement that may be in effect
from time to time, nothing in this Agreement shall confer upon Optionee any
right to continue in the employment of the Company or any of its subsidiaries,
or to interfere in any way with the right of the Company or any of its
subsidiaries to terminate Optionee's employment relationship with the Company or
any of its subsidiaries at any time.
V.
Binding Effect
This Agreement shall inure to the benefit of and be binding upon the
parties hereto and their respective heirs, executors, administrators and
successors.
VI.
Non-Transferability
The Option granted hereby may not be transferred, assigned, pledged or
hypothecated in any manner, by operation of law or otherwise, other than by will
or by the laws of descent and distribution and shall not be subject to
execution, attachment or similar process.
<PAGE>
VII.
Inconsistent Provisions
The Option granted hereby is subject to the provisions of the Plan as in
effect on the date hereof and as it may be amended. In the event any provision
of this Agreement conflicts with such a provision of the Plan, the Plan
provision shall control.
IN WITNESS WHEREOF the parties hereto have caused this Agreement to be
executed on the day and year first above written.
BNCCORP, INC.
By: /s/ Jerry Woodcox
Jerry Woodcox, Member
of the Compensation Committee
Name
Optionee
Exhibit 10.16
CONTRACT OF SALE
AGREEMENT made this 29th day of August, 1997, by and between BNC National
Bank, a National Banking Association, (Buyer) and Preferred Investment Services,
Inc., an Illinois corporation, (Seller).
W I T N E S S E T H:
WHEREAS, Seller pursuant to written agreement provides certain
administrative services with respect to Preferred Pension Investors I-87, an
Illinois partnership formed to permit employee benefit plan trusts to buy, sell
and otherwise deal with stocks, bonds and other fixed income securities
consistent with the investment objectives of ERISA; and
WHEREAS, Seller desires to sell and assign its rights and obligations under
such written agreement; and
WHEREAS, Buyer desires to assume certain administrative obligations and to
buy from the Seller under the terms and conditions set forth herein its rights
under said written agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth, the parties have agreed and by these presents do agree as
follows:
ARTICLE 1: PURCHASE AND SALE OF ASSETS
1.01 On the Closing Date (hereinafter defined) the Seller shall sell and Buyer
shall purchase all of the Seller's right, title, and interest in and to
the following designated assets owned by the Seller as the same shall
exist on the Closing Date (collectively, the "Assets"):
(a) All rights, privileges, and interests in the INVESTORS I-87
MANAGEMENT AGREEMENT dated April 21, 1987, ("I-87 Agreement")
between Preferred Investment Services, Inc., and Preferred Pension
Investors I-87, a partnership.
(b) All books and records, historical billing information,
correspondence files, customer files or any other business records
relating to or used in connection with the servicing of the contract
mentioned in subparagraph (a) above.
ARTICLE 2: PURCHASE PRICE AND PAYMENTS
2.01 Purchase Price. Buyer agrees to pay to Seller in consideration of the
Assets described above the aggregate sum of 4.71 per cent (%) of the
assets under management on August 31, 1997 pursuant to the I-87 Agreement.
<PAGE>
2.02 Method of Payment of Purchase Price. The purchase price shall be paid as
follows:
(a) Earnest Money. Contemporaneously with the signing of this Agreement,
Buyer shall pay Seller the sum of Three Hundred Thousand Dollars
($300,000.00) (the "Earnest Money"). The Earnest Money shall be paid
on the purchase price. In the event that the transactions
contemplated by this Agreement are not consummated for any reason
other than a material breach of this Agreement by Buyer the Earnest
Money promptly shall be returned to Buyer.
(b) Cash Payment For Balance. Buyer shall pay to Seller the balance of
the purchase price by wire transfer or other immediately available
funds pursuant to subparagraph (c) below. As soon as possible after
Closing, Seller shall furnish Buyer with a detailed listing of
assets under management pursuant to the I-87 Agreement along with
the valuation of the assets on August 31, 1997. Such listing shall
be in the form of the August 31, 1997 participants statements
prepared by Huntington Trust Company.
