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 September 30, 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 incorporation (IRS Employer Identification No.)
or organization)
322 East Main
Bismarck, North Dakota 58501
(Address of principal executive offices)
(701) 250-3040
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No ___
The number of shares of the Registrant's outstanding common stock on
November 6, 1998 was 2,390,184
Transitional Small Business Disclosure Format: Yes ___ No X
1
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share and per share data)
ASSETS September 30, December 31,
1998 1997
------------ ------------
(unaudited)
CASH AND DUE FROM BANKS.................................$ 7,045 $ 13,184
INTEREST - BEARING DEPOSITS WITH BANKS.................. 1,824 2,231
SECURITIES AVAILABLE FOR SALE........................... 92,191 94,624
LOANS AND LEASES, net of allowance for loan
losses of $3,633 and $3,069 at
September 30, 1998 and December 31,
1997, respectively.................................. 271,023 232,131
PREMISES, LEASEHOLD IMPROVEMENTS AND EQUIPMENT, net..... 8,655 8,617
ACCRUED INTEREST RECEIVABLE............................. 2,919 2,865
OTHER ASSETS............................................ 3,930 2,715
DEFERRED CHARGES AND INTANGIBLE ASSETS, net............. 4,218 4,636
---------- ----------
$ 391,805 $ 361,003
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS:
Noninterest-bearing..................................$ 26,794 $ 25,795
Interest-bearing -
Savings, NOW and money market..................... 72,771 75,630
Time deposits $100,000 and over................... 36,622 36,334
Other time deposits............................... 134,331 125,065
SHORT-TERM BORROWINGS................................... 58,416 46,503
LONG-TERM BORROWINGS.................................... 30,737 21,812
OTHER LIABILITIES....................................... 7,090 6,716
---------- ----------
Total liabilities................................. 366,761 337,855
---------- ----------
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; 2,390,184 and 2,402,126
shares issued and outstanding (excluding
42,880 and 25,380 shares held in treasury)
at September 30, 1998 and December 31,
1997, respectively................................ 24 24
Capital surplus...................................... 13,936 13,785
Retained earnings.................................... 11,185 9,385
Treasury stock (42,880 and 25,380 shares,
respectively)..................................... (513) (216)
Accumulated other comprehensive income, net
of income tax effects of $256 and $97 at
September 30, 1998 and December 31, 1997,
respectively...................................... 412 170
---------- ----------
Total stockholders' equity........................ 25,044 23,148
---------- ----------
$ 391,805 $ 361,003
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(In thousands, except per share data)
For the Three Months For the Nine Months
Endend Ended
September 30, September 30,
1998 1997 1998 1997
-------- -------- -------- --------
(unaudited) (unaudited)
INTEREST INCOME:
Interest on loans.................$ 6,609 $ 5,797 $ 18,435 $ 16,142
Interest on investment
securities -
Taxable........................ 1,256 951 3,822 2660
Tax-exempt..................... 25 18 56 54
Dividends...................... 61 110 245 331
Other............................. 89 18 267 193
-------- -------- -------- --------
Total interest income.......... 8,040 6,894 22,825 19,380
-------- -------- -------- --------
INTEREST EXPENSE:
Deposits.......................... 3,077 2,865 8,762 8,389
Short-term borrowings............. 715 379 2,060 811
Long-term borrowings.............. 604 415 1,623 963
-------- -------- -------- --------
Total interest expense......... 4,396 3,659 12,445 10,163
-------- -------- -------- --------
Net interest income............ 3,644 3,235 10,380 9,217
PROVISION FOR LOAN LOSSES............ 762 204 960 2,457
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION 2,882 3,031 9,420 6,760
FOR LOAN LOSSES...................
-------- -------- -------- --------
NONINTEREST INCOME:
Insurance commissions............. 431 385 1,269 1,263
Fees on loans..................... 365 373 1,096 734
Service charges................... 145 113 420 352
Rental income..................... 10 10 32 45
Net gain (loss) on sales of
securities..................... 51 8 68 (3)
Other............................. 249 151 782 473
-------- -------- -------- --------
Total noninterest income....... 1,251 1,040 3,667 2,864
-------- -------- -------- --------
NONINTEREST EXPENSE:
Salaries and employee benefits.... 2,041 1,556 5,733 4,642
Depreciation and amortization..... 385 339 1,126 972
Occupancy......................... 252 249 769 724
Professional services............. 197 169 525 384
Office supplies, telephone and
postage........................ 189 158 553 478
Marketing and promotion........... 82 57 322 255
FDIC and other assessments........ 47 43 138 126
Other............................. 356 243 949 690
-------- -------- -------- --------
Total noninterest expense...... 3,549 2,814 10,115 8,271
-------- -------- -------- --------
INCOME BEFORE TAXES.................. 584 1,257 2,972 1,353
INCOME TAXES......................... 242 499 1,172 544
-------- -------- -------- --------
NET INCOME ..........................$ 342 $ 758 $ 1,800 $ 809
======== ======== ======== ========
BASIC EARNINGS PER COMMON SHARE
(Note 4)..........................$ 0.14 $ 0.32 $ 0.75 $ 0.34
======== ======== ======== ========
DILUTED EARNINGS PER COMMON SHARE
(Note 4)..........................$ 0.14 $ 0.31 $ 0.73 $ 0.34
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(In thousands)
For the Three Months For the Nine Months
Ended Ended
September 30, September 30,
--------------------- -------------------
1998 1997 1998 1997
--------- ---------- --------- --------
(unaudited) (unaudited)
NET INCOME..............................$ 342 $ 758 $1,800 $ 809
OTHER COMPREHENSIVE INCOME--
Unrealized gains on securities:
Unrealized holding gains
arising during the period,
net of income tax effects
of $172 and $86 for the
three months ended September
30, 1998 and 1997, respectively,
and $159 and $77 for the nine
months ended September 30, 1998
and 1997, respectively............ 279 224 242 194
Less: reclassification adjustment
for (gains) losses included in
net income, net of income tax
effects of $21 and $3 for the
three months ended September
30, 1998 and 1997, respectively
and $27 and $1 for the nine months
ended September 30, 1998 and 1997,
respectively...................... (30) (5) (41) 2
--------- --------- --------- ---------
OTHER COMPREHENSIVE INCOME.............. 249 219 201 196
--------- --------- --------- ---------
COMPREHENSIVE INCOME....................$ 591 $ 977 $ 2,001 $ 1,005
========= ========= ========= =========
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 Nine Months Ended September 30, 1998
(In thousands, except share data)
Accumulated
Other
Common Stock 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).. -- -- -- 1,800 -- -- 1,800
Other Comprehensive income --
Change in unrealized
holding gain on securities
available for sale,
net of income taxes
(unaudited).......... -- -- -- -- -- 242 242
Compensation expense-
restricted
stock (unaudited).... -- -- 48 -- -- -- 48
Restricted stock forfeited
/retired (unaudited)... (1,377) -- -- -- -- -- --
Options exercised (unaudited) 1,935 -- 19 -- -- -- 19
Restricted stock issued
(unaudited) 5,000 -- 84 -- -- -- 84
Purchase of Treasury Stock
(unaudited).......... -- -- -- -- (297) -- (297)
-------- ------- ------- -------- ------ --------- -------
Balance, September 30, 1998
(unaudited)............. 2,433,064 $24 $13,936 $11,185 $(513) $412 $25,044
======== ======= ======= ======== ====== ========= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30
(In thousands)
1998 1997
---------- ---------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income............................................$ 1,800 $ 809
Adjustments to reconcile net income to net cash
provided by operating activities --
Provision for loan losses.......................... 960 2,457
Depreciation and amortization...................... 662 522
Amortization of intangible assets.................. 450 450
Net discount accretion on securities............... (7) (71)
Proceeds from loans recovered...................... 144 93
Change in accrued interest receivable and other
assets, net........................................ (1,315) (1,605)
Net realized (gains) losses on sales of securities. (68) 3
Change in other liabilities, net................... 374 70
Originations of loans to be participated........... (52,602) (46,483)
Proceeds from participations of loans.............. 52,602 46,483
---------- ---------
Net cash provided by operating activities....... 3,000 2,728
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in federal funds sold...................... -- 6,300
Purchases of investment securities.................... (71,528) (30,950)
Proceeds from sales of investment securities.......... 53,547 18,190
Proceeds from maturities of investment securities..... 20,731 9,135
Net increase in loans................................. (39,996) (37,424)
Additions to premises, leasehold improvements and
equipment, net..................................... (700) (1,929)
---------- ---------
Net cash used in investing activities........... (37,946) (36,678)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand, savings, NOW and
money market accounts......................... (1,860) 8,432
Net increase in time deposits......................... 9,554 1,106
Net increase in short-term borrowings................. 11,913 15,867
Repayments of long-term borrowings.................... (9,807) (22,283)
Proceeds from long-term borrowings.................... 18,670 32,846
Purchase of treasury stock............................ (297) --
Other................................................. 227 --
---------- ---------
Net cash provided by financing activities....... 28,400 35,968
---------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..... (6,546) 2,018
CASH AND CASH EQUIVALENTS, beginning of period........... 15,415 6,422
---------- ---------
CASH AND CASH EQUIVALENTS, end of period.................$ 8,869 $ 8,440
========== =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid.........................................$ 12,771 $ 9,950
========== =========
Income taxes paid.....................................$ 1,020 $ 815
========== =========
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 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 September 30, 1998 and for
the three and nine month periods ended September 30, 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 common stock for all of the outstanding stock of Lips & Lahr. The
accompanying financial statements as of September 30, 1998 and for the three and
nine months ended September 30, 1998 reflect the financial condition and
operations of the combined 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 three and nine month periods ended September
30, 1997 with restated amounts:
7
<PAGE>
For the Three For the Nine
Months Ended Months Ended
Sept. 30, 1997 Sept. 30, 1997
-------------- --------------
(in thousands) (in thousands)
Total revenues:
BNCCORP, Inc. and subsidiaries.... $ 7,548 $ 20,980
Lips & Lahr....................... 386 1,264
-------------- --------------
As restated................. $ 7,934 $ 22,244
============== ==============
Net income:
BNCCORP, Inc. and subsidiaries.... $ 772 $ 765
Lips & Lahr....................... (14) 44
-------------- --------------
As restated................. $ 758 $ 809
============== ==============
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 and 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 three and nine months
ended September 30, 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 September 30:
Net Per-Share
Income Shares Amount
------------ ------------ -----------
1998
Basic earnings per share:
Net income....................... $ 342,000 2,391,939 $ 0.14
===========
Effect of dilutive shares --
Options.................... 9,399
Warrants................... 12,832
------------
Diluted earnings per share:
Net income....................... $ 342,000 2,414,170 $ 0.14
============ ============ ===========
1997
Basic earnings per share:
Net income....................... $ 758,000 2,402,126 $ 0.32
===========
Effect of dilutive shares --
Options.................... 6,823
Warrants................... 4,659
------------
Diluted earnings per share:
Net income....................... $ 758,000 2,413,608 $ 0.31
============ ============ ===========
8
<PAGE>
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 nine month periods ended September 30:
Net Per-Share
Income Shares Amount
------------ ------------ -----------
1998
Basic earnings per share:
Net income........................ $ 1,800,000 2,399,367 $ 0.75
===========
Effect of dilutive shares --
Options..................... 42,919
Warrants.................... 36,136
------------
Diluted earnings per share:
Net income........................ $ 1,800,000 2,478,422 $ 0.73
============ ============ ===========
1997
Basic earnings per share:
Net income........................ $ 809,000 2,402,126 $ 0.34
===========
Effect of dilutive shares --
Options..................... 4,400
Warrants.................... 2,472
------------
Diluted earnings per share:
Net income........................ $ 809,000 2,408,998 $ 0.34
============ ============ ===========
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 -- Derivative Financial Instruments
The Company uses interest rate swaps and contracts to manage its interest rate
risk. Such instruments enable the Company to synthetically alter the repricing
characteristics of designated assets and interest-bearing liabilities. The
contracts subject the Company to market risk associated with changes in interest
rates as well as the risk of default by a counterparty to the contract. The
Company does not conduct trading activities or hold derivative financial
instruments for speculative purposes.
Income or expense on swaps and contracts designated as hedges of assets or
liabilities is recorded as an adjustment to interest income or expense. Changes
in market value of contracts qualifying as hedges of interest rate exposures are
not recognized in the period of change. If a swap or contract is terminated, the
gain or loss is deferred and amortized over either the remaining original life
of the derivative instrument or the expected life of the underlying asset or
liability. If the hedged instrument is disposed of, the swap or contract
agreement is marked to market with any resulting gain or loss included with gain
or loss from the disposition. Unamortized deferred gains or losses are included
in the balance sheet as deferred income or deferred charges.
In September 1998, the Company purchased a prime based interest rate floor with
a notional amount of $25.0 million. The contract is for a term of five years and
is designated as a hedge of floating rate commercial loans. The strike rate on
the floor is 8.50 percent. A $1.1 million premium paid upon acquisition of the
contract is being amortized over the life of the contract. Market value of the
contract,
9
<PAGE>
defined as the contract's current replacement value, was $1.3 million at
September 30, 1998. The impact of the floor on net interest income for the three
and nine month periods ended September 30, 1998 was not material.
NOTE 6 -- Debt
In August 1998, BNC Financial Corporation ("BNC Financial") obtained a $10
million revolving line of credit from Firstar Bank Milwaukee, N.A. The line of
credit is for a term of two years and is guaranteed by BNCCORP, Inc. It bears
interest, payable quarterly, at either the prime rate or 90 day LIBOR rate plus
2 percent (at BNC Financial's option). The interest rate was 7.69 percent at
September 30, 1998.
The loan agreement pursuant to which the line of credit was issued contains
covenants which, among other things, restricts or limits the ability of BNC
Financial, under certain circumstances, to pay cash dividends, redeem or
repurchase stock or make other distributions, incur indebtedness, allow liens or
other encumbrances on property owned by BNC Financial or guarantee obligations
of others. BNC Financial must also maintain certain ratios regarding tangible
net worth, nonperforming loans, loan loss reserve coverage and other measures.
At September 30, 1998, BNC Financial was in compliance with all of its debt
covenants.
NOTE 7 -- 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 will 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.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
133 requires that changes in the derivative's fair value be recognized currently
in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate, and assess the effectiveness
of transactions that receive hedge accounting.
SFAS 133 is effective for fiscal years beginning after June 15, 1999. A company
may also implement SFAS 133 as of the beginning of any fiscal quarter after
issuance (that is, fiscal quarters beginning June 16, 1998 and thereafter). SFAS
133 cannot be applied retroactively. SFAS 133 must be applied to (a) derivative
instruments and (b) certain derivative instruments embedded in hybrid contracts
that were issued, acquired, or substantively modified after December 31, 1997
(and, at the company's election, before January 1, 1998).
