U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
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[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 For the fiscal year ended December 31, 1998
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
Commission File No. 0-26290
BNCCORP, INC.
(Name of small business issuer in its charter)
Delaware 45-0402816
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or orrganization)
322 East Main 58501
Bismarck, North Dakota (Zip Code)
(Address of principal executive offices)
Issuer's telephone number: (701) 250-3040
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 of 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No ___
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. []
The issuer's revenues for its most recent fiscal year: $35,344,000
The aggregate market value of the voting stock held by non-affiliates of
the Registrant at March 15, 1999 was $16,050,000.
The number of shares of the Registrant's common stock outstanding on March
15, 1999 was 2,408,980.
Documents incorporated by reference. Portions of the Registrant's proxy
statement to be filed with the Securities and Exchange Commission in connection
with the Registrant's 1997 annual meeting of stockholders are incorporated by
reference into Part III hereof.
Transitional Small Business Disclosure Format (check one): Yes ___ No X
<PAGE>
BNCCORP, INC.
ANNUAL REPORT ON FORM 10-KSB
FOR FISCAL YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
Page
PART I
Item 1. Description of Business 3
Item 2. Description of Property 9
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 10
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 10
Item 6. Management's Discussion and Analysis or Plan of Operation 10
Item 7. Financial Statements 40
Item 8. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure 76
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Section 16(a) Beneficial Ownership Reporting Compliance 76
Item 10. Executive Compensation 76
Item 11. Security Ownership of Certain Beneficial Owners and Management 76
Item 12. Certain Relationships and Related Transactions 76
Item 13. Exhibits and Reports on Form 8-K 76
<PAGE>
PART I
Item 1. Description of Business
General
BNCCORP, Inc. ("BNCCORP"), a Delaware corporation, is a multibank holding
company registered under the Bank Holding Company Act of 1956 (the "BHCA")
headquartered in Bismarck, North Dakota. BNCCORP (together with its consolidated
subsidiaries, "BNC" or the "Company") provides a broad range of banking and
financial services to small and mid-size businesses, private banking clients and
consumers through its 17 facilities in North Dakota and Minnesota. BNCCORP
operates primarily through its two commercial banking subsidiaries, BNC National
Bank (together with its wholly-owned subsidiaries, BNC Insurance, Inc. and BNC
Asset Management, Inc., "BNC--North Dakota"), which is headquartered in Bismarck
and has 14 additional offices in North Dakota, and BNC National Bank of
Minnesota ("BNC--Minnesota," together with BNC--North Dakota, the "Banks"),
which is located in Minneapolis, Minnesota. In addition, the Company provides
asset-based commercial financing through its non-bank subsidiary, BNC Financial
Corporation ("BNC Financial"), located in St. Cloud, Minnesota.
Growth Strategy
BNCCORP was formed in 1987 with the objective of acquiring and improving the
performance of strategically located banks in North Dakota. Since that time, the
banking industry has undergone rapid change. Many non-bank competitors have
entered into the banking business. The proliferation of non-bank competitors has
resulted in the availability of a multitude of financial products and services.
Technological advances have improved delivery systems and given customers
immediate access to these products and services. To remain competitive in this
rapidly changing environment, BNCCORP has expanded its objective. The Company is
committed to moving into the future as a full-service provider of financial
services including traditional banking, trust, asset management, brokerage,
insurance, financial planning and other services.
BNC aims to achieve its objectives through expanded product and service
offerings and an emphasis on customer service and local relationship banking
with small and mid-size businesses, private banking clients and consumers.
Management believes that the Company's entrepreneurial approach to banking and
the introduction of new products and services will continue to attract small and
mid-size businesses which often are not of sufficient size to be of interest to
the larger banks in its market areas. See "--Market Areas." Such businesses
frequently have difficulty finding banking services that meet their specific
needs and have sought, and management believes will continue to seek, banking
institutions that are more relationship-oriented. BNC offers a wide range of
banking and finance-related products and services, including trust services,
asset management, retirement planning, tax planning and preparation, insurance
and other private banking services. See "--Products and Services."
Acquisitions have played an important role in BNC's growth strategy. The Company
has completed several bank and nonbank acquisitions. The largest of these
acquisitions was the Company's July 1995 acquisition of seven North Dakota
branches, with aggregate deposits of approximately $104.8 million, from First
Bank fsb. See Note 2 to the Consolidated Financial Statements included under
Item 7 of Part II for a summary of mergers and acquisitions consummated during
the three year period ended December 31, 1998.
<PAGE>
Management believes that its increased product and service offerings and
acquisitions have generated significant growth for the Company. BNC's total
assets have increased from $118.0 million at December 31, 1992 to $396.3 million
at December 31, 1998. The Company's goal continues to be the creation of a
well-capitalized $500 million to $1 billion financial services organization
focused on local relationship banking. Efforts are ongoing to ensure that the
executive management team and operating systems are in place to achieve this
goal. The Company's management team combines experienced, conscientious
overseers of traditional banking services with aggressive and innovative
marketers and managers of diversified financial services. BNC will continue to
emphasize internally-generated growth. The Company will also seek growth
opportunities through acquisition of financial services companies or de novo
branching in North and South Dakota, Minnesota and, possibly, Iowa, Nebraska and
Wisconsin. The Company recently expanded its growth opportunities by opening a
branch in Fargo, North Dakota, during February 1999.
Market Areas
BNC's primary market areas are the Bismarck/Mandan and Fargo (North Dakota)
metropolitan areas, the Minneapolis/St.Paul (Minnesota) metropolitan area, and
the rural communities surrounding the branch offices of BNC--North Dakota
(Linton, Ellendale, Garrison, Stanley, Kenmare, Crosby and Watford City, North
Dakota). During January 1999, the Company established an insurance office in
Dickinson, North Dakota. The asset-based lending activities of BNC Financial
have been conducted primarily in Minnesota. During 1998, BNC--Minnesota and BNC
Financial continued to generate significant loan growth in the Minnesota market
area. As of December 31, 1998, 52 percent of the Company's loans were to
borrowers located in Minnesota and 38 percent were to borrowers located in North
Dakota. The remaining 10 percent represents loans to borrowers in other states.
Other than brokered certificates of deposit and direct non-brokered certificates
of deposit obtained through national deposit networks, each banking branch draws
most of its deposits from its general market area. The following table presents
total deposits and loans originated at each of BNC's geographic locations:
December 31, 1998
-----------------------
Year
Location Opened
or Total Loans
Acquired Deposits Originated
----------------------------- ---------- ---------- ----------
(in thousands)
BNC--North Dakota..........
Bismarck................. 1990 $ 106,110 $ 122,788
Linton................... 1987 47,070 9,605
Ellendale................ 1995 10,343 1,385
Garrison................. 1995 13,735 428
Stanley.................. 1995 15,146 385
Kenmare.................. 1995 16,544 158
Crosby................... 1995 17,870 237
Watford City............. 1995 13,066 114
BNC--Minnesota............. 1996 44,615 111,928
BNC Financial.............. 1996 -- 23,842
BNCCORP (parent company)... 1987 -- 340
---------- ----------
Total ................ $ 284,499 $ 271,210
========== ==========
Products and Services
Loans. The Company's loans primarily consist of commercial and industrial loans,
real estate mortgage loans, real estate construction loans, agricultural loans,
consumer loans and lease financing. In allocating its assets among loans,
investments and other earning assets, BNC attempts to maximize return while
managing risk at acceptable levels. BNC's primary lending focus is on commercial
loans and owner-occupied real estate loans to small and mid-size businesses and
professionals. The Company offers a broad range of commercial and retail lending
services, including commercial revolving lines of credit, residential and
commercial real estate mortgage loans, consumer loans and equipment financing.
<PAGE>
For more information on the lending activities of the Company, see "Management's
Discussion and Analysis or Plan of Operation--Financial Condition--Loan
Portfolio" included under Item 6 of Part II.
Interest rates charged on loans may be fixed or variable and vary with the
degree of risk, loan term, underwriting and servicing costs, loan amount, and
extent of other banking relationships maintained with customers. Rates are
further subject to competitive pressures, the current interest rate environment,
availability of funds and government regulations.
The Company also offers asset-based commercial financing through BNC Financial,
the Company's non-bank subsidiary which was acquired in 1996. BNC Financial
provides asset-based working capital and term financing to small and mid-size
companies for refinancings, recapitalizations, acquisitions and seasonal
borrowing through senior loans secured by business assets such as equipment,
accounts receivable, and inventory. Revolving credit facilities and term loans
are cross-collateralized. Management of BNC Financial is experienced in, and has
adopted policies and procedures to address the risks associated with,
asset-based lending. Asset-based lending often involves higher risk than loans
traditionally extended by banks, but often involves higher returns.
Deposits. Each of BNC's bank branches offers the usual and customary range of
depository products provided by commercial banks, including checking, savings
and money market deposits and certificates of deposit. Deposits are insured by
the Federal Deposit Insurance Corporation ("FDIC") up to statutory limits. The
Banks also purchase brokered deposits and obtain direct non-brokered
certificates of deposit through national deposit networks when such transactions
are beneficial to the Banks. See "Management's Discussion and Analysis or Plan
of Operation--Financial Condition--Deposits" included under Item 6 of Part II.
Trust, Personal Banking, Investment and Insurance Products. Since January 1997,
BNC--North Dakota's Financial Services division has been providing a wide array
of trust, personal banking, investment and insurance services for corporations
and individuals. These services range from fiduciary and personal trust services
to tax planning and preparation, payroll processing, financial planning,
retirement planning, employee stock option plans, employee benefit plans,
individual retirement accounts ("IRAs"), including custodial self-directed IRAs,
asset preservation, charitable giving and related services and insurance
services of all types. These services provide opportunities to solidify customer
relationships by meeting more of the banking and financial needs of the
Company's current customer base. They also present opportunities to establish
new customer relationships in the markets served by BNC. The January 1998
business combination with Lips and Lahr, Inc. ("Lips & Lahr") has significantly
increased the level and nature of insurance activities conducted by BNC. See
Note 2 to the Consolidated Financial Statements included under Item 7 of Part
II.
Investment Portfolio. The purpose of the Company's investment portfolio is to
provide a source of earnings and manage liquidity. Investments are centrally
managed in order to aid in compliance with federal laws and regulations, which
place certain restrictions on the amounts and types of investments BNC may hold.
While the investment portfolio serves many functions, the primary function is to
contribute to the overall profitability of the Company. The objective of
managing the portfolio is to purchase and own securities with good risk/reward
profiles in various interest-rate scenarios. The role of the investment officer
is not to "predict" interest rates, but rather to identify what might happen to
a security in question, and the portfolio as a whole, given possible changes in
interest rates. BNC maintains an investment grade portfolio oriented toward
mortgage-backed securities and collateralized mortgage obligations issued by
U.S. government agencies. BNC maintains a small amount of investment grade
obligations of state and political subdivisions. In addition, BNC holds U.S.
Treasury and U.S. government agency obligations as a means of securing public
funds and repurchase agreements. See "Management's Discussion and Analysis or
Plan of Operation--Financial Condition--Investment Securities" included under
Item 6 of Part II.
<PAGE>
Distribution Methods
BNC offers its banking and financial products and services through traditional
industry distribution methods including its network of bank, branch and other
offices. In addition, the Company offers 24-hour telephone banking services
through its voice response system, BNC Bankline. The Company also provides cash
management services to its commercial customers through its Xpress Cash
Management system. This system allows customers to process funds transfers,
wires, automated clearing house (ACH) transactions, stop payments and account
history inquiries using their office computers and modems. The Company has also
established an internet web site which is currently being used to provide
corporate financial information, current investment news and stock prices. The
Company anticipates that it will begin offering full internet banking during
2000 in order to provide online banking to customers at any time and from any
location.
Risk Management
The uncertainty of whether events, expected or otherwise, will have an adverse
impact on the Company's capital or earnings is an inevitable component of the
business of banking. To ensure that the risks inherent in BNC's business are
identified, measured, controlled and monitored, the Company has established a
risk management committee composed of senior management from across the
organization (the "Risk Management Committee"). The Risk Management Committee is
responsible for determining the desired risk profile of the Company, allocating
resources to the lines of business, approving major investment programs that are
consistent with strategic priorities and risk appetite and making capital
management decisions to appropriately fund the Company's portfolio of
investments. The Risk Management Committee addresses each of the major risk
categories identified by the banking regulators, if applicable, as well as any
additional identified risks inherent in the Company's business. Such risks
include, but are not limited to, credit, liquidity, interest rate, transaction,
compliance, strategic and reputation risk. In each identified risk area, the
Risk Management Committee measures the level of risk to the Company based on the
business it conducts and develops plans to bring risks within acceptable
tolerances. See "Management's Discussion and Analysis or Plan of
Operation--Financial Condition--Loan Portfolio and --Liquidity, Market and
Credit Risk" included under Item 6 of Part II for further discussion of credit,
liquidity and interest rate risk.
Competition
The deregulation of the banking industry, the increasing number of state laws
that permit multi-bank holding companies and the increasing availability of
nationwide interstate banking have heightened the level of competition in an
already intensely competitive market. The North Dakota and Minnesota market
areas are highly competitive banking environments. Competition is encountered in
seeking deposits, obtaining loan customers and in providing all of the other
banking and financial products and services offered by BNC. Principal
competitors include multi-regional financial institutions such as Norwest
Corporation, U.S. Bancorp and Community First Bankshares, Inc. as well as large
and small thrifts, independent banks, credit unions and many national and
regional brokerage houses. BNC also competes with other non-bank financial
institutions, including retail stores that maintain their own credit programs
and government agencies that make low cost or guaranteed loans available to
certain borrowers. Some of these competitors have substantially greater
resources and lending limits than BNC, and may offer certain services that BNC
does not provide. In addition, some of the non-bank financial institutions that
compete with BNC are not subject to the extensive federal regulations that
govern BNC. Management believes that many competitors have emphasized retail
banking and financial services, leaving the small and mid-size business market
underserved. This has allowed BNC to compete effectively by emphasizing customer
service, establishing long-term customer relationships and providing services
meeting the needs of such businesses and the individuals associated with them.
The banking and financial services industries are highly competitive, and the
future profitability of the Company will depend on its ability to continue to
compete successfully in its market areas.
<PAGE>
Supervision and Regulation
General. BNCCORP and the Banks are extensively regulated under federal and state
laws and regulations. These laws and regulations are primarily intended to
protect depositors and the federal deposit insurance funds, not investors in the
securities of BNCCORP. The following information briefly summarizes certain
material statutes and regulations affecting BNCCORP and the Banks and is
qualified in its entirety by reference to the particular statutory and
regulatory provisions. Any change in applicable laws, regulations or regulatory
policies may have a material effect on the business, operations and prospects of
BNCCORP and the Banks. The Company is unable to predict the nature or extent of
the effects that fiscal or monetary policies, economic controls or new federal
or state legislation may have on its business and earnings in the future.
Primary Regulators. BNCCORP is a bank holding company registered under the BHCA,
and is subject to regulation, supervision and examination by the Board of
Governors of the Federal Reserve System ("FRB"). BNCCORP is required to file
periodic reports with the FRB and such other reports as the FRB may require
pursuant to the BHCA. As a nonbank subsidiary, BNC Financial is also subject to
regulation by the FRB. The Banks are national banking associations and are
subject to supervision, regulation and examination by the Office of the
Comptroller of the Currency ("OCC"). Since the deposits of the Banks are insured
by the FDIC, the Banks are also subject to regulation and supervision by the
FDIC. Additionally, the Banks are members of the Federal Reserve System.
Acquisitions and Permissible Activities. As a registered bank holding company,
BNCCORP is restricted in its acquisitions, certain of which are subject to
approval by the FRB. A bank holding company may not acquire, or may be required
to give certain notice regarding acquisitions of, companies considered to engage
in activities other than those determined by the FRB to be closely related to
banking or managing banks.
Transactions with Affiliates. Under Section 23A of the Federal Reserve Act (the
"Act"), certain restrictions are placed on loans and other extensions of credit
by the Banks to BNCCORP and BNC Financial who are defined as "affiliates" of the
Banks under the Act. Section 23B of the Act places standards of fairness and
reasonableness on other of the Banks' transactions with their affiliates.
Anti-Tying Restrictions. Bank holding companies and their affiliates are
prohibited from tying the provision of certain services, such as extensions of
credit, to other services offered by a holding company or its affiliates.
Restrictions on Loans to One Borrower. Under federal law, permissible loans to
one borrower by banks are generally limited to 15 percent of the bank's
unimpaired capital, surplus, undivided profits and loan loss reserves. The Banks
seek participations to accommodate borrowers whose financing needs exceed their
lending limits.
Loans to Executive Officers, Directors and Principal Stockholders. Certain
limitations and reporting requirements are also placed on extensions of credit
by the Banks to principal stockholders of BNCCORP and to directors and certain
executive officers of the Banks (and BNCCORP and its nonbank subsidiaries
provided certain criteria are met) and to "related interests" of such principal
stockholders, directors and officers. In addition, any director or officer of
BNCCORP or the Banks or principal stockholder of BNCCORP may be limited in his
or her ability to obtain credit from financial institutions with which the Banks
maintain correspondent relationships.
Interstate Banking and Branching. Interstate banking and branching provisions of
federal and state laws may place certain limitations on expansion by bank
holding companies or banks.
Capital Adequacy. The capital adequacy of BNCCORP and the Banks is monitored by
the federal regulatory agencies using a combination of risk-based and leverage
ratios. Failure to meet the applicable capital guidelines could subject BNCCORP
or the Banks to supervisory or enforcement actions. In addition, BNCCORP could
<PAGE>
be required to guarantee a capital restoration plan of one or more of its Banks,
should such Banks become "undercapitalized" under capital guidelines. See Note
11 to the Consolidated Financial Statements included under Item 7 of Part II.
Dividend Restrictions. Federal rules also limit a bank's ability to pay
dividends to its parent bank holding company in excess of certain amounts or if
the payment would result in the bank being considered "undercapitalized" under
capital guidelines.
Community Reinvestment Act. Under the Community Reinvestment Act ("CRA"), the
Banks are encouraged to respond to the credit and other needs of the communities
they serve. Bank performance under the CRA is periodically tested and the
federal bank regulatory agencies consider CRA ratings in connection with
acquisitions involving the change in control of a financial institution.
Deposit Insurance. FDIC-insured depository institutions that are members of the
FDIC's Bank Insurance Fund and Savings Association Insurance Fund pay insurance
premiums at rates based on their assessment risk classification, which is
determined in part based on the Bank's capital ratios and in part on factors
that the FDIC deems relevant to determine the risk of loss to the insurance
funds. The Banks also pay additional assessments that are used to pay certain
Financing Corporation obligations issued between 1987 and 1989 to resolve failed
savings and loan associations.
Cross-Guarantee. The Financial Institutions, Reform, Recovery and Enforcement
Act of 1989 provides for cross-guarantees of the liabilities of insured
depository institutions pursuant to which any bank subsidiary of a bank holding
company may be required to reimburse the FDIC for any loss or anticipated loss
to the FDIC that arises from a default of any of such holding company's other
subsidiary banks or assistance provided to such an institution in danger of
default.
Support of Banks. Bank holding companies are also subject to the "source of
strength doctrine" which requires such holding companies to serve as a source of
"financial and managerial" strength for their subsidiary banks.
Conservator and Receivership Powers. Federal banking regulators have broad
authority to place depository institutions into conservatorship or receivership
to include, among other things, appointment of the FDIC as conservator or
receiver of an undercapitalized institution under certain circumstances. If
either of the Banks was placed into conservatorship or receivership, because of
the cross-guarantee provisions of the Federal Deposit Insurance Act, as amended,
BNCCORP, as the sole stockholder of the Bank, would likely lose its investment
in the Bank.
Consumer Laws and Regulations. In addition to the laws and regulations discussed
herein, the Banks are also subject to certain consumer laws and regulations that
are designed to protect customers in transactions with banks. These include, but
are not limited to, the Truth in Lending Act, the Truth in Savings Act, the
Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal
Credit Opportunity Act and the Fair Housing Act. These laws mandate certain
disclosure requirements and regulate the manner in which financial institutions
must deal with customers when taking deposits or making loans to such customers.
Changing Regulatory Structure. The FRB, OCC and FDIC have extensive authority to
police unsafe or unsound practices and violations of applicable laws and
regulations by depository institutions and their holding companies. The
agencies' authority has been expanded by federal legislation in recent years. In
addition, the North Dakota Department of Banking and Financial Institutions and
the Minnesota Department of Commerce possess significant authority to address
violations of their respective state's banking laws by banks operating in their
respective states by enforcement and other supervisory actions.