(c) Final Accounting. Buyer shall be liable for all costs and expenses and
shall be entitled to all income resulting from the administration of
the Assets from and after August 31, 1997. Seller shall be liable for
all costs and expenses and shall be entitled to all income resulting
from the administration of the Assets prior to September 1, 1997.
Realizing that both costs and expenses are billed and paid on a
quarterly basis, a final accounting, including sums due pursuant to
subparagraph (b) above, shall be prepared by Buyer within five
business days after receipt from Seller of all invoices for expenses
for the administration of the Assets for the third quarter of 1997.
Buyer shall pay the total invoices for the third quarter and shall
receive credit against the purchase price for the actual expenses due
for the months of July and August 1997. Seller shall assign to Buyer
the right to receive the quarterly management fee from the Preferred
Pension Investors I-87 Partnership for management of the Assets and
Buyer shall credit to Seller the actual management fees due for the
months of July and August 1997. The final accounting along with
payment for the balance due shall be remitted to Seller not later that
the fifth business day following receipt by Buyer of the statements
for expenses as mentioned above.
ARTICLE 3: ASSUMPTION OF LIABILITlES
3.01 Except as expressly set forth below in this paragraph 3.01, Buyer does not
assume any liabilities or obligations of the Seller and Seller shall
defend, indemnify and hold Buyer harmless from and against any and all
obligations or liabilities of the Seller other than those expressly
assumed. From and after the Closing Date, Buyer shall assume and pay,
perform and discharge, and indemnify and hold Seller harmless from and
against, the following future liabilities, obligations and commitments of
Seller to be observed and performed by Seller from and after the Closing
Date except obligations, liabilities or commitments accrued prior to the
Closing Date:
(a) All of Seller's obligations and commitments from and under the I-87
Agreement referred to in subparagraph 1.01 as the same may be
modified with the cooperation of Buyer on or prior to the Closing
Date.
<PAGE>
ARTICLE 4: CLOSING DATE AND CLOSING TRANSACTIONS
4.01 The Closing of this Agreement shall be held on August 31, 1997. Closing
shall take place at Seller's offices in Bismarck, North Dakota, or such
location as Buyer and Seller shall mutually agree.
4.02 Seller agrees that on the Closing Date it will deliver to Buyer such
assignments and consents to transfer, all in form satisfactory to the
Buyer's counsel, as shall be effective to transfer to Buyer the assets to
be conveyed, transferred and delivered to Buyer as provided in this
Agreement. Without limiting the generality of the foregoing, Seller shall
deliver to Buyer:
(a) Appropriate instruments, in form satisfactory to Buyer's counsel,
assigning and transferring to Buyer as of the Closing Date, all of
the Seller's right, title and interest in, to and under all of the
rights, assets and properties described in Section 1.01.
ARTICLE 5: REPRESENTATIONS, WARRANTIES AND AGREEMENTS
5.01 Seller hereby represents and warrants to Buyer as follows, which
representation and warranties, together with all other representations and
warranties of Seller in this Agreement, shall, subject to the provisions
of paragraph 9.02 hereof, survive the date hereof and the closing:
(a) Seller is a corporation duly organized, validly existing and in good
standing under the laws of the state of Illinois and has all
requisite power and authority to enter into this Agreement and
perform its obligations hereunder.
(b) The execution and delivery of this Agreement by Seller has been duly
and validly authorized and approved by all necessary action by the
Seller, and this Agreement is valid and binding agreement,
enforceable against Seller in accordance with its terms.
(c) The execution and carrying out of this Agreement and compliance with
the provisions hereof by Seller will not violate any provision of
law, will not, with or without the giving of notice and/or the
passage of time, conflict with or result in any breach of any of the
terms or conditions of, or constitute a default under any agreement
or other instrument to which Seller is a party or by which it is
bound, and will not result in the creation of any lien charge or
encumbrance upon Seller's assets conveyed hereunder.