The Company has not yet quantified the impacts of adopting SFAS 133 on its
financial statements and has not determined the timing of or method of adoption
of SFAS 133, however, adoption of the accounting standard could increase
volatility in earnings and other comprehensive income.
10
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation
Comparison of Financial Condition at September 30, 1998 and December 31, 1997
Assets. Total assets increased $30.8 million, or 9 percent, from $361.0 million
at December 31, 1997 to $391.8 million at September 30, 1998. The following
table presents the Company's assets by category as of September 30, 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
(In thousands)
Change
----------------------
Sept 30, December 31,
1998 1997 $ %
---------- ------------ ---------- -------
Cash and due from banks......... $ 7,045 $ 13,184 $ (6,139) (47)% (a)
Interest-bearing deposits with
banks........................ 1,824 2,231 (407) (18)%
Securities available for sale... 92,191 94,624 (2,433) (3)%
Loans and leases, net........... 271,023 232,131 38,892 17 % (b)
Premises, leasehold improvements
and equipment, net.............. 8,655 8,617 38 .4%
Accrued interest receivable..... 2,919 2,865 54 2%
Other assets.................... 3,930 2,715 1,215 45%
Deferred charges and intangible
assets, net..................... 4,218 4,636 (418) (9)%
---------- ------------ ---------- -------
Total assets.............. $ 391,805 $ 361,003 $ 30,802 9 %
========== ============ ========== =======
- --------------------
(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.
(b) The increase in loans is primarily attributable to loan growth in the
Minnesota market including asset-based loans at BNC Financial.
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. Future loan growth will be impacted by
many factors beyond the control of the Company including, but not limited to,
general economic conditions and the competitive and interest rate environment in
the markets in which the Company operates.
11
<PAGE>
Allowance for Loan Losses. The following table sets forth information regarding
changes in the Company's allowance for loan losses for the three and nine month
periods ending September 30, 1998 (amounts are in thousands):
Three Months Nine Months
Ended Ended
September 30, September 30,
1998 1998
------------- -------------
(Unaudited) (Unaudited)
Balance, beginning of period.................$ 3,014 $ 3,069
Provision for loan losses.................... 762 960
Loans charged off............................ (272) (540)
Loans recovered.............................. 129 144
------------- -------------
Balance, end of period.......................$ 3,633 $ 3,633
============= =============
Ending loan portfolio .......................$ 274,656
=============
Allowance for loan losses as a percentage of
ending loan portfolio.................. 1.32%
As of September 30, 1998, the Company's allowance for loan losses was 1.32
percent of total loans as compared to 1.30 percent at December 31, 1997 and 1.21
percent one year ago. Net charge-offs as a percentage of average loans for the
three and nine month periods ended September 30, 1998 were .05 and .16 percent,
respectively, as compared to .10 and .52 percent, respectively, for the same
periods last year. Most of the Company's loan charge-offs and recoveries over
the past six quarters relate to credits originated by a former loan officer. The
majority of the recoveries represent payments from the Company's fidelity bond
carrier. 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
related to the lending activities of the former loan officer, management remains
optimistic that final settlement of the claim will result in an additional
payment by the carrier.
During the quarter ended September 30, 1998, the Company booked a special loan
loss provision of $631,000. The additional provision was primarily related to
three credits, including one large commercial loan (see "--Nonperforming
Assets"), one credit originated by the loan officer dismissed during 1997 (which
had been performing prior to the third quarter of 1998) and an investment in car
leases purchased during 1995. See "Comparison of Operating Results for the Three
Months Ended September 30, 1998 and 1997--General and --Provision for Loan
Losses" and "Comparison of Operating Results for the Nine Months Ended September
30, 1998 and 1997--General and --Provision for Loan Losses" for a summary of the
impact of the special provision on the Company's operating results for the three
and nine month periods ended September 30, 1998.
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, and information about specific borrower situations,
which includes their financial position, collateral values, and other factors
and estimates, all of 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. 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
12
<PAGE>
for loan losses is adequate to absorb any losses on existing loans that may
become uncollectible, 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.
Agricultural Loans. Recent developments relating to the agricultural industry
have caused concern with respect to how such developments might impact financial
institutions with concentrations of credit in the agricultural industry.
BNCCORP's agricultural loan portfolio totals approximately $21.5 million, or 8
percent of total loans. Within the portfolio, loans are diversified by type and
include loans to grain and/or livestock producers, agricultural real estate
loans, machinery and equipment and other types of loans. Approximately 95
percent of the Company's agricultural loans are extended to borrowers located in
North Dakota. Within the state, agricultural loans are diversified over 20
counties with concentrations (10 percent or more of the total agricultural loan
portfolio) in Emmons, Burleigh, Hettinger and Sargent counties. The Company has
been monitoring its agricultural loans closely. As of September 30, 1998,
nonperforming agricultural loans totaled $389,000.
Customer Year 2000 Preparedness. The Company has implemented a Year 2000 due
diligence program relating to its major borrowers and depositors which
incorporates guidelines established by regulatory agencies (the "Program").
Major components of the Program include assignment of accountability for the
various Program initiatives, establishment of critical Program completion dates,
identification of material borrowers and depositors (hereinafter collectively
referred to as "customers"), a risk assessment of all identified customers and
the establishment of risk controls.
A number of parameters were utilized to identify customers whose relationship
with the Company could be considered of a material nature. These parameters
included, but were not limited to, aggregate customer commitments exceeding
defined tolerances, the risk grade assigned to the customer's credit, customers
who have a line or lines of business relating to computerized or software
products or data processing services, customers whose operations rely on
technology for successful business operation, statistically significant samples
of customers that do not meet other parameters but which are part of an
identified industry or other concentration, customers with international
exposure (i.e., those with foreign operations or who are materially impacted by
international payment systems) and aggregate average deposit balances.
After having identified customers, the risk assessment phase of the Program
began and is expected to continue into 1999. This phase involves active
assessment of customer Year 2000 preparedness and includes various initiatives
aimed at tracking customer progress through the following five stages of Year
2000 compliance: awareness, assessment, planning, implementation/renovation, and
testing/rework/certification. A detailed scorecard of customer status is used to
track the progress of all material customers. Customers are being contacted on a
regular basis so that the Company may ascertain their progress with respect to
each stage. This phase of the Program will continue as customer progress is
tracked through the testing/rework/certification stage.
The Program's risk control phase, also currently in process, includes additional
initiatives aimed at minimizing risks related to material customer Year 2000
preparedness. Elements of this phase include, but are not limited to, credit
underwriting guidelines which incorporate Year 2000 considerations, the
incorporation of customer Year 2000 representations and other Year 2000-related
language and covenants into loan agreements, the adjustment of credit risk
grades and, if appropriate, the increase of the Company's reserve for loan
losses to reflect customer non-compliance with Year 2000-related recommendations
and the risks associated therewith.
The Company has thus far been managing the Program with current staff.
Therefore, no additional salary and benefit expenses have been incurred in the
process of implementing and administering the Program. Other expenses incurred
to date, such as postage and materials, have not been significant.
13
<PAGE>
Assessment of customer 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 customer status and taking
appropriate actions based on the results of such assessments, there can be no
assurance that each of its customers will be adequately prepared and, as a
result, the potential of an adverse impact on the Company cannot be eliminated.
See also "Year 2000 Issue."
Nonperforming Assets. The following table sets forth information concerning the
Company's nonperforming assets as of the dates indicated (amounts are in
thousands):
September 30, December 31,
1998 1997
-------------- ---------------
(Unaudited)
Nonperforming loans:
Loans 90 days or more delinquent and
still accruing interest......... $ 1,359 $ 1,016
Nonaccrual loans...................... 3,878 376
Restructured loans.................... 53 104
--------- ---------
Total nonperforming loans................... 5,290 1,496
Other real estate owned............... 384 --
--------- --------
Total nonperforming assets.................. $ 5,674 $ 1,496
========= =========
Allowance for loan losses...................$ 3,633 $ 3,069
Ratio of total nonperforming assets to
total assets............................. 1.45% 0.42%
Ratio of total nonperforming loans to
total loans.............................. 1.93% 0.64%
Ratio of allowance for loan losses to
total nonperforming loans................ 69% 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.
Of the $5.3 million reported as nonperforming loans at September 30, 1998, $2.5
million (reported in the nonaccrual category) relates to one commercial credit.
The Company has performed an examination of the financial condition of this
borrower. Pro-forma projections indicate the borrower to be a viable business,
capable of servicing its debt load, if managed with appropriate financial
discipline.
An additional $1.2 million represents loans originated by the loan officer
dismissed during 1997. See "--Allowance for Loan Losses" and "Comparison of
Operating Results for the Nine Months Ended September 30, 1998 and 1997
- --General." Since September 30, 1998, the following activity has been recorded
on these loans: $388,000 of payments have been received; $468,000 of the loans
are now performing; $195,000 has been charged off; and approximately $171,000
remains classified as nonperforming.
Remaining nonperforming loans at September 30, 1998 are $1.6 million or .58
percent of total loans. A significant portion of these loans were over 90 days
past due but still accruing interest as of that date. As of the current date,
several of the loans have been brought current or otherwise resolved and are no
longer classified as nonperforming. Based upon currently available information,
management expects nonperforming loans at December 31, 1998 to be significantly
less than the amount reported as of September 30, 1998.
14
<PAGE>
Liabilities. Total liabilities increased $28.9 million, or 9 percent, from
$337.9 million at December 31, 1997 to $366.8 million at September 30, 1998. The
following table presents the Company's liabilities by category as of September
30, 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:
Liabilities
(In thousands)
Change
--------------------
Sept 30, December 31,
1998 1997 $ %
----------- ------------- ---------- --------
Deposits:
Noninterest - bearing........$ 26,794 $ 25,795 $ 999 4%
Interest - bearing--
Savings, NOW and
money market........... 72,771 75,630 (2,859) (4) %
Time deposits $100,000
and over............... 36,622 36,334 288 1 %
Other time deposits.... 134,331 125,065 9,266 7 % (a)
Short-term borrowings........ 58,416 46,503 11,913 26 % (b)
Long-term borrowings......... 30,737 21,812 8,925 41 % (c)
Other liabilities............ 7,090 6,716 374 6%
----------- ------------- ---------- --------
Total liabilities......$ 366,761 $ 337,855 $ 28,906 9 %
=========== ============= ========== ========
- -------------------
(a) The increase in time deposits is attributable to an increase in national
market certificates of deposit. The Company's subsidiary banks obtain such
deposits by subscribing to a network over which they periodically post
rates for time deposits of desired terms. Other network subscribers
(generally public entities, credit unions or other banks) then contact the
posting bank if they are interested in investing funds at the posted rates
and terms.
(b) The increase in short-term borrowings reflects increased borrowings from
the Federal Home Loan Bank ("FHLB").
(c) The increase in long-term borrowings is due to additional borrowings (by
the Company and BNC Financial) on revolving lines of credit with Firstar
Bank Milwaukee, N.A., primarily for the purpose of funding asset-based
loans at BNC Financial. See Note 6 to the Consolidated Financial
Statements included under Item 1.
Stockholders' Equity. The Company's equity capital increased $1.9 million
between December 31, 1997 and September 30, 1998. The increase resulted from net
earnings of $1.8 million, transactions involving the exercise of stock options
or the issuance or vesting of restricted stock totaling $151,000 and a $242,000
increase in the net unrealized holding gain on securities available for sale
offset by the repurchase of 17,500 shares of stock for $297,000.
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 September 30, 1998:
15
<PAGE>
Tier 1 Total Tier 1
Risk-Based Risk-Based Leverage
Ratio Ratio Ratio
----------- ------------ -----------
Consolidated.............. 6.61% 11.08% 5.40%
BNC-- North Dakota........ 8.92 10.17 6.12
BNC-- Minnesota (1)....... 9.30 10.20 9.44
- -------------------
(1) BNC National Bank of Minnesota
As of September 30, 1998, BNCCORP and its subsidiary banks exceeded capital
adequacy requirements and the banks were considered "well capitalized" under
prompt corrective action provisions.
No major capital expenditures were made during the nine month period ended
September 30, 1998. The Company recently announced a plan to open a branch
office in Fargo, North Dakota. A portion of the capital expenditures related to
establishment of this branch, approximately $540,000, will be incurred during
the fourth quarter of 1998. The remainder of the planned capital expenditures
related to the branch office, currently estimated at $2.0 to $2.7 million, are
expected to be incurred in the second half of 1999. All capital expenditures are
expected to be funded without incurring additional debt.
Comparison of Operating Results for the
Three Months Ended September 30, 1998 and 1997
General. Net income for the three months ended September 30, 1998 was $342,000
as compared to $758,000 for the three months ended September 30, 1997. The
Company's basic and diluted EPS were $0.14 for the quarter ended September 30,
1998 as compared to $0.32 and $0.31, respectively, for basic and diluted EPS for
the same period one year ago. The returns on average assets and average equity
for the three months ended September 30, 1998 were .35 and 5.47 percent,
respectively, as compared to .93 and 13.57 percent, respectively, for the same
period last year.
The Company's performance for the third quarter of 1998 was impacted by a
special loan loss provision of $631,000. See "Comparison of Financial Condition
at September 30, 1998 and December 31, 1997--Allowance for Loan Losses and
- --Nonperforming Assets" for more information relating to the special loan loss
provision.
The Company's pro forma net income, EPS and return on average assets and average
equity for the three month periods ended September 30, 1998, without the special
loan loss provision, would have been approximately (in thousands, except EPS
data; 1997 data included for comparative purposes):
Three Months Three Months
Ended Ended
Sept. 30, 1998 Sept. 30, 1997
(Pro Forma)
-------------- --------------
(unaudited) (unaudited)
Net Income.............................. $ 744 $ 758
EPS - Basic............................. $ 0.31 $ 0.32
EPS - Diluted........................... $ 0.31 $ 0.31
Return on average assets................ 0.77% 0.93%
Return on average equity................ 11.87% 13.57%
16
<PAGE>
Net Interest Income. Net interest income for the three month period ended
September 30, 1998 increased $409,000, or 13 percent, to $3.6 million as
compared to $3.2 million for the same period in 1997. Net interest margin
decreased to 4.05 percent for the quarter ended September 30, 1998 from 4.29
percent for the same period one year earlier.
