U.S. Securities and Exchange Commission
Washington, D.C. 20549
-----
FORM 10-Q
-----
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarter ended March 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File No. 0-26290
BNCCORP, INC.
(Exact name of registrant 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 registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No ___
The number of shares of the Registrant's outstanding common stock on May 1,
1999 was 2,410,980
1
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share and per share data)
ASSETS March 31, December 31,
1999 1998
---------- ----------
(unaudited)
CASH AND DUE FROM BANKS.................................$ 6,132 $ 7,475
INTEREST - BEARING DEPOSITS WITH BANKS.................. 2,053 2,809
INVESTMENT SECURITIES AVAILABLE FOR SALE................ 83,459 96,601
LOANS AND LEASES, net of unearned income................ 265,931 270,876
ALLOWANCE FOR CREDIT LOSSES............................. (3,048) (3,093)
---------- ----------
Net loans and leases................................. 262,883 267,783
PREMISES, LEASEHOLD IMPROVEMENTS AND EQUIPMENT, net..... 9,008 8,827
INTEREST RECEIVABLE..................................... 2,470 2,618
OTHER ASSETS............................................ 6,261 6,163
DEFERRED CHARGES AND INTANGIBLE ASSETS, net............. 3,760 4,056
---------- ----------
$ 376,026 $ 396,332
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS:
Noninterest-bearing..................................$ 24,564 $ 28,475
Interest-bearing -
Savings, NOW and money market..................... 83,498 89,887
Time deposits $100,000 and over................... 39,844 39,162
Other time deposits............................... 132,184 126,975
Total deposits....................................... 280,090 284,499
SHORT-TERM BORROWINGS................................... 33,365 49,290
LONG-TERM BORROWINGS.................................... 31,555 30,646
OTHER LIABILITIES....................................... 5,787 6,642
---------- ----------
Total liabilities................................. 350,797 371,077
---------- ----------
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; 2,409,980 and 2,390,184 shares issued
and outstanding (excluding 42,880 shares held in
treasury) at March 31, 1999 and December 31, 1998,
respectively...................................... 24 24
Capital surplus...................................... 14,003 13,951
Retained earnings.................................... 11,909 11,651
Treasury stock (42,880 shares)....................... (513) (513)
Accumulated other comprehensive income, net of income
tax effects of $87 and $97, respectively.......... (194) 142
---------- ----------
Total stockholders' equity........................ 25,229 25,255
---------- ----------
$ 376,026 $ 396,332
========== ==========
The accompanying notes are an integral part of these consolidated balance
sheets.
2
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the Three Months Ended March 31
(In thousands, except per share data)
1999 1998
--------- ----------
(unaudited)
INTEREST INCOME:
Interest and fees on loans............................$ 6,163 $ 5,771
Interest and dividends on investment securities -
Taxable............................................ 1,333 1,331
Tax-exempt......................................... 51 16
Dividends.......................................... 55 110
Other................................................. 15 28
--------- ----------
Total interest income.............................. 7,617 7,256
--------- ----------
INTEREST EXPENSE:
Interest on deposits.................................. 3,019 2,798
Interest on short-term borrowings..................... 607 630
Interest on long-term borrowings...................... 637 490
--------- ----------
Total interest expense............................. 4,263 3,918
--------- ----------
Net interest income................................ 3,354 3,338
PROVISION FOR CREDIT LOSSES.............................. 249 83
--------- ----------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES.... 3,105 3,255
--------- ----------
NONINTEREST INCOME:
Insurance commissions................................. 538 374
Fees on loans......................................... 432 326
Service charges....................................... 125 149
Brokerage income...................................... 125 11
Rental income......................................... 11 11
Net gain on sales of securities....................... 53 18
Other................................................. 275 235
--------- ----------
Total noninterest income........................... 1,559 1,124
--------- ----------
NONINTEREST EXPENSE:
Salaries and employee benefits........................ 2,282 1,841
Depreciation and amortization......................... 397 371
Occupancy............................................. 306 266
Professional services................................. 296 153
Office supplies, telephone and postage................ 227 180
Marketing and promotion............................... 156 101
FDIC and other assessments............................ 47 45
Other................................................. 381 296
--------- ----------
Total noninterest expense.......................... 4,092 3,253
--------- ----------
INCOME BEFORE TAXES...................................... 572 1,126
INCOME TAXES............................................. 218 436
--------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE............................................. 354 690
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET
OF INCOME TAX EFFECTS................................. (96) --
--------- ----------
NET INCOME...............................................$ 258 $ 690
========= ==========
3
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income, con't
For the Three Months Ended March 31
(In thousands, except per share data)
BASIC EARNINGS PER COMMON SHARE:
Income before cumulative effect of change in accounting
princple.............................................$ 0.15 $ 0.29
Cumulative effect of change in accounting principle,
net of income tax effects........................... (0.04) --
--------- ---------
Net income..............................................$ 0.11 $ 0.29
========= =========
DILUTED EARNINGS PER COMMON SHARE:
Income before cumulative effect of change in accounting
princple............................................$ 0.15 $ 0.28
Cumulative effect of change in accounting principle,
net of income tax effects.......................... (0.04) --
--------- ---------
Net income..............................................$ 0.11 $ 0.28
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the Three Months Ended March 31
(In thousands)
1999 1998
------- -------
(unaudited)
-------
NET INCOME........................................... $ 258 $ 690
OTHER COMPREHENSIVE LOSS--
Unrealized losses on securities:
Unrealized holding losses arising during the
period, net of income tax effects of $207
and $10........................................ (336) (26)
Less: reclassification adjustment for gains
included in net income, net of income tax
effects of $19 and $7.......................... (34) (11)
------- -------
OTHER COMPREHENSIVE LOSS............................. (370) (37)
------- -------
COMPREHENSIVE INCOME (LOSS).......................... $ (112) $ 653
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
For the Three Months Ended March 31, 1999
(In thousands, except share data)
<TABLE>
<CAPTION>
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, 1998.2,433,064 $ 24 $13,951 $11,651 $(513) $ 142 $ 25,255
Net income (unaudited).. -- -- -- 258 -- -- 258
Other comprehensive loss --
Change in unrealized
holding gain on
securities available
for sale, net of
income tax effects
(unaudited).......... -- -- -- -- -- (336) (336)
Other (unaudited)....... 19,796 -- 52 -- -- -- 52
-------- ------- ------- ------- ------- --------- -------
Balance, March 31, 1999
(unaudited).............2,452,860 $ 24 $14,003 $11,909 $ (513) $ (194) $25,229