(d) Seller has, or will secure, all requisite consents and assignments
and is entitled to sell and convey to the Buyer all rights, assets
and property described in Section 1.01 hereof, free and clear of all
liens, pledges, encumbrances, charges and adverse claims whatsoever.
(e) There are no actions, suits, proceedings, or investigations pending,
or, to the knowledge of Seller, threatened, against Seller which may
materially adversely affect the assets conveyed hereunder or
customer relations of Seller's clients or the right of Seller to
dispose of the assets being sold hereunder, or to enter into or
carry out this Agreement, nor does Seller know of any basis for any
such litigation, proceeding or investigation in the future.
<PAGE>
(f) No representation or warranty made herein by Seller, or any written
statement, schedule or certificate furnished to Buyer pursuant
hereto or in connection with the transactions contemplated hereby by
the Seller contains any untrue Statement of material fact or omits a
material fact necessary to make the statement contained therein not
misleading.
(g) Seller has timely filed all Federal and state income tax returns
relating to the assets conveyed and there are no proceedings pending
nor to the knowledge of Seller threatened that would result in the
imposition of additional tax based on income which might result in
filing of a lien on any of the assets being acquired hereunder.
(h) The contract to be transferred or assigned to Buyer under this
Agreement will, on the Closing Date, be in full force and effect.
Seller represents and warrants that Seller has complied in all
material respects with the provisions of such contacts and is not,
and at the time of Closing will not be in material default under
such contract.
5.02 Buyer hereby represents and warrants to Seller as follows:
(a) Buyer is a corporation duly organized, validly existing and in good
standing under the applicable laws of the State of North Dakota, and
has all requisite power and authority to enter into this Agreement
and perform its obligations hereunder.
(b) The execution and delivery of this Agreement by Buyer has been duly
and validly authorized and approved by all necessary action, and
this Agreement is valid and binding upon Buyer in accordance with
its terms.
(c) The execution and carrying out of this Agreement and the compliance
with the provisions hereof by Buyer will not violate any provision
of law, will not, with or without the giving of notice and/or the
passage of time, conflict with or result in any breach of any of the
terms or conditions of, or constitute a default under any agreement
or other instrument to which Buyer is a party or by which it is
bound, and will not result in the creation of any lien, charge or
encumbrance upon Buyer's assets.
(d) No representation or warranty of Buyer, or any statement or
certificate furnished to Seller hereunder or in connection with the
transactions contemplated hereby, contains or will contain any
untrue statement of a material fact or omits or will omit to state a
material fact necessary to make the statement contained therein not
misleading (except to the extent that such statements are made in
reliance on Seller's representations and warranties).
ARTICLE 6: CONDITIONS TO OBLIGATIONS
6.01 The obligation of Buyer to perform or fulfill or carry out its agreements,
undertakings and obligations herein made or expressed to be performed,
fulfilled or carried out on or after the date hereof and on or before
Closing Date is and shall be subject to fulfillment of or compliance with,
on the date hereof and on or before Closing Date, of the following
conditions precedent, any of which may be waived by Buyer:
<PAGE>
(a) Seller's representations and warranties contained in this Agreement
shall be true in all material respects; Seller shall have performed
and complied in all material respects with all agreements required
by this Agreement to be performed or complied with by it prior to or
on the closing date.
(b) There shall not have been instituted by any third party any suit or
proceeding to restrain or invalidate this transaction or seeking
damages from or to impose obligations upon Buyer as a result of this
transaction which, in Buyer's good faith judgment, based upon the
written advice of counsel, a copy of which shall be delivered to
Seller, would involve expense or lapse of time that would be
materially adverse to Buyer's interests.
(c) There shall have been no material adverse change in the assets under
management pursuant to the agreement between the date hereof and the
Closing Date, and the business of Seller shall have been conducted
between the date hereof and the Closing Date in the ordinary course
of business consistent in all material respects with past practices.