The following table presents average balances, interest earned or paid,
associated yields on interest-earning assets and costs on interest-bearing
liabilities for the three months ended September 30, 1998 and 1997 as well as
the changes between the two periods. Significant factors contributing to the
increase in net interest income and the decrease in net interest margin are
discussed in lettered notes below the table:
<TABLE>
<CAPTION>
Three Months ended September 30,
1998 1997 Change
----------------------- --------------------------- ----------------------------
Interest Average Interest Average Interest Average
Average earned yield Average earned yield or Average earned or yield or
balance or paid or cost balance or paid cost balance paid cost
------- ------- ------- ------- ------- -------- ------- ------- --------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Investments.................. $93,846 $1,431 6.05% $68,121 $1,097 6.39% $25,725 $ 334 -0.34%(a)
Loans........................ 265,809 6,609 9.86% 234,360 5,797 9.81% 31,449 812 0.05%(b)
Allowance for loan losses (3,088) -- (3,053) -- (35) --
------- ------ ------- ------- ------- -------
Total interest-earning
assets $356,567 $8,040 8.95% $299,428 $6,894 9.13% $57,139 $1,146 -0.18%(c)
======= ------ ======= ------- ======= -------
Interest-bearing liabilities
Savings, NOW & money market
accounts.............. $71,784 $ 594 3.28% $59,982 $ 456 3.02% $11,802 $ 138 0.26%(d)
Certificates of deposit under
$100,000............... 135,737 1,920 5.61% 126,086 1,782 5.61% 9,651 138 0.00%(e)
Certificates of deposit
$100,000 and over...... 37,870 563 5.90% 43,239 628 5.76% (5,369) (65) 0.14%(e)
------- ------ ------- ------- ------- -------
Interest - bearing
deposits............245,391 3,077 4.97% 229,307 2,866 4.96% 16,084 211 0.01%(f)
Short-term borrowings........ 51,784 715 5.48% 26,589 379 5.66% 25,195 336 -0.18%(g)
Long-term borrowings......... 28,274 604 8.48% 18,441 414 8.91% 9,833 190 -0.43%(h)
------- ------ ------- ------- ------- -------
Total borrowings........ 80,058 1,319 6.54% 45,030 793 6.99% 35,028 526 -0.45%(i)
------- ------ ------- ------- ------- -------
Total interest-bearing
liabilities..........$325,449 4,396 5.36% $274,337 3,659 5.29% $51,112 737 0.07%(j)
======= ------ ======= ------- ======= -------
Net interest income/
spread.............. $3,644 3.59% $3,235 3.84% $ 409 -0.25%(k)
====== ======= ======= ====== ======= =======
Net interest margin.... 4.05% 4.29% -0.24%(k)
======= ====== =======
Notation:
Noninterest-bearing
deposits $24,979 -- $20,958 -- $ 4,021 --
------- ------- -------
Total deposits.......... $270,370 $3,077 4.52% $250,265 $ 2,866 4.54% $20,105 $ 211 -0.02%(f)
======= ====== ======= ======= ======= ====== ======= ======= =======
</TABLE>
- --------------------------
(a) Average balance increase is attributable to the purchase of $18.8 million
of long-term Government National Mortgage Association securities late in
1997 and an increase in securities issued by U.S. government agencies. The
decrease in the investment yield is primarily due to the decline in U.S.
Treasury rates, which has caused the Company to receive prepayments on
mortgage-backed securities, the proceeds of which have been reinvested at
lower rates currently available.
(b) Average balance increase is primarily attributable to loan growth in the
Minnesota market, including asset-based loans at BNC Financial.
(c) Decrease in yield on interest-earning assets is primarily due to a mix
change in the earning asset portfolio coupled with the decrease in yield
on investment securities discussed in (a) above. During the third quarter
of 1998, 26 percent of average interest-earning assets were lower-yielding
investments as compared to only 23 percent for the same period one year
earlier.
(d) Average balance increase is attributable to higher average balances in
money market deposit accounts during the third quarter of 1998 as compared
to the same quarter one year earlier. Increased cost is caused by
increased volume in higher tier/higher rate money market deposits.
(e) The increase in average balance of certificates of deposit ("CD's") under
$100,000 is attributable to increases in national market CD's. The
decrease in volume of CD's $100,000 and over reflects the fact that the
Company's average balances of brokered deposits during the third quarter
of 1998 were negligible. Increased cost is caused by increases in certain
large certificate of deposit rates.
17
<PAGE>
(f) Increase in cost of interest-bearing deposits is the result of the factors
discussed in (d) and (e) above. While several interest-bearing deposit
categories reflected cost increases, the overall cost of interest-bearing
deposits increased only 1 basis point due to a mix change in the average
interest-bearing deposit portfolio. Low-cost deposits represented 29
percent of average interest-bearing deposits for the quarter ended
September 30, 1998 as compared to 26 percent for the same quarter one year
earlier. A deposit mix change is further accentuated in the cost of total
deposits (i.e., with noninterest-bearing deposits included). While the
Company experienced cost increases in several categories of
interest-bearing deposits, the total cost of deposits for the quarter ended
September 30, 1998 was 2 basis points under the cost for the same quarter
in 1997. Average noninterest-bearing deposits represented over 9 percent of
the average total deposit portfolio for the third quarter of 1998 as
compared to 8 percent for the same period in 1997.
(g) Average balance increase is attributable to increased borrowings from the
FHLB during 1998. Reduced cost is primarily attributable to a decrease in
average cost on FHLB borrowings.
(h) Average balance increase is attributable to additional draws on the
Company's long-term borrowing facilities primarily for the purpose of
funding asset-based loans at BNC Financial. Cost decrease is attributable
to decreases in cost on the Company's Firstar borrowings which adjust
quarterly and have generally been priced at 90 day LIBOR plus 2 percent.
(i) Variances are a result of the factors discussed in (g) and (h) above.
(j) The increase in cost of interest-bearing liabilities is due to the
above-noted increased cost of interest-bearing deposits and a mix change
in the average interest-bearing liabilities portfolio. Borrowings
represented 25 percent of average interest-bearing liabilities for the
quarter ended September 30, 1998 compared to 16 percent for the same
period one year earlier.
(k) Reduction in net interest spread and net interest margin is attributable
to the above-mentioned increase in the cost of interest-bearing
liabilities coupled with the decrease in yield on interest-earning assets.
As indicated in the table above, the Company has experienced pressure on its net
interest spread and margin. Competition for high quality loans in the markets in
which the Company operates has been strong, and the recent decline in U.S.
Treasury rates has negatively impacted the Company's yield on investments.
Earning asset growth continues to outpace core deposit growth because of the
increased number of non-bank competitors and the multitude of financial and
investment products available to customers. This has resulted in the increased
use of brokered and out of market certificates of deposit and other borrowings,
which, unless accompanied by increases in noninterest- or low-interest-bearing
deposits, can cause increases in the cost of interest-bearing liabilities.
Other factors, including, but not limited to, the monetary policies of the
Federal Reserve Board can impact interest rates which can materially affect the
operating results of commercial banks. In fact, and as anticipated, the Federal
Reserve Board has decreased rates twice since late September 1998, 25 basis
points in each case. This resulted in immediate reductions in the Wall Street
prime rate, the index to which a large percentage of the Company's floating rate
commercial loans are tied. To help protect its net interest margin in a downward
rate cycle, the Company, prior to the Federal Reserve Board's interest rate
reductions, purchased an interest rate floor. See Note 5 to the Consolidated
Financial Statements included under Item 1.
Management cannot predict, with any degree of certainty, prospects for net
interest income in future periods. Management, however, expects to continue to
experience intense competition for bank customers and pressure on the Company's
net interest spread and margin. In addition to the employment of available
interest rate risk management options, the Company expects to continue to focus
on broadening its financial product and service offerings in order to supplement
earnings from core banking activities.
Provision for Loan Losses. The provision for loan losses was $762,000 for the
quarter ended September 30, 1998 as compared to $204,000 for the same period one
year earlier. The Company booked a special loan loss provision of $631,000
during the quarter ended September 30, 1998. As of September 30, 1998, the
allowance for loan losses was 1.32 percent of total loans as compared to 1.30
and 1.21 percent at December 31, 1997 and September 30, 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 September 30, 1998 and December 31,
1997--Allowance for Loan Losses" for further discussion of the special loan loss
provision booked during the quarter ended September 30, 1998.
18
<PAGE>
Noninterest Income. The following table presents the major categories of the
Company's noninterest income for the three months ended September 30, 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
For the Three Months
Ended September 30, Change
-------------------- --------------------
1998 1997 $ %
--------- ------- ------- --------
(in thousands)
-------
Insurance commissions...... $ 431 $ 385 $ 46 12%
Fees on loans.............. 365 373 (8) (2)%
Service charges............ 145 113 32 28%
Rental income.............. 10 10 -- --
Net gain on sales of
securities ............ 51 8 43 538%
Other noninterest income... 249 151 98 65% (a)
--------- ------- ------- --------
Total noninterest income $ 1,251 $1,040 $ 211 20%
========= ======= ======= ========
- -----------------
(a) 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 September 30, 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
For the Three Months
Ended September 30, Change
-------------------- --------------------
1998 1997 $ %
-------- -------- -------- --------
(in thousands)
--------
Salaries and employee
benefits $2,041 $ 1,556 $ 485 31% (a)
Depreciation and amortization 385 339 46 14%
Occupancy................. 252 249 3 1%
Professional services..... 197 169 28 17%
Office supplies, telephone
and postage............ 189 158 31 20%
Marketing and promotion... 82 57 25 44%
FDIC and other assessments 47 43 4 9%
Other..................... 356 243 113 47% (b)
-------- -------- -------- --------
Total noninterest
expense $ 3,549 $ 2,814 $ 735 26%
======== ======== ======== ========
- --------------------
(a) Increase is attributable to growth. Average full time equivalent employees
increased from 149 for the three month period ended September 30, 1997 to
177 for the same period in 1998, a 19 percent increase.
(b) Increase is attributable to small increases in several items in this
category including insurance, travel, employee education and development
and correspondent charges.
Income Tax Expense. Income tax expense decreased $257,000 due to the decrease in
pre-tax income for the quarter ended September 30, 1998 as compared to the
pre-tax income for the same period in 1997. The estimated effective tax rates
for the three month periods ended September 30, 1998 and 1997 were 39.7 and 41.5
percent, respectively. These rates are higher than the federal statutory rate of
34.0 percent due principally to state income taxes.
19
<PAGE>
Earnings per Common Share. Basic and diluted earnings per common share were
$0.14 for the quarter ended September 30, 1998 as compared to $0.32 and $0.31,
respectively, 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 September 30, 1998 and 1997. See also "Comparison of Operating
Results for the Three Months Ended September 30, 1998 and 1997--General."
Comparison of Operating Results for the
Nine Months Ended September 30, 1998 and 1997
General. Net income for the nine months ended September 30, 1998 was $1.8
million as compared to $809,000 for the nine months ended September 30, 1997.
The Company's basic and diluted EPS were $0.75 and $0.73, respectively, for the
nine months ended September 30, 1998 as compared to $0.34 for both basic and
diluted EPS for the same period one year ago. The returns on average assets and
average equity for the nine months ended September 30, 1998 were .66 and 9.97
percent, respectively, as compared to .35 and 4.89 percent, respectively, for
the same period last year.
The Company's performance for the nine months ended September 30, 1997 was
impacted by a special $1.9 million loan loss provision booked during the second
quarter of 1997. The additional provision resulted from questionable loan
practices by a loan officer dismissed during the quarter. More than 80 percent
of the $1.9 million provision was attributable to questionable activity with one
customer. During the same quarter, the Company charged off approximately
$856,000 in principal and over $60,000 in interest and late fees all related to
transactions with this customer. The Company also booked a special loan loss
provision of $631,000 during the quarter ended September 30, 1998. See
"Comparison of Financial Condition at September 30, 1998 and December 31,
1997--Allowance for Loan Losses" for more information relating to the special
provision.
The Company's pro forma net income, EPS and return on average assets and average
equity for the nine month periods ended September 30, 1998 and 1997, without the
special loan loss provisions booked during the second quarter of 1997 and the
third quarter of 1998, would have been approximately (in thousands, except EPS
data):
Nine Months Nine Months
Ended Ended
Sept. 30, 1998 Sept 30, 1997
(Pro Forma) (Pro Forma)
-------------- -------------
(unaudited) (unaudited)
Net income $ 2,202 $ 2,106
EPS - Basic $ 0.92 $ 0.88
EPS - Diluted $ 0.90 $ 0.87
Return on average assets 0.81% 0.91%
Return on average equity 12.17% 12.47%
Net Interest Income. Net interest income for the nine month period ending
September 30, 1998 increased $1.2 million, or 13 percent, to $10.4 million as
compared to $9.2 million for the same period in 1997. Net interest margin
decreased to 4.08 percent for the nine months ended September 30, 1998 from 4.31
percent for the same period one year earlier.
The following table presents average balances, interest earned or paid,
associated yields on interest-earning assets and costs on interest-bearing
liabilities for the nine months ended September 30, 1998 and 1997 as well as the
changes between the two periods. Significant factors contributing to the
increase in net interest income and the decrease in net interest margin are
discussed in lettered notes below the table:
20
<PAGE>
<TABLE>
<CAPTION>
Nine Months ended September 30,
1998 1997 Change
----------------------- --------------------------- ----------------------------
Interest Average Interest Average Interest Average
Average earned yield Average earned yield or Average earned or yield or
balance or paid or cost balance or paid cost balance paid cost
------- ------- ------- ------- ------- -------- ------- ------- --------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Investments................. $95,520 $4,390 6.14% $67,924 $3,237 6.37% $27,596 $1,153 -0.23%(a)
Loans....................... 247,595 18,435 9.95% 219,854 16,143 9.82% 27,741 2,292 0.13%(b)
Allowance for losses... (3,068) -- (2,184) -- (884) --
------- ------ ------- ------- ------- -------
Total interest-earning
assets $340,047 $22,825 8.97% $285,594 $19,380 9.07% $54,453 $3,445 -0.10%(c)
======= ------ ======= ------- ======= -------
Interest-bearing liabilities
Savings, NOW & money market
accounts............ $69,691 $1,664 3.19% $57,156 $1,259 2.95% $12,535 $ 405 0.24%(d)
Certificates of deposit under
$100,000............. 130,648 5,518 5.65% 127,471 5,328 5.59% 3,177 190 0.06%
Certificates of deposit
$100,000 and over.... 35,912 1,580 5.88% 42,206 1,802 5.71% (6,294) (222) 0.17%(e)
------- ------ ------- ------- ------- -------
Interest - bearing
deposits.......... 236,251 8,762 4.97% 226,833 8,389 4.94% 9,418 373 0.03%(f)
Short-term borrowings...... 50,163 2,060 5.49% 18,870 811 5.75% 31,293 1,249 -0.26%(g)
Long-term borrowings....... 24,500 1,623 8.86% 14,590 963 8.82% 9,910 660 0.04%(h)
------- ------ ------- ------- ------- -------
Total borrowings...... 74,663 3,683 6.60% 33,460 1,774 7.09% 41,203 1,909 -0.49%(i)
------- ------ ------- ------- ------- -------
Total interest-bearing
liabilities........ $310,914 12,445 5.35% $260,293 10,163 5.22% $50,621 2,282 0.13%(j)
======= ------ ======= ------- ======= -------
Net interest income/
spread............. $10,380 3.62% $9,217 3.85% $1,163 -0.23%(k)
====== ======= ======= ====== ======= =======
Net interest margin... 4.08% 4.31% -0.23%(k)
======= ====== =======
Notation:
Noninterest-bearing deposits $23,579 -- $19,514 -- $4,065 --
------- ------- -------
Total deposits......... $259,830 $8,762 4.51% $246,347 $ 8,389 4.53% $13,483 $ 373 -0.02%(f)
======= ====== ======= ======= ======= ====== ======= ======= =======
</TABLE>
- --------------------------
(a) Average balance increase is attributable to the purchase of $18.8 million
of long-term Government National Mortgage Association securities late in
1997 and an increase in securities issued by U.S. government agencies. The
decrease in the investment yield is primarily due to the decline in U.S.