======== ======= ======= ======= ======= ========= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Three Months Ended March 31
(In thousands)
1999 1998
---------- ---------
(unaudited)
OPERATING ACTIVITIES:
Net Income..............................................$ 258 $ 690
Adjustments to reconcile net income to net cash provided
by operating activities --
Provision for credit losses.......................... 249 83
Depreciation and amortization........................ 255 218
Amortization of intangible assets.................... 137 149
Net discount accretion on securities................. (8) (51)
Proceeds from loans recovered........................ 94 4
Change in interest receivable and other assets, net.. 410 817
Loss on sale of bank premises and equipment.......... 16 --
Net realized gains on sales of investment securities. (53) (18)
Change in other liabilities, net..................... (855) (346)
Originations of loans to be sold..................... (14,514) (11,893)
Proceeds from sale of loans.......................... 14,514 11,893
---------- ---------
Net cash provided by operating activities......... 503 1,546
---------- ---------
INVESTING ACTIVITIES:
Net change in federal funds sold........................ -- (3,200)
Purchases of investment securities...................... (82,015) (23,964)
Proceeds from sales of investment securities............ 19,622 21,146
Proceeds from maturities of investment securities....... 75,053 11,858
Net decrease in loans................................... 4,558 2,740
Additions to premises, leasehold improvements and
equipment............................................. (452) (172)
---------- ---------
Net cash provided by investing activities......... 16,766 8,408
---------- ---------
FINANCING ACTIVITIES:
Net decrease in demand, savings, NOW and
money market accounts........................... (10,300) (11,231)
Net increase (decrease) in time deposits................ 5,891 (3,362)
Net decrease in short-term borrowings................... (15,925) (236)
Repayments of long-term borrowings...................... (18,733) (9,795)
Proceeds from long-term borrowings...................... 19,620 9,285
Other................................................... 79 40
---------- ---------
Net cash used in financing activities............. (19,368) (15,299)
---------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS.................. (2,099) (5,345)
CASH AND CASH EQUIVALENTS, beginning of period............. 10,284 15,415
---------- ---------
CASH AND CASH EQUIVALENTS, end of period...................$ 8,185 $ 10,070
========== =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid...........................................$ 4,227 $ 4,051
========== =========
Income taxes paid.......................................$ 123 $ 209
========== =========
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 1999
NOTE 1 - Basis of Presentation
The accompanying interim consolidated financial statements have been prepared by
BNCCORP, Inc. ("BNCCORP" or the "Company"), without audit, in accordance with
generally accepted accounting principles for interim financial information and
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations, although
the Company believes that the disclosures made are adequate to make the
information presented not misleading.
The unaudited consolidated financial statements as of March 31, 1999 and for the
three month periods ended March 31, 1999 and 1998 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, 1999.
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, 1998. Accordingly, footnote
disclosures which would substantially duplicate the disclosures contained in the
December 31, 1998 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, 1998
and the notes thereto.
NOTE 2 -- Reclassifications
Certain of the 1998 amounts have been reclassified to conform with the 1999
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 was merged into J.D. Meier Insurance Agency,
Inc. and became a wholly owned subsidiary of BNC National Bank ("BNC -- North
Dakota") through the exchange of 63,406 shares of the Company's stock for all of
the outstanding stock of Lips & Lahr. The name of the combined agency was
subsequently changed to BNC Insurance, Inc. Under the provisions of the
agreement and plan of merger related to the business combination, former
stockholders of Lips & Lahr had the right to receive additional shares of
BNCCORP common stock on the first anniversary of the initial share
8
<PAGE>
distribution date based on a formula relating to final resolution of
contingencies pending at the consummation date. In March 1999, the Company
issued 3,296 shares of BNCCORP common stock to the former stockholders of Lips &
Lahr. These shares represented final resolution of all contingencies existing at
the time of consummation of the business combination. The accompanying financial
statements as of and for the three months ended March 31, 1999 and 1998 reflect
financial condition and the combined operations of the companies.
The Company continues to engage in an acquisition program. Pursuant to that
program, the Company periodically considers or participates in discussions
concerning acquisitions. At the present time, the Company has no binding
commitments or agreements regarding acquisitions, but additional agreements may
be negotiated or entered into in the future.
NOTE 4 -- Earnings per Share
The following table shows the amounts used in computing earnings per share
("EPS") and the effect on weighted average number of shares of potential
dilutive common stock issuances for the three month periods ended March 31:
<TABLE>
<CAPTION>
Net Per-Share
Income Shares Amount
------------ ------------ -----------
<S> <C> <C> <C>
1999
Basic earnings per share:
Income before cumulative effect of
change in accounting principle......$ 354,000 2,405,891 $ 0.15
Cumulative effect of change in
accounting principle, net of
income tax effects.................. (96,000) 2,405,891 (0.04)
------------ ------------ -----------
Income available to common stockholders... $ 258,000 2,405,891 $ 0.11
============ ===========
Effect of dilutive shares --
Options............................. --
Warrants............................ --
------------
Diluted earnings per share:
Income before cumulative effect of
change in accounting principle...... $ 354,000 2,405,891 $ 0.15
------------ ------------ -----------
Cumulative effect of change in
accounting principle, net of
income tax effects.................. (96,000) 2,405,891 (0.04)
------------ ------------ -----------
Income available to common stockholders... $ 258,000 2,405,891 $ 0.11
============ ============ ===========
1998
Basic earnings per share:
Income available to common stockholders... $ 690,000 2,401,584 $ 0.29
===========
Effect of dilutive shares--
Options............................. 20,197
Warrants............................ 16,641
------------
Diluted earnings per share:
Income available to common stockholders... $ 690,000 2,438,422 $ 0.28
============ ============ ===========
</TABLE>
9
Warrants to purchase 50,000 shares of common stock at $12 per share and options
to purchase 120,134 shares of common stock at prices ranging from $10 to $17.75
were outstanding during the quarter ended March 31, 1999 but were not included
in the computation of diluted EPS because their effects were antidilutive.
Additionally, the following transaction occurred after March 31, 1999, which,
had it taken place during the quarter ended March 31, 1999, would have changed
the number of shares used in the EPS computations: 1,000 shares of restricted
stock were issued on April 1, 1999.
NOTE 5 -- Segment Disclosures
BNCCORP segments its operations into three separate business activities, based
on the nature of the products and services for each segment: BNC--North Dakota,
BNC National Bank of Minnesota ("BNC--Minnesota") and BNC Financial Corporation
("BNC Financial").
The operations of BNC--North Dakota provide traditional community banking
services to individuals and small and mid-size businesses, such as accepting
deposits, consumer and mortgage banking activities and making commercial loans.