6.02 The obligation of Seller to perform or fulfill or carry out their
agreements, undertakings and obligations herein made or expressed or to be
performed, fulfilled or carried out on or after the date hereof is and
shall be subject to fulfillment of or compliance with, on the Closing
Date, the following conditions precedent, any of which may be waived by
Seller:
(a) Buyer's representations and warranties contained in this Agreement
shall be true in all material respects.
(b) There shall not have been instituted by any third party any suit or
proceeding to restrain or invalidate this transaction or seeking
damages from or to impose obligations upon Seller as a result of
this transaction which in Seller's good faith judgment, based upon
the written advice of counsel, a copy of which shall be delivered to
Buyer, would involve expense or lapse of time that would be
materially adverse to Seller's interests.
ARTICLE 7: CLOSING
7.01 The Closing Date shall be August 31, 1997.
7.02 If this Agreement is terminated because of the mutual agreement of the
parties or because any condition precedent to the obligations set forth in
Section 6 hereof has not been timely satisfied or waived, then this
Agreement shall become null and void and have no further effect, except
that Seller and Buyer shall continue to indemnify and hold harmless the
other, its officers, directors, partners or affiliated companies against
any claim arising out of any breach of such party's, or its affiliated
company's, representations and warranties with respect to the absence of
any claim by any broker, finder, agent or other intermediary.
ARTICLE 8: INDEMNITY
8.01 Seller agrees from and after the Closing Date to indemnify and to hold
Buyer harmless from and against and in respect of any losses incurred by
Buyer from:
<PAGE>
(a) Breach of any representation or warranty or non-fulfillment of any
agreement or covenant on the part of the Seller which survives the
Closing Date under this Agreement.
(b) Any claims made by creditors of Seller relating to the assets
conveyed hereunder
(c) All reasonable costs and expenses (including reasonable attorneys'
fees) incurred by Buyer in connection with any action, suit,
proceeding, demand, assessment or judgment incident to any of the
matters Buyer is indemnified against by Seller in this Agreement.
(d) All costs and expenses (including reasonable attorneys' fees)
incurred by Buyer as a result of the failure of Seller to secure any
consent to any agreement Seller was aware of to which such consent
was required to be secured by Seller hereunder in order to vest
Buyer with ownership of the assets.
8.02 Buyer agrees from and after the Closing to indemnify and to hold Seller
harmless from and against and in respect of any losses incurred by Seller
from:
(a) Any and all damages, costs, claims and expenses arising by reason of
Buyer's failure to materially perform and discharge all of the
obligations and liabilities assumed by it hereunder.
(b) Any claims made by creditors of Buyer relating to the asset conveyed
hereunder which are incurred by Buyer from and after the Closing
Date.
(c) Any damage or deficiency resulting from any material
misrepresentation, breach of warranty, or non-fulfillment of any
agreement or covenant on the part of the Buyer under this Agreement,
or from any material misrepresentation in or material omission from
any other instrument furnished or to be furnished to Seller
hereunder.
(d) All reasonable costs and expenses (including reasonable attorneys'
fees) incurred by Seller in connection with any action, suit,
proceeding, demand, assessment or judgment incident to any of the
matters Seller is indemnified against by Buyer in this Agreement.
8.03 The remedies provided to Seller and Buyer by this indemnity shall be in
addition to, and not in lieu of, any other remedies to which the
respective party is entitled at law or in equity for any breach or
noncompliance by the other with the provisions of this Agreement.