Treasury rates, which has caused the Company to receive prepayments on
mortgage-backed securities, the proceeds of which have been reinvested at
lower rates currently available.
(b) Average balance increase is primarily attributable to loan growth in the
Minnesota market, including asset-based loans at BNC Financial. The
improvement in loan yield is primarily attributable to the increase in
asset-based loans.
(c) Decrease in yield on interest-earning assets is primarily due to a mix
change in the earning asset portfolio coupled with the decrease in yield
on investment securities discussed in (a) above. During the nine months
ended September 30, 1998, 28 percent of average interest-earning assets
were lower-yielding investments as compared to 24 percent for the same
period one year earlier.
(d) Average balance increase is attributable to higher average balances in NOW
and money market deposit accounts during the nine months ended September
30, 1998 as compared to the same period in 1997. Increased cost is caused
by increased volume in higher tier/higher rate money market deposits.
(e) Decrease in volume reflects the fact that the Company's average balances
of brokered deposits during the nine months ended September 30, 1998 were
negligible. Increased cost is caused by increases in certain large
certificate of deposit rates.
(f) Increase in cost of interest-bearing deposits is the result of the factors
discussed in (d) and (e) above. While all interest-bearing deposit
categories reflected cost increases, the overall cost of interest-bearing
deposits increased only 3 basis points due to a mix change in the average
interest-bearing deposit portfolio. Low-cost deposits represented 29
percent of average interest-bearing deposits for the nine months ended
September 30, 1998 as compared to 25 percent for the same period one year
earlier. A deposit mix change is further accentuated in the cost of total
deposits (i.e., with noninterest-bearing deposits included). While the
Company experienced cost increases in each category of interest-bearing
deposits, the total cost of deposits for the nine months ended September
30, 1998 was 2 basis points under the cost for the same period
21
<PAGE>
in 1997. Average noninterest-bearing deposits represented over 9 percent
of the average total deposit portfolio for the nine months ended September
30, 1998 as compared to 7.9 percent for the same period in 1997.
(g) Average balance increase is attributable to increased borrowings from the
FHLB during 1998. Reduced cost is also primarily attributable to a
decrease in average cost on FHLB borrowings.
(h) 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)
and additional draws on the Company's other borrowing facilities primarily
for the purpose of funding asset-based loans at BNC Financial.
(i) Variances are a result of the factors discussed in (g) and (h) above.
(j) The increase in cost of interest-bearing liabilities is due to the
above-noted increased cost of interest-bearing deposits coupled with a mix
change in the interest-bearing liabilities portfolio. Average borrowings
represented 24 percent of average interest-bearing liabilities for the
nine months ended September 30, 1998 as compared to 13 percent for the
same period in 1997.
(k) Reduction in net interest spread and net interest margin is attributable
to the above-mentioned increase in the cost of interest-bearing
liabilities coupled with the decrease in yield on interest-earning assets.
See --"Comparison of Operating Results for the Three Months Ended September 30,
1998 and 1997--Net Interest Income" for additional comments regarding net
interest spread and margin.
Provision for Loan Losses. The provision for loan losses was $960,000 for the
nine months ended September 30, 1998 as compared to $2.5 million for the same
period one year earlier. Both of these periods were impacted by special loan
loss provisions -- $631,000 for 1998 and $1.9 million for 1997. See "Comparison
of Financial Condition at September 30, 1998 and December 31, 1997--Allowance
for Loan Losses" and "Comparison of Operating Results for the Nine Months Ended
September 30, 1998 and 1997--General" for discussions relating to these special
loan loss provisions.
Noninterest Income. The following table presents the major categories of the
Company's noninterest income for the nine months ended September 30, 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
For the Nine Months
Ended September 30, Change
-------------------- ---------------------
1998 1997 $ %
--------- ------- ------- ---------
(in thousands)
-------
Insurance commissions...... $ 1,269 $1,263 $ 6 1%
Fees on loans.............. 1,096 734 362 49% (a)
Service charges............ 420 352 68 19%
Rental income.............. 32 45 (13) (29)%
Net gain (loss) on sales of
securities ........... 68 (3) 71 (2367)%
Other noninterest income... 782 473 309 65 % (b)
--------- ------- ------- ---------
Total noninterest income $ 3,667 $2,864 $ 803 28 %
========= ======= ======= =========
- -----------------
(a) Increase is attributable to increases in commercial, residential and
consumer loan fees as well as prepayment fees on loan payoffs. A
significant amount of the increase in commercial loan fees relates to
commercial loans originated and subsequently sold at which time loan fees
related to the sold portion of the loans are recognized as fee income.
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) 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 nine months ended September 30, 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:
22
<PAGE>
Noninterest Expense
For the Nine Months
Ended September 30, Change
-------------------- --------------------
1998 1997 $ %
-------- -------- -------- --------
(in thousands)
Salaries and employee bene
fits $5,733 $ 4,642 $ 1,091 24% (a)
Depreciation and amortization 1,126 972 154 16% (b)
Occupancy................. 769 724 45 6%
Office supplies, telephone
and postage............ 553 478 75 16%
Professional services..... 525 384 141 37% (c)
Marketing and promotion... 322 255 67 26%
FDIC and other assessments 138 126 12 10%
Other..................... 949 690 259 38% (d)
-------- -------- -------- --------
Total noninterest
expense $ 10,115 $ 8,271 $ 1,844 22%
======== ======== ======== ========
- --------------------
(a) Increase is attributable to growth. Average full time equivalent employees
increased from 146 for the nine month period ended September 30, 1997 to
170 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 and furniture and
equipment necessary to support the Company's increase in employees (see a.
above) as well as amortization of intangibles related to acquisitions in
the latter half of 1997.
(c) Increase is due to increases in legal, software support and other
consulting fees.
(d) Increase is attributable to increases in several items in this category
including insurance, travel, dues and publications, employee education and
development, correspondent bank changes, and other such expenses.
Income Tax Expense. Income tax expense increased $628,000 due to the increase in
pre-tax income for the nine months ended September 30, 1998 as compared to the
pre-tax income recorded for the same period in 1997. The estimated effective tax
rates for the nine month periods ended September 30, 1998 and 1997 were 40.2 and
39.4 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
$0.75 and $0.73, respectively, for the nine months ended September 30, 1998 as
compared to $0.34 basic and diluted EPS for the same period in 1997. See Note 4
to the Consolidated Financial Statements for a summary of the EPS calculations
for the nine month periods ended September 30, 1998 and 1997. See also
"Comparison of Operating Results for the Nine Months Ended September 30, 1998
and 1997--General."
Year 2000 Issue
Like other financial and business organizations, the Company could be adversely
affected if its information technology ("IT") and non-IT systems and those of
its customers and other businesses with which the Company interacts do not
properly process and calculate date-related information beginning in the Year
2000. Therefore, the company is taking steps that it believes are reasonably
designed to address any problems with respect to the IT and non-IT systems that
it uses and to obtain satisfactory assurances that comparable steps are being
taken by material customers, vendors and other business partners.
IT and non-IT Systems. The IT systems maintained by the Company consist
primarily of its core application system, item processing system and local area
networks ("LAN's") in branches and operating units which are connected through a
wide area network ("WAN"). Core application processing is performed in-house
using a core application system provided by a third party vendor which has over
1,300 customers nationally. The item processing system operates on a separate
23
<PAGE>
platform from the core applications and communicates to them through an
interface. The initial design, installation and maintenance of the LAN's and WAN
are provided by internal IT personnel who also manage the basic support and
configurations for the systems.
Non-IT systems include embedded circuitry found in telephone equipment, security
and alarm systems, copiers, fax machines, heating and air conditioning systems
and other infrastructure systems that are used by the Company in connection with
the operation of its business.
Year 2000 Program / State of Readiness. The Company has implemented a Year 2000
program which includes the following phases: awareness, assessment, renovation,
testing / validation and implementation (the "Y2K Program"). The Y2K Program
applies to all IT and non-IT systems, as well as any providers who service and
maintain these systems.
Awareness Phase. During the awareness phase, which has been completed, the
Company defined the Year 2000 problem, gained executive level support for the
commitment of resources necessary to perform Year 2000 compliance work,
established a Y2K Program team, and developed an overall strategy encompassing
all in-house IT and non-IT systems and equipment, outsourced systems, customers
and vendors.
Assessment Phase. The assessment phase has been completed (except for those
activities considered ongoing in nature, such as monitoring the status of
customers and vendors with respect to their own Year 2000 programs). During this
phase the Company performed an assessment of the size and complexity of the Year
2000 issue, developed details of the magnitude of the effort necessary to
address Year 2000 issues, identified all hardware, software, networks, automated
teller machines, other processing platforms and equipment as well as customer
and vendor interdependencies affected by the Year 2000 date change, evaluated
the Year 2000 effect on other strategic business initiatives (such as mergers
and acquisitions or planned hardware or software revisions), identified resource
needs and established a Year 2000 budget, assigned accountability for the life
of the Y2K Program, established deadlines for Y2K Program phases, identified
those systems considered "mission critical" (i.e., applications or systems
considered vital to the successful continuance of any of the Company's core
business activities), communicated with customers, vendors and correspondents to
request information regarding the status of their Year 2000 programs and
outlined a contingency plan to be implemented in the event internal or external
systems are not ready for the Year 2000. See "Contingency Plan."
Renovation Phase. During the renovation phase, which is substantially complete,
the Company made necessary hardware or software upgrades, replaced any
non-compliant system components and obtained certifications regarding the Year
2000 readiness of vendor-provided software or equipment employed by the Company
in its business operations. The Company established a Year 2000 testing lab
which mirrors the systems and software used by the Company in its day to day
processing. In addition, the Company replaced a number of non-compliant personal
computers in its North Dakota rural branch offices. See "Costs."
Testing / Validation and Implementation. The testing / validation phase is
currently in process. The Company's written testing strategy and plan were
completed prior to June 30, 1998. Testing of internal mission critical systems,
including those programmed in-house and those purchased from software vendors
commenced prior to September 30, 1998. The Company is planning to have testing
of mission critical systems completed by December 31, 1998. By March 31, 1999,
testing of systems where the Company relies on service providers for mission
critical systems should be substantially complete. By June 30, 1999, testing of
non-mission critical systems should be complete with the implementation stage
also substantially completed. The objective of the testing is to minimize
business risk due to operational failures. This phase is considered to be the
most critical phase of the Company's Y2K Program.
Costs. The Company has managed the Y2K Program with available staff (other than
a few isolated instances where consultants have been engaged for a specific
activity). Therefore, the Company has not incurred excessive salary and benefits
expenses related to the development and implementation of the Y2K Program.
Because of the considerable time commitment of current staff to the Y2K
24
<PAGE>
Program,however, the Company has, on more than one occasion, elected to defer
investments in alternate technologies (for example, the purchase of new hardware
or software packages) or postpone requested program changes in order to ensure
that the processes and systems currently in place achieve Y2K readiness within
recommended time frames.
The Company has invested approximately $45,000 in hardware (primarily for the
Y2K lab and the non-compliant personal computers which were replaced). Other Y2K
Program costs incurred to date have not been of a material nature (less than
$25,000) and have included costs for items such as materials, supplies and
postage. Based on information currently available, management feels its initial
projection of $200,000 to $400,000 remains a reasonable estimate for Y2K Program
expenses. All costs associated with the Y2K Program are expected to be funded
through current operating profits.
Risks. The major risks posed by the Year 2000 issue are the failure of core
applications systems or utility or telecommunications failures. For example, a
failure of the Company's core application system would impair access to Company
data or the ability to process certain business transactions. The Company's core
application provider revised all of its programs in 1992 and, at that time,
changed from a two digit date format to a four digit date format. All subsequent
updates have included date information in the four digit format. All systems and
programs are being tested even though the Company may have received
certifications attesting to Year 2000 compliance. Utility and telecommunications
failures would also impact the Company (for example, a source of power and
telecommunications connections are crucial to running core applications and
processing business transactions).
While the company has been in close communication with customers, vendors and
other intermediaries, it has no control over the remediation efforts of these
third parties with whom it has material business relationships and the failure
of certain of these parties to successfully remediate their Year 2000 issues
could have a material adverse affect on the Company. The Company has received
initial assurances from certain of these third parties that their ability to
perform their obligations to the Company are not expected to be materially
adversely affected by the Year 2000 problem. The Company is also testing, to the
extent possible, systems, software and interfaces through which business
transactions with such third parties are effected. The Company will continue to
request updated information from these third parties in order to assess their
Year 2000 readiness. If a material third party business partner is unable to
provide reassurance to the Company that it is or will be ready for the Year
2000, the Company intends to seek an alternative business partner to the extent
practical.
Contingency Plan. The Company is in the process of completing a contingency plan
to handle its most reasonably likely worst case Y2K scenarios. Phases of this
plan include organization and planning, business impact analysis, Y2K business
resumption planning and testing. The Year 2000 contingency plan is intended to
provide assurance that the Company's mission critical functions will continue if
one or more systems fail. In developing the plan, the Company is taking into
consideration the impact of external systems, including those of service
providers, other financial institutions, customers, business partners and
infrastructure providers such as suppliers of power and telecommunications.