The mortgage and commercial banking activities include the origination and
purchase of loans as well as providing servicing of loans to others. In addition
to these banking services, BNC--North Dakota also provides brokerage and trust
services along with selling insurance products.
BNC--Minnesota also provides traditional banking services, but this segment is
identified primarily from its commercial banking activities in Minnesota.
BNC--Financial offers asset-based commercial financing. In addition, it also
manages a consulting services division, which provides a number of services
including pre-funding due diligence, collateral review, problem loan consulting,
bankruptcy support and asset valuation.
The accounting policies of the three segments are the same as those described in
the summary of significant accounting policies included in the audited
consolidated financial statements for the year ended December 31, 1998, which
conform to generally accepted accounting principles. The information shown in
the following tables have been restated to give the effect of any business
combinations that have been accounted for under the pooling-of-interests method.
The Company's financial information for each segment is derived from the
internal profitability reporting system used by management to monitor and manage
the financial performance of the Company. The operating segments have been
determined by how management has organized the business for making operating
decisions and assessing performance.
10
<PAGE>
The following tables present segment profit or loss, assets and a reconciliation
of segment information as of, and for the periods ended, March 31 (in
thousands):
<TABLE>
<CAPTION>
1999 1998
----------------------------------------------- ------------------------------------------------
BNC- BNC- BNC- Other BNC- BNC- BNC- Other
ND MN Financial (a) Total ND MN Financial (a) Total
------ ------ -------- ------ ------ ------- ------ -------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income $2,350 $ 856 $ 313 $(165) $3,354 $ 2,460 $ 755 $ 284 $ (161) $3,338
Other revenue-
external
customers....... 1,211 211 136 1 1,559 883 160 53 28 1,124
Intersegment
revenue........ 63 -- -- 853 916 61 -- -- 1,231 1,292
Segment profit
before taxes... 355 248 234 189 1,026 774 383 222 612 1,991
Income tax expense 107 103 95 (87) 218 268 156 90 (78) 436
Segment profit
before
cumulative effect
of change in
accounting
principle....... 248 145 139 276 808 506 227 132 690 1,555
Cumulative effect
of change in
accounting
principle, net of
income tax
effects....... 43 35 -- 18 96 -- -- -- -- --
Segment profit... 205 110 139 258 712 506 227 132 690 1,555
Segment assets... 298,350 74,985 25,629 55,457 454,421 305,309 61,351 15,774 46,012 428,446
</TABLE>
- -----------------------
(a) The financial information presented in the "Other" column is for the bank
holding company. This component of the Company is not intended to earn
revenue and does not qualify as an operating segment.
11
<PAGE>
Reconciliation of segment profit to consolidated results:
1999 1998
--------------- ---------------
Segment profit before taxes..... $ 1,026 $ 1,991
Income tax expense.............. (218) (436)
--------------- ---------------
Segment profit before cumulative
effect of change in accounting
principle.................... 808 1,555
Cumulative effect of change in
accounting principle, net of
income tax effects.......... (96) --
Elimination of intersegment profit (454) (865)
--------------- ---------------
Consolidated net income......... $ 258 $ 690
=============== ===============
NOTE 6--Recently Issued Accounting Standards
On January 1, 1999, the Company adopted Statement of Position 98-5, "Reporting
on the Costs of Start-Up Activities" ("SOP 98-5"), which requires costs of
start-up activities and organization costs to be expensed as incurred. SOP 98-5
did not require restatement of prior period financial statements. The impact of
adoption of SOP 98-5 is presented in the interim consolidated financial
statements as a cumulative effect of change in accounting principle.
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 plans to adopt SFAS 133 on January 1, 2000 and is currently in the
process of developing applicable policy statements, effecting any necessary
system changes and quantifying the impact of the adoption of SFAS 133 on its
financial statements. Adoption of the accounting standard could increase
volatility in earnings and other comprehensive income.
NOTE 7--Subsequent Event
See Item 1 of Part II, "Legal Proceedings."
12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Comparison of Financial Condition at March 31, 1999 and December 31, 1998
Assets. Total assets decreased $20.3 million, or 5 percent, from $396.3 million
at December 31, 1998 to $376.0 million at March 31, 1999. The following table
presents the Company's assets by category as of March 31, 1999 and December 31,
1998 as well as the amount and percent of change between the two dates. Material
changes are discussed in lettered explanations following the table (amounts are
in thousands):
<TABLE>
<CAPTION>
Assets
Change
----------------------
March 31, December 31,
1999 1998 $ %
---------- ------------ ---------- --------
<S> <C> <C> <C> <C>
Cash and due from banks.......... $ 6,132 $ 7,475 $ (1,343) (18)%
Interest-bearing deposits with banks 2,053 2,809 (756) (27)%
Investment securities available for
sale............................. 83,459 96,601 (13,142) (14)% (a)
Loans and leases, net............ 262,883 267,783 (4,900) (2)%
Premises, leasehold improvements
and equipment, net............... 9,008 8,827 181 2%
Interest receivable.............. 2,470 2,618 (148) (6)%
Other assets..................... 6,261 6,163 98 2%
Deferred charges and intangible
assets, net...................... 3,760 4,056 (296) (7)%
---------- ------------ ----------
Total assets............... $ 376,026 $ 396,332 $ (20,306) (5)%
========== ============ ==========
</TABLE>
- --------------------
(a) The Company's securities position had to be increased, on a short term
basis, in order to provide adequate pledges for increased municipal
deposits at December 31, 1998. The short term securities were sold
subsequent to December 31, 1998 to fund withdrawals from the municipal
deposit accounts. See "--Liabilities."
Allowance for Credit Losses. The following table sets forth information
regarding changes in the Company's allowance for credit losses for the three
month period ending March 31, 1999 (amounts are in thousands):
13
<PAGE>
Three Months
Ended
March 31,
1999
-------------
(Unaudited)
Balance, beginning of period.................$ 3,093
Provision for credit losses.................. 249
Loans charged off............................ (388)
Loans recovered.............................. 94
-------------
Balance, end of period.......................$ 3,048
=============
Ending loan portfolio .......................$ 265,931
=============
Allowance for credit losses as a percentage of
ending loan portfolio.................. 1.15%
As of March 31, 1999, the Company's allowance for credit losses stands at 1.15
percent of total loans as compared to 1.14 percent at December 31, 1998 and 1.34
percent one year ago. Net charge-offs as a percentage of average loans for the
three month periods ended March 31, 1999 and 1998 were .11 and .02 percent,
respectively.
