U.S. Securities and Exchange Commission
Washington, D.C. 20549
-----
FORM 10-QSB
-----
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarter ended March 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ________ to ________
Commission File No. 0-26290
BNCCORP, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 45-0402816
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization
322 East Main
Bismarck, North Dakota 58501
(Address of principal executive offices)
(701) 250-3040
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No ___
The number of shares of the Registrant's outstanding common stock on May 1,
1998 was 2,402,684
Transitional Small Business Disclosure Format: Yes ___ No X
1
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share and per share data)
ASSETS March 31, December 31,
1998 1997
---------- ----------
(unaudited)
CASH AND DUE FROM BANKS...............................$ 7,980 $ 13,184
INTEREST - BEARING DEPOSITS WITH BANKS................ 2,090 2,231
FEDERAL FUNDS SOLD.................................... 3,200 --
SECURITIES AVAILABLE FOR SALE......................... 85,627 94,624
LOANS AND LEASES, net of allowance for loan
losses of $3,113 at March 31, 1998 and
$3,069 at December 31, 1997....................... 229,304 232,131
PREMISES, LEASEHOLD IMPROVEMENTS AND EQUIPMENT, net... 8,571 8,617
ACCRUED INTEREST RECEIVABLE........................... 2,570 2,865
OTHER ASSETS.......................................... 2,198 2,715
DEFERRED CHARGES AND INTANGIBLE ASSETS, net........... 4,478 4,636
---------- ----------
$ 346,018 $ 361,003
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS:
Noninterest-bearing................................$ 24,949 $ 25,795
Interest-bearing -
Savings, NOW and money market................... 65,245 75,630
Time deposits $100,000 and over................. 31,253 36,334
Other time deposits............................. 126,784 125,065
SHORT-TERM BORROWINGS................................. 46,267 46,503
LONG-TERM BORROWINGS.................................. 21,322 21,812
OTHER LIABILITIES..................................... 6,370 6,716
---------- ----------
Total liabilities............................... 322,190 337,855
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 2,000,000
shares authorized; no shares issued
or outstanding.................................. -- --
Common stock, $.01 par value, 10,000,000
shares authorized; 2,400,749 and 2,402,126
shares issued and outstanding
(excluding 25,380 shares held in treasury)
at March 31, 1998 and December 31, 1997,
respectively.................................... 24 24
Capital surplus.................................... 13,801 13,785
Retained earnings.................................. 10,075 9,385
Treasury stock (25,380 shares)..................... (216) (216)
Accumulated other comprehensive income, net
of income tax effects of $87 and $97............ 144 170
---------- ----------
Total stockholders' equity...................... 23,828 23,148
---------- ----------
$ 346,018 $ 361,003
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the Three Months Ended March 31
(In thousands, except per share data)
1998 1997
--------- ----------
(unaudited)
INTEREST INCOME:
Interest on loans................................... $ 5,771 $ 4,974
Interest on investment securities -
Taxable.......................................... 1,331 794
Tax-exempt....................................... 16 19
Dividends........................................ 110 113
Other............................................... 28 160
--------- ----------
Total interest income............................ 7,256 6,060
--------- ----------
INTEREST EXPENSE:
Deposits............................................ 2,798 2,745
Short-term borrowings............................... 630 162
Long-term borrowings................................ 490 228
--------- ----------
Total interest expense........................... 3,918 3,135
--------- ----------
Net interest income.............................. 3,338 2,925
PROVISION FOR LOAN LOSSES.............................. 83 170
--------- ----------
3,255 2,755
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES....