The laws and regulations affecting banks and bank holding companies have changed
significantly in recent years, and there is reason to expect that changes will
<PAGE>
continue in the future, although it is difficult to predict the outcome of these
changes. From time to time, various bills are introduced in the United States
Congress with respect to regulation of financial institutions. Certain of these
proposals, if adopted, could significantly change the regulation of banks and
the financial services industry. BNC cannot predict whether any of these
proposals will be adopted or, if adopted, how these proposals would affect BNC.
Monetary Policy. The monetary policy of the FRB has a significant effect on the
operating results of bank holding companies and their subsidiaries. The FRB uses
the various means at its disposal to influence overall growth and distribution
of bank loans, investments and deposits and interest rates charged on loans or
paid on deposits. FRB monetary policies have materially affected the operations
of commercial banks in the past and are expected to continue to do so in the
future. The nature of future monetary policies and the effect of such policies
on the business and earnings of BNCCORP and its subsidiaries cannot be
predicted.
Employees
At December 31, 1998, BNC had approximately 200 employees, including 183
full-time equivalent employees. None of BNC's employees are covered by a
collective bargaining agreement and management believes that its relationship
with its employees is good.
Item 2. Description of Property
The principal offices of BNCCORP and BNC--North Dakota are located in BNC's main
office building at 322 East Main Avenue, Bismarck, North Dakota. The building is
owned by BNC--North Dakota. BNC--North Dakota also owns branch offices at 219
South 3rd Street and 807 East Century Avenue and an additional office building
at 116 North 4th Street in Bismarck. It also owns its banking facilities in
Linton, Crosby, Ellendale, Kenmare and Stanley, North Dakota as well as a
temporary facility located on its permanent site in Fargo, North Dakota. The
Company plans to begin construction of a permanent facility for Fargo by April
1999.
BNC--North Dakota's facilities at 100 West Main Street (Mandan), 500 North 9th
Street (Bismarck), Watford City, Garrison and Dickinson, North Dakota and the
land at South 3rd Street (Bismarck) are leased. BNC-North Dakota is also leasing
a facility at 4656 Amber Valley Parkway in Fargo, pending completion of its
permanent facility to be located at 3137 32nd Avenue SW. The facilities occupied
by BNC--Minnesota at 333 South Seventh Street, Minneapolis, Minnesota and the
facilities housing BNC Financial at 4150 South 2nd Street, St. Cloud, Minnesota
are also leased.
All owned and leased properties are considered in good operating condition and,
except for the Fargo location, are believed adequate for the Company's present
and foreseeable future operations. BNC does not anticipate any difficulty in
leasing additional suitable space upon expiration of present lease terms. See
Note 16 to the Consolidated Financial Statements included under Item 7 of part
II for additional information concerning lease and other commitments and
construction of the Fargo facility.
Item 3. 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. See Note 16 to the Consolidated
Financial Statements included under Item 7 of Part II for a discussion of
current status of this case.
The Company is currently not a party to any additional material legal
proceedings. Periodically, and in the ordinary course of business, various
claims and lawsuits which are incidental to BNC's business may be brought
against or by BNC, such as claims to enforce liens, condemnation proceedings on
properties in which BNC holds security interests, claims involving the making
and servicing of real property loans and other issues incidental to the
Company's business. In the opinion of management, the resolution of these
matters will not have a material adverse effect on the Company's financial
position or results of operations.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the quarter ended
December 31, 1998.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
BNCCORP's common stock, $.01 par value ("Common Stock"), is traded on the Nasdaq
Stock Market under the symbol "BNCC".
The following table lists the high and low sales prices of the Common Stock for
the periods indicated as reported by the Nasdaq Stock Market. The quotes
represent "inter-dealer" prices without adjustment or mark-ups, mark-downs or
commissions and may not represent actual transactions.
For the Years Ended December 31,
------------------------------------
1998 1997
----------------- -----------------
Period High Low High Low
-------- ------- ------- -------
First Quarter...... $ 20.50 $ 16.25 $ 13.50 $ 11.75
Second Quarter..... $ 23.25 $ 16.88 $ 12.75 $ 10.50
Third Quarter...... $ 19.00 $ 12.88 $ 17.00 $ 11.00
Fourth Quarter..... $ 13.00 $ 9.00 $ 17.00 $ 14.50
On March 15, 1999, there were 108 record holders and approximately 1,300
beneficial owners of the Company's Common Stock.
BNCCORP's policy is to retain its earnings to support the growth of its
business. The board of directors of BNCCORP has never declared cash dividends on
its Common Stock and does not plan to do so in the foreseeable future. The
ability of BNCCORP to pay cash dividends largely depends on the amount of cash
dividends paid to it by the Banks. Capital distributions, including dividends,
by the Banks are subject to federal regulatory restrictions tied to each
institution's earnings and capital. See "Supervision and Regulation--Dividend
Restrictions" included under Item 1 of Part I.
During March 1999, the Company issued 3,296 shares of Common Stock to
shareholders of Lips & Lahr in a private offering believed to be exempt under
the Securities Act of 1933 and the regulations and rules thereunder. The
issuance was the second and final share issuance in conjunction with the
business combination with Lips & Lahr. See Note 2 to the Consolidated Financial
Statements included under Item 7.
Item 6. Management's Discussion and Analysis or Plan of Operation
Selected Financial Data
The selected consolidated financial data presented below under the captions
"Income Statement Data" and "Balance Sheet Data" as of and for the years ended
December 31, 1998, 1997 and 1996 are derived from the historical audited
consolidated financial statements of the Company. The Consolidated Balance
Sheets as of December 31, 1998 and 1997 and the related Consolidated Statements
of Income, Comprehensive Income, Stockholders' Equity and Cash Flows for each of
the three years in the period ended December 31, 1998 were audited by Arthur
Andersen LLP, independent public accountants. The financial data below should be
read in conjunction with and are qualified by the Consolidated Financial
Statements and the notes thereto included under Item 7.
<PAGE>
Selected Financial Data
For the Years Ended December 31,
---------------------------------
1998 1997 1996
----------- --------- --------
(dollars in thousands, except
share data)
Income Statement Data:
Total interest income........................ $ 30,467 $26,543 $20,962
Total interest expense....................... 16,749 13,915 11,108
--------- --------- --------
Net interest income.......................... 13,718 12,628 9,854
Provision for credit losses.................. 1,290 2,619 739
Noninterest income........................... 5,050 4,124 3,730
Noninterest expense.......................... 13,918 11,663 10,506
Provision for income taxes................... 1,293 1,044 1,169
--------- --------- --------
Net income................................... $ 2,267 $ 1,426 $ 1,170
========= ========= ========
Balance Sheet Data: (at end of period)
Total assets................................. $396,332 $361,003 $289,479
Investments and federal funds sold........... 96,601 94,624 66,391
Loans........................................ 270,876 235,200 202,997
Allowance for credit losses.................. 3,093 3,069 1,594
Total deposits............................... 284,499 262,824 239,770
Short-term borrowings........................ 49,290 46,503 11,437
Long-term borrowings......................... 30,646 21,812 10,615
Stockholders' equity......................... 25,255 23,148 21,595
Book value per common share outstanding...... $10.57 (1) $ 9.64 (2)$ 8.99(2)
Earnings Performance Data:
Return on average total assets............... .61% .45% .45%
Return on average stockholders' equity....... 9.30% 6.39% 5.47%
Net interest margin.......................... 3.98% 4.31% 4.09%
Net interest spread.......................... 3.51% 3.85% 3.63%
Basic earnings per common share.............. $0.95 $0.59 $0.49
Diluted earnings per common share............ $0.91 $0.59 $0.49
Balance Sheet and Other Key Ratios:
Nonperforming assets to total assets......... 1.14% .41% .15%
Nonperforming loans to total loans........... .88% .64% .14%
Net loan charge-offs to average loans........ (.50)% (.51)% (.11)%
Allowance for credit losses to total loans... 1.14% 1.30% .78%
Allowance for credit losses to nonperforming
loans..................................... 129% 205% 555%
Average stockholders' equity to average
total assets.............................. 6.58% 7.06% 8.20%
- --------------------
(1) Based on total common shares outstanding of 2,390,184.
(2) Based on total common shares outstanding of 2,402,126.
Overview
Net income for 1998 was $2.3 million, or basic and diluted earnings per share of
$0.95 and $0.91, respectively, compared with $1.4 million, or basic and diluted
earnings per share of $0.59, in 1997 and $1.2 million, or basic and diluted
earnings per share of $0.49, in 1996. The Company's performance for 1998 and
1997 was impacted by special credit loss provisions of $631,000 booked during
the third quarter of 1998 and $1.9 million booked during the second quarter of
1997. $454,000 of the special provision booked in 1998 and all of the special
$1.9 million provision booked in 1997 related to lending activities of a former
loan officer at BNC-North Dakota. Additionally, the Company incurred legal and
<PAGE>
other expenses relating to proceedings against the loan officer and resolution
of loans originated by the officer totaling $124,000 and $139,000 in 1998 and
1997, respectively.
The Company's unaudited proforma net income, earnings per share and returns on
average assets and average equity for the years ended December 31, 1998 and
1997, without the special credit loss provisions and other expenses related to
the former loan officer would have been approximately (in thousands, except per
share data):
1998 1997
---------------------------- --------------------------
As Reported Pro Forma As Reported Pro Forma
------------- ------------- ------------- -----------
Net income............... $ 2,267 $ 2,638 $ 1,426 $ 2,745
Basic earnings per share. $ 0.95 $ 1.10 $ 0.59 $ 1.14
Diluted earnings per share $ 0.91 $ 1.05 $ 0.59 $ 1.14
Return on average assets. 0.61% 0.71% 0.45% 0.87%
Return on average equity. 9.30% 10.28% 6.39% 11.94%
In addition to the special credit loss provision and other expenses discussed
above, the Company's 1998 results reflected the following highlights:
Net interest income increased 9 percent to $13.7 million due to a
combination of factors discussed below.
Noninterest income increased 22 percent to $5.1 million due to increases
in loan fees and revenues from trust, brokerage and other professional
services.
Noninterest expenses increased 19 percent to $13.9 million. The increase
was primarily attributable to the Company's growth initiatives.
Results of Operations
Net Interest Income. Net interest income, the difference between total interest
income earned on earning assets and total interest expense paid on
interest-bearing liabilities, is the Company's principal source of earnings. The
amount of net interest income is affected by changes in the volume and mix of
earning assets, the level of rates earned on those assets, the volume and mix of
interest-bearing liabilities and the level of rates paid on those liabilities.
The following table sets forth, for the periods indicated, certain information
relating to BNC's average balance sheets and reflects the yield on average
assets and costs of average liabilities. Such yields and costs are derived by
dividing income and expense by the average balance of assets and liabilities. No
tax equivalent adjustments were made, and all average balances have been derived
from monthly averages which are indicative of daily averages.
<PAGE>
<TABLE>
<CAPTION>
Analysis of Average Balances, Interest and Yields/Rates
For the Years ended December 31,
-------------------------------------------------------------------------------
1998 1997 1996
------------------------- -------------------------- --------------------------
Interest Average Interest Average Interest Average
Average earned yield Average earned Yield Average earned yield
Balance or or balance or or Balance or or
paid cost paid Cost paid cost
------- -------- -------- -------- -------- -------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(dollars in thousands)
Assets
Federal funds sold....... $ 5,336 $ 289 5.42% $ 5,650 $ 306 5.42% $ 2,714 $ 145 5.34%
Taxable investments...... 87,781 5,284 6.02% 64,862 4,163 6.42% 66,189 4,340 6.56%
Tax-exempt investments... 1,775 95 5.35% 1,112 71 6.38% 1,448 94 6.49%
Loans (1)................ 253,282 24,799 9.79% 223,486 22,003 9.85% 171,780 16,383 9.54%
Allowance for credit
losses................ (3,134) -- -- (2,298) -- -- (1,265) -- --
-------- -------- -------- -------- -------- ----------
Total interest-
earning assets (2).. 345,040 30,467 8.83% 292,812 26,543 9.06% 240,866 20,962 8.70%
Noninterest-earning assets:
Cash and due from
banks........... 6,911 6,208 5,436
Other.............. 18,383 17,040 14,319
-------- -------- --------
Total assets..$370,334 $316,060 $260,621
======== ======== ========
Liabilities and Stockholders'
Equity
Deposits:
NOW and money market
accounts.........$ 63,115 $ 2,128 3.37% $ 50,582 $ 1,580 3.12% $38,920 $ 1,004 2.58%
Savings............. 8,717 197 2.26% 8,904 206 2.31% 8,498 196 2.31%
Certificates of deposit:
Under $100,000...... 130,759 7,332 5.61% 127,092 7,110 5.59% 124,682 7,055 5.66%
$100,000 and over... 36,704 2,152 5.86% 41,581 2,386 5.74% 25,499 1,483 5.82%
-------- -------- -------- -------- -------- -------
Total interest-bearing
deposits.............. 239,295 11,809 4.93% 228,159 11,282 4.94% 197,599 9,738 4.93%
Short-term borrowings:
Securities and loans
sold under
agreements to
repurchase and
federal funds
purchased........ 6,745 348 5.16% 7,262 413 5.69% 7,340 409 5.57%
FHLB notes payable. 42,831 2,346 5.48% 15,468 881 5.70% 7,192 406 5.65%
Long-term borrowings..... 25,741 2,246 8.73% 16,062 1,339 8.34% 7,027 555 7.90%
------- ------- ------- ------- ------- -------
Total
interest-bearing
liabilities.... 314,612 16,749 5.32% 266,951 13,915 5.21% 219,158 11,108 5.07%
Noninterest-bearing demand
accounts................... 24,827 20,357 15,147
-------- -------- --------
Total deposits and
interest-bearing
liabilities............. 339,439 287,308 234,305
Other noninterest-bearing
liabilities................ 6,518 6,425 4,939
-------- -------- --------
Total liabilities....... 345,957 293,733 239,244
Stockholders' equity.......... 24,377 22,327 21,377
-------- -------- --------
Total liabilities and
stockholders'
equity.............. $370,334 $316,060 $260,621
======== ======== ========
Net interest income........... $13,718 $12,628 $9,854
======= ======= =======
Net interest spread........... 3.51% 3.85% 3.63%
====== ====== ======
Net interest margin........... 3.98% 4.31% 4.09%
====== ====== ======
Ratio of average
interest-earning assets
to average interest-
bearing liabilities......109.67% 109.69% 109.91%
======= ======= =======
</TABLE>
- --------------------
(1) Interest income does not include loan origination fees other than those
amortized and included as an adjustment to loan yield as required under
Statement of Financial Accounting Standards No. 91, "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans
and Initial Direct Costs of Leases." Average nonaccrual loans are included
in average loans outstanding.
(2) Yields do not include adjustments for tax-exempt interest because such
interest is not material.
The following table illustrates, for the periods indicated, the dollar amount of
changes in BNC's interest income and interest expense for the major components
of interest-earning assets and interest-bearing liabilities and distinguishes
<PAGE>
between the increase related to higher outstanding balances and the volatility
of interest rates. Changes in net interest income due to both volume and rate
have been included in the changes due to rate:
Analysis of Changes in Net Interest Income
For the Years Ended December 31,
---------------------------------------------
1998 Compared to 1997 1997 Compared to 1996
----------------------- ---------------------
Change Due to Change Due to
--------------- ---------------
Volume Rate Total Volume Rate Total
------- ------ ------ ------- ------- -------
(in thousands)
Interest-Earning Assets
Federal funds sold........... $ (17) $ -- $ (17) $ 157 $ 4 $ 161
Investments.................. 1,514 (369) 1,145 (109) (91) (200)
Loans........................ 2,934 (138) 2,796 4,931 689 5,620
------- ------ ------ ------- ------- -------
Total increase (decrease)
in interest income.... 4,431 (507) 3,924 4,979 602 5,581
------- ------ ------ ------- ------- -------
Interest-Bearing Liabilities
NOW and money market accounts 392 156 548 301 275 576
Savings...................... (4) (5) (9) 9 1 10
Certificates of Deposit:
Under $100,000............ 205 16 221 136 (81) 55
$100,000 and over......... (280) 46 (234) 935 (32) 903
Short-term borrowings:
Securities and loans sold
under agreements to
repurchase and federal
funds purchased........ (29) (35) (64) (4) 9 5
FHLB notes payable........ 1,558 (93) 1,465 467 7 474
Long-term borrowings......... 807 100 907 714 70 784
------- ------- ------ ------- ------- -------
Total increase in interest
expense................ 2,649 185 2,834 2,558 249 2,807
------- ------- ------ ------- ------- -------
Increase (decrease) in net
interest income...........$1,782 $ (692) $1,090 $2,421 $ 353 $ 2,774
======= ======= ====== ======= ======= =======
Year ended December 31, 1998 compared to year ended December 31, 1997. Net
interest income increased $1.1 million, or 8.6 percent, to $13.7 million as
compared to $12.6 million. Net interest spread and net interest margin declined
to 3.51 and 3.98 percent, respectively. The following condensed information
summarizes the major factors combining to create the changes to net interest
income, spread, and margin. Lettered explanations following the summary describe
causes of the changes in these major factors.
<PAGE>
Net Interest Income Analysis
For the Years
Ended December Change
31,
------------------ ----------------
1998 1997
------- ---------
(amounts in millions)
Total interest income increased.............$ 30.5 $ 26.5 $ 4.0 15%
Due to:
Increase in average earning assets......$ 345.0 $ 292.8 $ 52.2 18%
Driven by:
Increase in average loans (a)...........$ 253.3 $ 223.5 $ 29.8 13%
Increase in average taxable
investments (b)......................$ 87.8 $ 64.9 $ 22.9 35%
The increases in average earning assets
volume were offset by:
Decreased yield on earning assets....... 8.83% 9.06% -0.23% -3%
Driven by:
Decreased yield on loans (c)............ 9.79% 9.85% -0.06% -1%
Decreased yield on taxable
investments (d)...................... 6.02% 6.42% -0.40% -6%
Mix change in earning asset portfolio --
Average loans as a percent of total
interest- earning assets (e)....... 73% 76% -3.0% -4%
Total interest expense increased............$ 16.7 $ 13.9 $ 2.8 20%
Due to:
Increase in average interest-bearing
liabilities..........................$ 314.6 $ 267.0 $ 47.6 18%
Increased cost on interest-bearing
liabilities.......................... 5.32% 5.21% 0.11% 2%
Driven by:
Increase in average interest-bearing
deposits (f).........................$ 239.3 $ 228.2 $ 11.1 5%
Increase in average borrowings (g)......$ 75.3 $ 38.8 $ 36.5 94%
Mix change in interest-bearing liability
portfolio --
Average borrowings as a percent of
total interest-bearing liabilities
(h)................................ 24% 15% 9% 60%
These increases with somewhat offset by:
Decrease in cost of borrowings (i)...... 6.56% 6.79% -0.23% -3%
- --------------------
(a) Loan growth primarily attributable to increases in loans originated at
BNC-Minnesota and BNC Financial.
(b) Increase in average taxable investments is primarily attributable to the
purchase of $18.8 million of fixed rate mortgage-backed securities late in 1997
as part of an interest rate risk management strategy.
(c) 75 basis point decline in prime rate late in 1998. Decrease in loan pricing
spread to prime rate due to competitive pressures in all markets.
(d) Primarily attributable to the significant decrease in the Treasury yield
curve that 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.
(e) Average loans increased by 13 percent. However, average taxable investments
increased by $22.9 million, or 35 percent. Late in 1997, the Company purchased
$18.8 million of fixed rate mortgage-backed securities funded with an advance
from the Federal Home Loan Bank ("FHLB") as part of an interest rate risk
management strategy. Overall, the larger percentage increase of taxable
investments was greater than the percentage increase in loans. Therefore,
average loans as a percent of total interest-earning assets decreased.
(f) Deposit growth from both BNC-North Dakota and BNC-Minnesota, primarily money
market deposit accounts.
<PAGE>
(g) The Company relied more heavily on borrowings to fund growth, including
increased FHLB borrowings. The borrowing rates charged by the FHLB were often
cost effective compared to offering top of market rates for time certificates of
deposit. Increase also reflects issuance of the Company's 8 5/8 percent
subordinated notes (the "Subordinated Notes") in May 1997 (outstanding 7 months
during 1997 versus 12 months during 1998). See Note 8 to the Consolidated
Financial Statements included under Item 7 for a summary of all borrowings
outstanding at December 31, 1998.
(h) Increased reliance on borrowings caused a higher percentage of the
interest-bearing liabilities portfolio to be comprised of borrowings with
generally higher costs than interest-bearing deposits. However, the borrowing
rates charged by the FHLB were often cost effective compared to offering top of
market rates for time certificates of deposits, although these borrowing rates
are higher than costs of interest-bearing checking and money market accounts.
(i) Lower overall average cost on federal funds purchased and FHLB borrowings
due to 75 basis point decline in federal funds rate late in 1998 along with a
similar decrease in rates at the FHLB.