All forecasts, estimates and other statements relating to the Year 2000
readiness of the Company and its customers and business partners are based on
information and assumptions about future events. Such "forward looking
statements" are subject to various known and unknown risks and uncertainties
that may cause actual events to differ from such statements. These uncertainties
include, but are not limited to, the understanding of the Company that its core
application and other systems are or will be Year 2000 compliant, the ability to
identify, repair or replace mission critical non-IT equipment in a timely
fashion, the ability of certain third parties to ensure their systems are Year
2000 compliant and the ability of the Company to test interfaces with certain of
these third parties, the performance of telecommunications, data transmission
and utilities providers, the failure or impairment of certain
25
<PAGE>
third parties with which the Company transacts business and undiscovered
problems in the Company's Year 2000 testing plans and processes.
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 and national
market 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. Between December 31, 1997 and September 30, 1998, the Company
increased its borrowings from the FHLB by $6.5 million. The Company has also
obtained funding through long-term borrowings and the issuance of subordinated
notes, primarily for the purpose of funding asset-based loans at BNC Financial.
The following table sets forth, for the nine months ended September 30, 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:
24
<PAGE>
Major Sources and Uses of Funds
For the Nine Months
Ended September 30,
-----------------------
1998 1997
--------- ---------
(in thousands)
---------
Proceeds from sales and maturities of investment
securities................................. $ 74,278 $ 27,325
Purchases of investment securities............ (71,528) (30,950)
Net increase in loans......................... (39,996) (37,424)
Net increase in short-term borrowings......... 11,913 15,867
Net increase in long-term borrowings.......... 8,863 10,563
Net increase in deposits...................... 7,694 9,538
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. The Company is
currently in the process of developing a contingency plan for liquidity
management over the period spanning several months before and after the year
2000 date change. Management expects to have a final draft of the plan and begin
testing in the fourth quarter of 1998. Testing will continue throughout 1999.
While the Company will exercise due diligence in the development of the plan and
take appropriate actions based on the results of testing of the plan, there can
be no assurance that events and circumstances will transpire as expected and, as
a result, the potential of a material adverse impact on the Company's liquidity
position cannot be completely eliminated. See "Year 2000 Issue."
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
26
<PAGE>
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,
net interest spread and margin, 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 or vendors; and other risks which are difficult to
predict and many of which are beyond the control of the Company.
In addition, such forward-looking statements are necessarily dependent upon
assumptions, estimates and data that may be incorrect or imprecise and involve
known and unknown risks, uncertainties and other factors. Accordingly, any
forward-looking statements included herein do not purport to be predictions of
future events or circumstances and may not be realized. All subsequent written
and oral forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by the foregoing
cautionary statements. The Company disclaims any obligation to update any such
factors or to announce publicly the results of any revisions to any of the
forward-looking statements contained herein to reflect future events or
developments.
27
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(i) Part I Exhibits
27. Financial Data Schedule
(ii) Part II Exhibits
10.23 Employment Agreement Among BNCCORP, Inc., BNC National
Bank and David J. Sorum dated as of October 13, 1998.
10.24 Revolving Credit Agreement dated August 14, 1998 by and
between BNC Financial Corporation and Firstar Bank Milwaukee,
N.A.
(b) Reports on Form 8-K
None.
28
<PAGE>
Signatures
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
BNCCORP, Inc.
Date: November 13, 1998 By /s/ Gregory K. Cleveland
----------------------------
Gregory K. Cleveland
President
Chief Operating Officer
Only Authorized Signature
29
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
balance sheet dated 9/30/98 and statement of income for the nine
months ended 9/30/98 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 7,045
<INT-BEARING-DEPOSITS> 1,824
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 92,191
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 274,656
<ALLOWANCE> 3,633
<TOTAL-ASSETS> 391,805
<DEPOSITS> 270,518
<SHORT-TERM> 58,416
<LIABILITIES-OTHER> 7,090
<LONG-TERM> 30,737
0
0
<COMMON> 24
<OTHER-SE> 25,020
<TOTAL-LIABILITIES-AND-EQUITY> 391,805
<INTEREST-LOAN> 18,435
<INTEREST-INVEST> 4,123
<INTEREST-OTHER> 267
<INTEREST-TOTAL> 22,825
<INTEREST-DEPOSIT> 8,762
<INTEREST-EXPENSE> 12,445
<INTEREST-INCOME-NET> 10,380
<LOAN-LOSSES> 960
<SECURITIES-GAINS> 68
<EXPENSE-OTHER> 10,115
<INCOME-PRETAX> 2,972
<INCOME-PRE-EXTRAORDINARY> 1,800
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,800
<EPS-PRIMARY> .75
<EPS-DILUTED> .73
<YIELD-ACTUAL> 8.97
<LOANS-NON> 3,878
<LOANS-PAST> 1,359
<LOANS-TROUBLED> 52
<LOANS-PROBLEM> 8,609
<ALLOWANCE-OPEN> 3,069
<CHARGE-OFFS> 540
<RECOVERIES> 144
<ALLOWANCE-CLOSE> 3,633
<ALLOWANCE-DOMESTIC> 3,633
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
- ------------------------------------------------------------------------------
EMPLOYMENT AGREEMENT
Among
BNCCORP, Inc.,
BNC National Bank
and
David J. Sorum
Dated as of October 13, 1998
- ------------------------------------------------------------------------------
<PAGE>
EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement") among BNCCORP, Inc., a
Delaware corporation (the "Company"), BNC National Bank, a national banking
association (the "Bank"), and David J. Sorum (the "Executive"), is dated as of
October 13, 1998 (the "Commencement Date").
W I T N E S S E T H:
WHEREAS, as of the Commencement Date, the Bank desires to employ the
Executive as President of the Fargo Branch of the Bank (the "Fargo Branch") and
the Executive wishes to accept such employment;
WHEREAS, Executive is expected to make a major contribution to the
profitability, growth and financial strength of the Company and the Bank;
WHEREAS, the Company and the Bank consider the continued services of
Executive to be in the best interests of the Company and its stockholders and
the Bank and desire to assure the continued services and undivided loyalty of
the Executive on behalf of the Company and the Bank on an objective and
impartial basis and without distraction or conflict of interest in the event of
an attempt to obtain control of the Company;
WHEREAS, in consideration of the covenants of the Company and the Bank
contained herein, the Executive is willing to remain in the employ of the Bank
upon the terms and conditions specified below; and
WHEREAS, in order to induce Executive to remain in the employ of the
Bank, this Agreement sets forth the compensation and benefits payable to
Executive, including the severance benefits that the Company or the Bank agree
will be provided to Executive if Executive's employment with the Bank is
terminated.
NOW, THEREFORE, in consideration of the promises and respective covenants
and agreements that the parties herein contain, and intending to be legally
bound, the parties hereto agree as follows:
The Company and the Bank and the Executive agree as follows:
1. Employment Capacity and Term. Subject to the terms and conditions of
this Agreement, the Bank hereby agrees to employ Executive, and Executive agrees
to serve, as the President of the Fargo Branch for the period beginning on the
Commencement Date, through October 13, 2001, and from year to year thereafter
subject to the right of the Executive or the Company to terminate this Agreement
as of any subsequent anniversary date by written notice given to the other party
at least 90 days prior to such anniversary date. Termination of this Agreement
by either party in accordance with the preceding sentence shall not require a
statement of the reasons therefore. All provisions herein governing a party's
rights and obligations upon the termination of Executive's employment shall
survive the termination of this Agreement.
<PAGE>
2. Duties; Place of Performance.
a. Duties. As the President of the Fargo Branch, the Executive
shall perform the duties normally associated with such office(s), such
additional duties as may be prescribed from time to time by the President of the
Bank or the Company and such duties as are described in the Bank's Bylaws as
being duties or responsibilities of the President of the Fargo Branch. Executive
shall report to and be subject to the supervision of the President of the Bank.
The Executive accepts such employment and agrees that, during the term of this
Agreement, the Executive will devote all of his business time and attention to
the business of the Company and the Bank and that he will not be employed by any
other business or engage in any other business activity that would materially
interfere with his ability to perform the duties required of him under this
Agreement or would constitute a conflict between his personal or financial
interests and the business or financial interests of the Company or the Bank.
b. Place of Performance. In connection with the Executive's
employment by the Bank, the Executive shall be based at the principal office of
the Fargo Branch in Fargo, North Dakota, except for required travel relating to
the business of the Company or the Bank to an extent substantially consistent
with the Executive's prior business travel practices.
3. Compensation and Benefits. The Executive shall be provided with the
compensation and benefits described below:
a. Salary. An annual salary of $100,000, payable in equal monthly
installments. This salary may be increased from time to time by the Company's
Board of Directors and, if so increased, shall not thereafter be decreased
during the term of this Agreement.
b. Bonus. An annual incentive bonus with respect to the services
provided by the Executive. The amount of the annual incentive bonus shall be
determined from time to time by the Compensation Committee of the Company's
Board of Directors. The parties acknowledge and agree that the award of bonuses
by the Compensation Committee is discretionary and that this Section 3(b)
imposes no obligation on the Company to award a bonus to the Executive.
c. Other Benefits. The Executive shall be entitled to the benefits
and perquisites maintained by the Company for its employees generally, or for
its senior executives in particular, on the same basis and subject to the same
requirements and limitations as may be applicable to other senior executive
employees of the Company. The Company shall not directly or indirectly make any
changes in any benefit plan or arrangement or perquisite that would adversely
affect the Executive's rights or benefits thereunder, unless such changes do not
result in a proportionately greater reduction in the rights of or benefits to
the Executive compared with any other executive officer of the Company. The
Company agrees that where credited service of the Executive for the Company is
relevant in determining eligibility for benefits under any benefit plan or
arrangement, the Executive's credited service for the Company shall be deemed to
have commenced on the Commencement Date.
-2-
<PAGE>
d. Partial Year; Proration. Any payments or benefits payable to the
Executive hereunder in respect of any fiscal year of the Company during which
the Executive is employed for less than the entire fiscal year shall, unless
otherwise provided in the applicable benefit plan, be prorated in accordance
with the number of days in such fiscal year during which the Executive is so
employed.
4. Other Benefits.
a. Vehicle. The Company or the Bank shall provide the Executive
with the use of a current model automobile of the Executive's choosing, subject
to approval by the President of the Company, and shall pay insurance and
maintenance expenses related to such automobile.
b. Club Membership. The Company or the Bank shall pay the
Employee's monthly membership dues at a country club in the Fargo/Moorhead area
as selected by the Executive.
c. Expenses. The Executive shall be reimbursed for reasonable
out-of-pocket expenses incurred from time to time on behalf of the Company, the
Bank or any subsidiary of the Company in the performance of his duties under
this Agreement, in accordance with standard Company procedures and upon the
presentation of such supporting invoices, receipts, documents and forms as the
Company reasonably requests.
d. Facilities; Secretarial Assistance. The Executive shall be
provided with office space, secretarial assistance and such other facilities and
services as shall be suitable to the Executive's position and adequate for the
performance of his duties.
5. Termination of Employment.
a. Death. The Executive's status as an employee shall terminate
upon the Executive's death during the term of this Agreement.
b. Disability. If (I) the Executive is incapable because of
physical or mental illness of satisfactorily discharging his duties under this
Agreement for a period of 90 consecutive days and (ii) a duly qualified
physician chosen by the Company and acceptable to the Executive or his legal
representatives so certifies in writing, the Company's Board may determine that
the Executive has become disabled. If the Company's Board makes such a
determination, the Company shall have the right, at any time during the period
that such disability continues to terminate the status of Executive as an
employee by notifying the Executive, in writing, of such termination in
accordance with Section 5(e). Any such termination shall become effective 30
days after such notice of termination is given (the "Disability Effective
Date"), unless within such 30-day period the Executive becomes capable of
resuming the duties contemplated hereby (and a physician chosen by the Company
and acceptable to the Executive or his legal representatives so certifies in
writing) and the Executive in fact resumes such duties. The Executive's
incapacity due to physical or mental illness to discharge the duties assigned by
this Agreement shall not constitute a breach of this Agreement by the Executive.
The Executive's death due to physical or mental illness to discharge the duties
assigned by this Agreement shall not constitute a breach of this Agreement by
the
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<PAGE>
Executive. Disability for purposes of this Agreement is defined under section
22(e)(3) of the Internal Revenue Code of 1986.
c. By the Company for Cause. The Company may terminate the
Executive's status as an employee for Cause by notifying the Executive, in
writing, of such termination in accordance with Section 5(e). As used herein,
"Cause" shall mean (I) the willful and continuing failure by the Executive to
perform the duties contemplated by this Agreement (other than any failure
resulting from a certified disability of the type specified in Section 5(b))
within a reasonable period of time after a written demand for substantial
performance as delivered to the Executive by a duly authorized member or
representative of the Company's Board which specifically identifies the manner
in which it is alleged that the Executive has not substantially performed such
services, (ii) the conviction of a felony or (iii) the willful engaging by the
Executive in gross misconduct injurious to the Company or the Bank. For purposes
of this Agreement, an act or failure to act on the Executive's part shall be
considered "willful" if done or omitted to be done without a reasonable belief
that such action or omission was in, or not opposed to, the best interests of
the Company or the Bank. Any act or failure to act by the Executive that is
based upon authority given pursuant to a resolution duly adopted by the
Company's Board or based upon the advice of counsel for the Company shall be
presumed to be done or omitted to be done by the Executive with a reasonable
belief that such action was in, or not opposed to, the best interests of the
Company or the Bank. Notwithstanding the foregoing, the Executive's employment
may not be terminated for Cause unless and until there shall have been delivered
to the Executive a copy of a resolution duly adopted by the affirmative vote of
not less than three-fourths of the entire membership of the Company's Board (not
counting the Executive) at a meeting of the Company's Board and held for the
purpose (after reasonable notice to the Executive and an opportunity for the
Executive, together with his counsel, to be heard before the Company's Board),
finding that in the good faith opinion of the Company's Board the Executive was
guilty of the conduct set forth in clauses (I), (ii) or (iii) of this paragraph
and specifying the particulars thereof.
d. Notice of Termination. Notice of termination of the Executive's
status as an employee must be communicated in a writing delivered to the other
party as provided in Section 9 (a notice of termination complying with this
sentence is referred to in this Agreement as a "Notice of Termination"). Any
Notice of Termination that purports to terminate Executive's employment for
Cause or for Good Reason shall specify the provision or provisions of this
Agreement relied upon by the party giving such notice and shall set forth in
reasonable detail the facts and circumstances claimed by such party to provide a
basis for termination of the Executive's employment under the provision(s) so
indicated.
e. Date of Termination. "Employment Termination Date" means (I) if
Executive's employment is terminated by the Company or the Bank for Cause, or by
Executive for Good Reason, the date of delivery of the Notice of Termination or
any later date specified therein, as the case may be, (ii) if the Executive's
employment is terminated by the Company or the Bank other than for Cause or
disability, the Date of Termination shall be the date on which the Company or
the Bank notifies the Executive of such termination and (iii) if Executive's
employment is terminated by reason of his death or disability, the Date of
Termination shall be the date of death of Executive or the Disability Effective
Date, as the case may be.