--------- ----------
NONINTEREST INCOME:
Insurance commissions............................... 374 427
Fees on loans....................................... 326 195
Service charges..................................... 149 124
Rental income....................................... 11 24
Net gain (loss) on sales of securities.............. 18 (11)
Other............................................... 246 161
--------- ----------
Total noninterest income......................... 1,124 920
--------- ----------
NONINTEREST EXPENSE:
Salaries and employee benefits...................... 1,841 1,564
Depreciation and amortization....................... 371 307
Occupancy........................................... 266 248
Office supplies, telephone and postage.............. 180 148
Professional services............................... 153 89
Marketing and promotion............................. 101 85
FDIC and other assessments.......................... 45 41
Other............................................... 296 235
--------- ----------
Total noninterest expense........................ 3,253 2,717
--------- ----------
INCOME BEFORE TAXES.................................... 1,126 958
INCOME TAXES........................................... 436 355
--------- ----------
NET INCOME ............................................ $ 690 $ 603
========= ==========
BASIC EARNINGS PER COMMON SHARE (Note 4)............... $ 0.29 $ 0.25
========= ==========
DILUTED EARNINGS PER COMMON SHARE (Note 4)............. $ 0.28 $ 0.25
========= ==========
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the Three Months Ended March 31
(In thousands)
1998 1997
------- -------
(unaudited)
NET INCOME.............................................. $ 690 $ 603
OTHER COMPREHENSIVE INCOME--
Unrealized gains (losses) on securities:
Unrealized holding losses arising during the period,
net of income tax effects of $10 and $177......... $ (26) $ (294)
Less: reclassification adjustment for (gains) losses
included in net income, net of income tax effects
of $7 and $4............................... (11) 7
------- -------
OTHER COMPREHENSIVE INCOME.............................. (37) (287)
------- -------
COMPREHENSIVE INCOME.................................... $ 653 $ 316
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
<TABLE>
<CAPTION>
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
For the Three Months Ended March 31, 1998
(In thousands, except share data)
Accumulated
Common Stock Other
------------------ Capital Retained Treasury Comprehensive
Shares Amount Surplus Earnings Stock Income Total
-------- ------- ------- --------- -------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1997 as
previously reported.............. 2,364,100 $23 $13,768 $10,529 $(216) $170 $24,274
Effects of business combination
accounted for as a pooling of
interests (unaudited)
(Note 3)..................... 63,406 1 17 (1,144) -- -- (1,126)
-------- -------- ------- -------- ------ --------- -------
Balance December 31, 1997,
restated (unaudited).............. 2,427,506 24 13,785 9,385 (216) 170 23,148
Net income (unaudited)............ -- -- -- 690 -- -- 690
Other Comprehensive income --
Change in unrealized holding
gain on securities available
for sale, net of income
taxes (unaudited)........... -- -- -- -- -- (26) (26)
Compensation expense-restricted
stock (unaudited)............. -- -- 16 -- -- -- 16
Restricted stock forfeited/retired
(unaudited).................... (1,377) -- -- -- -- -- --
-------- ------- ------- ------ ------ -------- -------
Balance, March 31, 1998
(unaudited)....................... 2,426,129 $24 $13,801 $10,075 ($216) $144 $23,828
========= ======= ======= ======= ======= ========= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Three Months Ended March 31
(In thousands)
1998 1997
---------- ---------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income.............................................$ 690 $ 603
Adjustments to reconcile net income to net cash
provided by operating activities --
Provision for loan losses........................... 83 170
Depreciation and amortization....................... 218 163
Amortization of intangible assets................... 149 144
Net premium amortization (discount accretion)
on securities.................................... (51) (32)
Proceeds from loans recovered....................... 4 11
Change in accrued interest receivable and other
assets, net...................................... 817 (672)
Net realized (gains) losses on sales of securities.. (18) 11
Change in other liabilities, net.................... (346) 786
Originations of loans to be participated............ (11,893) (26,854)
Proceeds from participations of loans............... 11,893 26,854
---------- ---------
Net cash provided by operating activities........ 1,546 1,184
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in federal funds sold....................... (3,200) (7,200)
Purchases of investment securities..................... (23,964) (17,823)
Proceeds from sales of investment securities........... 21,146 11,098
Proceeds from maturities of investment securities...... 11,858 3,990
Net (increase) decrease in loans....................... 2,740 (6,525)
Additions to premises, leasehold improvements and
equipment, net...................................... (172) (928)
---------- ---------
Net cash provided by (used in) investing
activities.................................... 8,408 (17,388)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand, savings, NOW and
money market accounts.......................... (11,231) 3,659
Net increase (decrease) in time deposits............... (3,362) 9,871
Net increase (decrease) in short-term borrowings....... (236) 3,869
Repayments of long-term borrowings..................... (9,795) (11,240)
Proceeds from long-term borrowings..................... 9,285 12,221
Other.................................................. 40 --
---------- ---------
Net cash provided by (used in) financing
activities.................................... (15,299) 18,380
---------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...... (5,345) 2,176
CASH AND CASH EQUIVALENTS, beginning of period............ 15,415 6,422
---------- ---------
CASH AND CASH EQUIVALENTS, end of period..................$ 10,070 $ 8,598
========== =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid..........................................$ 4,051 $ 2,693
========== =========
Income taxes paid......................................$ 209 $ 81
========== =========
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 1998
NOTE 1 - Basis of Presentation
The accompanying interim consolidated financial statements have been prepared by
BNCCORP, Inc. ("BNCCORP" or the "Company"), without audit, in accordance with
generally accepted accounting principles for interim financial information and
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations, although
the Company believes that the disclosures made are adequate to make the
information presented not misleading.
The unaudited consolidated financial statements as of March 31, 1998 and for the
three month periods ended March 31, 1998 and 1997 include, in the opinion of
management, all adjustments, consisting solely of normal recurring adjustments,
necessary for a fair presentation of the financial results for the respective
interim periods and are not necessarily indicative of results of operations to
be expected for the entire fiscal year ending December 31, 1998.