Although costs on interest-bearing liabilities increased, the Company's cost of
total deposits, with noninterest-bearing deposits included, decreased 7 basis
points to 4.47 percent due to an increase in the ratio of noninterest-bearing
deposits to total deposits to 9.40 percent from 8.19 percent. See "--Financial
Condition--Deposits."
As indicated above, the Company's net interest margin for the year ended
December 31, 1998 was negatively impacted by a number of factors. These factors
included, but were not limited to, competitive pricing pressures, the decrease
in the Treasury yield curve during the second half of 1998 and the 75 basis
point decrease in prime rate that occurred primarily during the fourth quarter
of 1998. While the prime rate reductions are generally reflected immediately in
the yield on adjustable rate loans tied to prime, the full extent of these
reductions often cannot be offset immediately with comparable reductions on the
liability side of the Company's balance sheet primarily because most
certificates of deposit, the largest component of the Company's interest-bearing
liability portfolio, are fixed rate accounts. These accounts must be repriced as
they mature and / or as new volume is generated. Additionally, the ability to
decrease rates offered on interest-bearing checking and money market accounts is
limited as the rates paid on these liabilities may already be at low levels.
Therefore, absent further FRB actions with respect to interest rates, management
anticipates that net interest margins for the first half of 1999 will continue
to reflect the negative impact of the recent prime rate decreases on the
Company's yield on earning assets.
Management implemented a deposit restructuring strategy during 1998. Under this
program, the Company has been successful in reducing its overall cost of
deposits. This program, coupled with additional deposit-related initiatives,
will continue into 1999. Although it is difficult to predict, with any degree of
certainty, prospects for net interest income in future periods, management
anticipates that continued successful implementation of its deposit-related
strategies should result in further reductions in total cost of deposits over
the course of 1999 and improved net interest margins in the second half of 1999.
Factors beyond the control of management, however, including, but not limited
to, continued intense competition for bank customers and the monetary policies
of the FRB, will continue to impact, and could materially affect the Company's
net interest margin and net interest income in coming months. See "Supervision
and Regulation -Monetary Policy" included under Item I of Part I. See "
- -Financial Condition - Liquidity, Market and Credit Risk" for information
relating to the impact of fluctuating interest rates on the Company net interest
income. BNC will continue to focus on expansion of its product and service
offerings in order to supplement earnings from core banking activities. See
"--Noninterest Income."
Year ended December 31, 1997 compared to year ended December 31, 1996. Net
interest income increased $2.7 million, or 27 percent, to $12.6 million as
compared to $9.9 million. Net interest spread and net interest margin improved
22 basis points to 3.85 and 4.31 percent, respectively. The following condensed
information summarizes the major factors combining to create this improvement in
net interest income, spread and margin. Lettered explanations following the
summary describe causes of the changes in these major factors:
<PAGE>
Net Interest Income Analysis
For the Years
Ended December 31, Change
------------------ -----------------
1997 1996
-------- --------
(amounts in millions)
Total interest income increased............$ 26.5 $ 21.0 $ 5.5 26%
Due to:
Increase in average earning assets.....$ 292.8 $ 240.9 $ 51.9 22%
Improved yield on earning assets....... 9.06% 8.70% 0.36% 4%
Driven by:
Increase in average loans (a)..........$ 223.5 $ 171.8 $ 51.7 30%
Improved yield on loans (b)............ 9.85% 9.54% 0.31% 3%
Mix change in earning asset portfolio--
Average loans as a percent of total
interest-earning assets (c)....... 76% 71% 5% 7%
Total interest expense increased...........$ 13.9 $ 11.1 $ 2.8 25%
Due to:
Increase in average interest-bearing
liabilities.........................$ 267.0 $ 219.2 $ 47.8 22%
Increased cost of interest-bearing
liabilities......................... 5.21% 5.07% 0.14% 3%
Driven by:
Increase in average interest-bearing
deposits (d)........................$ 228.2 $ 197.6 $ 30.6 15%
Increase in cost of interest-bearing
deposits (e)........................ 4.94% 4.93% 0.02% 0%
Increase in average borrowings (f).....$ 38.8 $ 21.6 $ 17.2 80%
Increase in cost of borrowings (g)..... 6.79% 6.35% 0.44% 7%
Mix change in interest-bearing liability
portfolio --
Average borrowings as a percent of
total interest-bearing liabilities
(h)............................... 15% 10% 5% 50%
- --------------------
(a) Loan growth primarily attributable to loans made to customers in the
Minnesota market area.
(b) 25 basis point increase in prime rate in early 1997 and increased volume in
asset-based loans at BNC Financial.
(c) Loan growth caused a larger percentage of the earning asset portfolio to be
comprised of loans which have higher yields than investments.
(d) Deposit growth from both BNC--North Dakota and BNC--Minnesota, primarily
money market deposit accounts.
(e) Decreased costs on time certificates of deposit (caused by lower renewal
rates) were offset by increased costs on interest-bearing checking and money
market deposit accounts (caused by increased volume in higher tier/higher rate,
primarily commercial, money market deposit accounts).
(f) The Company relied more heavily on borrowings to fund growth, including
increased FHLB borrowings. Increase also reflects issuance of the Subordinated
Notes in May 1997. See Note 9 to the Consolidated Financial Statements included
under Item 7.
(g) Higher overall average costs on federal funds purchased and FHLB borrowings
coupled with higher costs on long-term borrowings due to increase in prime rate
and the issuance of the Subordinated Notes.
(h) Increased reliance on borrowings caused higher percentage of
interest-bearing liabilities portfolio to be comprised of borrowings with higher
average costs than interest-bearing deposits.
Although costs on interest-bearing liabilities increased, the Company's cost of
total deposits, with noninterest-bearing deposits included, decreased 4 basis
points to 4.54 percent due to an increase in the ratio of noninterest-bearing
deposits to total deposits.
See "--Financial Condition--Deposits."
<PAGE>
Provision for Credit Losses. Management determines a provision for credit losses
which it considers sufficient to maintain an adequate allowance for credit
losses. In evaluating the adequacy of the allowance for credit losses,
consideration is given to historical charge-off experience, growth of the loan
portfolio, changes in the composition of the loan portfolio, general economic
conditions, information regarding specific borrower status including financial
condition and related loan collateral values and other factors and estimates
which are subject to change over periods of time. Estimating the risk and
potential amount of loss on loans is subjective. Ultimate losses may vary from
current estimated losses. Management reviews its estimates periodically and, as
adjustments become necessary, such adjustments are reported in income through
the provision for credit losses in the appropriate period.
The provision for credit losses for the year ended December 31, 1998 was $1.3
million as compared to $2.6 million in 1997 and $739,000 in 1996. Special loan
loss provisions of $631,000 and $1.9 million were booked by the Company during
1998 and 1997, respectively. See "-Overview" for a discussion of the facts
surrounding the special provisions and their impact on the Company's results of
operations for the years ended December 31, 1998 and 1997. Management believes
the allowance for credit losses is adequate to cover anticipated losses in the
loan portfolio at December 31, 1998. See "--Financial Condition--Loan
Portfolio--Allowance for Credit Losses."
Noninterest Income. The following table presents, for the periods indicated, the
major categories of the Company's noninterest income as well as the amount and
percent of change between each of the periods presented. Related information and
material changes are discussed in lettered explanations following the table:
<PAGE>
<TABLE>
<CAPTION>
Noninterest Income
Increase (Decrease)
-------------------------------------
For the Years Ended 1998 - 1997 1997 -1996
December 31,
--------------------------- ---------------- -----------------
1998 1997 1996 $ % $ %
-------- -------- ------- ------ ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
(in thousands)
Insurance Commissions $ 1,769 $ 1,694 $ 1,606 $ 75 4% $ 88 5%
Loan fees ........... 1,551 1,040 1,296 511 49% (a) (256) (20)%(a)
Service charges...... 566 471 418 95 20% 53 13%
Rental income........ 43 56 34 (13) (23)% 22 65%
Net gain (loss) on
sales of securities
(b)............... 130 8 19 122 1,525% (11) (58)%
Other noninterest
income............ 991 855 357 136 16% (c) 498 139%(d)
-------- -------- ------- ------ --------
Total noninterest
income............ $ 5,050 $ 4,124 $ 3,730 926 22% $ 394 11%
======== ======== ======= ====== ========
</TABLE>
- --------------------
(a) The increase in loan fees for 1998 is largely attributable to loans
generated and sold during 1998 by BNC-Minnesota and BNC Financial. The decrease
for 1997 is largely attributable to a significant loan fee collected by
BNC-North Dakota upon origination of a large commercial loan during 1996.
Management cannot predict with any degree of certainty the amount of loans which
will be originated and related loan fees which will be recognized in future
periods.
(b) For the year ended December 31, 1998, proceeds from sales of securities
available for sale were $58.9 million with resultant gross gains and losses of
$164,000 and $34,000, respectively. In 1997, the proceeds from sales of
securities available for sale were $27.2 million with resultant gross gains and
losses of $40,000 and $32,000, respectively. In 1996, the proceeds from sales of
securities available for sale were $48.7 million with resultant gross gains and
losses of $32,000 and $13,000, respectively.
(c) The increase in other noninterest income in 1998 was attributable to a
combination of factors. The most significant were as follows:
(i) BNC-North Dakota's Financial Services division recorded approximately
$200,000 in increased revenue from trust, brokerage and other
professional services.
(ii) $73,000 was attributable to increased income from automated teller
machines ("ATMs").
(iii) Other immaterial decreases in several line items in this category.
(d) A number of factors combined to cause this increase in 1997. The most
significant were as follows:
(i) Approximately $242,000 was attributable to the activities of
BNC--North Dakota's Financial Services division which recorded
$370,000 from commission income on the sale of nondeposit investments,
trust fee income, tax preparation and other activities in 1997 as
compared to $128,000 in commission income on the sale of nondeposit
investments in 1996.
(ii) $79,000 was attributable to increased income from ATMs. The Company
was operating more ATMs during 1997 than in previous years.
(iii) $72,000 represents a portion of the payments received from the
Company's fidelity bond carrier. See Note 16 to the
Consolidated Financial Statements included under Item 7.
(iv) $49,000 was attributable to a gain on the sale of farmland held
as other real estate owned.
Items (iii) and (iv) could be considered to be nonrecurring in nature.
Noninterest Expense. The following table presents, for the periods indicated,
the major categories of the Company's noninterest expense as well as the amount
and percent of change between each of the periods presented. Related information
and material changes are discussed in lettered explanations below the table:
<PAGE>
<TABLE>
<CAPTION>
Noninterest Expense
Increase (Decrease)
--------------------------------------
For the Years Ended 1998 - 1997 1997 - 1996
December 31,
--------------------------- ------------------- ----------------
1998 1997 1996 $ % $ %
-------- ------- ------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
(in thousands)
Salaries and employee
benefits............ $ 7,770 $ 6,473 $ 5,448 $ 1,297 20% (a) $ 1,025 19%(a)
Depreciation and
amortization........ 1,525 1,327 1,106 198 15% (b) 221 20%(b)
Occupancy.............. 1,046 997 785 49 5% 212 27%(c)
Office supplies,
telephone and
postage............. 769 661 582 108 16% (d) 79 14%(d)
Professional services.. 785 564 401 221 39% (e) 163 41%(f)
Marketing and promotion 455 365 362 90 25% 3 1%
FDIC and other
assessments......... 184 171 239 13 8% (68) (28)%
Other.................. 1,384 1,105 1,583 279 25% (g) (478) (30)%(g)
-------- ------- ------- -------- -------
Total noninterest expense $ 13,918 $11,663 $10,506 $ 2,255 19% $ 1,157 11%
======== ======= ======= ======== =======
Efficiency ratio (h)... 74.16% 69.62% 77.34% 4.54% (7.72%)
</TABLE>
- --------------------
(a) Increases in salaries and employee benefits expense over the three year
period are attributable primarily to growth in the number of employees. The
Company's average full-time equivalent employees was 173 for 1998 as compared to
149 and 130 for 1997 and 1996, respectively. Additional increases in this
category are expected for 1999 due to the staffing of the Company's recently
opened Fargo branch as well as additional staffing in BNC-North Dakota's
insurance and brokerage divisions. As of March 15, 1999, the Company had 193
full-time equivalent employees.
(b) Depreciation and amortization expenses were as follows for the years ended
December 31:
1998 1997 1996
------- -------- --------
(in thousands)
Depreciation and amortization on
premises, leasehold improvements
and equipment ..................... $ 901 $ 718 $ 542
Amortization on deferred charges and
intangible assets..................... 624 609 564
------- -------- --------
Total........................... $1,525 $ 1,327 $ 1,106
======= ======== ========
Increases over the three year period for both depreciation and amortization
are attributable to growth and acquisitions. Total premises, leasehold
improvements and equipment being depreciated/amortized were $12.4, $11.4 and
$8.9 million as of December 31, 1998, 1997 and 1996, respectively. Total
deferred charges and intangible assets being amortized were $6.4, $6.3, and
$6.2 million, respectively, as of the same dates. See Note 2 to the
Consolidated Financial Statements included under Item 7 for a summary of
mergers and acquisitions consummated during the three year period ended
December 31, 1998.
<PAGE>
(c) The increase in occupancy expense for 1997 was also growth-related. During
1997, the Company operated 12 facilities for the full year (and one additional
for a portion of the year) as compared to ten for the full year (and two
additional for a portion of the year) in 1996. As of March 1999, the Company is
operating 17 facilities.
(d) Increases in office supplies, telephone and postage are growth-related and
can be expected to increase in future periods due to the recent opening of the
Fargo branch and expansion in Company divisions providing nontraditional
financial services.
(e) The increase in expenses for professional services for 1998 were primarily
attributable to increases in payments to outside professionals and consultants
and were related to several different Company initiatives including mergers and
acquisitions and recruiting. Late in 1998, the Company also engaged an investor
relations consulting firm. The Company also experienced small increases in other
professional expenses such as legal and software support.
(f) The increase in expenses related to professional services for 1997 was
mainly attributable to increased legal fees and repossession and collection
expenses incurred by BNC--North Dakota. Approximately $139,000 in legal fees and
repossession and collection expenses incurred during 1997 were directly related
to proceedings against a former loan officer and resolution of related loans.
(Legal and other expenses associated with the former officer totaled
approximately $124,000 in 1998). See "-Overview" and Note 16 to the Consolidated
Financial Statements included under Item 7 for a discussion of the impact of
these expenses on the Company and the current status of legal proceedings
involving the former officer. During 1997, the Company also incurred smaller
additional increases in other items in this category including software support
fees and other consulting fees.
(g) This category of expenses includes directors fees, blanket bond and other
insurance expense, education and development expense, correspondent charges,
travel, dues, conventions and other miscellaneous expenses. The increase in 1998
was primarily growth-related and involved many of the categories in this
classification, however, none of the increases in any individual item was of a
material nature. The decrease for 1997 is the result of the write-off, in 1996,
of certain covenants not to compete deemed to be impaired under Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of," which the
Company adopted during 1996 offset by growth-related immaterial increases in a
number of other expense categories in this classification.
(h) Noninterest expense divided by an amount equal to net interest income plus
noninterest income.
Financial Condition
Investment Securities. BNC's investment policy is designed to enhance net income
and return on equity through prudent management of risk, ensure liquidity for
cash-flow requirements, help manage interest rate risk, ensure collateral is
available for public deposits, advances and repurchase agreements and manage
asset diversification. In managing the portfolio and the composition of the
entire balance sheet, the Company seeks a balance among earnings, credit and
liquidity considerations, with a goal of maximizing the longer-term overall
profitability of the Company.
Investments are centrally managed in order to maximize compliance (federal laws
and regulations place certain restrictions on the amounts and types of
investments BNC may hold) and effectiveness of overall investing activities. The
primary goal of BNC's investment policy is to contribute to the overall
profitability of the Company. The objective of the investment officer is to
purchase and own securities and combinations of securities with good risk/reward
characteristics. "Good" risk/reward securities are those identified through
thorough analysis of the cash flows and potential cash flows as well as a market
value and potential market value of the security in question given various
interest rate scenarios. Investment strategies are developed in light of
constant view of the company's overall asset/liability position. As is relates
to investment strategies, the focus of the Asset/Liability management committee
is to determine the impact of interest-rate changes on both future income and
market value of securities in the portfolio. See "--Liquidity, Market and Credit
Risk--Interest Rate Risk Management."
The following table presents the composition of the investment portfolio by
major category as of the dates indicated:
<PAGE>
<TABLE>
<CAPTION>
Investment Portfolio Composition
December 31,
---------------------------------------------------------------------
1998 1997 1996
--------------------- --------------------- ----------------------
Estimated Estimated Estimated
Amortized fair Amortized fair Amortized fair
cost market cost market cost market
value value value
--------- ---------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
(in thousands)
Available for Sale:
U.S. Treasury securities.. $ 5,098 $ 5,109 $ 12,489 $ 12,532 $ 13,814 $ 13,856
U.S. government agency
mortgage-backed
securities.............. 51,194 51,444 32,136 32,236 9,555 9,559
U.S. government agencies
securities.............. 13,096 12,998 20,039 20,006 3,633 3,642
Collateralized mortgage
obligations............. 19,602 19,607 21,291 21,325 23,898 23,855
State and municipal bonds.. 3,355 3,420 1,166 1,289 759 800
Equity securities.......... 4,024 4,023 7,236 7,236 7,773 7,779
--------- ---------- --------- --------- --------- -----------
Total investments.......... $ 96,369 $ 96,601 $ 94,357 $ 94,624 $ 59,432 $ 59,491
========= ========== ========= ========= ========= ===========
</TABLE>
The following table presents maturities for all securities available for sale
(other than equity securities) and yields for all securities in the Company's
investment portfolio at December 31, 1998:
<TABLE>
<CAPTION>
Investment Portfolio -- Maturity and Yields
Maturing
After 1 but After 5 but
Within 1 within 5 within 10 After 10
year years years years Total
------------------ ----------------- ----------------- ---------------- -----------------
Amount Yield (1) Amount Yield(1) Amount Yield(1) Amount Yield(1) Amount Yield(1)
------- ---------- ------- --------- ------- --------- ------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Available for Sale:(2) (dollars in thousands)
U.S. Treasury
securities.......$5,098 5.88% -- -- -- -- -- -- $5,098 5.88%
U.S. government
agency mortgage-
backed
securities (3)... -- -- $7,854 5.97% $10,445 6.03% $32,895 6.14% 51,194 6.09%
U.S. government
agencies
securities........11,965 4.74% 250 5.74% 881 4.40% -- -- 13,096 4.74%
Collateralized
mortgage
obligations (3)... 146 5.96% 2,061 5.67% 3,850 6.04% 13,545 5.67% 19,602 5.75%
State and municipal
bonds............. 20 7.20% 220 6.86% -- -- 3,115 4.86% 3,355 5.01%
------- ---------- ------- --------- ------- --------- ------- -------- ------- ---------
Total book value
of investment
securities.....$17,229 5.09% $10,385 5.92% $15,176 5.94% $49,555 5.93 $92,345 5.78%
======= ========== ======= ========= ======= ========= ======= ======== ------ --------
Unrealized holding
gain on
securities
available for sale.. 232
Equity securities... $ 4,024 6.52%
------ --------
Total investment in
securities
available for sale $96,601 5.80%(4)
====== =========
</TABLE>
- --------------------
(1)Yields do not include adjustments for tax-exempt interest because such
interest is not material; yields also do not reflect changes in fair value
that are reflected as a separate component of stockholders' equity (except as
noted in (4) below).
(2) Based on amortized cost/book value.
(3)Maturities of mortgage-backed securities and collateralized mortgage
obligations are based on contractual maturities.
(4)Yield reflects changes in fair value that are reflected as a separate
component of stockholders' equity.
As of December 31, 1998, BNC had $96.6 million of securities in the investment
portfolio as compared to $94.6 and $59.5 million at December 31, 1997 and 1996,
respectively. During 1998, the Company increased its holdings in agency
mortgage-backed securities and municipal bonds by $19.1 and $2.2 million,
respectively. During the year, the Company also reduced the investment
<PAGE>
portfolio's allocation to U.S. Treasury securities and government agency
securities by $7.4 and $6.9 million, respectively. The shift between sectors was
the result of the significant decrease in the Treasury yield curve that occurred
during the second half of 1998. As yield spreads on mortgage-backed securities
and municipal bonds widened relative to the Treasury-curve, cash flows from
maturing Treasury and agency securities were reinvested in these two sectors to
maintain the yield on maturing cash flow. The portfolio increased in 1997 from
1996 as the Company increased its holdings of U.S. government agency securities
by $16.4 million. In addition, late in 1997, as part of its interest rate risk
management strategy, the Company also purchased $18.8 million of long-term
Government National Mortgage Association securities. See "--Liquidity, Market
and Credit Risk--Interest Rate Risk Management." Investments accounted for 24,
26 and 21 percent of total assets as of December 31, 1998, 1997 and 1996,
respectively.