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<PAGE>
6. Obligations of the Company Upon Termination.
a. Death. If Executive's employment is terminated by his death, in
addition to all other death benefits provided by the Company and the Bank, the
Company or the Bank shall pay to Executive's spouse or, if he leaves no spouse,
to his estate, in a lump sum in cash within 30 days of the Date of Termination
the sum of the pro rata amount of Executive's annual base salary earned through
the Date of Termination to the extent due but not paid and any compensation
previously deferred by Executive (together with any accrued interest thereon)
and any accrued vacation pay, in each case to the extent not previously paid
(collectively, "Accrued Obligations"). The Company or the Bank shall also timely
pay or provide to such person any other amounts or compensation required to be
furnished to Executive under any benefit plan or arrangement ("Other Benefits").
b. Disability. During any period that Executive is deemed to be
disabled under Section 5(b) ("disability period"), Executive shall continue to
receive his full annual base salary at the rate then in effect for such period
until his employment is terminated pursuant to Section 5(b), provided that
payments so made to Executive shall be reduced by the sum of the amounts, if
any, payable to Executive under disability benefit plans of the Company. Upon
termination of Executive's employment under Section 5(b), the Company or the
Bank shall pay to Executive in a lump sum in cash within 30 days of the Date of
Termination all Accrued Obligations and shall timely furnish to Executive all
Other Benefits.
c. Cause. If Executive's employment shall be terminated for Cause
by the Company or the Bank, or voluntarily terminated by Executive other than
for Good Reason, this Agreement shall terminate without further obligation to
Executive other than for Accrued Obligations, which shall be paid in a lump sum
in cash within 30 days of the Date of Termination, and for Other Benefits, which
the Company or the Bank shall timely furnish to Executive.
d. Change in Control. If during the term of this Agreement the
Company or the Bank shall terminate Executive's employment, following a Change
in Control of the Company; or Executive shall terminate his employment for Good
Reason following a Change in Control, then, in addition to all amounts or
compensation to which he is entitled pursuant to the Company's or the Bank's
termination policies and plans then in effect,
(A) Executive shall receive as severance pay an amount equal to
three times Compensation Amount, payable in a lump sum within 30 days of the
Date of Termination. For purposes of this Section 6(d), the term "Compensation
Amount" shall mean Executive's annual base salary plus all cash bonuses paid to
Executive during the most recent twelve- month period ending before the Date of
Termination;
The term "Good Reason" for the purposes of this Agreement shall mean: the
occurrence of any of the following during the term of this Agreement:
A. any removal of the Executive from, or any failure to reappoint or
reelect the Executive to, the position of President of the Fargo Branch, except
in connection with a termination by the Company of the Executive's employment
for Cause or on account of Disability or death of the Executive;
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<PAGE>
B. a diminution in the Executive's duties, responsibilities or position in
the management of the Bank including, without limitation, the assignment to
Executive of duties or responsibilities that are inconsistent with the
Executive's position as President; or
C. require the Executive to be based anywhere other than in Fargo, North
Dakota, except for required travel in the ordinary course of the Company's or
Bank's business. As used in this Agreement a "Change of Control" is deemed to
have occurred at such time as: (i) BNCCORP shall not be the surviving entity in
any merger, consolidation or other reorganization (or survives only as a
subsidiary of an entity other than a previously wholly-owned subsidiary of the
Company), (ii) the Company sells, leases or exchanges all or substantially all
of its assets to any other person or entity (other than a wholly-owned
subsidiary of the Company), (iii) BNCCORP is to be dissolved or liquidated, (iv)
any person or entity, including a "group" as contemplated by section 13(d)(3) of
the 1934 Act, other than an employee benefit plan of the company or a related
trust, acquires or gains ownership or control (including, without limitation,
power to vote) of more than 30% of the outstanding shares of BNCCORP's voting
stock, or (v) as a result of or in connection with a contested election of
directors, the persons who were directors of BNCCORP before such election shall
cease to constitute a majority of the Board of Directors of BNCCORP.
e. Change in Control Benefit. If Executive's employment is
terminated following a Change in Control of the Company, then the Company or the
Bank shall pay to Executive, contemporaneously with payments due under Section
6(d) and in addition to any other amounts due, (i) the amount of any excise tax
imposed on Executive by Section 4999 or any successor provision of the Internal
Revenue Code of 1986, as amended, as a result of any determination or finding
that amounts received by Executive are "excess parachute payments" under such
section, (ii) the amount of any similar excise tax imposed on Executive by state
law and (iii) the amount of Executive's federal and state income and excise tax
liability generated by the payment to Executive of all amounts provided by
clauses (i), (ii) and (iii) of this Section 6(e).
7. Covenant Not To Compete. If Executive terminates his employment other
than for Good Reason then for a period of two years from the date of such
termination of employment, Executive shall not directly or indirectly, solicit
any customers of the Company or the Bank or otherwise disrupt any previously
established relationships existing between a customer and the Company or the
Bank or own, manage, operate, control, be employed by, participate in, or be
connected in any manner with the ownership, management, operation or control of
any bank, savings and loan association, financial institution or any other
entity providing lending or deposit services located in either the City of Fargo
or the County of Cass, North Dakota; provided, however, that the Executive may
own passive investments of not more than 5% of the outstanding securities of any
similar business (but without otherwise participating in such business) if such
securities are listed on a national or regional securities exchange or
quotations of such securities are published on a national interdealer quotation
system, or are registered under Section 12(g) or 15(d) of the Securities
Exchange Act of 1934, as amended.
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<PAGE>
8. Binding Effect.
a. This Agreement shall be binding upon and inure to the benefit of
the Company, the Bank and any of its successors or assigns.
b. This Agreement is personal to the Executive and shall not be
assignable by the Executive without the consent of the Company (there being no
obligation to give such consent) other than such rights or benefits as are
transferred by will or the laws of descent and distribution.
c. The Company will require any successor or assign (whether direct
or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the assets or businesses of the Company (i) to assume
unconditionally and expressly this Agreement and (ii) to agree to perform all of
the obligations under this Agreement in the same manner and to the same extent
as would have been required of the Company had no assignment or succession
occurred, such assumption to be set forth in a writing reasonably satisfactory
to the Executive. In the event of any such assignment or succession, the term
"Company" as used in this Agreement shall refer also to such successor or
assign.
9. Notices. Any notice or other communication required under this
Agreement shall be in writing, shall be deemed to have been given and received
when delivered in person, or, if mailed, shall be deemed to have been given when
deposited in the United States mail, first class, registered or certified,
return receipt requested, with proper postage prepaid, and shall be deemed to
have been received on the third business day thereafter, and shall be addressed
as follows:
If to the Company, addressed to:
BNCCORP, INC.
322 East Main
Bismarck, ND 58501
Attn: Tracy J. Scott
If to the Executive, addressed to:
David J. Sorum
4913 Meadow Creek Drive SW
Fargo, ND 58104
or such other address as to which any party hereto may have notified the other
in writing.
10. Governing Law. This Agreement shall be governed by and interpreted in
accordance with the laws of the State of North Dakota.
11. Entire Agreement. This Agreement and the documents referred to herein
contain the
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<PAGE>
entire arrangement or understanding between the Executive, the Company and the
Bank relating to the employment of the Executive by the Bank. No provision of
the Agreement may be modified or amended except by an instrument in writing
signed by both parties.
12. Severability. If any term or provision of this Agreement, or the
application thereof to any person or circumstance, shall at any time or to any
extent be invalid or unenforceable, the remainder of this Agreement, or the
application of such term or provision to persons or circumstances other than
those as to which it is held invalid or unenforceable, shall not be affected
thereby and each term and provision of this Agreement shall be valid and
enforced to the fullest extent permitted by law.
13. Waiver of Breach. The waiver by either party of a breach of any
provision of this Agreement shall not operate or be construed as a waiver of any
subsequent breach thereof.
14. Beneficiaries. Whenever this Agreement provides for any payment to be
made to the Executive or his estate, such payment may be made instead to such
beneficiary or beneficiaries as the Executive may have designated in writing and
filed with the Company. The Executive shall have the right to revoke any such
designation from time to time and to redesignate any beneficiary or
beneficiaries by written notice to the Company.
15. Survival. The rights and obligations of the Company and the Executive
contained in Sections 6, 7, 8, 9 and 10 of this Agreement shall survive the
termination of the Agreement. Following the termination of this Agreement, each
party shall have the right to enforce all rights, and shall be bound by all
obligations, of such party that are continuing rights and obligations under this
Agreement.
16. Expenses of Enforcement. If either party shall successfully seek to
enforce any provision of this Agreement or to collect any amount claimed to be
due hereunder, such successful party shall be entitled to be reimbursed by the
other party for any and all of its out-of-pocket expenses, including reasonable
attorneys' fees, incurred in connection with such enforcement and/or collection.
17. Remedy; Exclusivity. No remedy specified herein shall be deemed to be
such party's exclusive remedy, and accordingly, in addition to all of the rights
and remedies provided for in this Agreement, the parties shall have all of the
rights and remedies provided to them by applicable law, rule or regulation.
18. No Obligation to Mitigate Damages. The Executive shall not be
required to mitigate damages or the amount of any payment provided for under
this Agreement by seeking other employment or otherwise, nor shall the amount of
any payment provided for under this Agreement be reduced by any compensation
earned by the Executive as a result of employment by another employer or by
retirement or other benefits, before the date of this Agreement or after the
date of termination of his employment with the Bank, or otherwise, provided that
the Executive shall have complied with the provisions hereof.
19. Company's Reservation of Rights. The Executive acknowledges and
understands that the Executive serves at the pleasure of the Bank's Board of
Directors and that the Bank has the right
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<PAGE>
at any time to terminate Executive's status as an employee of the Bank, or to
change or diminish his status during the Employment Term, subject to the rights
of the Executive to claim the benefits conferred by Section 6(d) if such action
constitutes a termination by the Bank without Cause.
20. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
BNCCORP, Inc.
By: /s/ Gregory K. Cleveland
Gregory K. Cleveland
Authorized Officer
BNC NATIONAL BANK
By: /s/ Kevin D. Pifer
Kevin D. Pifer
Authorized Officer
Executive:
/s/ David J. Sorum
David J. Sorum
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<PAGE>
REVOLVING CREDIT AGREEMENT
This Revolving Credit Agreement (the "Agreement") is made and entered into by
and between the undersigned borrower (the "Borrower") and the undersigned bank
(the "Bank") as of the date set forth on the last page of this Agreement.
ARTICLE I. LOANS
1.1 Revolving Credit Loans. From time to time prior to August 1, 2000 (the
"Maturity Date") or the earlier termination hereof, the Borrower may borrow from
the Bank solely to fund loans made by Borrower to unrelated third parties up to
the aggregate principal amount outstanding at any one time of the lesser of (i)
$10,000,000. (the "Loan Amount"), or (ii) the Borrowing Base (defined below).
All revolving loans hereunder will be evidenced by a single promissory note of
the Borrower payable to the order of the Bank in the principal amount of the
Loan Amount (the "Note"). Although the Note will be expressed to be payable in
the full Loan Amount, the Borrower will be obligated to pay only the amounts
actually disbursed hereunder, together with accrued interest on the outstanding
balance at the rates and on the dates specified therein and such other charges
provided for herein. In the event that the principal amount outstanding under
the Note exceeds the Borrowing Base at any time, the Borrower will immediately,
without request, prepay an amount sufficient to eliminate such excess.
1.2 Borrowing Base. The Borrowing Base will be an amount equal to 40% of the
unpaid and outstanding principal amount of Eligible Loans. The Borrower will
provide the Bank with a monthly Borrowing Base compliance certificate in a form
acceptable to the Bank by the 20th date of each month, and at such other times
as Bank may request. The terms used in this Section 1.2 will have the meanings
set forth in a supplement entitled "Financial Definitions," a copy of which the
Borrower acknowledges having received with this Agreement and which is
incorporated herein by reference.
1.3 Advances and Paying Procedure. The Bank is authorized and directed to
credit any of the Borrower's accounts with the Bank (or to the account the
Borrower designates in writing) for all loans made hereunder, and the Bank is
authorized to debit such account or any other account of the Borrower with the
Bank for the amount of any principal or interest due under the Note or other
amount due hereunder on the due date with respect thereto. The Borrower shall
request loans by written notice, or by telephonic notice confirmed in writing,
to the Bank not later than 2 p.m. on the proposed borrowing date, specifying the
amount thereof. In the event of any inconsistency between the telephonic notice
and the written confirmation thereof, the telephonic notice shall control.
1.4 Commitment Fee. The Borrower will pay the Bank a one-time commitment fee
of $50,000 either prior to or contemporaneously with execution of this
Agreement. This fee is in addition to all other fees, expenses and other amounts
due hereunder.
1.5 Loan Facility Fee. The Borrower will pay a loan facility fee equal to
.25% per annum of the difference between the Loan Amount and the unpaid
principal amount of the Note outstanding from time to time, payable quarterly,
in arrears, on the last business day of each third calendar month, and at
maturity. The loan facility fee is payable for the entire period that this
Agreement is in effect, regardless of whether any amounts are outstanding
hereunder at any given time.
1.6 Expenses and Attorneys' Fees. The Borrower will reimburse the Bank and
any Participant (defined below) for all attorneys' fees and all other costs,
fees and out-of-pocket disbursements (including fees and disbursements of both
inside counsel and outside counsel) incurred by the Bank or any Participant in
connection with the preparation, execution, delivery, administration, defense
and enforcement of this Agreement or any of the other Loan Documents (defined
below), including fees and costs related to any waivers or amendments with
respect thereto (examples of costs and fees include but are not limited to fees
and costs for: filing, perfecting or confirming the priority of the Bank's lien,
title searches or insurance, appraisals, environmental audits and other reviews
related to the Borrower, any collateral or the loans, if requested by the Bank).
The Borrower will also reimburse the Bank and any Participant for all costs of
collection before and after judgment, and the costs of preservation and/or,
liquidation of any collateral (including fees and disbursements of both inside
and outside counsel).