The accompanying interim consolidated financial statements have been prepared
under the presumption that users of the interim consolidated financial
information have either read or have access to the audited consolidated
financial statements for the year ended December 31, 1997. Accordingly, footnote
disclosures which would substantially duplicate the disclosures contained in the
December 31, 1997 audited consolidated financial statements have been omitted
from these interim consolidated financial statements. It is suggested that these
interim consolidated financial statements be read in conjunction with the
audited consolidated financial statements for the year ended December 31, 1997
and the notes thereto.
NOTE 2 -- Reclassifications
Certain of the 1997 amounts have been reclassified to conform with the 1998
presentations. These reclassifications had no effect on net income or
stockholders' equity.
NOTE 3 -- Acquisitions and Divestitures
On January 1, 1998, the Company acquired Lips & Lahr, Inc. ("Lips & Lahr") in a
business combination accounted for as a pooling of interests. Lips & Lahr, which
engages in the insurance business, became a wholly owned subsidiary of BNC
National Bank ("BNC -- North Dakota") through the exchange of 63,406 shares of
the Company's stock for all of the outstanding stock of Lips & Lahr. The
accompanying financial statements as of and for the three months ended March 31,
1998 reflect financial condition and the combined operations of the companies,
and financial statements of prior periods have been restated to give effect to
the combination.
The following is a reconciliation of the amounts of total revenues and net
income previously reported for the quarter ended March 31, 1997 with restated
amounts:
7
<PAGE>
Quarter ended
March 31, 1997
--------------
(in thousands)
Total revenues:
BNCCORP, Inc. and subsidiaries.... $ 6,541
Lips & Lahr....................... 439
--------------
As restated................. $ 6,980
==============
Net income:
BNCCORP, Inc. and subsidiaries.... $ 561
Lips & Lahr....................... 42
--------------
As restated................. $ 603
==============
The Company continues to engage in an acquisition program. Pursuant to that
program, the Company periodically considers or participates in discussions
concerning acquisitions. At the present time, the Company has no binding
commitments or agreements regarding acquisitions, but additional agreements may
be negotiated or entered into in the future.
NOTE 4 -- Earnings per Share
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128" ) during the fourth quarter of 1997. For
comparative purposes, earnings per share ("EPS") for the quarter ended March 31,
1997 have been recalculated in accordance with the provisions of SFAS 128.
The following table shows the amounts used in computing EPS and the effect on
weighted average number of shares of potential dilutive common stock issuances
for the three month periods ended March 31:
Net Per-Share
Income Shares Amount
------------ ------------ -----------
1998
Basic earnings per share:
Income available to common stockholders.. $ 690,000 2,401,584 $ 0.29
===========
Effect of dilutive shares --
Options............................ 20,197
Warrants........................... 16,641
------------
Diluted earnings per share:
Income available to common stockholders.. $ 690,000 2,438,422 $ 0.28
============ ============ ===========
1997
Basic earnings per share:
Income available to common stockholders.. $ 603,000 2,402,126 $ 0.25
===========
Effect of dilutive shares --
Options............................ 6,378
Warrants........................... 2,756
------------
Diluted earnings per share:
Income available to common stockholders.. $ 603,000 2,411,260 $ 0.25
============ ============ ===========
8
<PAGE>
Under the provisions of the agreement and plan of merger related to the business
combination with Lips & Lahr (see Note 3), 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.
Contingently issuable shares under this agreement have been considered
outstanding common shares and included in the computation of basic EPS as of the
date that all necessary conditions have been satisfied.
NOTE 5 -- Recently Issued Accounting Standards
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" on January 1, 1998. Financial statements for
prior periods have been reclassified for comparative purposes.
Statement of Financial Accounting Standards No. 131, "Disclosures About Segments
of an Enterprise and Related Information," ("SFAS 131") became effective on
January 1, 1998. SFAS 131 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.