At December 31, 1998, BNC held no securities of any single issuer, other than
the U.S. Treasury and U.S. government agencies securities, that exceeded ten
percent of stockholders' equity. A significant portion of the Company's
investment securities portfolio (approximately 87 percent at December 31, 1998)
is pledged as collateral for public deposits and borrowings, including
borrowings with the FHLB.
Loan Portfolio. The Company's primary source of income is interest earned on
loans. The Company's loan portfolio has grown significantly during the past
three years as a result of BNC's strategy of increasing the amount of high
quality loans outstanding to increase net interest income. Net loans increased
$35.7 million, or 15 percent, to $267.8 million at December 31, 1998 as compared
to $232.1 million at December 31, 1997. In 1997, net loans increased $30.7
million, or 15 percent, as compared to December 31, 1996. The following table
presents the composition of the Company's loan portfolio as of the dates
indicated:
<TABLE>
<CAPTION>
Loan Portfolio Composition
December 31,
----------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------- -------------- ------------- ---------------- ---------------
Amount % Amount % Amount % Amount % Amount %
------- ------ ------ ------- ------ ------ -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(dollars in thousands)
Commercial and
industrial (1)...$131,165 49.0 $111,429 47.0 $ 94,701 47.0 $ 41,639 34.8 $ 39,218 35.9
Real estate mortgage 77,254 28.8 56,875 24.5 47,451 23.6 36,606 30.6 32,805 30.0
Real estate
construction........ 20,831 7.8 18,215 7.8 8,806 4.4 5,884 4.9 3,992 3.6
Agricultural........ 19,777 7.4 21,064 9.1 20,673 10.3 18,046 15.1 22,144 20.2
Consumer............ 14,761 5.5 18,726 8.0 18,734 9.3 9,960 8.3 9,331 8.5
Lease financing..... 7,422 2.8 9,211 4.0 12,970 6.4 8,660 7.2 3,076 2.8
------- ------ -------- ------- ------- ------ ------- ------ ------- -------
Total face amount
of loans......... 271,210 101.3 235,520 101.4 203,335 101.0 120,795 100.9 110,566 101.0
Unearned income..... (334) (0.1) (320) (0.1) (338) (0.2) (112) (0.1) (95) (0.1)
------- ------ -------- ------- ------- ----- -------- ------ ------- -------
Loans............... 270,876 101.2 235,200 101.3 202,997 100.8 120,683 100.8 110,471 100.9
Less allowance for
credit losses.... (3,093) (1.2) (3,069) (1.3) (1,594) (0.8) (1,048) (0.8) (1,021) (0.9)
------- ------ -------- ------- ------- ----- -------- ------- ------- -------
Net loans...........$267,783 100.0 $232,131 100.0 $201,403 100.0 $119,635 100.0 $109,450 100.0
======= ====== ======== ======= ======= ===== ======== ======= ======= =======
</TABLE>
- --------------------
(1)The commercial and industrial loan category includes BNC Financial's
asset-based loans totaling $23.3, $15.1 and $5.6 million at December 31,
1998, 1997 and 1996, respectively.
The following table presents, for the periods indicated, the amount and percent
of change in each category of loans in the Company's loan portfolio. Material
changes are discussed in lettered explanations below the table:
<PAGE>
Change in Loan Portfolio Composition
Increase (Decrease)
------------------------------------------------
1998 - 1997 1997 - 1996
--------------------- ----------------------
$ % $ %
----------- -------- ---------- ---------
(dollars in thousands)
Commercial and industrial.. $ 19,736 18% (a) $ 16,728 18% (a)
Real estate--mortgage...... 20,379 36% (b) 9,424 20% (b)
Real estate--construction.. 2,616 14% 9,409 107% (c)
Agricultural............... (1,287) (6)% 391 2%
Consumer................... (3,965) (21)% (8) 0%
Lease financing............ (1,789) (19)% (3,759) (29)%
----------- ----------
Total face amount of loans. 35,690 15% 32,185 16%
Unearned income............ (14) (4)% 18 5%
----------- ----------
Loans...................... 35,676 15% 32,203 16%
Allowance for credit losses (24) 1% (1,475) (93)%
----------- ----------
Net Loans.................. $ 35,652 15% $ 30,728 15%
=========== ==========
- --------------------
(a) Commercial and industrial - Increases are primarily attributable to
commercial loan volume generated out of the Minnesota market area during 1998
and 1997.
(b) Real estate--mortgage - Increases are primarily attributable to loan volume
generated out of the Minnesota market during 1998 and the North Dakota market
during 1997.
(c) Real estate--construction - Increase is attributable primarily to
construction loan volume generated out of the Minnesota market area during 1997.
While prospects for continued loan growth appear favorable, particularly in the
Minnesota market, management cannot predict with any degree of certainty the
Company's future loan growth potential.
Credit Policy and Approval Procedures. BNC follows a uniform credit policy that
sets forth underwriting and loan administration criteria. The loan policy,
including lending guidelines for the various types of credit offered by the
Company, is established by the Board of Directors (the "Board") based upon the
recommendations of senior lending management, the Chief Credit Officer and such
credit committees as are established at either the bank or corporate level. The
loan policy is reviewed and reaffirmed by the Board at least annually.
Underwriting criteria are based upon the risks associated with each type of
credit offered, the related borrowers and types of collateral.
The Company delegates lending decision authority among various lending officers
and the credit committees based on the size of the customer's credit
relationship with BNC. All loans and commitments approved in excess of $300,000
are presented to the Board on a monthly basis for summary review. Any exceptions
to loan policies and guidelines are subject to special approval by bank
executive lenders or the credit committees.
Loan Participations. Pursuant to BNC's lending policy, loans may not exceed 85
percent of bank legal lending limits (except to the extent collateralized by
U.S. Treasury securities or bank deposits and, accordingly, excluded from the
bank's legal lending limit). To accommodate customers whose financing needs
exceed lending limits and internal loan restrictions relating primarily to
industry concentration, the Banks sell loan participations to outside
participants without recourse. Loan participations sold on a nonrecourse basis
to outside financial institutions were as follows as of the dates indicated:
<PAGE>
Loan Participations Sold
December 31,
-------------------------------------------------------
1998 1997 1996 1995 1994
---------- --------- --------- --------- ---------
(in thousands)
BNC--North Dakota......$ 32,300 $ 55,500 $ 54,100 $ 35,000 $ 23,400
BNC--Minnesota......... 24,400 10,300 3,200 -- --
---------- --------- --------- --------- ---------
Total............... $ 56,700 $ 65,800 $ 57,300 $ 35,000 $ 23,400
========== ========= ========= ========= =========
The Banks generally retain the right to service the loans as well as the right
to receive a portion of the interest income on the loans. The vast majority of
the loans sold by the Banks are commercial lines of credit for which balances
and related payment streams cannot be reasonably estimated in order to determine
the fair value of the servicing rights and/or future interest income retained by
the Banks. See Note 1 to the Consolidated Financial Statements included under
Item 7. Management cannot reliably predict BNC's ability to continue to generate
or sell loan participations or the terms of any such sales.
Concentrations of Credit. The Company's credit policies emphasize
diversification of risk among industries, geographic areas and borrowers. For
purposes of the analysis of concentrations of credit as of December 31, 1998,
total outstanding loans as well as all outstanding loan commitments were
included. As of December 31, 1998, the Company identified one concentration of
loans exceeding ten percent of total loans and loan commitments outstanding.
This concentration was in the construction industry and represented 10.6 percent
of total loans and loan commitments outstanding. Loans and commitments in this
category were extended to 95 customers who are located in Minnesota, Iowa and
North and South Dakota and who can be generally categorized as indicated below:
Percent of
total
Number of outstanding
Customers loans and
loan
commitments
------------- -------------
General building contractors....... 29 3.7%
Heavy construction, excluding
building........................ 28 4.8%
Special trade contractors.......... 38 2.1%
------------- -------------
Total......................... 95 10.6%
============= =============
The contractors are involved in various aspects of the construction industry
including highway and street construction, water/sewer drilling, plumbing,
heating and air conditioning, commercial painting, electrical, concrete and
excavating and foundation contractors. Loans in this category are secured, in
many cases, by construction equipment.
The Company continually monitors industry and other credit concentrations as
part of its credit risk management strategies. In cases where significant
concentrations exist without sufficient diversification and other mitigating
factors, BNC generally sells loans without recourse to outside financial
institutions.
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. BNC's
agricultural loan portfolio totals approximately $19.8 million, or 7 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. The majority 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,
<PAGE>
Burleigh, Hettinger, and Sargent counties. The Company has been monitoring its
agricultural loans closely. As of December 31, 1998, nonperforming agricultural
loans totaled $336,000.
Loan Maturities. The following table sets forth the remaining maturities of
loans in each major category of BNC's portfolio as of December 31, 1998. Actual
maturities may differ from the contractual maturities shown below as a result of
renewals and prepayments. Loan renewals are evaluated in the same manner as new
credit applications:
<TABLE>
<CAPTION>
Maturities of Loans (1)
Over 1 Year
Through 5 years Over 5 Years
------------------- -----------------
One year Fixed Floating Fixed Floating
or less Rate Rate Rate Rate Total
--------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
(in thousands)
Commercial and
industrial.......... $ 59,885 $ 14,406 $ 49,737 $ 2,382 $ 4,755 $ 131,165
Real estate mortgage... 8,603 9,437 17,997 21,376 19,841 77,254
Real estate
construction........ 12,691 -- 8,140 -- -- 20,831
Agricultural........... 10,736 2,069 2,775 707 3,490 19,777
Consumer............... 7,494 5,686 872 624 85 14,761
Lease financing........ 2,481 4,788 -- 153 -- 7,422
--------- -------- --------- -------- -------- ---------
Total face amount of
loans............... $101,890 $ 36,386 $ 79,521 $ 25,242 $ 28,171 $ 271,210
========= ======== ========= ======== ======== =========
</TABLE>
- --------------------
(1) Maturities are based upon contractual maturities. Floating rate loans
include loans that would reprice prior to maturity if base rates change. See
"--Liquidity, Market and Credit Risk--Interest Rate Risk Management" for further
discussion regarding repricing of loans and other assets.
Interest Rate Floors. From time to time the Company may use off-balance-sheet
instruments, principally interest rate floors, to adjust the interest rate
sensitivity of on-balance-sheet items, including loans. During 1998, the Company
purchased an interest rate floor to adjust the interest rate sensitivity of
$25.0 million of variable rate commercial loans indexed to the prime rate. The
terms of the contract were as follows:
Trade Date........... September 24, 1998
Notional Amount...... $25.0 million
Referenced Interest
Rate.............. Prime Rate
Strike Rate.......... 8.50%
Maturity Date........ September 29, 2003
Determination Dates.. December, March, June and
September 28th
See -"Liquidity, Market and Credit Risk" and Note 1 to the Consolidated
Financial Statements included under Item 7 for further discussion relating to
the interest rate floor and applicable accounting policies.
Nonperforming Loans and Assets. BNC's lending personnel are responsible for
continuous monitoring of the quality of the loan portfolio. Officer compensation
depends, to a substantial extent, on maintaining loan quality and dealing with
credit issues in a timely and proactive manner. Lenders are not compensated for
growth at the expense of credit quality. Loan officers are responsible for
ongoing and regular review of past due loans in their respective portfolios. The
loan portfolio is also monitored regularly and examined by the Company's loan
review personnel. Loans demonstrating weaknesses are downgraded in a timely
fashion and the Board receives a listing of all such loans on a monthly basis.
The Company also has an annual independent credit review which tests credit
quality, compliance with loan policy and documentation for all loans over
$100,000 and a sampling of smaller loans.
<PAGE>
The following table sets forth, as of the dates indicated, the amounts of
nonperforming loans and other assets, the allowance for loan losses and certain
related ratios:
<TABLE>
<CAPTION>
Nonperforming Assets
December 31,
-----------------------------------------------
1998 1997 1996 1995 1994
-------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
(dollars in thousands)
Nonperforming loans:
Loans 90 days or more delinquent
and still accruing interest.........$ 307 $ 1,016 $ 129 $ 290 $ 39
Nonaccrual loans (1) (2)......... 2,042 376 22 71 248
Restructured loans (1) (2)....... 44 104 136 119 257
-------- ------- ------- ------- --------
Total nonperforming loans..... 2,393 1,496 287 480 544
Real estate acquired by (or in
lieu of)foreclosure........... 2,112 -- 159 -- 100
-------- ------- ------- ------- --------
Total nonperforming assets.. $ 4,505 $ 1,496 $ 446 $ 480 $ 644
======== ======= ======= ======= ========
Allowance for credit losses......... $ 3,093 $ 3,069 $1,594 $1,048 $ 1,021
======== ======= ======= ======= ========
Ratio of total nonperforming loans
to total loans.................... 88% .64% .14% .40% .49%
Ratio of total nonperforming assets
to total assets................... 1.14% .41% .15% .20% .44%
</TABLE>
- --------------------
(1)If the Company's nonaccrual and restructured loans had been current in
accordance with their original terms, additional interest income would have
been recognized into earnings in the amount of $49,000, $30,000 and $12,000
for the years ended December 31, 1998, 1997 and 1996, respectively.
(2)The interest income on nonaccrual and restructured loans actually included
in the Company's net income was $175,000, $26,000 and $6,000 for the years
ended December 31, 1998, 1997 and 1996, respectively.
The increase in nonperforming loans at December 31, 1997 is primarily
attributable to the lending activities of a former officer. See "-Overview,"
"-Allowance for Credit Losses," and Note 16 to the Consolidated Financial
Statements included under Item 7 for further discussion relating to the former
officer. The December 31, 1998 nonperforming loans included a number of loans
which have since been either charged off or resolved. Net charge-offs for 1999
through February 28, 1999 were $372,000. As of February 28, 1999 the Company's
nonperforming loans totaled $1.2 million, or .46 percent of total loans. Total
nonperforming assets as of the same date totaled $3.4 million, or .83 percent of
total assets.
Loans 90 days or more delinquent and still accruing interest include loans over
90 days past due which management believes, based on its specific analysis of
the loans, do not present doubt about the collection of interest and principal
in accordance with the loan contract. Loans in this category must be
well-secured and in the process of collection. These loans are monitored closely
by BNC lending and management personnel.
Nonaccrual loans include loans on which the accrual of interest has been
discontinued. Accrual of interest is discontinued when management believes,
after considering economic and business conditions and collection efforts, that
the borrower's financial condition is such that the collection of interest is
doubtful. A delinquent loan is generally placed on nonaccrual status when it
becomes 90 days or more past due unless the loan is well-secured and in the
process of collection. When a loan is placed on nonaccrual status, accrued but
uncollected interest income applicable to the current reporting period is
reversed against interest income of the current period. Accrued but uncollected
interest income applicable to previous reporting periods is charged against the
allowance for credit losses. No additional interest is accrued on the loan
balance until the collection of both principal and interest becomes reasonably
certain. When a problem loan is finally resolved, there may ultimately be an
actual write down or charge-off of the principal balance of the loan which may
necessitate additional charges to earnings.
<PAGE>
Restructured loans are those for which concessions, including a reduction of the
interest rate or the deferral of interest or principal, have been granted due to
the borrower's weakened financial condition. Interest on restructured loans is
accrued at the restructured rates when it is anticipated that no loss of its
original principal will occur.
Other real estate owned represents properties acquired through, or in lieu of,
loan foreclosure. Such properties are included in other assets in the balance
sheets. They are initially recorded at fair value at the date of acquisition
establishing a new cost basis. Write-downs to fair value at the time of
acquisition are charged to the allowance for credit losses. After foreclosure,
valuations are periodically performed by management and the real estate is
carried at the lower of carrying amount or fair value less cost to sell.
Write-downs, revenues and expenses incurred subsequent to foreclosure are
charged to operations as recognized / incurred.
Potential Problem Loans. In accordance with accounting standards, the Company
identifies loans considered impaired and the valuation allowance attributable to
these loans. Impaired loans generally include loans on which management
believes, based on current information and events, it is probable that the
Company will not be able to collect all amounts due in accordance with the terms
of the loan agreement and which are analyzed for a specific reserve allowance.
BNC generally considers all loans risk-graded substandard and doubtful as well
as nonaccrual and restructured loans as impaired. Impaired loans at December 31,
1998, not including the past due, nonaccrual and restructured loans reported
above, totaled $6.9 million. A significant portion of these loans are not in
default but may have characteristics such as recent adverse operating cash flows
or general risk characteristics that the loan officer feels might jeopardize the
future timely collection of principal and interest payments. The ultimate
resolution of these credits is subject to changes in economic conditions and
other factors. These loans are closely monitored to ensure that the Company's
position as creditor is protected to the fullest extent possible.
Customer Year 2000 Issues. The Company 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
<PAGE>
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.
See also "Year 2000 Issue" for further information on the Company's Year 2000
program, state of readiness and contingency plans.
Allowance for Credit Losses. An allowance for credit losses has been established
to provide for those loans which may not be repaid in their entirety. It
represents management's recognition of the risks of extending credit and its
evaluation of the quality of the loan portfolio. Loan losses are primarily
created from the loan portfolio, but may also be generated from other sources,
such as commitments to extend credit, guarantees and standby letters of credit.
The allowance for credit losses is increased by provisions charged to expense
and decreased by charge-offs, net of recoveries. See "Results of
Operations--Provision for Credit Losses." Although a loan is charged-off by
management when deemed uncollectible, collection efforts continue and future
recoveries may occur.
The allowance is maintained at a level considered adequate to provide for
anticipated credit 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. 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. Although
management believes that the allowance for credit losses is adequate to absorb
any losses on existing loans that may become uncollectible, there can be no
assurance that the allowance will prove sufficient to cover actual credit 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 BNC to make additional
provisions to the allowance based upon their judgments about information
available to them at the time of their examination.
The following table summarizes, for the periods indicated, activity in the
allowance for credit losses, including amounts of loans charged-off, amounts of
recoveries, additions to the allowance charged to operating expense, the ratio
of net charge-offs to average total loans, the ratio of the allowance to total
loans at the end of each period and the ratio of the allowance to nonperforming
loans:
<PAGE>
<TABLE>
<CAPTION>
Analysis of Allowance for Credit Losses
For the Years ended December 31,
----------------------------------------------
1998 1997 1996 1995 1994
------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
(dollars in thousands)
Balance of allowance for credit
losses at beginning of period ..... $ 3,069 $ 1,594 $ 1,048 $ 1,021 $ 713
------- -------- -------- -------- -------
Charge-offs:
Commercial and industrial.......... 1,316 1,319 104 114 22
Real estate mortgage............... 66 24 -- -- --
Real estate construction........... -- -- -- -- --
Agricultural....................... -- -- 22 130 --
Consumer........................... 73 107 6 4 1
Lease financing.................... -- 471 218 -- --
------- -------- -------- -------- -------
Total charge-offs............... 1,455 1,921 350 248 23
------- -------- -------- -------- -------
Recoveries:
Commercial and industrial.......... 151 744 5 116 147
Real estate mortgage............... 26 9 6 3 --
Real estate construction........... -- -- -- -- --
Agricultural....................... -- -- 146 84 --
Consumer........................... 12 24 -- 4 5
Lease financing.................... -- -- -- -- --
------- -------- -------- -------- -------
Total recoveries................ 189 777 157 207 152
------- -------- -------- -------- -------
Net (charge-offs) recoveries.......... (1,266) (1,144) (193) (41) 129
Provision for credit losses charged
to operations...................... 1,290 2,619 739 168 179
Allowance attributable to FMB......... -- -- -- (100)(a) --
------- -------- -------- -------- -------
Balance of allowance for credit
losses at end of period............ $3,093 $ 3,069 $ 1,594 $ 1,048 $ 1,021
======= ======== ======== ======== =======
Ratio of net (charge-offs) recoveries
to average loans................... (.50%) (.51%) (.11%) (.03%) .13%
======= ======== ======== ======== =======
Average gross loans outstanding
during the period..................$253,282 $223,486 $171,780 $117,773 $98,749
======= ======== ======== ======== =======
Ratio of allowance for credit losses
to total loans..................... 1.14% 1.30% .78% .87% .92%
======= ======== ======== ======== =======
Ratio of allowance for credit losses
to nonperforming loans............. 129.00% 205.00% 555.00% 218.00% 188.00%
======= ======== ======== ======== =======
</TABLE>
- --------------------
(a)In connection with the sale of Farmers & Merchants Bank of Beach ("FMB") in
October 1995, $100,000 of the Company's allowance for credit losses, together
with approximately $9.2 million of loans originated by FMB, was transferred
to Community First Bankshares, Inc.