<PAGE>
1.7 Compensating Balances. Intentionally omitted.
1.8 Conditions to Borrowing. The Bank will not be obligated to make (or
continue to make) advances hereunder unless (i) the Bank has received executed
originals of the Note and all other documents or agreements applicable to the
loans described herein, including but not limited to the documents specified in
Article III (collectively with this Agreement the "Loan Documents"), in form and
content satisfactory to the Bank; (ii) the Bank has received confirmation
satisfactory to it that the Bank has a properly perfected security interest,
mortgage or lien, with the proper priority; (iii) the Bank has received
Collateral (as defined in the Business Security Agreement between Borrower and
Bank dated even date herewith (the "Security Agreement")) in form and substance
satisfactory to Bank as provided in Section 2.7 of the Security Agreement; (iv)
the Bank has received certified copies of the Borrower's Articles of
Incorporation and By-Laws, certification of corporate status satisfactory to the
Bank and all other relevant documents; (v) the Bank has received a certified
copy of a resolution or authorization in form and content satisfactory to the
Bank authorizing the loan and all acts contemplated by this Agreement and all
related documents, and confirmation of proper authorization of all guaranties
and other acts of third parties contemplated hereunder; (vi) the Bank has been
provided with an Opinion of the Borrower's counsel in form and content
satisfactory to the Bank confirming the matters outlined in Section 2.2 and such
other matters as the Bank requests; (vii) no default exists under this Agreement
or under any other Loan Documents, or under any other agreements by and between
the Borrower or Guarantor and the Bank; and (viii) all proceedings taken in
connection with the transactions contemplated by this Agreement (including any
required environmental assessments), and all instruments, authorizations and
other documents applicable thereto, are satisfactory to the Bank and its
counsel.
ARTICLE II. WARRANTIES AND COVENANTS
While any part of the credit granted to the Borrower under this Agreement or the
other Loan Documents is available or any obligations under any of the Loan
Documents are unpaid or outstanding, the Borrower continuously warrants and
agrees as follows:
2.1 Accuracy of Information. All information, certificates or statements
given to the Bank pursuant to this Agreement and the other Loan Documents will
be true and complete when given.
2.2 Organization and Authority; Litigation. If the Borrower is a corporation
or partnership, the Borrower is a validly existing corporation or partnership
(as applicable) in good standing under the laws of its state of organization,
and has all requisite power and authority, corporate or otherwise, and possesses
all licenses necessary, to conduct its business and own its properties. The
execution, delivery and performance of this Agreement and the other Loan
Documents (i) are within the Borrower's power; (ii) have been duly authorized by
proper corporate or partnership action (as applicable); (iii) do not require the
approval of any governmental agency, other entity or person; and (iv) will not
violate any law, agreement or restriction by which the Borrower is bound. This
Agreement and the other Loan Documents are the legal, valid and binding
obligations of the Borrower, enforceable against the Borrower in accordance with
their terms. There is no litigation or administrative proceeding threatened or
pending against the Borrower which would, if adversely determined, have a
material adverse effect on the Borrower's financial condition or its property.
2.3 Existence; Business Activities; Assets. The Borrower will (i) preserve
its corporate or partnership (as applicable) existence, rights and franchises;
(ii) not make any material change in the nature or manner of its business
activities; (iii) not liquidate, dissolve, merge or consolidate with or into
another entity; (iv) not form or acquire any subsidiary or the ownership
interest in any entity without the Bank's prior written consent (v) not sell,
lease, transfer or otherwise dispose of all or any substantial part of its
assets and (vi) provide copies of the Borrower's underwriting standards and
policies and will not change or deviate from the same without ten day's prior
written notice to the Bank.
2.4 Use of Proceeds; Margin Stock; Speculation. Advances by the Bank
hereunder will be used exclusively by the Borrower for working capital and other
regular and valid purposes. The Borrower will not, without the prior written
consent of the Bank, redeem, purchase, or retire any of the capital stock or
declare or pay any dividends, or make any
<PAGE>
other payments or distributions of a similar type or nature. The Borrower will
not use any of the loan proceeds to purchase or carry "margin" stock (as defined
in Regulation U of the Board of Governors of the Federal Reserve System). No
part of any of the proceeds will be used for speculative investment purposes,
including, without limitation, speculating or hedging in the commodities and/or
futures market.
2.5 Environmental Matters. Except as disclosed in a written schedule attached
to this Agreement (if no schedule is attached, there are no exceptions), there
exists no uncorrected violation by the Borrower of any federal, state or local
laws (including statutes, regulations, ordinances or other governmental
restrictions and requirements) relating to the discharge of air pollutants,
water pollutants or process waste water or otherwise relating to the environment
or Hazardous Substances as hereinafter defined, whether such laws currently
exist or are enacted in the future (collectively "Environmental Laws"). The term
"Hazardous Substances" will mean any hazardous or toxic wastes, chemicals or
other substances, the generation, possession or existence of which is prohibited
or governed by any Environmental Laws. The Borrower is not subject to any
judgment, decree, order or citation, or a party to (or threatened with) any
litigation or administrative proceeding, which asserts that the Borrower (i) has
violated any Environmental Laws; (ii) is required to clean up, remove or take
remedial or other action with respect to any Hazardous Substances (collectively
"Remedial Action"); or (iii) is required to pay all or a portion of the cost of
any Remedial Action, as a potentially responsible party. Except as disclosed on
the Borrower's environmental questionnaire provided to the Bank, there are not
now, nor to the Borrower's knowledge after reasonable investigation have there
ever been, any Hazardous Substances (or tanks or other facilities for the
storage of Hazardous Substances) stored, deposited, recycled or disposed of on,
under or at any real estate owned or occupied by the Borrower during the periods
that the Borrower owned or occupied such real estate, which if present on the
real estate or in soils or ground water, could require Remedial Action. To the
Borrower's knowledge, there are no proposed or pending changes in Environmental
Laws which would adversely affect the Borrower or its business, and there are no
conditions existing currently or likely to exist while the Loan Documents are in
effect which would subject the Borrower to Remedial Action or other liability.
The Borrower currently complies with and will continue to timely comply with all
applicable Environmental Laws; and will provide the Bank, immediately upon
receipt, copies of any correspondence, notice, complaint, order or other
document from any source asserting or alleging any circumstance or condition
which requires or may require a financial contribution by the Borrower or
Remedial Action or other response by or on the part of the Borrower under
Environmental Laws, or which seeks damages or civil, criminal or punitive
penalties from the Borrower for an alleged violation of Environmental Laws.
2.6 Compliance with Laws. The Borrower has complied and will at all times
comply with all laws applicable to its business and its properties, and has and
will at all times maintain all permits, licenses and approvals required by such
laws, copies of which have been provided to the Bank.
2.7 Restriction on Indebtedness. The Borrower will not create, incur, assume
or have outstanding any indebtedness for borrowed money (including capitalized
leases) except (i) any indebtedness owing to the Bank, (ii) indebtedness owed to
BNCCORP, Inc. the payment of which is fully subordinated, in a manner
satisfactory to the Bank, to the prior payment of all indebtedness of the
Borrower to the Bank and (iii) any other indebtedness outstanding on the date
hereof, and shown on the Borrower's financial statements delivered to the Bank
prior to the date hereof, provided that such other indebtedness will not be
increased.
2.8 Restriction on Liens. The Borrower will not create, incur, assume or
permit to exist any mortgage, pledge, encumbrance or other lien or levy upon or
security interest in any of the Borrower's property now owned or hereafter
acquired, except (i) taxes and assessments which are either not delinquent or
which are being contested in good faith with adequate reserves provided; (ii)
easements, restrictions and minor title irregularities which do not, as a
practical matter, have an adverse effect upon the ownership and use of the
affected property; (iii) liens in favor of the Bank; and (iv) other liens
disclosed in writing to the Bank prior to the date hereof .
2.9 Restriction on Contingent Liabilities. The Borrower will not guarantee or
become a surety or otherwise contingently liable for any obligations of others,
except pursuant to the deposit and collection of checks and similar matters in
the ordinary course of business.
<PAGE>
2.10 Insurance. The Borrower will maintain insurance to such extent, covering
such risks and with such insurers as is usual and customary for businesses
operating similar properties, and as is satisfactory to the Bank, including
insurance for fire and other risks insured against by extended coverage, public
liability insurance and workers' compensation insurance; and will designate the
Bank as loss payee with a "Lender's Loss Payable" endorsement on any casualty
policies and take such other action as the Bank may reasonably request to ensure
that the Bank will receive (subject to no other interests) the insurance
proceeds on the Bank's collateral.
2.11 Taxes and Other Liabilities. The Borrower will pay and discharge, when
due, all of its taxes, assessments and other liabilities, except when the
payment thereof is being contested in good faith by appropriate procedures which
will avoid foreclosure of liens securing such items, and with adequate reserves
provided therefor.
2.12 Financial Statements and Reporting. The financial statements and other
information previously provided to the Bank or provided to the Bank in the
future are or will be complete and accurate and prepared in accordance with
generally accepted accounting principles. There has been no material adverse
change in the Borrower's financial condition since such information was provided
to the Bank. The Borrower will (i) maintain accounting records in accordance
with generally accepted accounting principles consistently applied throughout
the accounting periods involved; (ii) without request, provide the Bank with the
minutes of each monthly loan portfolio review meeting by the 20th date of each
month; (iii) provide the Bank with such information concerning its business
affairs and financial condition (including insurance coverage) the Bank may
request; and (iv) without request, provide the Bank with management-prepared
financial statements quarterly within 20 days of the end of each quarter and
annually within 60 days of the end of each fiscal year.
2.13 Inspection of Properties and Records; Fiscal Year. The Borrower will
permit representatives of the Bank to visit and inspect any of the properties
and examine any of the books and records of the Borrower twice in any one fiscal
year, at Borrower's sole expense, and at any reasonable time and as often as the
Bank may reasonably desire. The Borrower will not change its fiscal year.
2.14 Financial Status. The Borrower will maintain at all times:
(i) a ratio of Loan Loss Reserves to Total Loans of at least (w) 1 % as
of December 31, 1998 and thereafter through June 29, 1999; (x) 1.1% as of June
30, 1999 and thereafter through December 30, 1999; (y) 1.3% as of December 31,
1999 and thereafter through June 29, 2000; and (z) 1.5% as of June 30, 2000 and
thereafter.
(ii) a ratio of Nonperforming Loans plus Other Real Estate to Effective
Capital of not greater than 10%.
(iii)a ratio of Total Tangible Equity to Total Loans of at least 10%.
(iv) an Interest Coverage Ratio of not less than 1.25: 1.
The terms used in this Section 2.14 will have the meanings set forth in a
supplement entitled "Financial Definitions," a copy of which the Borrower hereby
acknowledges having received with this Agreement and which is incorporated
herein by reference.
2.15 Paid-In-Full Period. Intentionally omitted.
ARTICLE III. COLLATERAL AND GUARANTIES
3.1 Collateral. This Agreement and the Note are secured by any and all
security interests, pledges, mortgages or liens now or hereafter in existence
granted to the Bank to secure indebtedness of the Borrower to the Bank,
including without limitation the Security Agreement.
3.2 Guaranties. This loan is guaranteed by BNCCORP, Inc.
<PAGE>
3.3 Credit Balances; Setoff. As additional security for the payment of the
obligations described in the Loan Documents and any other obligations of the
Borrower to the Bank of any nature whatsoever (collectively the "Obligations"),
the Borrower hereby grants to the Bank a security interest in, a lien on and an
express contractual right to set off against all depository account balances,
cash and any other property of the Borrower now or hereafter in the possession
of the Bank and the right to refuse to allow withdrawals from any account
(collectively "Setoff"). The Bank may, at any time upon the occurrence of a
default hereunder (notwithstanding any notice requirements or grace/cure periods
under this or other agreements between the Borrower and the Bank), Setoff
against the Obligations whether or not the Obligations (including future
installments) are then due or have been accelerated, all without any advance or
contemporaneous notice or demand of any kind to the Borrower, such notice and
demand being expressly waived.
The omission of any reference to an agreement will not affect the validity
or enforceability thereof. The rights and remedies of the Bank outlined in this
Agreement and the documents identified above are intended to be cumulative.
ARTICLE IV. DEFAULTS
4.1 Defaults. Notwithstanding any cure periods described below, the Borrower
will immediately notify the Bank in writing when the Borrower obtains knowledge
of the occurrence of any default specified below. Regardless of whether the
Borrower has given the required notice, the occurrence of one or more of the
following will constitute a default:
(a) Nonpayment. The Borrower shall fail to pay (i) any interest due
on the Note or any fees, charges, costs or expenses under the Loan Documents by
5 days after the same becomes due; or (ii) any principal amount of the Note when
due.
(b) Nonperformance. The Borrower or any guarantor of Borrower's
Obligations to the Bank ("Guarantor") shall fail to perform or observe any
agreement, term, provision, condition, or covenant (other than a default
occurring under (a), (c), (d), (e), (f) or (g) of this Section 4.1) required to
be performed or observed by the Borrower or any Guarantor hereunder or under any
other Loan Document or other agreement with or in favor of the Bank.
(c) Misrepresentation. Any financial information, statement,
certificate, representation or warranty given to the Bank by the Borrower or any
Guarantor (or any of their representatives) in connection with entering into
this Agreement or the other Loan Documents and/or any borrowing thereunder, or
required to be furnished under the terms thereof, shall prove untrue or
misleading in any material respect (as determined by the Bank in the exercise of
its judgment) as of the time when given.
(d) Default on Other Obligations. The Borrower or any Guarantor
shall be in default under the terms of any loan agreement, promissory note,
lease, conditional sale contract or other agreement, document or instrument
evidencing, governing or securing any indebtedness owing by the Borrower or any
Guarantor to the Bank or any indebtedness in excess of $10,000 owing by the
Borrower to any third party, and the period of grace, if any, to cure said
default shall have passed.
(e) Judgments. Any judgment shall be obtained against the Borrower
or any Guarantor which, together with all other outstanding unsatisfied
judgments against the Borrower (or such Guarantor), shall exceed the sum of
$10,000 and shall remain unvacated, unbonded or unstayed for a period of 30 days
following the date of entry thereof.
(f) Inability to Perform; Bankruptcy/Insolvency. (i) The Borrower
or any Guarantor shall die or cease to exist; or (ii) any Guarantor shall
attempt to revoke any guaranty of the Obligations described herein, or any
guaranty becomes unenforceable in whole or in part for any reason; or (iii) any
bankruptcy, insolvency or receivership proceedings, or an assignment for the
benefit of creditors, shall be commenced under any Federal or state law by or
against the Borrower or any Guarantor; or (iv) the Borrower or any Guarantor
shall become the subject of any out-of-court settlement with its creditors; or
(v) the Borrower or any Guarantor is unable or admits in writing its inability
to pay its debts as they mature.