The Company maintains its allowance for credit losses at a level considered
adequate to provide for anticipated losses based on past loss experience,
general economic conditions, information about specific borrower situations
including their financial position, collateral values, and other factors and
estimates which are subject to change over time. Customer readiness for the year
2000 is an additional consideration in the analysis of the adequacy of the
Company's allowance for credit losses. See "Year 2000 Issue--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 credit losses in the periods in
which they become known. The adequacy of the allowance for credit losses is
monitored by management and reported to the Company's board of directors.
Although management believes that the allowance for credit losses is adequate to
absorb any losses on existing loans that may become uncollectible, judgment of
the adequacy of the allowance is necessarily approximate and imprecise, and
there can be no assurance that the allowance will prove sufficient to cover
actual 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 credit 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.
Nonperforming Assets. The following table sets forth information concerning the
Company's nonperforming assets as of the dates indicated (amounts are in
thousands):
14
<PAGE>
March 31, December 31,
1999 1998
--------------- ---------------
(Unaudited) ---------------
Nonperforming loans:
Loans 90 days or more delinquent and
still accruing interest..........$ 12 $ 307
Nonaccrual loans........................ 1,218 2,042
Restructured loans...................... 34 44
--------------- ---------------
Total nonperforming loans..................... 1,264 2,393
Other real estate owned................. 2,112 2,112
--------------- ---------------
Total nonperforming assets....................$ 3,376 $ 4,505
=============== ===============
Allowance for credit losses...................$ 3,048 $ 3,093
=============== ===============
Ratio of total nonperforming assets to total
assets.................................. 0.90% 1.14%
Ratio of total nonperforming loans to total
loans................................... 0.48% 0.88%
Ratio of allowance for credit losses to total
nonperforming loans..................... 241.14% 129.25%
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.
Liabilities. Total liabilities decreased $20.3 million, or 5 percent, from
$371.1 million at December 31, 1998 to $350.8 million at March 31, 1999. The
following table presents the Company's liabilities by category as of March 31,
1999 and December 31, 1998 as well as the amount and percent of change between
the two dates. Material changes are discussed in lettered explanations following
the table (amounts are in thousands):
15
<PAGE>
Liabilities
<TABLE>
<CAPTION>
Change
-----------------------
March 31, December 31,
1999 1998 $ %
----------- ------------- ---------- --------
<S> <C> <C> <C> <C>
DEPOSITS:
Noninterest - bearing........ $ 24,564 $ 28,475 $ (3,911) (14)%
Interest - bearing--
Savings, NOW and
money market........... 83,498 89,887 (6,389) (7)% (a)
Time deposits $100,000
and over............... 39,844 39,162 682 2%
Other time deposits.... 132,184 126,975 5,209 4%
Short-term borrowings........ 33,365 49,290 (15,925) (32)% (b)
Long-term borrowings......... 31,555 30,646 909 3%
Other liabilities............ 5,787 6,642 (855) (13)%
----------- ------------- ----------
Total liabilities...... $ 350,797 $ 371,077 $ (20,280) (5)%
=========== ============= ==========
</TABLE>
- -------------------
(a) The December 31, 1998 balance in this category was inflated due to large
municipal deposits received in December 1998. See "--Assets." A
significant amount of these deposits were withdrawn during the first
quarter of 1999.
(b) The reduction in short-term borrowings was primarily due to a reduction in
BNC--North Dakota's repurchase agreement with the Federal Home Loan Bank
("FHLB") which totaled $15 million at December 31, 1998 as compared to $2
million at March 31, 1999.
Stockholders' Equity. The Company's equity capital decreased $26,000 between
December 31, 1998 and March 31, 1999. This decrease resulted from the $258,000
of earnings recorded for the three months ended March 31, 1999, $21,000 of
additional capital surplus related to the issuance of restricted stock under the
Company's stock incentive plan and $31,000 of additional capital surplus
relating to the final share issuance in the business combination with Lips &
Lahr (see Note 3), offset by a $336,000 decrease in the net unrealized holding
gain on securities available for sale.
Capital Adequacy and Expenditures. BNCCORP's management actively monitors
compliance with bank regulatory capital requirements, including risk-based and
leverage capital measures. Under the risk-based capital method of capital
measurement, the ratio computed is dependent on the amount and composition of
assets recorded on the balance sheet, and the amount and composition of
off-balance- sheet items, in addition to the level of capital. The following
table includes the risk-based and leverage capital ratios of the Company and its
banking subsidiaries as of March 31, 1999:
16
<PAGE>
Tier 1 Total
Risk- Risk- Tier 1
Based Based Leverage
Ratio Ratio Ratio
----------- ------------ -----------
Consolidated............... 7.03% 11.53% 5.51%
BNC--North Dakota.......... 9.85 10.80 6.37
BNC--Minnesota............. 9.25 10.37 9.18
As of March 31, 1999, BNCCORP and its subsidiary banks exceeded capital adequacy
requirements and the banks were considered "well capitalized" for prompt
corrective action provisions.
No major capital expenditures were made during the quarter ended March 31, 1999.
The Company plans to construct an office building in Fargo, North Dakota during
1999. The total cost to complete the construction and provide furniture and
equipment for the building is estimated at between $4.0 and $4.5 million and
will be funded through current operating profits.
Comparison of Operating Results for the
Three Months Ended March 31, 1999 and 1998
General. Net income for the three months ended March 31, 1999, before the
cumulative effect of a change in accounting principle, was $354,000 as compared
with $690,000 for the three months ended March 31, 1998. Net income after the
cumulative effect of the change in accounting principle was $258,000. The
Company's basic and diluted EPS for the quarter ended March 31, 1999 were $0.15
before the cumulative effect of the accounting change and $0.11 after the
accounting change as compared to $0.29 and $0.28, respectively, for the same
period one year ago. The returns on average assets before and after the
cumulative effect of the accounting change were .36 and .26 percent,
respectively, as compared to .80 percent for the same period in 1998. The
returns on average equity before and after the cumulative effect of the
accounting change were 5.71 and 4.17 percent, respectively, as compared to 11.92
percent for the quarter ended March 31, 1998.
While noninterest income for the three months ended March 31, 1999 increased 39
percent as compared to the same period in 1998, the Company's operating results
for the period were negatively impacted by the 75 basis point decrease in prime
rate (which occurred during the fourth quarter of 1998) and the resultant
decrease in net interest margin percentage. See "--Net Interest Income." An
increase in the Company's provision for credit losses and increased noninterest
expense also impacted operating results for the first quarter of 1999 as
compared to the same period in 1998. See "--Provision for Credit Losses" and
"--Noninterest Expense."
Net Interest Income. Net interest income for the three month period ending March
31, 1999 increased slightly to $3.4 million as compared to $3.3 million for the
same period in 1998. Net interest margin decreased to 3.71 percent for the
quarter ended March 31, 1999 from 4.17 percent for the same period one year
earlier.