The increases in the Company's provision for credit losses, charge-offs and
recoveries for the years ended December 31, 1998 and 1997 are primarily
attributable to the activities of a former loan officer. Included in the data
above relating exclusively to the former officer are special provisions of
$454,000 and $1.9 million, charge-offs of approximately $639,000 and $1.8
million and recoveries of approximately $153,000 and $690,000 for the years
ended December 31, 1998 and 1997, respectively. The recoveries primarily
represent payments from the Company's fidelity bond carrier. See "-Overview" and
Note 16 to the Consolidated Financial Statements included under Item 7 for
further discussion of the impact of the former officer's activities on the
Company's financial performance and the current status of legal proceedings
related to the officer.
Management regards the allowance for credit losses as a general reserve which is
available to absorb losses from all loans. However, for purposes of complying
with disclosure requirements of the Securities and Exchange Commission, the
table below presents, for the periods indicated, an allocation of the allowance
for credit losses among the various loan categories and sets forth the
percentage of loans in each category to gross loans. The allocation of the
allowance for credit losses as shown in the table should neither be interpreted
as an indication of future charge-offs, nor as an indication that charge-offs in
future periods will necessarily occur in these amounts or in the indicated
proportions.
<PAGE>
<TABLE>
CAPTION>
Allocation of the Allowance for Loan Losses
December 31,
---------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------ ------------------ ----------------- ------------------ ------------------
Loans in Loans in Loans in Loans in Loans in
category category category category category
as a as a as a as a as a
percentage percentage percentage percentage percentage
Amount of total Amount of total Amount of total Amount of total Amount of total
of gross of gross of gross of gross of gross
allowance loans allowance loans allowance loans allowance loans allowance loans
--------- -------- --------- -------- --------- ------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(dollars in thousands)
Commercial and
industrial....$ 1,388 49% $ 1,078 47% $ 721 47% $ 355 31% $ 265 35%
Real estate
mortgage....... 673 29% 444 24% 306 24% 213 30% 267 30%
Real estate
construction... 129 8% 311 8% 57 4% 41 5% 24 4%
Agricultural... 252 7% 139 9% 176 10% 318 15% 395 20%
Consumer....... 217 5% 174 8% 97 9% 58 8% 52 8%
Leasing........ 133 2% 136 4% 63 6% 41 4% -- --
Unallocated.... 301 0% 787 0% 174 0% 22 7% 18 3%
--------- -------- --------- -------- --------- ------- -------- -------- --------- ---------
Total.........$ 3,093 100% $ 3, 069 100% $ 1,594 100% $ 1,048 100% $ 1,021 100%
========= ======== ========= ======== ========= ======= ======== ======== ========= =========
</TABLE>
Deposits. BNC's core deposits consist of noninterest- and interest-bearing
demand deposits, savings deposits, certificates of deposit under $100,000,
certain certificates of deposit of $100,000 and over and public funds. These
deposits, along with other borrowed funds are used by the Company to support its
asset base. See "--Borrowed Funds."
The following table sets forth, for the periods indicated, the distribution of
BNC's average deposit account balances and average cost of funds rates on each
category of deposits. See "Results of Operations--Net Interest Income" for an
explanation of changes in deposit volume and costs during the periods presented:
<TABLE>
<CAPTION>
Average Deposits and Deposit Costs
For the Years Ended December 31,
--------------------------------------------------------------------------
1998 1997 1996
------------------------ ------------------------ -----------------------
Percent Wgtd. Percent Wgtd. Percent Wgtd.
Average of avg. Average of avg. Average of avg.
balance deposits rate balance deposits rate balance deposits rate
------- ------- ------- ------- -------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(dollars in thousands)
Interest-bearing
demand deposits.......$ 63,115 23.90% 3.37% $ 50,582 20.36% 3.12% $ 38,920 18.29% 2.58%
Savings deposits...... 8,717 3.30% 2.26% 8,904 3.58% 2.31% 8,498 3.99% 2.31%
Time deposits ("CDs"):
CDs under $100,000.... 130,759 49.50% 5.61% 127,092 51.14% 5.59% 124,682 58.61% 5.66%
CDs $100,000 and over. 36,704 13.90% 5.86% 41,581 16.73% 5.74% 25,499 11.99% 5.82%
------- ------- -------- ------- -------- -------
Total time deposits... 167,463 63.40% 5.66% 168,673 67.87% 5.63% 150,181 70.60% 5.69%
------- ------- -------- ------- -------- -------
Total
interest-bearing
deposits.............. 239,295 90.60% 4.93% 228,159 91.81% 4.94% 197,599 92.88% 4.93%
Noninterest-bearing
demand deposits....... 24,827 9.40% -- 20,357 8.19% -- 15,147 7.12% --
------- ------- -------- ------- -------- -------
Total deposits........ 264,122 100.0% 4.47% $248,516 100.0% 4.54% $212,746 100.0% 4.58%
======= ======= ======== ======= ======== =======
</TABLE>
In recent years, earning asset growth has outpaced core deposit growth resulting
in the use of brokered and out of market certificates of deposit and other
borrowed funds. See "--Borrowed Funds." This trend has been common in the
banking industry because of the proliferation of non-bank competitors and the
multitude of financial and investment products available to customers. As of
December 31, 1998, BNC held a total of $5.0 million of brokered certificates of
deposit. Under current FDIC regulations, only "well capitalized" financial
institutions may fund themselves with brokered deposits without prior approval
of regulators. BNC--North Dakota and BNC--Minnesota were both well capitalized
at December 31, 1998. See Note 11 to the Consolidated Financial Statements
included under Item 7.
Time deposits in denominations of $100,000 and more
totaled $39.2 million at December 31, 1998 as compared to $36.3 and $39.7
million at December 31, 1997 and 1996, respectively. The following table sets
forth the amount and maturities of time deposits of $100,000 or more as of
December 31, 1998:
<PAGE>
Time Deposits of $100,000 and Over
(in thousands)
Maturing in:
3 months or less................... $ 19,148
Over 3 months through 6 months..... 9,209
Over 6 months through 12 months.... 9,404
Over 12 months..................... 1,401
----------
Total........................... $ 39,162
==========
Borrowed Funds. BNC uses short-term borrowings to support its asset base. These
borrowings include federal funds purchased and U.S. Treasury tax and loan note
option accounts, securities sold under agreements to repurchase and FHLB
borrowings. At December 31, 1998, short-term borrowings were $49.3 million, or
13% of total liabilities, as compared to $46.5 million, or 14 percent of total
liabilities, at December 31, 1997 and $11.4 million, or 4 percent of total
liabilities, at December 31, 1996. See Note 9 to the Consolidated Financial
Statements included under Item 7 for a listing of borrowings outstanding at
December 31, 1998 and 1997, including interest rates and terms.
The following table provides a summary of the Company's short-term borrowings
and related cost information as of, or for the periods ended, December 31:
Short-Term Borrowings
1998 1997 1996
-------- -------- --------
(dollars in thousands)
Short-term borrowings outstanding at period end...$ 49,290 $ 46,503 $ 11,437
Weighted average interest rate at period end...... 4.99% 5.77% 5.60%
Maximum month-end balance during the period.......$ 58,416 $ 46,503 $ 23,416
Average borrowings outstanding for the period.....$ 49,576 $ 22,730 $ 14,532
Weighted average interest rate for the period..... 5.44% 5.69% 5.60%
As of December 31, 1998, the Company's outstanding long-term debt totaled $30.6
million and included, for BNCCORP, a $3.0 million term loan and $11.5 million on
a $12.0 million revolving line of credit from Firstar Bank Milwaukee, N.A.
("Firstar") and the Subordinated Notes ($15.0 million less unamortized discount
of $621,000). BNC Financial had $1.7 million outstanding on a $10.0 million
revolving line of credit from Firstar. See Notes 1 and 9 to the Consolidated
Financial Statements included under Item 7 for more details regarding the
Company's borrowings, debt covenants and the use of interest rate contracts to
adjust the interest rate sensitivity of long-term debt. See also "--Liquidity,
Market and Credit Risk--Interest Rate Risk Management."
The Company's increased usage of long-term borrowings ($30.6 million at December
31, 1998 as compared to $21.8 and $10.6 million at December 31, 1997 and 1996,
respectively) is partly attributable to the funding of asset-based loans at BNC
Financial. As of December 31, 1998, BNC Financial had outstanding loans of $23.3
million.
<PAGE>
Capital Resources and Expenditures. BNC's management actively monitors
compliance with bank regulatory capital requirements, including risk-based and
leverage capital measures. Under the risk-based capital method of capital
measurement, the ratio computed is dependent on the amount and composition of
assets recorded on the balance sheet, and the amount and composition of
off-balance sheet items, in addition to the level of capital. Note 11 to the
Consolidated Financial Statements included under Item 7 includes a summary of
the risk-based and leverage capital ratios of BNC and its subsidiary banks as of
December 31, 1998 and 1997. As of each of those dates, BNCCORP and the Banks
exceeded capital adequacy requirements and the Banks were considered "well
capitalized" under prompt corrective action provisions.
There where no major capital expenditures for additional facilities during 1998.
During 1999 the Company plans to construct an office building in Fargo North
Dakota. See Note 16 to the Consolidated Financial Statements included under Item
7 for further information relating to the Fargo construction project.
Liquidity, Market and Credit Risk
The Company's business activities generate, in addition to other risks,
significant liquidity, market and credit risks. Liquidity risk is the
possibility of being unable to meet all present and future financial obligations
in a timely manner. Market risk arises from changes in interest rates, exchange
rates, commodity prices and equity prices and represents the possibility that
changes in future market rates or prices will have a negative impact on the
Company's earnings or value. The Company's principal market risk is interest
rate risk. Credit risk is the possibility of loss from the failure of a customer
to perform according to the terms of a contract. BNC is a party to transactions
involving financial instruments that create risks that may or may not be
reflected on a traditional balance sheet. These financial instruments can be
subdivided into three categories:
Cash financial instruments, generally characterized as on-balance-sheet
items, include investments, loans, mortgage-based securities, deposits and
other debt obligations.
Credit-related financial instruments, generally characterized as
off-balance-sheet items, include such instruments as commitments to extend
credit and standby letters of credit.
Derivative financial instruments, also generally characterized as
off-balance-sheet items, include such instruments as interest rate, foreign
exchange, commodity price and equity price contracts, including forwards,
swaps and options.
The Company's risk management policies are intended to monitor and limit
exposure to liquidity, market and credit risks that arise from each of these
financial instruments. See "--Loan Portfolio" for a discussion of the Company's
credit risk management strategies.
Liquidity Risk Management. Liquidity risk management encompasses the Company's
ability to meet all present and future financial obligations in a timely manner.
The objectives of liquidity management policies are to maintain adequate liquid
assets, liability diversification among instruments, maturities and customers
and a presence in both the wholesale purchased funds market and the retail
deposit market.
The Consolidated Statements of Cash Flows in the Consolidated Financial
Statements included under Item 7 present data on cash and cash equivalents
provided by and used in operating, investing and financing activities. In
addition to liquidity from core deposit growth, together with repayments and
maturities of loans and investments, BNC utilizes brokered deposits, sells
securities under agreements to repurchase and borrows overnight federal funds.
BNC--North Dakota is a member of the FHLB, which affords the Bank the
opportunity to borrow funds in terms ranging from overnight to ten years and
beyond. Borrowings from the FHLB are collateralized by the Bank's mortgage loans
<PAGE>
and various securities from the Company's investment portfolio. See
"--Investment Securities" and Note 9 to the Consolidated Financial Statements
included under Item 7. The Company has also obtained funding, primarily for the
purpose of funding asset-based loans at BNC Financial, through long-term
borrowings and the issuance of its Subordinated Notes. See "--Borrowed Funds"
and Note 9 to the Consolidated Financial Statements included under Item 7.
The following table sets forth, for the periods indicated, a summary of the
Company's major sources and (uses) of funds. This summary information is derived
from the Consolidated Statements of Cash Flows included under Item 7:
Major Sources and Uses of Funds
For the Years Ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
(in thousands)
Proceeds from sales and maturities of
investment securities................... $ 89,926 $ 39,335 $ 57,553
Net increase in deposits................... 21,675 23,054 28,722
Net change in long-term borrowings......... 8,750 11,151 7,261
Increase in short-term borrowings.......... 2,787 35,066 10,437
Purchases of investment securities........ (91,981) (74,121) (22,575)
Net increase in loans...................... (37,131) (34,124) (82,664)
BNC's liquidity is measured by its ability to raise cash when it needs it at a
reasonable cost and with a minimum of loss. Given the uncertain nature of our
customer's demands as well as the Company's desire to take advantage of earnings
enhancement opportunities, the Company must have adequate sources of on- and
off-balance sheet funds that can be acquired in time of need. Accordingly, in
addition to the liquidity provided by balance sheet cash flows, liquidity is
supplemented with additional sources such as credit lines with the FHLB, credit
lines with correspondent banks for federal funds, wholesale and retail
repurchase agreements, brokered certificates of deposit, and direct non-brokered
national certificates of deposit through national deposit networks. BNC's
management measures its liquidity position on a monthly basis. Key factors that
determine the Company's liquidity are the reliability or stability of its
deposit base, the pledged/nonpledged status of its investments and potential
loan demand. BNC's liquidity management system divides the balance sheet into
liquid assets, and short-term liabilities that are assumed to be vulnerable to
non-replacement under abnormally stringent conditions. The excess of liquid
assets over short-term liabilities is measured over a 30-day planning horizon.
Assumptions for short-term liabilities vulnerable to non-replacement under
abnormally stringent conditions are based on a historical analysis of the
month-to-month percentage changes in deposits. The excess of liquid assets over
short-term liabilities and other key factors such as expected loan demand as
well as access to other sources of liquidity such as lines with the FHLB,
federal funds, and those other supplemental sources listed above are tied
together to provide a measure of the Company's liquidity. Management has a
targeted range and manages its operations such that these targets can be
achieved. Management believes that its prudent management policies and
guidelines will ensure adequate levels of liquidity to fund anticipated needs of
on- and off-balance-sheet items. In addition, a contingency funding plan
identifies actions to be taken in response to an adverse liquidity event.
The Company's asset/liability committee has been actively involved in initiating
a liquidity plan for the period spanning the Year 2000 date change. See "-Year
2000 Issues."
Interest Rate Risk Management. Interest rate risk arises from changes in
interest rates. Interest rate risk can result from: (1) Re-pricing risk - timing
<PAGE>
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 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. See "--Loan
Portfolio-Interest Rate Floors" and Note 1 to the Consolidated Financial
Statements included under Item 7 for a summary of the Company's accounting
policies pertaining to such instruments.
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 12-month horizon that covers
the calendar year of 1999 is shown below. The growth assumption used for this
simulation was based on the growth projections built into the Company's 1999
budget. The impact of each interest rate scenario on projected net interest
<PAGE>
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.
<TABLE>
<CAPTION>
Net Interest Income Simulation
(amounts in thousands)
Movement in interest rates -300bp -200bp -100bp Unchanged +100bp +200bp +300bp
<S> <C> <C> <C> <C> <C> <C> <C>
Projected 12-month net
interest income............ $14,022 $14,379 $14,720 $15,056 $15,370 $15,660 $16,069
Dollar change from rates
unchanged scenario......... (1,034) (677) (336) - 314 604 1,013
Percentage change from rates
unchanged scenario......... -6.87% -4.50% -2.23% 0.00% 2.09% 4.01% 6.73%
Benefit/(cost) from $25MM
floor (1).................. 380 242 104 (34) (161) (196) (208)
Total net interest income
impact with floor.......... 14,402 14,621 14,824 15,022 15,209 15,464 15,861
Dollar change from flat w/
floor...................... (620) (401) (198) - 187 442 839
Percentage change from
unchanged w/floor.......... -4.13% -2.67% -1.32% 0.00% 1.24% 2.94% 5.59%
Benefit from amortization of
deferred gain on sale of
interest rate swaps (2).... 49 49 49 49 49 49 49
Total net interest income
impact w/floor & swap gain. $14,451 $14,670 $14,873 $15,071 $15,258 $15,513 $15,910
Dollar change from flat
w/floor & swap............. $ (620) $ (401) $ (198) $ - $ 187 $ 442 $ 839
Percentage change from flat
w/floor & swap............. -4.12% -2.66% -1.32% 0.00% 1.24% 2.93% 5.57%
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. See "-Loan Portfolio-Interest Rate Floors" and Note 1 to the
Consolidated Financial Statements included under Item 7.
(2) The swaps were sold in October and November 1997. Gains recognized upon sale
of the swaps are being amortized as a reduction of interest expense over the
remaining lives of the original swap contracts.
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.
Static gap analysis is another tool which may be used for interest rate risk
measurement. The net differences between the amount of assets, liabilities,
equity and off-balance-sheet instruments repricing within a cumulative calendar
<PAGE>
period is typically referred to as the "rate sensitivity position" or "gap
position." The following table sets forth the Company's rate sensitivity
position as of December 31, 1998. Assets and liabilities are classified by the
earliest possible repricing date or maturity, whichever occurs first:
<TABLE>
<CAPTION>
Interest Sensitivity Gap Analysis
Estimated maturity or repricing at
December 31, 1998
----------------------------------------------
0-3 4-12 1-5 Over
months months years 5 Total
Years
-------- -------- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
(dollars in thousands)
Interest-earning assets:
Cash equivalents....................$ 2,809 -- -- -- $ 2,809
Investment securities (1)........... 17,100 $ 146 $10,443 $68,912 96,601
Fixed rate loans (2)................ 7,368 10,617 36,386 25,243 79,614
Floating rate loans (2)............. 180,129 7,515 3,952 -- 191,596
-------- -------- ------- ------- ----------
Total interest-earning assets....$ 207,406 $18,278 $50,781 $94,155 $370,620
======== ======== ======= ======= ==========
Interest-bearing liabilities:
NOW and money market accounts.......$ 82,264 -- -- -- 82,264
Savings............................. 7,623 -- -- -- 7,623
Time deposits under $100,000........ 33,418 76,403 15,917 1,237 126,975
Time deposits $100,000 and over..... 19,148 18,613 1,188 213 39,162
Borrowings.......................... 65,510 47 0 14,379 79,936
-------- -------- ------- ------- ----------
Total interest-bearing
liabilities...................$ 207,963 $95,063 $17,105 $15,829 $335,960
======== ======== ======= ======= ==========
Interest rate gap......................$ (557) $(76,785)$33,676 $78,326 $ 34,660
======== ======== ======= ======= ==========
Cumulative interest rate gap at
December 31, 1998...................$ (557) $(77,342)$(43,666)$34,660
======== ======== ======== =======
Cumulative interest rate gap to total
assets.............................. (0.14)% (19.51)% (11.02)% 8.75%
</TABLE>
- -----------------
(1) Investment securities are generally reported in the timeframe representing
the earliest of repricing date, call date (for callable securities), estimated
life or maturity date. Estimated lives of mortgage-backed securities and
collateralized mortgage obligations are based on published industry prepayment
estimates for securities with comparable weighted average interest rates and
contractual maturities.
(2) Loans are stated gross of the allowance for credit losses and are placed in
the earliest timeframe in which maturity or repricing may occur.
The table assumes that all savings and interest-bearing demand deposits reprice
in the earliest period presented, however, BNC's management believes a
significant portion of these accounts constitute a core component and are
generally not rate sensitive. Management's position is supported by the fact
that aggressive reductions in interest rates paid on these deposits historically
has not caused notable reductions in balances.
The table does not necessarily indicate the future impact of general interest
rate movements on the Company's net interest income because the repricing of
certain assets and liabilities is discretionary and is subject to competitive
and other pressures. As a result, assets and liabilities indicated as repricing
within the same period may in fact reprice at different times and at different
rate levels.
Static gap analysis does not fully capture the impact of embedded options,
lagged interest rate changes, administered interest rate products, or certain
off-balance-sheet sensitivities to interest rate movements. Therefore, this tool
cannot be used in isolation to determine the level of interest rate risk
exposure in more complex banking institutions.
<PAGE>
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 analysis is based on the
Company's assets and liabilities as of December 31, 1998 (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.
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
<PAGE>
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.
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. 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.
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 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
<PAGE>
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.
An important part of the Company' contingency plan is the liquidity management
plan. The asset/liability committee has taken an active roll in planning and
approving implementation of elements of this plan.
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 6, "Management's Discussion and Analysis or Plan of
Operation," which are not historical in nature are intended to be, and are
hereby identified as "forward looking statements" for purposes of the safe
harbor provided by Section 21E of the Securities Exchange Act of 1934, as
amended. The Company cautions readers that forward looking statements, including
without limitation, those relating to the Company's future business prospects,
revenues, working capital, liquidity, capital needs, interest costs, 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 business partners; and
other risks which are difficult to predict and many of which are beyond the
control of the Company.