Item 2. Management's Discussion and Analysis or Plan of Operation
Comparison of Financial Condition at March 31, 1998 and December 31, 1997
Assets. Total assets decreased $15.0 million, or 4 percent, from $361.0 million
at December 31, 1997 to $346.0 million at March 31, 1998. The following table
presents the Company's assets by category as of March 31, 1998 and December 31,
1997 as well as the amount and percent of change between the two dates. Material
changes are discussed in lettered explanations following the table:
Assets
Change
---------------------
March 31, December 31,
1998 1997 $ %
---------- ------------ --------- --------
Cash and due from banks..... $ 7,980 $ 13,184 $ (5,204) (39)% (a)
Interest-bearing deposits
with banks............... 2,090 2,231 (141) (6)%
Federal funds sold.......... 3,200 -- 3,200 --
Securities available for
sale..................... 85,627 94,624 (8,997) (10)% (b)
Loans and leases, net....... 229,304 232,131 (2,827) (1)%
Premises, leasehold
improvements and
equipment, net........... 8,571 8,617 (46) (1)%
Accrued interest
receivable............... 2,570 2,865 (295) (10)%
Other assets................ 2,198 2,715 (517) (19)%
Deferred charges and
intangible assets, net... 4,478 4,636 (158) (3)%
---------- ------------ ---------
Total Assets.......... $ 346,018 $ 361,003 $(14,985) (4)%
========== =========== =========
- --------------------
9
<PAGE>
(a) The Company received a large municipal deposit on December 31, 1997. The
deposit was out for collection at year end 1997 causing an unusually high
balance in cash and due from banks at December 31, 1997. See (b) below and
"--Liabilities."
(b) The Company's securities position had to be increased, on a short term
basis, in order to provide adequate pledges for the increased municipal
deposits at December 31, 1997. The short term securities were sold
subsequent to December 31, 1997 to fund withdrawals from the municipal
deposit accounts. See (a) above and "--Liabilities."
Allowance for Loan Losses. The following table sets forth information regarding
changes in the Company's allowance for loan losses for the three month period
ending March 31, 1998 (amounts are in thousands):
Three Months
Ended
March 31, 1998
-------------
(Unaudited)
Balance, beginning of period.................$ 3,069
Provision for loan losses.................... 83
Loans charged off............................ (43)
Loans recovered.............................. 4
------------
Balance, end of period.......................$ 3,113
============
Ending loan portfolio .......................$ 232,417
============
Allowance for loan losses as a percentage of
ending portfolio....................... 1.34%
As of March 31, 1998, the Company's allowance for loan losses stands at 1.34
percent of total loans as compared to 1.30 percent at December 31, 1997 and .83
percent one year ago. Net charge-offs as a percentage of average loans for the
three month periods ended March 31, 1998 and 1997 were .02 and .01 percent,
respectively. See "Comparison of Operating Results for the Three Months Ended
March 31, 1998 and 1997--Provision for Loan Losses."
The Company maintains its allowance for loan losses 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 Preparedness."
Estimating the risk of loss and amount of loss on any loan is subjective and
ultimate losses may vary from current estimates. These estimates are reviewed
periodically and, as adjustments become necessary, they are reported in income
through the provision for loan losses in the periods in which they become known.
The adequacy of the allowance for loan losses is monitored by management and
reported to the Company's board of directors. Although management believes that
the allowance for loan losses is adequate to absorb any losses on existing loans
that may become uncollectible, judgment of the adequacy of the allowance is
necessarily approximate and imprecise, and there can be no assurance that the
allowance will prove sufficient to cover actual loan losses in the future. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the adequacy of the Company's allowance for loan
losses. Such agencies may require the Company to make additional provisions to
the allowance based upon their judgments about information available to them at
the time of the examination.
Customer Year 2000 Preparedness. The Company expects to implement a year 2000
due diligence policy relating to its borrowers by June 30, 1998. The policy will
outline the Company's action plan for assessment of borrower status as it
pertains to year 2000 issues and will incorporate guidelines
10
<PAGE>
established by regulatory agencies. The Company expects that the customer
assessment phase of this plan will be substantially completed by September 30,
1998.
Assessment of borrower status with respect to year 2000 issues, while critical
to the banking industry, is by nature subjective and imprecise. While the
Company will use due diligence in assessing borrower status and taking
appropriate actions based on the results of such assessments, there can be no
assurance that each of its borrowers will be adequately prepared and, as a
result, the potential of a material adverse impact on the Company cannot be
eliminated.
Nonperforming Assets. The following table sets forth information concerning the
Company's nonperforming assets as of the dates indicated (amounts are in
thousands):
March 31, December 31,
1998 1997
----------- -------------
(Unaudited)
Nonperforming loans:
Loans 90 days or more delinquent and still
accruing interest....................... $ 874 $ 1,016
Nonaccrual loans.............................. 329 376
Restructured loans............................ 70 104
--------- ---------
Total nonperforming loans........................... 1,273 1,496
Other real estate owned....................... -- --
--------- ---------
Total nonperforming assets.......................... $ 1273 $ 1496
========= =========
Allowance for loan losses........................... $3,113 $3,069
Ratio of total nonperforming assets to total assets. 0.37% 0.42%
Ratio of total nonperforming loans to total loans... 0.55% 0.64%
Ratio of allowance for loan losses to total
nonperforming loans........................... 244% 205%
Nonperforming loans consist of loans 90 or more days past due for which the
Company continues to accrue interest, nonaccrual loans, and loans on which the
original terms have been restructured.