8.04 Seller and Buyer each agrees to give prompt written notice to the other of
any claim against the party giving notice which might give rise to a claim
by it against the other party hereto based upon the indemnity agreement
contained in Sections 8.01 and 8.02 hereof, stating the nature and basis
of the claim and the actual or estimated amount thereof. In the event any
action, suit or proceeding is brought against Seller or Buyer with respect
to which the other party hereto may have liability under the indemnity
agreement contained in Sections 8.01 or 8.02 hereof, the indemnifying
party shall have the right, at its sole cost and expense, to defend such
action in the name and on behalf of the indemnified party and in
connection with any such action, suit or proceeding, the parties hereto
agree to render to each other such assistance as may reasonably be
required in order to insure the proper and adequate defense of any such
action, suit or proceeding. The party hereto seeking indemnification
hereunder shall not make any settlement of any claim which might give rise
to liability to the other party hereto under the indemnity
<PAGE>
contained in Sections 8.01 or 8.02 hereof without the written consent of
such other party, which consent such other party covenants shall not be
unreasonably withheld. In any event the indemnifying party shall not be
obligated to make any payment pursuant to this indemnity agreement until
the aggregate amount of the indemnifying party's liability hereunder for
all claims exceeds $25,000 in the aggregate.
ARTICLE 9: MISCELLANEOUS
9.01 Each party hereto agrees to use its best efforts to cause the consummation
of the transactions contemplated hereby including, but not limited to,
using its best efforts to assure that the conditions to Closing are
satisfied.
9.02 Each party hereto covenants and agrees that its representations and
warranties contained in this Agreement and in any instrument of sale,
assignment, conveyance, and transfer executed and delivered pursuant to
this Agreement shall survive the date hereof and the closing, and such
representations contained therein shall be of no further force and effect
after the end of the twelfth (12th) month following the date hereof,
except as to breaches theretofore discovered.
9.03 All notices, claims and other communications hereunder shall be in writing
and shall be deemed to have been duly given if personally delivered or
mailed first class, postage prepaid:
(a) if to Buyer:
Mr. Tracy J. Scott
CEO
BNC National Bank
322 East Main
Bismarck, North Dakota 58501
(b) if to Seller:
Mr. Elliott Simon
President
Preferred Investment Services, Inc.
One East Wacker Drive, Suite 3622
Chicago, Illinois 60601
A. or at such other address as any party may from time to time furnish
to the other party by notice given in accordance with the provisions
of this Section. All notices shall be deemed given when mailed or
personally delivered in the manner provided in this Section.
9.04 This Agreement, together with the Exhibits hereto, contains the entire
understanding between the parties hereto concerning the subject matter
hereof and may not be changed, modified, altered or terminated, except by
an agreement in writing executed by the parties hereto. Any waiver by
either party of any of its rights under this Agreement or of any breach of
this Agreement shall not constitute a waiver of any other rights or of any
other or future breach.
<PAGE>
9.05 Each and all of the rights and remedies in this Agreement provided, and
each and all of the rights and remedies allowed at law in equity in like
case, shall be cumulative, and be exercise of one right or remedy shall
not be exclusive of the right to exercise or resort to any and all other
rights or remedies provided in this Agreement or at law or in equity.
9.06 This Agreement and all rights and obligations of the Buyer may be
assigned, either before or after the Closing Date, without the consent of
Seller, to an affiliate or subsidiary of Buyer or a limited partnership,
the general partner of which is a wholly-owned subsidiary of Buyer,
provided that any such assignment shall not relieve Buyer of any of its
obligations hereunder.
9.07 Descriptive headings are for convenience only and shall not control or
affect the meaning or construction of any provisions of this Agreement.
9.08 This Agreement has been executed in, and shall be construed in accordance
with and subject to the laws and decisions of the State of North Dakota,
applicable to contracts made and to be performed entirely therein. This
Agreement may be executed in several counterparts, each of which shall be
an original; but such counterparts shall together constitute one and the
same instrument.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
on the day and year first above written.
BUYER:
BNC NATIONAL BANK
By: /s/ Tracy J. Scott
TRACY J. SCOTT
Its Chief Executive Officer
SELLER:
PREFERRED, INVESTMENT SERVICES,
INC.
By: /s/ Elliot Simon
ELLIOT SIMON
Its President
Exhibit 10.17
ASSIGNMENT AGREEMENT
THIS ASSIGNMENT AGREEMENT made this 29th day of August, 1997, by and
between Preferred Investment Services, Inc., with its principal place of
business at One East Wacker Drive, Suite 3622, Chicago, Illinois 60601,
("Assignor") and BNC National Bank, a National Banking Association, with its
principal place of business at 322 East Main Street, Bismarck, North Dakota
58501 ("Assignee").