<PAGE>
Effects of Inflation
Unlike most industrial companies, the assets and liabilities of financial
institutions are primarily monetary in nature. Therefore, banking organizations
do not necessarily gain or lose due to the effects of inflation. Changes in
interest rates, which are a major determinant of a financial service
organization's profitability, do not necessarily correspond to changes in the
prices of goods and services. An analysis of a banking organization's asset and
liability structure provides the best indication of how the organization is
positioned to respond to changing interest rates and maintain profitability.
The financial statements and supplementary financial data have been prepared,
primarily, on a historical basis which is mandated by generally accepted
accounting principles. Fluctuations in the relative value of money due to
inflation or recession are generally not considered.
Recent Accounting Pronouncements
Note 1 to the Consolidated Financial Statements included under Item 7 includes
discussions of recent accounting pronouncements applicable to the activities and
financial reporting of BNC.
Item 7. Financial Statements
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements: Page
Report of Independent Public Accountants.................................. 41
Consolidated Balance Sheets - December 31, 1998 and 1997.................. 42
Consolidated Statements of Income - the years ended December 31, 1998,
1997 and 1996.......................................................... 43
Consolidated Statements of Comprehensive Income - the years ended
December 31, 1998, 1997 and 1996....................................... 44
Consolidated Statements of Stockholders' Equity - the periods ended
December 31, 1998, 1997, 1996 and 1995................................. 45
Consolidated Statements of Cash Flows - the years ended December 31,
1998, 1997 and 1996.................................................... 46
Notes to Consolidated Financial Statements................................ 47
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTS
To BNCCORP, Inc.:
We have audited the accompanying consolidated balance sheets of BNCCORP, Inc. (a
Delaware corporation) and Subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of BNCCORP's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of BNCCORP, Inc. and
Subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
January 22, 1999
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31
(In thousands, except share and per share data)
ASSETS 1998 1997
----------- ----------
CASH AND DUE FROM BANKS.................................... $ 7,475 $13,184
INTEREST-BEARING DEPOSITS WITH BANKS....................... 2,809 2,231
INVESTMENT SECURITIES AVAILABLE FOR SALE................... 96,601 94,624
LOANS AND LEASES, net of unearned income................... 270,876 235,200
ALLOWANCE FOR CREDIT LOSSES................................ (3,093) (3,069)
----------- ----------
Net loans and leases.................................... 267,783 232,131
PREMISES, LEASEHOLD IMPROVEMENTS AND
EQUIPMENT, net.......................................... 8,827 8,617
INTEREST RECEIVABLE........................................ 2,618 2,865
OTHER ASSETS............................................... 6,163 2,721
DEFERRED CHARGES AND INTANGIBLE ASSETS, net................ 4,056 4,630
----------- ----------
$396,332 $361,003
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS:
Noninterest-bearing..................................... $ 28,475 $ 25,795
Interest-bearing --
Savings, NOW and money market........................ 89,887 75,630
Time deposits $100,000 and over...................... 39,162 36,334
Other time deposits.................................. 126,975 125,065
----------- ----------
Total deposits.......................................... 284,499 262,824
NOTES PAYABLE.............................................. 79,936 68,315
OTHER LIABILITIES.......................................... 6,642 6,716
----------- ----------
Total liabilities................................. 371,077 337,855
----------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 15 and 16)
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) in 1998 and 1997,
respectively......................................... 24 24
Capital surplus......................................... 13,951 13,786
Retained earnings....................................... 11,651 9,384
Treasury stock (42,880 and 25,380 shares, respectively). (513) (216)
Accumulated other comprehensive income,
net of income tax effects............................ 142 170
----------- ----------
Total stockholders' equity........................ 25,255 23,148
----------- ----------
$396,332 $361,003
=========== ==========
The accompanying notes are an integral part of these consolidated balance
sheets.
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the Years Ended December 31
(In thousands, except per share data)
1998 1997 1996
--------- -------- --------
INTEREST INCOME:
Interest and fees on loans...................... $24,799 $22,003 $16,383
Interest and dividends on investment securities--
Taxable...................................... 4,977 3,714 3,739
Tax-exempt................................... 95 71 94
Dividends.................................... 304 446 576
Other........................................... 292 309 170
---------- -------- --------
Total interest income..................... 30,467 26,543 20,962
INTEREST EXPENSE:
Interest on deposits............................ 11,809 11,282 9,738
Interest on short-term borrowings............... 2,694 1,294 815
Interest on long-term debt...................... 2,246 1,339 555
---------- -------- --------
Total interest expense.................... 16,749 13,915 11,108
---------- -------- --------
Net interest income....................... 13,718 12,628 9,854
PROVISION FOR CREDIT LOSSES........................ 1,290 2,619 739
---------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR
CREDIT LOSSES................................... 12,428 10,009 9,115
---------- -------- --------
NONINTEREST INCOME:
Insurance commissions........................... 1,769 1,694 1,606
Fees on loans................................... 1,551 1,040 1,296
Service charges................................. 566 471 418
Net gain on sales of securities................. 130 8 19
Rental income................................... 43 56 34
Other........................................... 991 855 357
---------- -------- --------
Total noninterest income.................. 5,050 4,124 3,730
---------- -------- --------
NONINTEREST EXPENSE:
Salaries and employee benefits.................. 7,770 6,473 5,448
Depreciation and amortization................... 1,525 1,327 1,106
Occupancy....................................... 1,046 997 785
Professional services........................... 785 564 401
Office supplies, telephone and postage.......... 769 661 582
Marketing and promotion......................... 455 365 362
FDIC and other assessments...................... 184 171 239
Other........................................... 1,384 1,105 1,583
---------- -------- --------
Total noninterest expense................. 13,918 11,663 10,506
---------- -------- --------
INCOME BEFORE TAXES................................ 3,560 2,470 2,339
INCOME TAXES....................................... 1,293 1,044 1,169
---------- -------- --------
NET INCOME......................................... $ 2,267 $1,426 $1,170
========== ======== ========
BASIC EARNINGS PER COMMON SHARE.................... $ 0.95 $0.59 $0.49
========== ======== ========
DILUTED EARNINGS PER COMMON SHARE.................. $ 0.91 $0.59 $0.49
========== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the Year Ended December 31
(In thousands)
1998 1997 1996
--------- ---------- ----------
NET INCOME............................ $2,267 $1,426 $1,170
OTHER COMPREHENSIVE INCOME --
Unrealized gains on securities:
Unrealized holding gains (losses)
arising during the period, net of
income tax effects.............. (28) 127 (91)
Less: reclassification adjustment
for gains included in net income,
net of income tax effects....... (79) (5) (12)
---------- ----------- ---------
OTHER COMPREHENSIVE INCOME (LOSS)..... (107) 122 (103)
---------- ----------- ---------
COMPREHENSIVE INCOME.................. $2,160 $1,548 $1,067
========== =========== =========
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(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, 1995, as
Previously presented...... 2,364,100 $ 23 $ 13,776 $ 7,170 $ (216) $ 134 $20,887
Effects of business
combination accounted
for as a pooling of
interests (Note 2).... 63,406 1 17 (382) -- -- (364)
---------- -------- --------- --------- -------- ------------- ---------
BALANCE, December 31, 1995,
restated.............. 2,427,506 24 13,793 6,788 (216) 134 20,523
Net income................ -- -- -- 1,170 -- -- 1,170
Other comprehensive income-
Change in unrealized
holding gain on
securities available
for sale, net of income
tax effects.......... -- -- -- -- -- (91) (91)
Initial public offering
costs.................. -- -- (7) -- -- -- (7)
----------- --------- --------- -------- -------- -------------- --------
BALANCE, December 31, 1996.. 2,427,506 24 13,786 7,958 (216) 43 21,595
Net income............... -- -- -- 1,426 -- -- 1,426
Other comprehensive income-
Change in unrealized
holding gain on
securities available
for sale, net of
income tax effects.... -- -- -- -- -- 127 127
----------- --------- --------- -------- -------- -------------- --------
BALANCE, December 31, 1997.. 2,427,506 24 13,786 9,384 (216) 170 23,148
Net income............... -- -- -- 2,267 -- -- 2,267
Other comprehensive income-
Change in unrealized
holding gain on
securities available
for sale, net of
income tax effects..... -- -- -- -- -- (28) (28)
Restricted stock forfeited/
retired................... (1,377) -- -- -- -- --
Options exercised........... 1,935 -- 19 -- -- -- 19
Compensation expense -
restricted stock......... 5,000 -- 146 -- -- -- 146
Purchase of treasury stock.. -- -- -- -- (297) -- (297)
----------- --------- --------- -------- -------- -------------- ---------
BALANCE, December 31, 1998.. 2,433,064 $ 24 $ 13,951 $ 11,651 $ (513) $ 142 $25,255
=========== ========= ========= ======== ======== ============== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31
(In thousands)
1998 1997 1996
------ ------ ------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income...........................................$2,267 $1,426 $1,170
Adjustments to reconcile net income to net cash
provided by operrating activities --
Provision for credit losses....................... 1,290 2,619 739
Depreciation and amortization..................... 901 718 542
Amortization of intangible assets................. 606 599 564
Net premium amortization (discount accretion) on
investment securities............................. 172 (131) (110)
Proceeds from loans recovered..................... 189 777 157
Change in interest receivable and other assets,
net........................................... (3,047) (1,998) (2,313)
(Gain) loss on sale of bank premises and equipment. 117 (2) (10)
Net realized gains on sales of investment
securities..................................... (130) (8) (19)
Deferred income taxes............................ (190) (367) (182)
Change in other liabilities, net................. (74) 654 1,077
Originations of loans to be sold.................(47,412) (58,305)(45,238)
Proceeds from sale of loans...................... 47,412 58,305 45,238
-------- -------- -------
Net cash provided by operating activities..... 2,101 4,287 1,615
-------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities..................(91,981) (74,121)(22,575)
Proceeds from sales of investment securities........ 58,855 27,198 48,700
Proceeds from maturities of investment securities... 31,071 12,137 8,853
Net increase in loans...............................(37,131) (34,124)(82,664)
Additions to premises, leasehold improvements and
equipment........................................ (1,254) (2,693) (1,462)
Proceeds from sale of premises and equipment........ 26 82 70
-------- -------- -------
Net cash used in investing activities.........(40,414) (71,521)(49,078)
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand, savings, NOW and money
market accounts................................... 16,937 26,724 7,095
Net increase (decrease) in time deposits............ 4,738 (3,670) 21,627
Net increase in short-term borrowings............... 2,787 35,066 10,437
Repayments of long-term borrowings..................(13,492) (23,293) (1,954)
Proceeds from long-term borrowings.................. 22,242 34,444 9,215
Amortization of discount on subordinated notes...... 84 46 --
Amortization of deferred charges.................... 18 10 --
Repurchase of stock................................. (297) -- --
Other, net.......................................... 165 -- (7)
-------- -------- -------
Net cash provided by financing activities..... 33,182 69,327 46,413
-------- -------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS... (5,131) 2,093 (1,050)
CASH AND CASH EQUIVALENTS, beginning of year........... 15,415 13,322 14,372
-------- -------- -------
CASH AND CASH EQUIVALENTS, end of year.................$10,284 $15,415 $13,322
======== ======== =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid.......................................$14,091 $13,689 $11,422
======== ======= ========
Income taxes paid...................................$ 1,648 $ 1,664 $ 972
======== ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
1. Summary of Significant Accounting Policies
BNCCORP, Inc. ("BNCCORP") is a registered bank holding company incorporated
under the laws of Delaware. It is the parent company of BNC National Bank
(together with its wholly-owned subsidiaries, BNC Insurance, Inc. and BNC Asset
Management, Inc., "BNC-North Dakota"), BNC National Bank of Minnesota
("BNC-Minnesota" and, together with BNC-North Dakota, "the Banks"), and BNC
Financial Corporation ("BNC Financial"), a commercial finance company. Through
these wholly-owned subsidiaries, which operate from seventeen locations in North
Dakota and Minnesota, BNCCORP provides a broad range of banking and financial
services to small and mid-size businesses and individuals. An additional
wholly-owned subsidiary, Bismarck Properties, Inc., is inactive.
The accounting and reporting policies of BNCCORP and its subsidiaries
(collectively, the "Company") conform to generally accepted accounting
principles and general practices within the financial services industry. The
more significant accounting policies are summarized below.
Business Combinations. Business combinations which have been accounted for under
the purchase method of accounting include the results of operations of the
acquired businesses from the date of acquisition. Net assets of the companies
acquired were recorded at their estimated fair value as of the date of
acquisition. Other business combinations have been accounted for under the
pooling-of-interests method of accounting which requires the assets, liabilities
and stockholders' equity of the merged entity to be retroactively combined with
the Company's respective accounts at recorded value. Prior period financial
statements have been restated to give effect to business combinations accounted
for under this method.
Principles of Consolidation. The accompanying consolidated financial statements
include the accounts of BNCCORP and its wholly-owned subsidiaries. All
significant intercompany transactions and balances have been eliminated in
consolidation.
Cash and Cash Equivalents. For the purpose of presentation in the consolidated
statements of cash flows, the Company considers amounts included in the
consolidated balance sheet captions "cash and due from banks" and
Ainterest-bearing deposits with banks" to be cash equivalents.
Investment Securities. Investment and mortgage-backed securities which the
Company intends to hold for indefinite periods of time, including securities
that management intends to use as part of its asset/liability management
strategy, or that may be sold in response to changes in interest rates, changes
in prepayment risk, the need to increase regulatory capital or similar factors,
as well as securities on which call options have been written, are classified as
available for sale. Available-for-sale securities are measured at fair value.
Net unrealized gains and losses, net of deferred income taxes, on investments
and mortgage-backed securities available for sale, while included in
comprehensive income (see "Comprehensive Income"), are excluded from earnings
and reported as a separate component of stockholders= equity until realized. All
securities were classified as available for sale as of December 31, 1998 and
1997. Investment and mortgage-backed securities which the Company intends to
hold until maturity are stated at cost, adjusted for amortization of premiums
and accretion of discounts using a method that approximates level yield.
Declines in the fair value of individual available-for-sale or held-to-maturity
securities below their cost which are other than temporary could result in
write-downs of the individual securities to their fair value. Such write-downs,
should they occur, would be included in earnings as realized losses. There were
no such write-downs during 1998, 1997 or 1996.
<PAGE>
Securities purchased and sold for purposes of generating profits on short-term
differences in market prices are classified as trading securities. Trading
securities are stated at fair value and adjustments to fair value are reported
in non-interest income. The Company held no securities for trading purposes as
of December 31, 1998 or 1997.
Realized gains and losses on sales of investment securities are computed using
the specific identification method at the time of sale and are recorded in
non-interest income.
Loans and Leases. Loans are stated at their outstanding principal amount net of
unearned income and an allowance for credit losses.
Loans are generally placed on a nonaccrual status for recognition of interest
income when, in the opinion of management, uncertainty exists as to the ultimate
collection of principal or interest. At the time a loan is placed on nonaccrual
status, accrued but uncollected interest income applicable to the current
reporting period is reversed against interest income of the current period.
Accrued but uncollected interest income applicable to previous reporting periods
is charged against the credit loss reserve. While a loan is classified as
nonaccrual, collections of principal and interest are generally applied as a
reduction to principal outstanding.
Provision for Credit Losses and the Allowance for Credit Losses. The provision
for credit losses in the income statement results from the combination of an
estimate by management of loan losses that occurred during the current period
and the ongoing adjustment of prior estimates of losses.
To serve as a basis for making this provision each quarter, the Company
maintains a credit risk monitoring process that considers several factors,
including current economic conditions affecting the Company's customers, the
payment performance of individual large loans and pools of homogeneous small
loans, portfolio seasoning, changes in collateral values, and detailed reviews
of specific large loan relationships. For large loans deemed to be impaired due
to an expectation that all contractual payments will probably not be received,
impairment is measured by comparing the Company's recorded investment in the
loan to the present value of expected cash flows discounted at the loan's
effective interest rate, the fair value of the collateral or the loan=s
observable market price.
The provision for credit losses increases the allowance for credit losses, a
valuation account which is netted against loans on the balance sheet. As the
specific customer and amount of a credit loss is confirmed by gathering
additional information, taking collateral in full or partial settlement of the
loan, bankruptcy of the borrower, etc., the loan is written down, reducing the
allowance for credit losses. If, subsequent to a writedown, the Company is able
to collect additional amounts from the customer or from the sale of collateral
worth more than earlier estimated, a recovery is recorded, increasing the
allowance for credit losses.
Loan Origination Fees and Costs. Loan origination fees and costs incurred to
extend credit are deferred and amortized over the term of the loan as a yield
adjustment. Loan fees representing adjustments of yield are generally deferred
and amortized into interest income over the term of the loan using the interest
method. Loan commitment fees are generally deferred and amortized into
non-interest income on a straight-line basis over the commitment period.
Mortgage Servicing and Transfers of Financial Assets. The Company adopted
Statement of Financial Accounting Standards No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS
125") on January 1, 1997. SFAS 125 establishes accounting methods aimed at
ensuring that entities recognize only assets controlled and liabilities incurred
and derecognize assets only when control has been surrendered and liabilities
only when they have been extinguished. Statement of Financial Accounting
Standards No. 127, "Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125," deferred certain provisions of SFAS 125 until January 1,
1998.
<PAGE>
The Banks regularly sell loans to others on a non-recourse basis. Sold loans are
not included in the accompanying balance sheets. The Banks generally retain the
right to service the loans as well as the right to receive a portion of the
interest income on the loans. At December 31, 1998 and 1997, the Banks were
servicing loans for the benefit of others with aggregate unpaid principal
balances of $73.8 and $65.8 million, respectively. The vast majority of the
loans sold by the Banks are commercial lines of credit for which balances and
related payment streams cannot be reasonably estimated in order to determine the
fair value of the servicing rights and/or future interest income retained by the
Banks.
Premises, Leasehold Improvements and Equipment. Premises, leasehold improvements
and equipment are reported at cost less accumulated depreciation and
amortization. Depreciation and amortization for financial reporting purposes is
charged to operating expense using the straight-line method over the estimated
useful lives of the assets. Estimated useful lives are up to 40 years for
buildings and three to ten years for furniture and equipment. Leasehold
improvements are amortized over the shorter of the lease term or the estimated
useful life of the improvement. The costs of improvements are capitalized.
Maintenance and repairs, as well as gains and losses on dispositions of premises
and equipment, are included in non-interest expense as incurred.
Other Real Estate Owned. Real estate properties acquired through, or in lieu of,
loan foreclosure are included in other assets in the balance sheet and are
stated at the lower of carrying amount or fair value less cost to sell. When a
property is acquired, the excess of the recorded investment in the property over
fair value, if any, is charged to the allowance for credit losses. Subsequent
declines in the estimated fair value, net operating results and gains and losses
on disposition of the property are included in other non-interest expenses. The
Company=s investment in such properties at December 31, 1998 was $2.1 million.
There were no such properties held at December 31, 1997.
Deferred Charges and Intangible Assets. Deferred charges and intangible assets
includes premiums paid for deposits assumed, goodwill, debt related costs,
organization costs and other miscellaneous intangibles. Deposit premiums are
being amortized over their estimated lives of ten years using the straight-line
method. Goodwill represents the aggregate excess of the cost of subsidiaries
acquired over the fair value of their net assets at dates of acquisition and is
being amortized over its estimated useful life of 15 to 25 years using the
straight-line method. Debt related costs represent legal, accounting and other
fees and expenses associated with the issuance of such indebtedness. These costs
are being amortized over the term of the notes using the effective interest rate
method. Organization costs represent incorporation, legal, accounting and other
similar fees associated with establishment of BNCCORP or its subsidiaries. Such
costs are being amortized over five years using the straight-line method. The
Company's intangible assets are monitored to assess recoverability and determine
whether events and circumstances require adjustment to the recorded amounts or
amortization periods. See "Impairment of Long-Lived Assets."
Impairment of Long-Lived Assets. The Company periodically reviews long-lived
assets including property and equipment, certain identifiable intangibles and
goodwill for impairment. If impairment is identified, the assets are written
down to their fair value through a charge to non-interest expense. No such
impairment losses were recorded during 1998, 1997 or 1996.
Securities Sold Under Agreements to Repurchase. From time to time, the Company
enters into sales of securities under agreements to repurchase, generally for
periods of less than 90 days. Fixed coupon agreements are treated as financings,
and the obligations to repurchase securities sold are reflected as a liability
in the balance sheets. The cost of securities underlying the agreements remain
in the asset accounts.
<PAGE>
Fair Values of Financial Instruments. The following methods and assumptions were
used by the Company in estimating fair values of financial instruments as
disclosed herein:
Cash and Cash Equivalents, Noninterest-Bearing Deposits and Demand Deposits.
The carrying amounts approximate fair value due to the short maturity of the
instruments. The fair value of deposits with no stated maturity, such as NOW,
savings and money market accounts, is equal to the amount payable on demand
at the reporting date.