The following table presents average balances, interest earned or paid, and
associated yields on interest-earning assets and costs on interest-bearing
liabilities for the three months ended March 31, 1999 and 1998 as well as the
changes between the two periods. Significant factors
17
<PAGE>
contributing to the change in net interest income and net interest margin are
discussed in lettered notes below the table:
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------------------------------------
1999 1998 Change
----------------------------- ---------------------------- --------------------------------
Interest Average Interest Average Interest
Average earned yield or Average earned yield or Average earned or Average
balance or paid cost balance or paid cost balance paid yield or cost
------- ------- -------- ------- -------- -------- ------- --------- -------------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Investments.....................$ 101,592 $ 1,454 5.80% $ 95,681 $ 1,485 6.29% $ 5,911 $ (31) -0.49%(a)
Loans........................... 268,410 6,163 9.31% 231,862 5,771 10.09% 36,548 392 -0.78%(b)
Allowance for loan losses.. (2,999) -- -- (3,107) -- 108 --
------- ------- ------- ------- ------- -------
Total interest-earning
assets $ 367,003 $ 7,617 8.42% $324,436 $ 7,256 9.07% $42,567 $ 361 -0.65%(c)
======= ------- ======= ------- ======= -------
Interest-bearing liabilities
Savings, NOW & money market
accounts.................$ 89,407 $ 754 3.42% $ 72,376 $ 571 3.20% $17,031 $ 183 0.22%(d)
Certificates of deposit under
$100,000.................. 129,001 1,692 5.32% 125,648 1,752 5.66% 3,353 (60) -0.34%
Certificates of deposit $100,000
and over.................. 42,718 573 5.44% 32,697 475 5.89% 10,021 98 -0.45%(e)
------- ------- ------- ------- ------- -------
Interest - bearing
deposits............... 261,126 3,019 4.69% 230,721 2,798 4.92% 30,405 221 -0.23%(f)
Short-term borrowings........... 47,524 607 5.18% 45,995 630 5.56% 1,529 (23) -0.38%
Long-term borrowings............ 30,876 637 8.37% 21,489 490 9.25% 9,387 147 -0.88%(g)
------- ------- ------- ------- ------- -------
Total borrowings........... 78,400 1,244 6.44% 67,484 1,120 6.73% 10,916 124 -0.29%(g)
------- ------- ------- ------- ------- -------
Total interest-bearing
liabilities.............$339,526 4,263 5.09% $298,205 3,918 5.33% $41,321 345 -0.24%(h)
======= ------- ======= ------- ======= -------
Net interest income/spread. $3,354 3.33% $3,338 3.74% $ 16 -0.41%(i)
======= ======= ======= ====== ======= =======
Net interest margin........ 3.71% 4.17% -0.46%(i)
======= ====== =======
Notation:
Noninterest-bearing deposits....$ 25,386 -- $22,002 -- $ 3,384 --
------- ------- -------
Total deposits... $286,512 $3,019 4.27% $252,723 $2,798 4.49% $33,789 $ 221 -0.22%(f)
======= ====== ======= ======= ======= ========
</TABLE>
- --------------------------
(a) The decreased yield in the investment portfolio is primarily attributable
to the decrease in the Treasury yield curve which occurred during the
second half of 1998 and the reinvestment of cash flows from maturing
mortgage-backed securities and other investments at current, lower rates.
(b) The loan volume increase is largely attributable to increases in loans
originated at BNC--Minnesota and BNC Financial. The decreased loan yield
is reflective of the 75 basis point decline in the prime rate late in 1998
as well as a decrease in loan pricing spread to prime rate due to
competitive pressures in the markets in which the Company operates.
(c) See (a) and (b) above.
(d) Increased volume and cost in this deposit category reflect increased
balances in money market deposit accounts. A deposit restructuring and
repricing strategy implemented during the second half of 1998 contributed
to the increase in money market deposits by causing a shift in the mix of
the Company's interest-bearing deposit portfolio from certificates of
deposit ("CDs") to money market accounts. While costs in this deposit
category increased due to the increased volume in money market accounts,
the Company's overall cost of interest-bearing deposits decreased 23 basis
points and cost of total deposits decreased 22 basis points largely as a
result of the program implemented during 1998.
18
<PAGE>
(e) The volume increase is reflective of the fact that the Company's brokered
deposit holdings during the first quarter of 1998 were negligible. In
addition, the volume of national market CD's was greater during the first
quarter of 1999 as compared to the same period in 1998. The reduction in
cost of CDs is reflective of the program implemented during 1998, lower CD
renewal rates and the overall decreased rate environment.
(f) See (d) and (e) above.
(g) The increase in long-term borrowings is reflective of drawdowns on the
BNCCORP and BNC Financial lines of credit with Firstar Bank, N.A.,
primarily to fund asset-based loans at BNC Financial which totaled $24
million at March 31, 1999 as compared to $15 million at March 31, 1998.
The reduced cost on these borrowings is reflective of the interest rate
decreases late in 1998.
(h) See (d), (e) and (g) above.
(i) Reduction in net interest spread and net interest margin is primarily
attributable to the decreased yield on earning assets which was partially
offset by the decreased cost of interest-bearing liabilities.
Provision for Credit Losses. The provision for credit losses was $249,000 for
the quarter ended March 31, 1999 as compared to $83,000 for the same period one
year earlier. The increase in the provision is reflective of the Company's
intent to increase its reserve for credit losses as a percentage of total loans
over the course of the next several quarters. As of March 31, 1999, the
allowance for credit losses stands at 1.15 percent of total loans as compared to
1.14 percent at December 31, 1998. Management estimates indicate that the
allowance for credit losses is adequate to cover the risk of loss in the loan
portfolio at the present time. See "Comparison of Financial Condition at March
31, 1999 and December 31, 1998 -- Allowance for Credit Losses."
Noninterest Income. The following table presents the major categories of the
Company's noninterest income for the three months ended March 31, 1999 and 1998
as well as the amount and percent of change between the periods. Material
changes are discussed in lettered explanations following the table:
Noninterest Income
Increase (Decrease)
--------------------
For the Three Months
Ended March 31, 1999 - 1998
-------------------- --------------------
1999 1998 $ %
--------- ------- ------- --------
(in thousands)
-------
Insurance commissions...... $ 538 $ 374 $ 164 44% (a)
Fees on loans.............. 432 326 106 33% (b)
Service charges............ 125 149 (24) (16)%
Brokerage income........... 125 11 114 1036% (c)
Rental income.............. 11 11 0 0%
Net gain on sales of
securities................ 53 18 35 194%
Other noninterest income... 275 235 40 17%
--------- ------- -------
Total noninterest income $ 1,559 $ 1,124 $ 435 39%
========= ======= =======
- ----------------
(a) Increased insurance commissions resulted from an increase in the number of
insurance producers as well as successful efforts to cross-sell insurance
to bank customers.