Restructured loans are those for which concessions, including the reduction of
interest rates below a rate otherwise available to that borrower or the deferral
of interest or principal, have been granted due to the borrower's weakened
financial condition. Other real estate owned includes property acquired by the
Company in foreclosure proceedings or under agreements with delinquent
borrowers. There were no such properties held at March 31, 1998 or December 31,
1997.
Liabilities. Total liabilities decreased $15.7 million, or 5 percent, from
$337.9 million at December 31, 1997 to $322.2 million at March 31, 1998. The
following table presents the Company's liabilities by category as of March 31,
1998 and December 31, 1997 as well as the amount and percent of change between
the two dates. Material changes are discussed in lettered explanations following
the table:
11
<PAGE>
Liabilities
Change
--------------------
March 31, December 31,
1998 1997 $ %
----------- ------------- ---------- --------
DEPOSITS:
Noninterest - bearing........ $ 24,949 $ 25,795 $ (846) (3)%
Interest - bearing--
Savings, NOW and
money market........... 65,245 75,630 (10,385) (14)% (a)
Time deposits $100,000
and over............... 31,253 36,334 (5,081) (14)% (b)
Other time deposits.... 126,784 125,065 1,719 1%
Short-term borrowings........ 46,267 46,503 (236) (1)%
Long-term borrowings......... 21,322 21,812 (490) (2)%
Other liabilities............ 6,370 6,716 (346) (5)%
----------- --------- --------
Total liabilities...... $ 322,190 $ 337,855 $ (15,665) (5)%
=========== ========= ========
- -------------------
(a) The December 31, 1997 balance in this category was inflated due to large
municipal deposits received on December 31, 1997. See "--Assets." A
significant amount of these deposits were withdrawn during the first
quarter of 1998.
(b) The reduction in time deposits $100,000 and over was due to the fact that
the Company held less than $100,000 of brokered deposits at March 31, 1998
as compared to approximately $7.5 million at December 31, 1997.
Stockholders' Equity. The Company's equity capital increased $680,000 between
December 31, 1997 and March 31, 1998. This increase resulted from the $690,000
of earnings recorded for the three months ended March 31, 1998 combined with a
$26,000 decrease in the net unrealized holding gain on securities available for
sale and $16,000 of additional capital surplus related to compensation expense
recorded upon vesting of restricted stock (issued under the Company's stock
incentive plan).
Capital Adequacy and Expenditures. BNCCORP's management actively monitors
compliance with bank regulatory capital requirements, including risk-based and
leverage capital measures. Under the risk-based capital method of capital
measurement, the ratio computed is dependent on the amount and composition of
assets recorded on the balance sheet, and the amount and composition of
off-balance- sheet items, in addition to the level of capital. The following
table includes the risk-based and leverage capital ratios of the Company and its
banking subsidiaries as of March 31, 1998:
Tier 1 Total Tier 1
Risk-Based Risk-Based Leverage
Ratio Ratio Ratio
----------- ------------ -----------
Consolidated.............. 7.23% 12.01% 5.55%
BNC-- North Dakota........ 9.33 10.54 6.04
BNC-- Minnesota (1)....... 9.15 10.11 9.43
- -------------------
(1) BNC National Bank of Minnesota
12
<PAGE>
As of March 31, 1998, BNCCORP and its subsidiary banks exceeded capital adequacy
requirements and the banks were considered "well capitalized" for prompt
corrective action provisions.
No major capital expenditures were made during the quarter ended March 31, 1998
and there are no major capital expenditures for additional equipment or
facilities currently planned for the remainder of 1998.
Comparison of Operating Results for the
Three Months Ended March 31, 1998 and 1997
General. Net income for the three months ended March 31, 1998 was $690,000, a 14
percent increase over the $603,000 recorded for the three months ended March 31,
1997. The Company's basic and diluted EPS were $0.29 and $0.28, respectively for
the quarter ended March 31, 1998 as compared to $0.25 for both basic and diluted
EPS for the same period one year ago. The returns on average assets and average
equity for the three months ended March 31, 1998 were .80 and 11.92 percent,
respectively, as compared to .83 and 11.04 percent, respectively, for the same
period last year.
Net Interest Income. Net interest income for the three month period ending March
31, 1998 increased $413,000, or 14 percent, to $3.3 million as compared to $2.9
million for the same period in 1997. Net interest margin decreased to 4.17
percent for the quarter ended March 31, 1998 from 4.35 percent for the same
period one year earlier.