WITNESSETH:
I
Assignor, for and in consideration of the payment to Assignor by Assignee
of the sum of One Dollar ($1.00) in cash, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
does hereby sell, assign, transfer and convey unto Assignee and Assignee's
successors and assigns, all of Assignor's right, title and interest in and to
the following (collectively, the "Contracts");
(a) All rights, privileges, and interests in the Management Agreement
dated between Preferred Investment Services, Inc. and Preferred
Pension Investors I-87, an Illinois Partnership, including but not
limited to Assignor's right to the third quarter 1997 management
fees.
(b) All books and records, historical billing information,
correspondence files, customer files or any other business records
relating to or used in connection with the servicing of the contract
mentioned in subparagraph (a) above.
II
Assignor represents, covenants and warrants that:
B. True, correct and complete copies of the Contract and all amendments,
modifications, supplements and exhibits thereto have heretofore been
provided to Assignee.
B. Assignor has not previously sold, assigned, transferred or conveyed all or
any part of its right, title and interest in and to the Contract and the
right, title and interest of Assignor in and to the Contract is free and
clear of all security interests, pledges, chattel mortgages, liens, taxes,
charges, encumbrances, counterclaims, rights of set-off and adverse claims
whatsoever.
C. Assignor has full and complete right, power and authority to sell,
transfer, assign and convey all of its right, title and interest in and to
the Contract, and Assignor has obtained all consents
<PAGE>
necessary or appropriate in order to validly and effectively sell, assign,
transfer and convey to Assignee all right, title and interest of Assignor
in and to the Contract.
D. The Contract has been terminated or is in default as a result of any acts
or omissions of Assignor and the Contract is valid and enforceable by
Assignee in accordance with its terms and the Contract is free from
set-off, counterclaim and defense of any nature.
E. Assignor has not breached and is not in default under the Contract and the
execution and performance of this Assignment Agreement will not constitute
or result in a breach of or a default under the Contract.
F. Assignor warrants and will defend the right, title and interest of
Assignor and Assignee in and to the Contract against the claims of all
persons whosoever.
G. Assignor agrees that a copy of this Assignment Agreement can be relied
upon as if it were an original.
III
Assignee, for and in consideration of the above assignment and the above
representations, covenants and warranties of Assignor, and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, does hereby assume the future obligations of Assignor under the
Contract and agrees to observe and perform all of the terms, covenants,
conditions and provisions of the Contract therein provided to be observed and
performed by Assignor from and after the date hereof, except liabilities or
obligations accrued prior to the date hereof.
IN WITNESS WHEREOF, Assignor and Assignee have executed this Assignment
Agreement as of the day and year first above written.
"ASSIGNOR" "ASSIGNEE"
PREFERRED INVESTMENT BNC NATIONAL BANK
SERVICES, INC.
By:\s\ Elliott Simon By: \s\ Tracy J. Scott
ELLIOTT SIMON TRACY J. SCOTT
Its President Its CEO
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 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 included or incorporated by reference in the Form 10-KSB, into the
Company's previously filed Registration Statements, File Numbers 333-03512 and
333-24735.
ARTHUR ANDERSEN LLP
/s/ Arthur Andersen LLP
-----------------------------------
Minneapolis, Minnesota,
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted
from the balance sheet dated 12/31/97 and statement of income
for the twelve months ended 12/31/97 and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<CIK> 0000945434
<NAME> BNCCORP, INC.
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 13,058
<INT-BEARING-DEPOSITS> 2,231
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<LOANS> 232,131
<ALLOWANCE> 3,069
<TOTAL-ASSETS> 360,121
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<SHORT-TERM> 46,503
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0
0
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,512
<EPS-PRIMARY> .65
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<YIELD-ACTUAL> 9.06
<LOANS-NON> 376
<LOANS-PAST> 1,016
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</TABLE>