19
<PAGE>
(b) Increase is primarily attributable to an increase in commercial loan
volume and related fees during the first quarter of 1999.
(c) Increase is attributable to the addition of brokerage staff in BNC-- North
Dakota's subsidiary, BNC Asset Management, Inc.
Noninterest Expense. The following table presents the major categories of the
Company's noninterest expense for the three months ended March 31, 1999 and 1998
as well as the amount and percent of change between the periods. Material
changes are discussed in lettered explanations following the table:
Noninterest Expense
Increase (Decrease)
--------------------
For the Three Months
Ended March 31, 1999 - 1998
-------------------- --------------------
1999 1998 $ %
-------- -------- -------- --------
(in thousands)
Salaries and employee
benefits.............. $ 2,282 $ 1,841 $ 441 24% (a)
Depreciation and
amortization.......... 397 371 26 7%
Occupancy................. 306 266 40 15%
Professional services..... 296 153 143 93% (b)
Office supplies, telephone
and postage........... 227 180 47 26%
Marketing and promotion... 156 101 55 54% (c)
FDIC and other assessments 47 45 2 4%
Other..................... 381 296 85 29% (d)
-------- -------- --------
Total noninterest
expense............ $ 4,092 $ 3,253 $ 839 26%
======== ======== ========
- --------------------
(a) Increase is attributable to growth as well as the Company's expansion into
non-traditional banking services. Average full time equivalent employees
increased from 164 for the three month period ended March 31, 1998 to 194
for the same period in 1999, the increase representing addition of staff
at BNC Insurance, Inc., BNC Asset Management, Inc., BNC -- North Dakota's
Fargo branch and other general growth-related staffing increases.
(b) Increase represents increases in legal, software support and other
consulting fees.
(c) Increase is attributable to increased advertising, public relations and
promotional expenses, including fees paid to an investor relations firm
engaged late in 1998.
(d) Increase is attributable to small increases in several items in this
category including insurance, correspondent charges and other
miscellaneous expenses.
Income Tax Expense. Income tax expense decreased $218,000 due to the decrease in
pre-tax income for the quarter ended March 31, 1999 as compared to the pre-tax
income recorded for the same period in 1998. The estimated effective tax rates
for the three month periods ended March 31, 1999 and 1998 were 38.1 and 38.7
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. See Note 4 to the interim consolidated financial
statements included under Item 1 for a summary of the EPS calculations for the
three month periods ended March 31, 1999 and 1998.
20
<PAGE>
Liquidity. Liquidity risk management encompasses the Company's ability to meet
all present and future financial obligations in a timely manner. The objectives
of liquidity management 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 interim consolidated financial
statements included under Item 1 present data on cash and cash equivalents
provided by and used in operating, investing and financing activities. In
addition to liquidity from core deposit growth, together with repayments and
maturities of loans and investments, the Company utilizes brokered deposits,
sells securities under agreements to repurchase and borrows overnight federal
funds. BNC -- North Dakota is a member of the FHLB, which affords the bank the
opportunity to borrow funds on terms ranging from overnight to ten years and
beyond. Borrowings from the FHLB are generally collateralized by the bank's
mortgage loans and various securities from its investment portfolio.
The Company has also obtained funding, primarily for the purpose of funding
asset-based loans at BNC Financial, through long-term borrowings and the
issuance of subordinated notes. The loan agreements and indenture pursuant to
which the Company's subordinated notes were issued contain a number of covenants
restricting the ability of the Company or its subsidiaries to take certain
actions and requiring maintenance of certain ratios regarding capital,
nonperforming loans, loan loss reserve coverage, and other matters. At March 31,
1999, BNCCORP and its subsidiaries were in compliance with all material debt
covenants.
The following table sets forth, for the three months ended March 31, 1999 and
1998, a summary of the Company's major sources and (uses) of funds. The summary
information is derived from the Consolidated Statements of Cash Flows included
under Item 1:
Major Sources and Uses of Funds
For the Three Months
Ended March 31,
-----------------------
1999 1998
--------- ---------
(in thousands)
---------
Proceeds from sales and maturities of investment
securities................................. $ 94,675 $ 33,004
Purchases of investment securities............ (82,015) (23,964)
Net decrease in short-term borrowings......... (15,925) (236)
Net decrease in deposits...................... (4,409) (14,593)
Net decrease in loans......................... 4,558 2,740
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's
asset/liability committee has been actively involved in effecting a liquidity
plan for a period spanning the Year 2000 date change. See "Year 2000
Issue--Contingency Plan."
21
<PAGE>
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 ("LANs") 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
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.
22
<PAGE>
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 mission critical systems commenced
prior to September 30, 1998. The Company completed testing of mission critical
systems by December 31, 1998. Testing of systems where the Company relies on
service providers for mission critical systems was substantially complete by
March 31, 1999. 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.
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
$30,000) 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
23
<PAGE>
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.
Key components of the Company's contingency plan include, but are not limited
to, the following:
A plan for back-up generators to power the Company's phone system,
mainframe computer system, other computers and computer networks, security
systems, lights and to provide for other electrical power capabilities in
the event of interruptions in the power supply.
A plan for liquidity management. The Company's asset/liability committee
has taken an active roll in planning and approving implementation of
elements of this plan. Several phases of the liquidity plan have been
implemented and implementation will continue throughout 1999 and into the
year 2000.
Limited vacation for information systems and operations staff for the
months of November and December 1999 and January 2000 and for all other
staff from December 15, 1999 through January 15, 2000.
Agreements with the Company's core application provider to relocate
processing to any one of nine different processing facilities located
throughout the country should such relocation become necessary.
Plans to extend office hours should that become necessary due to the
failure of automated teller machines or other means of customer account /
funds access.
Expedited processing in order to ensure all end-of-day/month/year
processing is complete and all necessary reports, including customer
records, are printed prior to midnight on December 31, 1999.
Preparation of manual processing procedures that can be used in the event
automated systems fail.
Plans for conversion to different mainframe software in the event of
failure of the Company's core applications systems. The Company's current
provider has three additional software programs available with conversion
programs already established.
24
<PAGE>
Customer Year 2000 Issues. 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. 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 credit
losses to reflect customer non-compliance with Year 2000-related recommendations
and the risks associated therewith. The Company is using the customer Year 2000
status scorecard to calculate a composite risk rating for each material
customer. This risk rating is then used to establish whether additional amounts
should be set aside in the Company's allowance for credit losses.