The following table presents average balances, interest earned or paid, and
associated yields on interest-earning assets and costs on interest-bearing
liabilities for the three months ended March 31, 1998 and 1997 as well as the
changes between the two periods. Significant factors contributing to the
increase in net interest income and decrease in net interest margin are
discussed in lettered notes below the table:
13
<PAGE>
<TABLE>
<CAPTION>
Three Months ended March 31,
-------------------------------------------------------------
1998 1997 Change
---------------------------- ------------------------------ ----------------------------------
Average earned yield or Average earned yield or Average earned or Average
balance or paid cost balance or paid cost balance paid yeild or cost
------- ------- -------- ------- -------- -------- ------- --------- -------------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Investments.............$ 95,682 $1,485 6.29% $69,661 $1,086 6.32% $26,021 $ 399 -0.03%(a)
Loans................... 231,862 5,771 10.09% 204,931 4,974 9.84% 26,931 797 0.25%(b)
Allowance for loan
losses............ (3,107) -- (1,675) -- (1,432) --
------- ------ ------- ------ ------- -----
Total interest-earning
assets $324,437 $7,256 9.07% $272,917 $6,060 9.01% $51,520 $1,196 0.06%
======= ------ ======= ------ ======= ======
Interest-bearing
liabilities
Savings, NOW & money
market accounts..... $ 72,376 $ 571 3.20% $54,534 $ 387 2.88% $17,842 $ 184 0.32%(c)
Certificates of
deposit under
$100,000............ 125,648 1,752 5.66% 128,123 1,768 5.60% (2,475) (16) 0.06%
Certificates of
deposit $100,000
and over............ 32,697 475 5.89% 41,962 590 5.70% (9,265) (115) 0.19%(d)
------- ------ ------- ------ ------- ------
Interest - bearing
deposits............ 230,721 2,798 4.92% 224,619 2,745 4.96% 6,102 53 -0.04%(e)
Short-term borrowings.. 45,995 630 5.56% 11,346 162 5.79% 34,649 468 -0.23%(f)
Long-term borrowings... 21,489 490 9.25% 11,184 228 8.27% 10,305 262 0.98%(g)
------- ------ ------- ------ ------
Total borrowings.... 67,484 1,120 6.73% 22,530 390 7.02% 44,954 730 -0.29%
------- ------ ------
Total interest-
bearing
liabilities...... $298,205 3,918 5.33% $247,149 3,135 5.14% $51,056 783 0.19%(h)
======= ======= ====== =======
Net interest
income/spread.... $3,338 3.74% $2,925 3.87% $ 413 -0.13%(h)
====== ======= ====== ====== ======= =======
Net interest margin. 4.17% 4.35% -0.18%(h)
======= ====== =======
Notation:
Noninterest-bearing
deposits............ $ 22,002 -- $19,349 -- $2,653 --
------- ------- ------
Total deposits...... $252,723 $2,798 4.49% $243,968 $ 2,745 4.56% $8,755 $ 53 -0.07%
======= ====== ======= ======= ====== ======= =======
</TABLE>
- --------------------------
(a) The Company purchased $18.8 million of long-term Government National
Mortgage Association securities late in 1997 as part of its interest rate
risk management strategy. During 1997 the Company also increased its
holdings in U.S. government agencies securities.
(b) Average balance increase is primarily attributable to loan growth in the
Minnesota market area including asset-based loans at BNC Financial
Corporation ("BNC Financial"). The improvement in loan yield is primarily
attributable to the increase in asset-based loans.
(c) Average balance increase is attributable to higher average balances in NOW
and money market deposit accounts during the first quarter of 1998. See
"Comparison of Financial Condition at March 31, 1998 and December 31, 1997
--Liabilities." Increased cost was caused by increased volume in higher
tier/higher rate, primarily commercial, money market deposits.
(d) The Company's brokered deposit holdings during the first quarter of 1998
were negligible.
(e) Decrease in cost of interest-bearing deposits is the result of a mix
change in the interest-bearing deposit portfolio. During the first quarter
of 1998, 31 percent of average interest-bearing deposits were low-cost
deposits as compared to 24 percent for the same period one year earlier.
See (c) above.
(f) Average balance increase is attributable to increased borrowings from the
Federal Home Loan Bank ("FHLB") during the first quarter of 1998. Reduced
cost is also primarily attributable to FHLB borrowings.
(g) Average balance increase is attributable to issuance of the Company's 8
5/8 percent subordinated notes in May 1997 (net proceeds of $14.3 million)
offset by lower average balances on other long-term borrowings. Increased
cost is also primarily attributable to the subordinated notes.
(h) Reduction in net interest spread and net interest margin is primarily
attributable to increase in cost of rate related liabilities. Although
cost on interest-bearing deposits and total borrowings decreased, the cost
of rate-related liabilities increased due to a significant mix change in
the interest-bearing liabilities portfolio. During the first quarter of
1998, borrowings made up 23 percent of that portfolio as compared to only
9 percent for the same period in 1997.