Securities. The fair value of the Company's securities equals the quoted
market price.
Loans. Fair values for loans are estimated by discounting future cash flow
payment streams using rates at which current loans to borrowers with similar
credit ratings and similar loan maturities are being made.
Interest-Bearing Deposits. Fair values of interest-bearing deposit
liabilities are estimated by discounting future cash flow payment streams
using rates at which comparable current deposits with comparable maturities
are being issued.
Borrowings. The carrying amount of short-term borrowings approximates fair
value due to the short maturity and the instruments' floating interest rates,
which are tied to market conditions. The fair values of long-term borrowings,
for which the maturity extends beyond one year, are estimated by discounting
future cash flow payment streams using rates at which comparable borrowings
are currently being offered.
Derivative Financial Instruments. 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.
The Company entered into three interest rate swap agreements during 1997. One of
the swaps effectively converted the Company's fixed rate subordinated notes into
variable-rate borrowings. The Company received a fixed rate of interest of
6.6650 percent on the notional amount of $15.0 million and paid a variable rate
based on 3-month LIBOR. The swap was sold on October 30, 1997. The resulting
gain of $372,000 was deferred and is being amortized as a reduction of interest
expense over the remaining life of the original swap contract. Two additional
swaps with notional amounts totaling $10.0 million were used to adjust the
interest rate sensitivity of time deposits. These swaps were also sold during
1997 and resulting gains are being amortized over the remaining life of the
contracts.
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, defined as the contract=s current replacement value, was $934,000 at
December 31, 1998.
<PAGE>
The Company had no interest rate swap contracts outstanding at December 31, 1998
or 1997. At December 31, 1998 and 1997, deferred gains of $332,000 and $423,000,
respectively, resulting from the sale of interest rate swap contracts during
1997 were included in the balance sheet and were being amortized as a reduction
of interest expense over the original lives of the swap contracts.
Trust Fees. Trust fees are recorded on the accrual basis of accounting.
Income Taxes. BNCCORP and its subsidiaries file a consolidated federal income
tax return. State income tax returns are filed separately by each subsidiary. In
accordance with a tax sharing arrangement, BNCCORP collects for or pays to each
of its subsidiaries the tax or tax benefit resulting from its inclusion in the
consolidated federal return.
Deferred income taxes are reported for temporary differences between items of
income or expense reported for financial statement purposes and those reported
for income tax purposes. The differences relate primarily to differences in
accounting for loan losses, depreciation timing differences, unrealized gains
and losses on investment securities, deferred compensation and leases which are
treated as operating leases for tax purposes and capital leases for financial
statement purposes.
Earnings Per Common Share. Basic earnings per share is computed by dividing net
income by the weighted average common shares outstanding during the applicable
period. Diluted earnings per share is computed based on the amount of net income
that would be available for each common share, assuming all dilutive potential
common shares were issued. Such dilutive potential common shares include stock
options and warrants (see Note 18).
Comprehensive Income. Pursuant to Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" adopted on January 1, 1998, the
Company has prepared consolidated statements of comprehensive income detailing
changes in the amounts of items which bypass the income statement and are
reported with a balance in stockholders' equity. Financial statements for prior
periods have been reclassified for comparative purposes.
Segment Disclosures. Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information," became
effective for the year ended December 31, 1998. The Company has provided
disclosure of financial and descriptive information about reportable operating
segments in Note 19.
Other Recently Issued Accounting Standards. 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).
<PAGE>
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.
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities"
("SOP 98-5"), requires costs of start-up activities and organization costs to be
expensed as incurred. The Company intends to adopt SOP 98-5 effective January 1,
1999. The adoption is not expected to have a material effect on the Company's
financial position or results of operations.
Regulatory Environment. BNCCORP and its subsidiaries are subject to regulations
of certain state and federal agencies, including periodic examinations by those
regulatory agencies. BNCCORP and its subsidiary banks are also subject to
minimum regulatory capital requirements. At December 31, 1998, capital levels
exceed minimum capital requirements (see Note 11).
Reclassifications. Certain amounts in the financial statements for prior years
have been reclassified to conform with the current year's presentation.
Use of Estimates. The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. The actual results could differ from those
estimates.
2. Acquisitions and Divestitures:
The following mergers and acquisitions were consummated during the three years
ended December 31, 1998:
In May 1996, BNCCORP acquired a nonbank commercial finance company, BNC
Financial, St. Cloud, Minnesota, for $85,000. The subsidiary is engaged
primarily in asset-based commercial financing. Goodwill of $66,000 resulting
from the transaction is being amortized over 25 years.
In December 1996, BNC-North Dakota acquired the accounting firm of Gregory K.
Cleveland & Company, Bismarck, North Dakota (the "Firm") for $368,000. The Firm
was owned by an executive officer/director of BNCCORP. Goodwill of $265,000
resulting from the transaction is being amortized over 15 years. Employees of
the Firm now staff the trust and private banking division of BNC-North Dakota.
In January 1997, BNC-North Dakota acquired the stock of J.D. Meier Insurance
Agency, Inc., Linton, North Dakota ("J.D. Meier") for $34,000. Three executive
officers of the Company owned stock in J.D. Meier.
In August 1997, BNC-North Dakota purchased a management agreement between
Preferred Investment Services, Inc., and Preferred Pension Investors I-87, an
Illinois Partnership (the "Agreement") for $394,000. An executive
officer/director of BNCCORP owned stock in Preferred Investment Services, Inc.
Under the Agreement, BNC-North Dakota, through its trust and private banking
division, provides administrative management services for pension assets.
Goodwill of $394,000 resulting from the transaction is being amortized over 15
years.
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 and became a wholly
owned subsidiary of BNC-North Dakota through the exchange of 63,406 shares of
<PAGE>
BNCCORP common stock for all of the outstanding stock of Lips & Lahr. The name
of the combined agency was subsequently changed to BNC Insurance, Inc. ("BNC
Insurance"). 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 distribution date based on a formula relating to final
resolution of contingencies pending at the consummation date. The accompanying
financial statements for 1997 and 1996 have been restated to give effect to the
combination.
Following is a reconciliation of the amounts of total revenues and net income
previously reported for 1997 and 1996 with restated amounts:
Year ended December 31,
1997 1996
----------- -----------
(In thousands)
Total revenues:
BNCCORP, Inc. and
subsidiaries............ $ 28,984 $ 23,053
Lips & Lahr............. 1,682 1,639
----------- -----------
$ 30,666 $ 24,692
=========== ===========
Net income (loss):
BNCCORP, Inc. and
subsidiaries............ $ 1,512 $ 1,847
Lips & Lahr............. (86) (667)
----------- -----------
$1,426 $1,180
=========== ===========
Basic and diluted earnings
per common share........... $ 0.59 $ 0.49
=========== ===========
3. Restrictions on Cash and Due From Banks:
BNCCORP's subsidiary banks are required to maintain reserve balances in cash
with Federal Reserve Banks. The amount of those reserve balances was $1.3 and
$1.4 million as of December 31, 1998 and 1997, respectively.
4. Debt and Equity Securities:
Debt and equity securities have been classified in the consolidated balance
sheets according to management's intent. The Company had no securities
designated as trading or held-to-maturity in its portfolio at December 31, 1998
or 1997.
The carrying amount of securities and their approximate market values were as
follows as of December 31 (in thousands):
<PAGE>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ----------
Available-for-Sale Securities
1998
U.S. Treasury securities.......$ 5,098 $ 11 $ -- $ 5,109
U.S. government agency mortgage-
backed securities........... 51,194 329 (79) 51,444
U.S. government agencies
securities..................... 13,096 5 (103) 12,998
Collateralized mortgage
obligations.................... 19,602 127 (122) 19,607
State and municipal bonds...... 3,355 72 (7) 3,420
Equity securities.............. 4,024 -- (1) 4,023
---------- ---------- ---------- ---------
$ 96,369 $ 544 $ (312)$ 96,601
========== ========== ========== =========
Available-for-Sale Securities
1997
U.S. Treasury securities.......$ 12,489 $ 43 $ -- $ 12,532
U.S. government agency mortgage-
backed securities........... 32,136 100 -- 32,236
U.S. government agencies
securities..................... 20,039 -- (33) 20,006
Collateralized mortgage
obligations.................... 21,291 34 -- 21,325
State and municipal bonds...... 1,166 123 -- 1,289
Equity securities.............. 7,236 -- -- 7,236
---------- ---------- ---------- --------
$ 94,357 $ 300 $ (33) $ 94,624
========== ========== ========== ========
The scheduled contractual maturities of securities available for sale (other
than equity securities) at December 31, 1998, were as follows:
<PAGE>
Available-for-Sale
Securities
----------------------
Estimated
Amortized Market
Cost Value
---------- -----------
Due in one year or less........... $ 17,229 $ 17,246
Due after one year through five
years............................. 10,385 10,442
Due after five years through ten
years............................. 15,176 15,230
Due after ten years............... 49,555 49,660
---------- -----------
Total.......................... $ 92,345 $ 92,578
========== ===========
Securities, carried at approximately $83.8 and $80.1 million at December 31,
1998 and 1997, respectively, were pledged as collateral for public deposits and
borrowings, including borrowings with the Federal Home Loan Bank ("FHLB").
<PAGE>
Sales proceeds and gross realized gains and losses on securities available for
sale were as follows for the years ended December 31 (in thousands):
1998 1997 1996
----------- ----------- -----------
Sales proceeds........ $ 58,855 $ 27,198 $ 48,700
Gross realized gains.. $ 164 $ 40 $ 32
Gross realized losses. $ 34 $ 32 $ 13
5. Loans and Leases:
Composition of Loan and Lease Portfolio. The composition of the loan and lease
portfolio was as follows as of December 31 (in thousands):
1998 1997
---------- -----------
Commercial and industrial..... $ 131,165 $ 111,429
Real estate:
Mortgage................... 77,254 56,875
Construction............... 20,831 18,215
Agricultural.................. 19,777 21,064
Consumer...................... 14,345 18,173
Lease financing............... 7,422 9,211
Other......................... 416 553
---------- -----------
Total...................... 271,210 235,520
Less:
Allowance for credit losses (3,093) (3,069)
Unearned income............ (334) (320)
---------- -----------
Net loans and leases.... $ 267,783 $ 232,131
========== ===========
Geographic Location and Types of Loans. Loans were to borrowers located in the
following market areas as of December 31 (in thousands):
1998 1997
-------- -------
North Dakota............ 38% 52%
Minnesota............... 52 38
Other................... 10 10
======== =======
Totals............ 100% 100%
======== =======
Commercial loan borrowers are generally small- and mid-sized corporations,
partnerships and sole proprietors in a wide variety of businesses. Loans to
consumers are both secured and unsecured. Real estate loans are fixed or
variable rate and include both amortizing and revolving line-of-credit loans.
Real estate mortgage loans include various types of loans for which the Company
holds real property as collateral. Of the $77.3 and $56.9 million real estate
mortgages as of December 31, 1998 and 1997, respectively, approximately $35.0
and $31.0 million, respectively, were loans made to commercial customers where
the collateral for the loan is, among other things, the real estate occupied by
the business of the customer. Accordingly, certain loans categorized as real
<PAGE>
estate mortgage loans can be characterized as commercial loans which are secured
by real estate. Single- and multi-family residential mortgage loans totaling
$9.6 and $14.7 million at December 31, 1998 and 1997, respectively, were pledged
as collateral for FHLB borrowings.
The Company's credit policies emphasize diversification of risk among
industries, geographic areas and borrowers. The only concentration of loans
exceeding 10 percent of total loans at December 31, 1998 is construction loans.
Loans within this category are diversified across different types of
contractors, geographically dispersed and secured by many different types of
collateral.
Loans to Officers, Directors, Employees and Other Related Parties. Loans to
officers, directors and employees and to other related parties were as follows
as of December 31 (in thousands):
1998 1997
-------- -------
Loans to officers, directors and
employees............................ $ 1,494 $ 1,114
Loans to other related parties....... 502 310
-------- -------
Total loans to officers, directors
and employees and other related
parties........................... $ 1,996 $ 1,424
======== =======
Impaired Loans. As of December 31, the Company's recorded investment in impaired
loans and the related valuation allowance were as follows (in thousands):
1998 1997
------------------------ -----------------------
Recorded Valuation Recorded Valuation
Investment Allowance Investment Allowance
----------- ----------- ---------- ----------
Impaired loans --
Valuation allowance
required.................. $ 8,639 $ 960 $ 12,544 $ 762
No valuation allowance
required.................. 624 -- 116 --
----------- ----------- ---------- ----------
Total impaired loans... $ 9,263 $ 960 $ 12,660 $ 762
=========== =========== ========== ==========
Impaired loans generally include loans on which management believes, based on
current information and events, it is probable that the Company will not be able
to collect all amounts (i.e., contractual principal and interest) due in
accordance with the terms of the loan agreement and which are analyzed for a
specific reserve allowance. The Company generally considers all loans
risk-graded substandard and doubtful as well as nonaccrual and restructured
loans as impaired loans.
The valuation allowance on impaired loans is included in the allowance for
credit losses noted above.
Interest payments received on impaired loans are recorded as interest income
unless collection of the remaining recorded investment is doubtful at which time
payments received are recorded as reductions of principal. The average recorded
investment in impaired loans and approximate interest income recognized for such
loans were as follows for the years ended December 31 (in thousands):
<PAGE>
1998 1997 1996
--------- --------- ---------
Average recorded investment in impaired
loans................................. $ 9,542 $ 7,308 $ 3,555
========= ========= =========
Interest income recognized on impaired
loans................................. $ 992 $ 747 $ 216
========= ========= =========
Average recorded investment in impaired
loans as a percentage of average total
loans.............................. 3.8% 3.3% 2.1%
========= ========= =========
Nonaccrual and Restructured Loans. As of December 31, 1998 and 1997, the Company
had $2.0 million and $376,000, respectively, of nonaccrual loans and $44,000 and
$104,000, respectively, of restructured loans (included as impaired loans
above). The following table indicates the effect on income if interest on such
loans outstanding at year-end had been recognized at original contractual rates
during the year ended December 31 (in thousands):
1998 1997 1996
--------- --------- ---------
Interest income that would have been
recorded.............................. $ 224 $ 56 $ 18
Interest income recorded.............. $ 175 $ 26 $ 6
--------- --------- ---------
Effect on interest income............. $ 49 $ 30 $ 12
========= ========= =========
As of December 31, 1998, the Company had no commitments to lend additional funds
to borrowers with loans whose terms have been modified in troubled debt
restructurings.
Allowance for Credit Losses. Transactions in the allowance for credit losses
were as follows for the years ended December 31 (in thousands):
1998 1997 1996
--------- --------- ---------
Balance, beginning of year............. $ 3,069 $1,594 $1,048
Provision for credit losses......... 1,290 2,619 739
Loans charged off................... (1,455) (1,921) (350)
Loans recovered..................... 189 777 157
--------- --------- ---------
Balance, end of year................... $ 3,093 $3,069 $1,594
========= ========= =========
The increases in the Company's provision for credit losses and loans charged off
for the years ended December 31, 1998 and 1997 relate primarily to questionable
loan practices by a former loan officer at BNC-North Dakota. During a routine
audit of the subsidiary's loan portfolio, the Company discovered lending
practices conducted in violation of normal Company policy. After conducting a
review of the affected loans, the Company terminated the loan officer. For the
years ended December 31, 1998 and 1997, provisions for credit losses totaling
$454,000 and $1.9 million, respectively, related to loans originated by the
officer. Approximately $1.8 million and $639,000 in loans related to the
dismissed officer's activities were charged off during 1998 and 1997,
respectively.
In December 1997, following negotiations with its fidelity bond carrier, the
carrier made a payment of $762,000 to be applied against any covered losses of
the Company. Approximately $690,000 of this payment was credited to the
Company's allowance for credit losses. A second payment of $124,000 was received
from the fidelity bond carrier in September 1998. This payment was also credited
to the Company's allowance for credit losses. A final settlement of covered
<PAGE>
losses with the fidelity bond carrier has not been reached and negotiations with
the carrier are continuing. There can be no assurances concerning the amount of
final recovery on the claim.
6. Premises, Leasehold Improvements and Equipment:
Premises, leasehold improvements and equipment consisted of the following at
December 31 (in thousands):
1998 1997
---------- ----------
Land and improvements.......................... $ 530 $ 520
Buildings and improvements..................... 5,046 4,894
Leasehold improvements......................... 892 881
Furniture, fixtures and equipment.............. 5,969 5,076
---------- ----------
Total cost.................................. 12,437 11,371
Less accumulated depreciation and amortization. (3,610) (2,754)
---------- ----------
Net premises, leasehold improvements and
equipment...................................... $ 8,827 $ 8,617
========== ==========
Depreciation and amortization expense on premises, leasehold improvements and
equipment totaled approximately $901,000, $718,000, and $542,000 for the years
ended December 31, 1998, 1997 and 1996, respectively.
7. Deferred Charges and Intangible Assets:
Deferred charges and intangible assets consisted of the following at December 31
(in thousands):
1998 1997
----------- -----------
Premiums paid for deposits assumed............. $ 4,022 $ 4,022
Goodwill....................................... 1,182 1,182
Covenants not to compete....................... 480 480
Debt related costs............................. 211 161
Organization costs and other miscellaneous
intangibles.................................... 472 472
----------- -----------
Total costs................................. 6,367 6,317
Less accumulated amortization ................. (2,311) (1,687)
----------- -----------
Net deferred charges and intangible assets.. $ 4,056 $ 4,630
=========== ===========
Amortization expense charged to operations was $624,000, $609,000 and $564,000
for the years ended December 31, 1998, 1997 and 1996, respectively.
8. Income Taxes:
The provision for income taxes consists of the following for the years ended
December 31 (in thousands):
<PAGE>
1998 1997 1996
-------- --------- --------
Current.................................. $ 1,483 $ 1,411 $ 1,351
Deferred income taxes from the following
timing differences:
Provision for credit losses........ (121) (570) (274)
Depreciation....................... 46 42 87
Leases............................. (38) 18 129
Other.............................. (77) 143 (124)
-------- --------- --------
$ 1,293 $ 1,044 $ 1,169
======== ========= ========
The provision for federal income taxes expected at the statutory rate differs
from the actual provision as follows for the years ended December 31 (in
thousands):
1998 1997 1996
-------- --------- --------
Tax at 34% statutory rate................ $ 1,210 $ 840 $ 795
Increase (decrease) resulting from:
State taxes (net of federal benefit).. 86 169 131
Tax-exempt interest................... (28) (20) (27)
Other, net............................ 25 55 270
-------- --------- --------
$ 1,293 $ 1,044 $ 1,169
======== ========= ========
Temporary differences between the financial statement carrying amounts and tax
bases of assets and liabilities that result in significant portions of the
Company=s deferred tax assets and liabilities are as follows as of December 31
(in thousands):
1998 1997
-------- --------
Deferred tax asset:
Loans, primarily due to differences in accounting
for credit losses.............................. $ 1,331 $ 1,207
Net operating loss carry forwards................. 18 --
Other............................................. 294 106
-------- --------
Deferred tax asset.......................... 1,643 1,313
-------- --------
Deferred tax liability:
Unrealized gain on securities available for sale.. 90 97
Leases, primarily due to differences in accounting
for leases..................................... 504 542
Premises and equipment, primarily due to
differences in original cost basis and
depreciation................................... 539 493
Other....................................... 222 83
-------- --------
Deferred tax liability...................... 1,355 1,215
-------- --------
Net deferred tax asset...................... $ 288 $ 98
======== ========
<PAGE>
9. Notes Payable:
The Company's notes payable consist of the following as of December 31 (in
thousands):
<TABLE>
<CAPTION>
1998 1997
------- --------
<S> <C> <C>
BNCCORP:
Notes payable to Firstar Bank Milwaukee, N.A. ("Firstar") including a
term note for $3.0 million and a revolving line of credit up to
$12.0 million, interest payable quarterly at either the prime rate
or 90 day LIBOR rate plus 2.00% at BNCCORP's option (7.28% and 7.88%
at December 31, 1998 and 1997, respectively), secured by stock of
subsidiary banks..................................................... $14,520 $ 7,435
8 5/8% subordinated notes, due May 31, 2004, interest payable monthly
(plus unamortized discount of $621 and $705 at December 31, 1998 and
1997, repectively-effective rate 9.61%), unsecured (see below)....... 14,379 14,295
------- --------
Total BNCCORP............................................... 28,899 21,730
Subsidiaries:
Federal funds purchased and U. S. Treasury tax and loan note option
accounts............................................................. 6,030 5,504
Floating rate advances from FHLB repaid during 1998..................... -- 25,000
Repurchase advance from FHLB, renewable weekly, interest payable at
renewal, 5.28% at December 31, 1998, secured by mortgage loans
and government agency securities................................... 15,000 --
Fixed rate advances from FHLB, callable quarterly, principal due July
2000 and January and April 2008, interest payable monthly at rates
ranging from 4.75% and 5.54%, secured by mortgage loans and
government agency securities........................................ 26,500 15,000
Revolving line of credit up to the lessor of $10 million or 40% of
the unpaid and outstanding principal amount of certain of BNC
Financial's asset based loans, payable to Firstar, interest payable
quarterly at either the prime rate or 90 day LIBOR rate plus 2.00%
at BNC Financial's option (7.28% at December 31, 1998), secured
by certain assets of BNC Financial................................ 1,700 --
Other................................................................... 1,807 1,081
------- --------
Total..................................................... $79,936 $68,315
======= ========
</TABLE>
In January 1999, BNC-North Dakota increased its repurchase advance with FHLB to
$21.0 million and reduced its volume of federal funds purchased.