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, and are not expected to
be, significant.
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.
25
<PAGE>
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 third parties with
which the Company transacts business, systemic occurrences in the banking
industry which could impact the Company's liquidity and undiscovered problems in
the Company's Year 2000 testing plans and processes. While the Company will
exercise due diligence in the development of its Year 2000 plans and take
appropriate actions based on the best available information, 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 cannot be
completely eliminated.
Forward Looking Statements
Statements included in Item 2, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," which are not historical in
nature are intended to be, and are hereby identified as "forward looking
statements" for purposes of the safe harbor provided by Section 21E of the
Securities Exchange Act of 1934, as amended. The Company cautions readers that
forward looking statements, including without limitation, those relating to the
Company's future business prospects, revenues, working capital, liquidity,
capital needs, interest costs, and income and the anticipated impact of the Year
2000 Issue, are subject to certain risks and uncertainties that could cause
actual results to differ materially from those indicated in the forward looking
statements due to several important factors. These factors include, but are not
limited to: risks associated with the Company's acquisition strategy; risks of
loans and investments, including dependence on local economic conditions;
competition for the Company's customers from other providers of financial
services; possible adverse effects of changes in interest rates; risks of
unanticipated consequences related to the impact of the Year 2000 Issue on the
Company or its customers; and other risks which are difficult to predict and
many of which are beyond the control of the Company.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's business activities generate market and other risks. Market risk
arises from changes in interest rates, exchange rates, commodity prices and
equity prices and represents the possibility that changes in future market rates
and prices will have a negative impact on the Company's earnings or value. The
Company's principal market risk is interest rate risk which arises from changes
in interest rates. Interest rate risk can result from: (1) Re-pricing risk
timing differences in the maturity/re-pricing of assets, liabilities, and
off-balance sheet contracts; (2) Options risk - the effect of embedded options,
such as loan prepayments, interest rate caps/floors, and deposit withdrawals;
(3) Basis risk - risk resulting from unexpected changes in the spread between
two or more different rates of similar maturity, and the resulting impact on the
behavior of lending and funding rates; and (4) Yield curve risk - risk resulting
from unexpected changes in the spread between two or more rates of different
maturities from the same type of instrument. The Company has risk management
policies to monitor and limit exposure to interest rate risk. To date the
Company has not conducted trading activities as a
26
<PAGE>
means of managing interest rate risk. BNC's asset/liability management process
is utilized to manage the Company's interest rate risk. The measurement of
interest rate risk associated with financial instruments is meaningful only when
all related and offsetting on- and off-balance-sheet transactions are
aggregated, and the resulting net positions are identified.
Interest rate risk exposure is actively managed with the goal of minimizing the
impact of interest rate volatility on current earnings and on the market value
of equity. In general, the assets and liabilities generated through ordinary
business activities do not naturally create offsetting positions with respect to
repricing or maturity characteristics. Access to the derivatives market can be
an important element in maintaining the Company's interest rate risk position
within policy guidelines. Using off-balance-sheet instruments, principally
interest rate floors and caps, the interest rate sensitivity of specific
on-balance-sheet transactions, as well as pools of assets or liabilities, is
adjusted to maintain the desired interest rate risk profile.
The Company's primary tool in measuring and managing interest rate risk is net
interest income simulation. This exercise includes management assumptions
regarding the level of interest rate or balance changes on indeterminate
maturity deposit products (savings, NOW, money market and demand deposits) for a
given level of market rate changes. These assumptions have been developed
through a combination of historical analysis and future expected pricing
behavior. Interest rate caps and floors are included to the extent that they are
exercised in the 12-month simulation period. Additionally, changes in prepayment
behavior of the residential mortgage and mortgage-backed securities portfolios
in each rate environment are captured using industry estimates of prepayment
speeds for various coupon segments of the portfolio. Finally, the impact of
planned growth and anticipated new business activities is factored into the
simulation model.
It is the Company's objective to manage its exposure to interest rate risk,
bearing in mind that the Company will always be in the business of taking on
rate risk and that rate risk immunization is not entirely possible. Also, it is
recognized that as exposure to interest rate risk is reduced, so too may the
overall level of net interest income.
The Company monitors the results of net interest income simulation on a monthly
basis at regularly scheduled asset/liability management committee meetings. Each
month net interest income is simulated for the upcoming 12-month horizon in
seven interest scenarios. The scenarios modeled are parallel interest ramps of
+/- 100bp, 200bp, and 300bp along with a rates unchanged scenario. The parallel
movement of interest rates means all projected market interest rates move up or
down by the same amount. A ramp in interest rates means that the projected
change in market interest rates occurs over the 12-month horizon projected. For
example, in the +100bp scenario, the projected prime rate will increase from its
current starting point of 7.75 percent to 8.75 percent 12 months later. The
prime rate in this example will increase 1/12th of the overall increase of 100
basis points each month.
The net interest income simulation results for the twelve month period ending
March 31, 2000 is shown below. The growth assumption used for this simulation
was based on the growth projections built into the Company's 1999 budget with
assumed 5 percent growth thereafter. The impact of each interest rate scenario
on projected net interest income is displayed before and after the impact of the
$25.0 million notional interest rate floor on the prime rate (with an 8.50
percent strike) which the Company purchased in September 1998.
27
<PAGE>
<TABLE>
<CAPTION>
Net Interest Income Simulation
(amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Movement in interest rates -300bp -200bp -100bp Unchanged +100bp +200bp +300bp
Projected 12-month net interest income.. $14,698 $15,078 $ 15,446 $ 15,814 $ 16,007 $16,126 $16,332
Dollar change from rates unchanged
scenerio................................ (1,116) (736) (368) - 193 312 518
Percentage change from rates unchanged
scenario................................ -7.06% -4.65% -2.33% 0.00% 1.22% 1.97% 3.28%
Benefit/(cost) from $25MM floor (1)..... 379 241 104 (34) (161) (196) (209)
Total net interest income impact with
floor................................... 15,077 15,319 15,550 15,780 15,846 15,930 16,123
Dollar change from flat w/floor......... (703) (461) (230) - 66 150 343
Percentage change from unchanged w/floor. -4.45% -2.92% -1.46% 0.00% 0.42% 0.95% 2.17%
Benefit from amortization of deferred gain on
sale of interest rate swaps (2)..... 50 50 50 50 50 50 50
Total net interest income impact w/floor &
swap gain.......................... $ 15,127 $ 15,370 $15,600 $ 15,830 $ 15,896 $15,980 $16,174
Dollar change from flat w/floor & swap.. $ (703) $ (460) $ (230) $ - $ 66 $ 150 $ 344
Percentage change from flat w/floor
& swap.................................. -4.44% -2.91% -1.45% 0.00% 0.42% 0.95% 2.17%
POLICY LIMITS........................... -15.00% -10.00% -5.00% 0.00% 5.00% 10.00% 15.00%
</TABLE>
- ---------------------------
(1) In September 1998, the Company purchased an interest rate floor. The
notional amount of the floor is $25.0 million with a maturity date of September
29, 2003. The floor's reference rate is the prime rate with a strike of 8.50
percent. The Company paid a premium of $1,120,000 or (4.48% per million). The
premium is being amortized on a straight-line basis over the 5-year term of the
option.