<PAGE>
(g) Adverse Change; Insecurity. (i) There is a material adverse
change in the business, properties, financial condition or affairs of the
Borrower or any Guarantor, or in any collateral securing the Obligations; or
(ii) the Bank in good faith deems itself insecure.
(h) Change in Ownership. The Guarantor fails to own beneficially at
least 100% of the outstanding common stock of the Borrower, BNC National Bank or
BNC National Bank of Minnesota.
4.2 Termination of Loans; Additional Bank Rights. Upon the Maturity Date or
the occurrence of any of the events identified in Section 4.1, the Bank may at
any time (notwithstanding any notice requirements or grace/cure periods under
this or other agreements between the Borrower and the Bank) (i) immediately
terminate its obligation, if any, to make additional loans to the Borrower; (ii)
Setoff; and/or (iii) take such other steps to protect or preserve the Bank's
interest in any collateral, including without limitation, notifying account
debtors to make payments directly to the Bank, advancing funds to protect any
collateral and insuring collateral at the Borrower's expense; all without demand
or notice of any kind, all of which are hereby waived.
4.3 Acceleration of Obligations. Upon the Maturity Date or the occurrence of
any of the events identified in Sections 4.1(a) through 4.1(e), 4.1(g) and
4.1(h), and the passage of any applicable cure periods, the Bank may at any time
thereafter, by written notice to the Borrower, declare the unpaid principal
balance of any Obligations, together with the interest accrued thereon and other
amounts accrued hereunder and under the other Loan Documents, to be immediately
due and payable; and the unpaid balance will thereupon be due and payable, all
without presentation, demand, protest or further notice of any kind, all of
which are hereby waived, and notwithstanding anything to the contrary contained
herein or in any of the other Loan Documents. Upon the occurrence of any event
under Section 4.1(f), the unpaid principal balance of any Obligations, together
with all interest accrued thereon and other amounts accrued hereunder and under
the other Loan Documents, will thereupon be immediately due and payable, all
without presentation, demand, protest or notice of any kind, all of which are
hereby waived, and notwithstanding anything to the contrary contained herein or
in any of the other Loan Documents. Nothing contained in Section 4.1, Section
4.2 or this section will limit the Bank's right to Setoff as provided in Section
3.3 or otherwise in this Agreement.
4.4 Other Remedies. Nothing in this Article IV is intended to restrict the
Bank's rights under any of the Loan Documents or at law, and the Bank may
exercise all such rights and remedies as and when they are available.
ARTICLE V. OTHER TERMS
5.1 Financial Definitions Supplement. If a Borrowing Base or covenants
regarding financial status apply to this loan, the "Financial Definitions"
Supplement identified in Sections 1.2 and 2.14 of this Agreement is hereby
incorporated into this Agreement. The Borrower acknowledges receiving a copy of
such Supplement.
5.2 Additional Terms; Addendum/Supplements. Intentionally omitted.
ARTICLE VI. MISCELLANEOUS
6.1 Delay; Cumulative Remedies. No delay on the part of the Bank in
exercising any right, power or privilege hereunder or under any of the other
Loan Documents will operate as a waiver thereof, nor will any single or partial
exercise of any right, power or privilege hereunder preclude other or further
exercise thereof or the exercise of any other right, power or privilege. The
rights and remedies herein specified are cumulative and are not exclusive of any
rights or remedies which the Bank would otherwise have.
6.2 Relationship to Other Documents. The warranties, covenants and other
obligations of the Borrower (and the rights and remedies of the Bank) that are
outlined in this Agreement and the other Loan Documents are intended to
supplement each other. In the event of any inconsistencies in any of the terms
in the Loan Documents, all terms will be cumulative so as to give the Bank the
most favorable rights set forth in the conflicting documents, except that if
there is a direct conflict between any preprinted terms and specifically
negotiated terms (whether included in an addendum or
<PAGE>
otherwise), the specifically negotiated terms will control.
6.3 Participations; Guarantors. The Bank may, at its option, sell all or any
interests in the Note and other Loan Documents to other financial institutions
(the "Participant"), and in connection with such sales (and thereafter) disclose
any financial information the Bank may have concerning the Borrower or any
Guarantor to any such Participant or potential Participant. From time to time,
the Bank may, in its discretion and without obligation to the Borrower, any
guarantor or any other third party, disclose information about the Borrower and
this loan to any guarantor, surety or other accommodation party. This provision
does not obligate the Bank to supply any information or release the Borrower
from its obligation to provide such information, and the Borrower agrees to keep
all Guarantors advised of its financial condition and other matters which may be
relevant to the Guarantors' obligations to the Bank.
6.4 Successors. The rights, options, powers and remedies granted in this
Agreement and the other Loan Documents will extend to the Bank and to its
successors and assigns, will be binding upon the Borrower and its successors and
assigns and will be applicable hereto and to all renewals and/or extensions
hereof.
6.5 Indemnification. Except for harm arising from the Bank's willful
misconduct, the Borrower hereby indemnifies and agrees to defend and hold the
Bank harmless from any and all losses, costs, damages, claims and expenses of
any kind suffered by or asserted against the Bank relating to claims by third
parties arising out of the financing provided under the Loan Documents or
related to any collateral (including, without limitation, the Borrower's failure
to perform its obligations relating to Environmental Matters described in
Section 2.5 above). This indemnification and hold harmless provision will
survive the termination of the Loan Documents and the satisfaction of the
Obligations due the Bank.
6.6 Notice of Claims Against Bank; Limitation of Certain Damages. In order
to allow the Bank to mitigate any damages to the Borrower from the Bank's
alleged breach of its duties under the Loan Documents or any other duty, if any,
to the Borrower, the Borrower agrees to give the Bank immediate written notice
of any claim or defense it has against the Bank, whether in tort or contract,
relating to any action or inaction by the Bank under the Loan Documents, or the
transactions related thereto, or of any defense to payment of the Obligations
for any reason. The requirement of providing timely notice to the Bank
represents the parties' agreed-to standard of performance regarding claims
against the Bank. Notwithstanding any claim that the Borrower may have against
the Bank, and regardless of any notice the Borrower may have given the Bank, the
Bank will not be liable to the Borrower for consequential and/or special damages
arising therefrom, except those damages arising from the Bank's willful
misconduct.
6.7 Notices. Although any notice required to be given hereunder or under any
of the other Loan Documents might be accomplished by other means, notice will
always be deemed given when placed in the United States Mail, with postage
prepaid, or sent by overnight delivery service, or sent by telex or facsimile,
in each case to the address set forth below or as amended.
6.8 Payments. Payments due under the Note and other Loan Documents will be
made in lawful money of the United States without setoff or counterclaim, and
the Bank is authorized to charge payments due under the Loan Documents against
any account of the Borrower. All payments may be applied by the Bank to
principal, interest and other amounts due under the Loan Documents in any order
which the Bank elects.
6.9 Applicable Law and Jurisdiction; Interpretation; Joint Liability. This
Agreement and all other Loan Documents will be governed by and interpreted in
accordance with the internal laws of the state where the Bank's main office is
located, except to the extent superseded by Federal law. Invalidity of any
provisions of this Agreement will not affect any other provision. THE BORROWER
HEREBY CONSENTS TO THE EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT
SITUATED IN THE COUNTY OR FEDERAL JURISDICTION WHERE THE BANK'S OFFICE WHICH IS
DESIGNATED IN THE NOTE AS THE PLACE FOR PAYMENT IS LOCATED (OR IN THE ABSENCE OF
SUCH DESIGNATION, THE BANK'S MAIN OFFICE), AND WAIVES ANY OBJECTION BASED ON
FORUM NON CONVENIENS, WITH REGARD TO ANY ACTIONS, CLAIMS, DISPUTES OR
PROCEEDINGS RELATING TO THIS AGREEMENT, THE NOTE, THE COLLATERAL, ANY OTHER LOAN
DOCUMENT, OR ANY TRANSACTIONS ARISING THEREFROM, OR ENFORCEMENT AND/OR
<PAGE>
INTERPRETATION OF ANY OF THE FOREGOING. Nothing herein will affect the Bank's
rights to serve process in any manner permitted by law, or limit the Bank's
right to bring proceedings against the Borrower in the competent courts of any
other jurisdiction or jurisdictions. This Agreement, the other Loan Documents
and any amendments hereto (regardless of when executed) will be deemed effective
and accepted only upon the Bank's receipt of the executed originals thereof. If
there is more than one Borrower, the liability of the Borrowers will be joint
and several, and the reference to "Borrower" will be deemed to refer to all
Borrowers.
6.10 Copies; Entire Agreement; Modification. The Borrower hereby
acknowledges the receipt of a copy of this Agreement and all other Loan
Documents.
IMPORTANT: READ BEFORE SIGNING. THE TERMS OF THIS AGREEMENT SHOULD BE READ
CAREFULLY BECAUSE ONLY THOSE TERMS IN WRITING ARE ENFORCEABLE. NO OTHER TERMS OR
ORAL PROMISES NOT CONTAINED IN THIS WRITTEN CONTRACT MAY BE LEGALLY ENFORCED.
YOU MAY CHANGE THE TERMS OF THIS AGREEMENT ONLY BY ANOTHER WRITTEN AGREEMENT.
THIS NOTICE SHALL ALSO BE EFFECTIVE WITH RESPECT TO ALL OTHER CREDIT AGREEMENTS
NOW IN EFFECT BETWEEN YOU AND THE BANK. A MODIFICATION OF ANY OTHER CREDIT
AGREEMENTS NOW IN EFFECT BETWEEN YOU AND THE BANK, WHICH OCCURS AFTER RECEIPT BY
YOU OF THIS NOTICE, MAY BE MADE ONLY BY ANOTHER WRITTEN INSTRUMENT. ORAL OR
IMPLIED MODIFICATIONS TO SUCH CREDIT AGREEMENTS ARE NOT ENFORCEABLE AND SHOULD
NOT BE RELIED UPON.
6.11 Waiver of Jury Trial. THE BORROWER AND THE BANK HEREBY JOINTLY AND
SEVERALLY WAIVE ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING
RELATING TO ANY OF THE LOAN DOCUMENTS, THE OBLIGATIONS THEREUNDER, ANY
COLLATERAL SECURING THE OBLIGATIONS, OR ANY TRANSACTION ARISING THEREFROM OR
CONNECTED THERETO. THE BORROWER AND THE BANK EACH REPRESENTS TO THE OTHER THAT
THIS WAIVER IS KNOWINGLY, WILLINGLY AND VOLUNTARILY GIVEN.
IN WITNESS WHEREOF, the undersigned have executed this REVOLVING CREDIT
AGREEMENT as of August 14, 1998.
BNC FINANCIAL CORPORATION,
a Delaware corporation.
By: /s/ Jeffrey Reed
Name and Title: Jeffrey Reed, President
FIRSTAR BANK MILWAUKEE, N.A.
By: /s/ Lynn Hebel
Name and Title: Lynn Hebel, Vice President
Borrower Address:
4150 South Second Street
Suite 350
St. Cloud, MN 56301
<PAGE>
Borrower Telephone No.:
320-259-0500
<PAGE>
FINANCIAL DEFINITIONS
To
Revolving Credit Agreement
(a) "Assets" means the sum of all assets including Loan Loss Reserves of
the Borrower determined in accordance with generally accepted accounting
principles, consistently applied.
(b) "Borrower" means BNC Financial Corporation.
(c) "Effective Capital" means Total Tangible Equity plus Subordinated
Debt.
(d) "Eligible Loans" means the sum of those loans (i) less than 90 days
past due, (ii) not classified as "non-accrual" or "renegotiated" as reported to
the applicable regulatory agency for finance companies or bank holding
companies; (iii) pledged to the Bank with the applicable note or chattel paper
has been properly endorsed in blank and delivered to the Bank and upon which the
Bank has a first priority lien (iv) for which all representations and warranties
in the Revolving Credit Agreement and the Security Agreement are true and
correct; (v) payable in U.S. dollars; (vi) owing by U.S. residents, (vii)
originated and maintained in accordance with all applicable laws; and (viii)
originated in accordance with the Borrower's underwriting standards and policies
heretofore delivered to the Bank (or such revised standards and policies as the
Bank has consented to in writing) without giving effect an any exceptions to
such standards and policies.
(e) "Interest Coverage Ratio" means the relationship, expressed as a
numerical ration, between:
(i) the sum of [A] Net Earnings, [B] interest expense, and
[C] income tax expense;
and
(ii) interest expense;
all as determined without duplication in accordance with generally accepted
accounting principles for Borrower for the 12-month period preceding the date of
determination.
(f) "Loan Loss Reserves" means the loan loss reserves of the Borrower as
reported in accordance with generally accepted accounting principles,
consistently applied, in the most recent financial statements of the Borrower.
(g) "Net Earnings" means the excess of:
(i) all revenues and income derived from operations in the ordinary
course of business (excluding extraordinary gains and profits upon the
disposition of investments and fixed assets),
over
(ii) all expenses and other proper charges against income (including
payment or provision for all applicable income and other taxes, but excluding
extraordinary losses and losses upon the disposition of investments and fixed
assets),
all as determined in accordance with generally accepted accounting principles,
applied on a consistent basis to Borrower
(h) "Nonperforming Loans" means the sum of those loans 90 days or
more past due and those loans classified as "non-accrual" or "renegotiated" as
reported in accordance with generally accepted accounting principles,
consistently applied, in the most recent financial statements of the Borrower.
(i) "Other Real Estate" means the value of all real estate owned by the
Borrower, as reported in accordance
<PAGE>
with generally accepted accounting principles, consistently applied, in the most
recent financial statements of the Borrower.
(j) "Primary Capital" means the sum of Total Tangible Equity and Loan
Loss Reserves.
(k) "Regulatory Authority" means any state, federal or other authority,
agency or instrumentality including, without limitation, the Comptroller of the
Currency, Federal Deposit Insurance Corporation, Federal Reserve Board, Federal
Trade Commission, and Office of Thrift Supervision, responsible for examination
and oversight of the Borrower.
(l) "Subordinated Debt" means indebtedness of the Borrower to BNCCORP,
Inc., the payment of which is fully subordinated, in a manner satisfactory to
the Bank, to the prior payment of all indebtedness of the Borrower to the Bank.
(m) "Total Loans" means the aggregate outstanding principal amount of all
loans shown as Assets of the Borrower as reported in accordance with generally
accepted accounting principles, consistently applied, in the most recent
financial statements of the Borrower.
(n) "Total Tangible Equity" means the total amount of the capital stock,
surplus and undivided profits accounts less intangibles, all of which will be
determined in accordance with generally accepted accounting principles,
consistently applied.
<PAGE>