14
<PAGE>
Provision for Loan Losses. The provision for loan losses was $83,000 for the
quarter ended March 31, 1998 as compared to $170,000 for the same period one
year earlier. A significant loan loss provision booked during 1997 coupled with
the partial recovery of loans charged off during 1997 improved the adequacy of
the Company's allowance for loan losses and enabled the Company to reduce its
provision in the first quarter of 1998 as compared to the same period one year
earlier. As of March 31, 1998, the allowance for loan losses stands at 1.34
percent of total loans as compared to 1.30 and .83 percent at December 31, 1997
and March 31, 1997, respectively. Management estimates indicate that the
allowance for loan losses is adequate to cover the risk of loss in the loan
portfolio at the present time. See "Comparison of Financial Condition at March
31, 1998 and December 31, 1997 -- Allowance for Loan Losses."
Noninterest Income. The following table presents the major categories of the
Company's noninterest income for the three months ended March 31, 1998 and 1997
as well as the amount and percent of change between the periods. Material
changes are discussed in lettered explanations following the table:
Noninterest Income
Increase (Decrease)
--------------------
For the Three Months
Ended March 31, 1998 - 1997
-------------------- --------------------
1998 1997 $ %
--------- ------- ------- --------
(in thousands)
Insurance commissions...... $ 374 $ 427 $(53) (12)%
Fees on loans.............. 326 195 131 67 % (a)
Service charges............ 149 124 25 20%
Rental income.............. 11 24 (13) (54)%
Net gain (loss) on sales of
securities ........... 18 (11) 29 (264)%
Other noninterest income... 246 161 85 53% (b)
------- ------- -------
Total noninterest income $ 1,124 $ 920 $ 204 22%
======= ======= =======
- -----------------
(a) Increase is primarily attributable to an increase in loan fees on
residential and consumer loans collected during the first quarter of 1998.
(b) Increase is attributable to increases in trust and other fee income.
Noninterest Expense. The following table presents the major categories of the
Company's noninterest expense for the three months ended March 31, 1998 and 1997
as well as the amount and percent of change between the periods. Material
changes are discussed in lettered explanations following the table:
Noninterest Expense
Increase (Decrease)
--------------------
For the Three Months
Ended March 31, 1998 - 1997
-------------------- --------------------
1998 1997 $ %
-------- -------- -------- --------
(in thousands)
Salaries and employee
benefits............... $ 1,841 $ 1,564 $ 277 18% (a)
Depreciation and
amortization........... 371 307 64 21% (b)
Occupancy................. 266 248 18 7%
Office supplies,
telephone and
postage............... 180 148 32 22%
Professional services..... 153 89 64 72% (c)
Marketing and promotion... 101 85 16 19%
FDIC and other
assessments........... 45 41 4 10%
Other..................... 296 235 61 26% (d)
-------- -------- --------
Total noninterest
expense.............$ 3,253 $ 2,717 $ 536 20%
======== ======== ========
15
<PAGE>
- --------------------
(a) Increase is attributable to growth. Average full time equivalent employees
increased from 141 for the three month period ended March 31, 1997 to 164
for the same period in 1998, a 16 percent increase.
(b) Increase is primarily attributable to depreciation expense relating to
BNC--North Dakota's new branch office in Bismarck as well as furniture and
equipment located in the Centennial Plaza office building in Bismarck
(some of which was acquired subsequent to the first quarter of 1997).
(c) Increase is partially due to increased legal fees and as well as fees for
other consulting services.
(d) Increase is attributable to small increases in several items in this
category including insurance, travel, dues and publications and other such
expenses.
Year 2000 Issue. During the first quarter of 1998, the Company completed the
awareness and assessment phases of its year 2000 plan. Renovation and validation
are underway and will continue rigorously through the year 2000. The Company
will have its data testing lab operational by May 31, 1998. The testing facility
will be utilized extensively for validation purposes. The Company also continues
to communicate with vendors, regulatory agencies and peers in coordinating its
year 2000 conversion efforts.
Total year 2000 project cost estimates remain at approximately $200,000 to
$400,000 to be incurred beginning in 1998. The Company has not yet incurred
costs of a material nature. Applicable costs will continue to 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 tax expense. Income tax expense increased $81,000 due to the increase in
pre-tax income for the quarter ended March 31, 1998 as compared to the pre-tax
income recorded for the same period in 1997. The estimated effective tax rates
for the three month periods ended March 31, 1998 and 1997 were 38.7 and 37.1
percent, respectively. These rates are higher than the federal statutory rate of
34.0 percent due principally to state income taxes.
Earnings per common share. Basic and diluted earnings per common share were
$0.29 and $0.28, respectively, for the quarter ended March 31, 1998 as compared
to $0.25 basic and diluted EPS for the same quarter in 1997. See Note 4 to the
Consolidated Financial Statements for a summary of the EPS calculations for the
three month periods ended March 31, 1998 and 1997.