(2) The swaps were sold in October and November 1997. Gains recognized upon sale
of the swaps are being amortized as reduction of interest expense over the
remaining lives of the original swap contracts.
The Company's rate sensitivity position is asset sensitive. This is evidenced by
the projected increase of net interest income in the rising interest rate
scenarios, and the decrease in net interest income in falling rate scenarios.
The primary reason for this interest rate risk profile is the volume of
floating-rate loans made by the company that are indexed to the prime rate. In
addition, the ability to decrease the rates offered on interest-bearing checking
and money market accounts is limited as the rates paid on these liabilities are
already at low levels.
The Company's general policy is to limit the percentage change in projected net
interest income to +/- 5%, 10%, and 15% from the rates unchanged scenario for
the +/-100bp, 200bp, and 300bp interest rate ramp scenarios, respectively. The
Company was within its policy limits for each projected scenario in the table
above.
Since there are limitations inherent in any methodology used to estimate the
exposure to changes in market interest rates, these analyses are not intended to
be a forecast of the actual effect of changes in market interest rates such as
those indicated above on the Company. Further, this
28
<PAGE>
analysis is based on the Company's assets and liabilities as of March 31, 1999
(with forward adjustments for planned growth and anticipated business
activities) and does not contemplate any actions the Company might undertake in
response to changes in market interest rates.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
BancInsure, Inc. vs. BNC National Bank, N.A. and Debra J. Gronlie, Civ. No.
A1-98-97, U.S.D.C. District of North Dakota. Discovery and related activities
are ongoing in this case. In a related suit filed by BNC National Bank (the
"Bank") on March 11, 1999 in the United States District Court for Bexar County,
Texas (BNC National Bank v. Alamation, LLC, et al.; Civ. No. 99CI03586), the
bank alleges, among other things, fraud, misrepresentations and breaches of
fiduciary duty by Deb Gronlie (a former loan officer of the Bank) and that
Gronlie conspired with others improperly divert property (a motion simulator)
and revenues generated by operation of the simulator. The Bank is seeking, among
other things, a declaratory judgement that it is the owner of and entitled to
immediate possession of the simulator, compensatory damages and punitive
damages.
In addition to the foregoing litigation, the Bank and certain of its officers
were named defendants in a suit filed on April 30, 1999 in the United States
District Court for the District of North Dakota (Bunk v. BNC National Bank, et
al.; Civ. No. A1-99-41). The plaintiff alleged that the Bank, acting in concert
with Deb Gronlie (the Bank's former loan officer who was terminated and is
subject to litigation by the Bank alleging, among other things,
misrepresentations, breaches of fiduciary duty and conflicts of interest) and
the Bank's officers named in the suit, violated the U.S. and North Dakota
Racketeer Influenced and Corrupt Organization Act, committed fraud and breached
their fiduciary duties to the plaintiff by inducing plaintiff to purchase two
businesses that were customers of the Bank, forcing the plaintiff to sell
control of the businesses and then forcing the plaintiff from day-to-day control
of the businesses, requiring the plaintiff, among other things, to file for
protection under the federal bankruptcy laws. The plaintiff seeks compensatory
damages of $7.5 million plus treble and punitive damages. The Bank denies
liability, intends to pursue all available remedies in this matter, and intends
to vigorously defend this claim.
Item 2. Changes in Securities and Use of Proceeds
On March 1, 1999, the Company issued 3,296 shares of its common stock, $.01 par
value, to stockholders of Lips & Lahr in a private offering believed to be
exempt under Sections 4(2) and 4(6) of the Securities Act of 1933 and the
regulations and rules thereunder including Regulation D. The stock was the
second and final issuance related to a business combination accounted for as a
pooling of interests. See Note 3 to the interim consolidated financial
statements included under Item 1 of Part I.
Item 6. Exhibits and Reports on Form 8-K
(a) Part I Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K
None.
29
<PAGE>
Signatures
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
BNCCORP, Inc.
Date: May 14, 1999 By \s\ Gregory K. Cleveland
---------------------------------------
Gregory K. Cleveland
President
Chief Operating Officer
Only Authorized Signature
30
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
balance sheet dated 3/31/99 and statement of income for the three
months ended 3/31/99 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<CIK> 0000945434
<NAME> BNCCORP, INC.
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 6,132
<INT-BEARING-DEPOSITS> 2,053
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 83,459
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 265,931
<ALLOWANCE> 3,048
<TOTAL-ASSETS> 376,026
<DEPOSITS> 280,090
<SHORT-TERM> 33,365
<LIABILITIES-OTHER> 5,787
<LONG-TERM> 31,555
0
0
<COMMON> 24
<OTHER-SE> 25,205
<TOTAL-LIABILITIES-AND-EQUITY> 376,026
<INTEREST-LOAN> 6,163
<INTEREST-INVEST> 1,439
<INTEREST-OTHER> 15
<INTEREST-TOTAL> 7,617
<INTEREST-DEPOSIT> 3,019
<INTEREST-EXPENSE> 4,263
<INTEREST-INCOME-NET> 3,354
<LOAN-LOSSES> 249
<SECURITIES-GAINS> 53
<EXPENSE-OTHER> 4,092
<INCOME-PRETAX> 572
<INCOME-PRE-EXTRAORDINARY> 354
<EXTRAORDINARY> 0
<CHANGES> (96)
<NET-INCOME> 258
<EPS-PRIMARY> .11
<EPS-DILUTED> .11
<YIELD-ACTUAL> 8.42
<LOANS-NON> 12
<LOANS-PAST> 1,218
<LOANS-TROUBLED> 34
<LOANS-PROBLEM> 10,796
<ALLOWANCE-OPEN> 3,093
<CHARGE-OFFS> 388
<RECOVERIES> 94
<ALLOWANCE-CLOSE> 3,048
<ALLOWANCE-DOMESTIC> 3,048
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