Liquidity. The Company's continued liquidity risk management objectives 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 1 present data on cash and cash equivalents
provided by and used in operating, investing and financing activities. In
addition to liquidity from core deposit growth, together with repayments and
maturities of loans and investments, the Company utilizes brokered deposits,
sells securities under agreements to repurchase and borrows overnight federal
funds. BNC -- North Dakota is a member of the FHLB, which affords the bank the
opportunity to borrow funds on 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. During the first
quarter of 1998, the Company increased its borrowings from the FHLB by $4.0
million.
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 subordinated notes. The loan
16
<PAGE>
agreements and indenture pursuant to which the Company's subordinated notes were
issued contain a number of covenants restricting the ability of the Company or
its subsidiaries to take certain actions and requiring maintenance of certain
ratios regarding capital, nonperforming loans, loan loss reserve coverage, and
other matters. At March 31, 1998, BNCCORP and its subsidiaries were in
compliance with all material debt covenants.
The following table sets forth, for the quarters ended March 31, 1998 and 1997,
a summary of the Company's major sources and (uses) of funds. The summary
information is derived from the Consolidated Statements of Cash Flows included
under Item 1:
Major Sources and Uses of Funds
For the Three Months
Ended March 31,
-----------------------
1998 1997
--------- ---------
(in thousands)
Proceeds from sales and maturities of investment
securities................................. $ 33,004 $ 15,088
Purchases of investment securities............ (23,964) (17,823)
Net increase (decrease) in deposits........... (14,593) 13,530
Net (increase) decrease in loans.............. 2,740 (6,525)
The Company regularly measures its liquidity position and believes that its
management policies and guidelines will ensure adequate levels of liquidity to
fund anticipated needs of on- and off-balance- sheet items.
Forward Looking Statements
Statements included in Item 2, "Management's Discussion and Analysis or Plan of
Operation," which are not historical in nature are intended to be, and are
hereby identified as "forward looking statements" for purposes of the safe
harbor provided by Section 21E of the Securities Exchange Act of 1934, as
amended. The Company cautions readers that forward looking statements, including
without limitation, those relating to the Company's future business prospects,
revenues, working capital, liquidity, capital needs, interest costs, and income
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.
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On February 4, 1998, the Company issued 63,406 shares of its common stock, $.01
par value, to stockholders of Lips & Lahr in a private offering believed to be
exempt under Sections 4(2) and 4(6) of the Securities Act of 1933 and the
regulations and rules thereunder including Regulation D. The stock was issued in
conjunction with a business combination accounted for as a pooling of interests,
and in exchange for all the outstanding stock of Lips & Lahr. See Note 3 to the
Consolidated Financial Statements.
Item 6. Exhibits and Reports on Form 8-K
(a) Part I Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K
None.
17
<PAGE>
Signatures
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
BNCCORP, Inc.
Date: May 14, 1998 By /s/ Gregory K. Cleveland
----------------------------
Gregory K. Cleveland
President
Chief Operating Officer
Only Authorized Signature
18
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
balance sheet dated 3/31/98 and statement of income for the three
months ended 3/31/98 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 7,980
<INT-BEARING-DEPOSITS> 2,090
<FED-FUNDS-SOLD> 3,200
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 85,627
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 232,417
<ALLOWANCE> 3,113
<TOTAL-ASSETS> 346,018
<DEPOSITS> 248,231
<SHORT-TERM> 46,267
<LIABILITIES-OTHER> 6,370
<LONG-TERM> 21,322
0
0
<COMMON> 24
<OTHER-SE> 23,804
<TOTAL-LIABILITIES-AND-EQUITY> 346,018
<INTEREST-LOAN> 5,771
<INTEREST-INVEST> 1,457
<INTEREST-OTHER> 28
<INTEREST-TOTAL> 7,256
<INTEREST-DEPOSIT> 2,798
<INTEREST-EXPENSE> 3,918
<INTEREST-INCOME-NET> 3,338
<LOAN-LOSSES> 83
<SECURITIES-GAINS> 18
<EXPENSE-OTHER> 3,253
<INCOME-PRETAX> 1,126
<INCOME-PRE-EXTRAORDINARY> 690
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 690
<EPS-PRIMARY> .29
<EPS-DILUTED> .28
<YIELD-ACTUAL> 9.07
<LOANS-NON> 329
<LOANS-PAST> 874
<LOANS-TROUBLED> 70
<LOANS-PROBLEM> 8,233
<ALLOWANCE-OPEN> 3,069
<CHARGE-OFFS> 43
<RECOVERIES> 4
<ALLOWANCE-CLOSE> 3,113
<ALLOWANCE-DOMESTIC> 3,113
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