The Firstar notes were renewed in February 1999 and mature in August 1999.
Collateral, interest rates and timing of payments on the notes are as indicated
above.
In May 1997, BNCCORP sold $15.0 million of 8 5/8 percent subordinated notes
pursuant to a public offering (the "Subordinated Notes" or "Notes"). The net
proceeds of the offering of $14.3 million were used to repay approximately $9.6
million of indebtedness then outstanding under revolving lines of credit and for
general corporate purposes. The Subordinated Notes, which qualify as Tier 2
capital up to a certain limit under the Federal Reserve Board's risk-based
capital guidelines (73 percent at December 31, 1998), are considered unsecured
general obligations of BNCCORP. They are redeemable, at the option of BNCCORP,
at par plus accrued interest to the date of redemption, beginning on May 31,
2000. Payment of principal of the Notes may be accelerated only in the case of
certain events relating to bankruptcy, insolvency or reorganization of BNCCORP.
<PAGE>
An initial discount of $750,000 is being amortized to interest expense over the
term of the Notes using the effective interest rate method.
The loan agreements of BNCCORP and BNC Financial, and the indenture pursuant to
which the Subordinated Notes were issued, contain covenants which, among other
matters, restrict or limit the ability of BNCCORP and its subsidiaries, under
certain circumstances, to pay cash dividends, redeem or repurchase stock or make
other capital distributions, incur indebtedness, allow liens or other
encumbrances on property owned or acquired, or guarantee obligations of others
(other than in the ordinary course of banking business). BNCCORP and its
subsidiaries must also maintain certain ratios regarding capital, nonperforming
loans, loan loss reserve coverage, and other matters. BNCCORP and its
subsidiaries were in compliance with or had obtained a waiver for all debt
covenants as of December 31, 1998 and 1997.
10. Stockholders' Equity:
BNCCORP and its subsidiary banks are subject to certain minimum capital
requirements (see Note 11). In addition, certain regulatory restrictions exist
regarding the ability of the subsidiary banks to transfer funds to BNCCORP in
the form of cash dividends, loans or advances. Approval of the principal
regulator is required for the Banks to pay dividends to BNCCORP in excess of the
subsidiary banks' earnings retained in the current year plus retained net
profits for the preceding two years.
11. Regulatory Capital:
BNCCORP and its subsidiary banks are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory- and possibly
additional discretionary-actions by regulators that, if undertaken, could have a
direct material effect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
BNCCORP and its subsidiary banks must meet specific capital guidelines that
involve quantitative measures of their assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices.
Capital amounts and classifications of BNCCORP and its banks are also subject to
qualitative judgments by the regulators about components, risk weightings and
other factors.
Quantitative measures established by the regulations to ensure capital adequacy
require BNCCORP and its banks to maintain minimum amounts and ratios (set forth
in the tables that follow) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes that, as of
December 31, 1998, BNCCORP and its banks meet all capital adequacy requirements
to which they are subject.
As of December 31, 1998, the most recent notifications from the Office of the
Comptroller of the Currency categorized BNCCORP's subsidiary banks as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, the banks must maintain minimum total
risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the
table that follows. There are no conditions or events since that notification
that management believes have changed the institutions' categories.
Actual capital amounts and ratios of BNCCORP and its subsidiary banks as of
December 31 are also presented in the tables (dollar amounts in thousands):
<PAGE>
<TABLE>
<CAPTION>
To be Well
For Capital Capitalized Under
Actual Adequacy Purposes Prompt Corrective
Action Provisions
----------------- ------------------ --------------------
Amount Ratio Amount Ratio Amount Ratio
--------- ------- --------- -------- -------- ----------
Greater Greater
than or than or
equal to equal to
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998
Total Capital (to risk-weighted
assets):
Consolidated................ $ 34,680 11.0 % $ 25,216 8.0 % N/A N/A
BNC-North Dakota............ 21,900 10.3 17,091 8.0 $ 21,364 10.0 %
BNC-Minnesota............... 7,433 10.3 5,778 8.0 7,223 10.0
Tier I Capital (to risk-weighted
assets):
Consolidated................ 21,058 6.7 12,608 4.0 N/A N/A
BNC-North Dakota............ 19,859 9.3 8,546 4.0 12,818 6.0
BNC-Minnesota............... 6,621 9.2 2,889 4.0 4,334 6.0
Tier I Capital (to average
assets):
Consolidated................ 21,058 5.5 15,278 4.0 N/A N/A
BNC-North Dakota............ 19,859 6.5 12,242 4.0 15,303 5.0
BNC-Minnesota............... 6,621 9.1 2,913 4.0 3,642 5.0
As of December 31, 1997
Total Capital (to risk-weighted
assets):
Consolidated................ $ 32,849 12.2 % $ 21,551 8.0 % N/A N/A
BNC-North Dakota............ 21,535 10.8 16,014 8.0 $20,017 10.0 %
BNC-Minnesota............... 5,742 10.2 4,482 8.0 5,603 10.0
Tier I Capital (to risk-weighted
assets):
Consolidated................ 19,853 7.4 10,776 4.0 N/A N/A
BNC-North Dakota............ 19,168 9.6 8,007 4.0 12,010 6.0
BNC-Minnesota............... 5,191 9.3 2,241 4.0 3,362 6.0
Tier I Capital (to average
assets):
Consolidated................ 19,853 5.9 13,380 4.0 N/A N/A
BNC-North Dakota............ 19,168 6.8 11,238 4.0 14,047 5.0
BNC-Minnesota............... 5,191 9.4 2,200 4.0 2,750 5.0
</TABLE>
12. Fair Value of Financial Instruments:
The estimated fair values of the Company's financial instruments are as follows
as of December 31 (in thousands):
<PAGE>
1998 1997
---------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ---------
Assets:
Cash, due from banks and federal
funds sold....................$ 10,284 $ 10,284 $ 15,415 $ 15,415
Investment securities available
for sale...................... 96,601 96,601 94,624 94,624
Loans and leases, net............ 267,783 266,790 232,131 232,329
--------- --------- --------- ----------
374,668 $ 373,675 342,170 $ 342,368
========== =========
Other assets..................... 21,664 18,833
--------- ---------
$ 396,332 $ 361,003
========= ==========
Liabilities:
Deposits, noninterest-bearing....$ 28,475 $ 28,475 $ 25,795 $ 25,795
Deposits, interest-bearing....... 256,024 256,775 237,029 237,493
Notes payable.................... 79,936 80,672 68,315 68,833
---------- --------- ---------- ---------
364,435 $ 365,922 331,139 $ 332,121
========= =========
Other liabilities................ 6,642 6,716
Stockholders= equity............. 25,255 23,148
---------- ----------
$ 396,332 $ 361,003
========== ==========
13. Financial Instruments With Off-Balance-Sheet Risk:
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit, including loan
commitments and unused portions of lines of credit, and letters of credit. These
instruments involve, to varying degrees, elements of credit risk in excess of
the amount recognized in the consolidated balance sheets. The contract or
notional amounts of these instruments reflect the extent of involvement the
Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party for commitments to extend credit and letters of credit is
represented by the contractual or notional amount of those instruments. The
Company generally requires collateral or other security specifically to support
off-balance-sheet financial instruments with credit risk.
Financial instruments with contract amounts representing credit risk are as
follows as of December 31 (in thousands):
1998 1997
---------- ----------
Commitments to extend credit........ $ 82,311 $ 52,168
Letters of credit................... 1,840 1,418
---------- ----------
$ 84,151 $ 53,586
========== ==========
<PAGE>
14. Related-Party Transactions:
The Company has entered into transactions with its stockholders, directors,
officers and other affiliates including the accounting firm, insurance agency,
and management agreement purchases discussed in Note 2. In the opinion of
management, such transactions have been fair and reasonable to the Company and
have been entered into under terms and rates substantially the same as those
offered by the Company in the ordinary course of business.
15. Benefit Plans:
BNCCORP has a 401(k) plan covering all employees of BNCCORP and its subsidiaries
who meet specified age and service requirements. Eligible employees may elect to
defer up to 15 percent of compensation each year not to exceed the dollar limit
set by law. At their discretion, BNCCORP and its subsidiaries provide matching
contributions of up to 50 percent of employee deferrals up to a maximum employer
contribution of 5 percent of compensation. The Company made matching
contributions of $180,000, $132,000, and $99,000 in 1998, 1997 and 1996,
respectively. Under the investment options available under the 401(k) plan,
employees may elect to invest their salary deferrals in BNCCORP stock.
16. Commitments and Contingencies:
Employment Agreements and Noncompete Convenants. The Company has entered into
three-year employment agreements with its chief executive officer ("CEO"),
president and chief operating officer ("COO"), the presidents of BNC-North
Dakota, BNC-North Dakota's Fargo Branch and BNC-Minnesota and the executive vice
president of BNC-North Dakota's financial services division and general counsel
of the Company (the "Executives"). The Executives will be paid minimum annual
salaries throughout the terms of the agreements and annual incentive bonuses as
may, from time to time, be fixed by the board of directors. The Executives will
also be provided with benefits under any employee benefit plan maintained by
BNCCORP for its employees generally, or for its senior executive officers in
particular, on the same terms as are applicable to other senior executives of
BNCCORP. Under the agreements of the CEO and COO, if status as employees with
BNCCORP is terminated for any reason other than death, disability, cause, as
defined in the agreements, or if they terminate their employment for good
reason, as defined in the agreements, or following a change in control of the
Company, as defined in the agreements, then the CEO and COO will be paid a
lump-sum amount equal to three times their current annual compensation. Under
the remaining agreements, except for the agreement with the president of
BNC-North Dakota's Fargo branch, if status as employees with the Company is
terminated for any reason other than death, disability, cause, or if they
terminate their employment for good reason, except in the event of a change in
control of the Company, then these executives will be paid a lump-sum amount
equal to 1/12th of their current annual compensation multiplied by the number of
partial or full months remaining in the employment agreement. If status as
employees with the Company is terminated following a change in control of the
Company, then these executives will be paid a lump-sum amount equal to three
times their current annual compensation.
In conjunction with the business combination with Lips & Lahr, the Company
assumed five-year employment agreements with two officers of Lips & Lahr (the
"Officers"). The agreements, which originally provided for salaries based upon a
percentage of all net annual commission received by Lips & Lahr on business
written by the Officers, were amended to provide for minimum annual salaries
through the remainder of the contract term which runs through December 31, 2000.
Additionally, the contracts provide for the payment of deferred compensation for
a term of ten years commencing on February 1, 2001 and continuing monthly until
paid in full. Finally, as separate consideration for the release of all present
and future claims to the Officer's book of business at the end of the term of
the employment contract and for other terms of the contract involving
confidentiality, nonpiracy and a restrictive covenant covering a period of five
years after the term of the agreement, the agreements provide for 120 monthly
payments also commencing on February 1, 2001. One of the Officers resigned
<PAGE>
subsequent to December 31, 1998 and is now acting as a consultant to BNC
Insurance pursuant to a consulting agreement. Under this agreement, the
Officer's annual salary is replaced with an annual consulting fee and the
Company remains obligated under the deferred compensation and non-compete
provisions of the original employment agreements.
In the business combination with Lips & Lahr, BNC Insurance assumed two
additional non-compete agreements with former officers of Lips & Lahr. Monthly
payments under these agreements, which commenced in 1996, are scheduled to
continue into 2006.
Leases. The Company has entered into operating lease agreements for certain
facilities and equipment used in its operations. Rent expense for the years
ended December 31, 1998, 1997 and 1996, was $359,000, $350,000, and $339,000,
respectively. Minimum annual base lease payments for operating leases with
remaining terms of greater than one year are as follows:
1999............... $ 463,000
2000............... 434,000
2001............... 371,000
2002............... 300,000
2003............... 258,000
Thereafter......... 303,000
Property and Equipment. 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 though current operating profits. At
December 31, 1998, the Company was not committed to any portion of this amount,
however, a construction contract was signed during January 1999. The Company
anticipates that excess office space in the new building will be rented out
until such time as the Company's Fargo operations require use of the full
building.
Legal Proceedings. On September 21, 1998 BancInsure, BNC-North Dakota insurer of
employee fidelity, brought a declaratory judgment action in federal court
against the bank and a former loan officer. The bank filed a proof of loss with
BancInsure claiming a loss of $2.9 million resulting from the officer's
unauthorized activities while she was a senior loan officer with the bank. The
bank alleges that the officer's unauthorized activities consist of
misrepresentations to management, conflicts of interest and breach of fiduciary
duties in conjunction with her handling of her loan portfolio. BancInsure paid
the bank the sum of $886,000 under a reservation of rights and in its lawsuit
BancInsure requests that the court determine BancInsure's obligations to the
bank under the fidelity insurance agreement it issued to the bank. BancInsure
also requests that in the event the court determines that it is obligated to pay
the bank under its insuring agreement, that a judgment of indemnity be entered
for that amount against the officer. The bank filed a cross claim against the
officer in the federal action for the losses sustained by the bank as a result
of the officer's unauthorized activities. The state court action previously
filed by the bank against the officer has been dismissed and the bank's claims
against the officer will be litigated in the federal court action. The matter is
set for trial in February 2000.
17. Stock-Based Compensation:
BNCCORP's Stock Incentive Plan (the "Stock Plan"), is intended to provide
long-term incentives to its key employees, including officers and directors who
are employees of the Company. The Stock Plan, which is administered by the
compensation committee of the board of directors (the "Committee"), provides for
an authorization of 250,000 shares of common stock for issuance thereunder.
Under the Stock Plan, the Company may grant employees incentive stock options,
nonqualified stock options, restricted stock, stock awards or any combination
thereof. The Committee establishes the exercise price of any stock options
granted under the Stock Plan provided that the exercise price may not be less
<PAGE>
than the fair market value of a share of common stock on the date of grant. As
of December 31, 1998, 25,000 restricted shares had been awarded under the Stock
Plan. 20,000 shares of restricted stock vest in 33 1/3 percent increments during
1998, 1999 and 2000 and the remaining 5,000 shares vest 60 percent in 2001 and
an additional 20 percent in each of 2002 and 2003. The Company records the
compensation expense related to restricted stock over the applicable service
period. A total of 172,200 options had been awarded under the Stock Plan as of
December 31, 1998.
The Company's Nonemployee Director Stock Option Plan (the "Directors' Plan") was
adopted during 1998 and is also administered by the Committee. The Directors'
Plan provides for 650 options to be issued to each nonemployee director of
BNCCORP and its subsidiaries who is serving as a director immediately following
each annual meeting of stockholders. The exercise price of stock options granted
under the Directors' Plan is equal to the fair market value of a share of common
stock on the date of grant. As of December 31, 1998, 4,550 options had been
awarded under the Directors' Plan. The options are exercisable at a price of
$17.75 per share and became fully vested on December 17, 1998.
The Company applies Accounting Principles Board Opinion No. 25, and related
interpretations in accounting for both the Stock Plan and the Directors' Plan.
Accordingly, no compensation cost has been recognized for the options issued
under the plans in 1998, 1997, or 1996. For the restricted stock issued under
the Stock Plan, compensation cost charged to operations was $146,000 in 1998.
There was no compensation cost related to restricted stock charged to operations
during 1997 or 1996. Had compensation cost been determined on the basis of fair
value pursuant to Statement of Financial Accounting Standards No. 123, net
income and earnings per share ("EPS") would have been reduced as follows:
1998 1997 1996
----------- ------------ -----------
Net Income:
As Reported................ $2,267,000 $ 1,426,000 $1,170,000
Pro Forma.................. 2,118,000 1,412,000 1,137,000
Basic EPS:
As Reported................ 0.95 0.59 0.49
Pro Forma.................. 0.85 0.58 0.47
Diluted EPS:
As reported................ 0.91 0.59 0.49
Pro Forma.................. 0.80 0.58 0.47
A summary of the status of stock options under the Stock Plan and the Directors'
Plan at December 31, 1998 and 1997 and changes during the years then ended, is
presented in the tables and narrative below:
<PAGE>
Stock Plan 1998 1997
--------------------- --------------------
Options Weighted Options Weighted
To Average to Average
Purchase Exercise Purchase Exercise
Shares Price Shares Price
--------- ---------- --------- ---------
Outstanding, beginning of
year....................... 27,926 $ 10.00 30,000 $ 10.00
Granted.................... 142,200 17.00 -- --
Exercised.................. 1,935 10.00 -- --
Forfeited.................. 21,981 15.92 2,074 10.00
--------- ---------- --------- ---------
Outstanding, end of year... 146,210 $ 15.92 27,926 $ 10.00
--------- ---------- --------- ---------
Exercisable, end of year... 18,088 $ 10.00 16,756 $ 10.00
========= ========== ========= =========
Weighted average fair value
of options:
Granted............... $ 7.60 --
========= =========
Exercised............. $ 4.50 --
========= =========
Forfeited............. $ 7.12 $ 4.50
========= =========
Directors' Plan 1998
---------------------
Options Weighted
To Average
Purchase Exercise
Shares Price
--------- ----------
Outstanding, beginning of
year....................... -- --
Granted.................... 4,550 $ 17.75
--------- ----------
Outstanding, end of year... 4,550 $ 17.75
========= ==========
Exercisable, end of year... 4,550 $ 17.75
========= ==========
Weighted average fair value
of options granted......... $ 6.58
=========
The fair value of each option granted is estimated on the grant date using the
Black-Scholes option pricing model. The following assumptions were made in
estimating fair value:
Stock Stock Plan Director's
Assumption Plan 1998 1995 Grant Plan 1998
Grant Grant
- ------------------------- ----------- ------------ --------------
Dividend yield.......... 0.00% 0.00% 0.00%
Risk-free interest rate. 5.63% 6.08% 5.49%
Expected life........... 7 years 7 years 5 years
Expected volatility..... 29.79% 28.69% 30.39%
Following is a summary of the status of options outstanding under each of the
Company's plans at December 31, 1998:
<PAGE>
Outstanding Options Exercisable Options
------------------------------------------ --------------------
Weighted
Average Exercise Exercise
Number Remaining Price Number Price
Contractual Life
----------- ----------------- --------- ---------- --------
Stock Plan: 22,610 6.5 years $ 10.00 18,088 $ 10.00
123,600 9.0 years $ 17.00 -- --
Director's Plan: 4,550 9.5 years $ 17.75 4,550 $ 17.75
18. Earnings Per Common Share:
The following table shows the amounts used in computing EPS and the effect on
weighted average number of shares of potential dilutive common stock issuances:
Net
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------ -------------- -----------
1998
Basic earnings per share
Income available to common
stockholders....................... $ 2,267,000 2,397,340 $ 0.95
===========
Effect of dilutive shares
Options......................... 58,013
Warrants........................ 48,182
--------------
Diluted earnings per share:
Income available to common
stockholders....................... $ 2,267,000 2,503,535 $ 0.91
============ ============== ===========
1997
Basic earnings per share:
Income available to common
stockholders....................... $ 1,426,000 2,402,126 $ 0.59
===========
Effect of dilutive shares
Options......................... 5,831
Warrants........................ 4,791
--------------
Diluted earnings per share:
Income available to common
stockholders....................... $ 1,426,000 2,412,748 $ 0.59
============ ============== ===========
1996
Basic earnings per share:
Income available to common
stockholders....................... $ 1,170,000 2,404,944 $ 0.49
===========
Effect of dilutive shares
Options......................... 1,027
Warrants........................ --
--------------
Diluted earnings per share:
Income available to common
stockholders....................... $ 1,170,000 2,405,971 $ 0.49
============ ============== ===========
<PAGE>
Warrants to purchase 50,000 shares of common stock at $12 per share were
outstanding during all periods presented but were not included in the
computation of diluted EPS for 1996 and portions of 1997 and 1998 because their
effects were antidilutive. Additionally, options to purchase between 23,000 and
30,000 shares of common stock at $10 per share were outstanding during all
periods presented but were not included in the computation of diluted EPS for
the first half of 1996 and a portion of 1997 because their effects were
antidilutive. Finally, options to purchase between 124,000 and 138,000 shares of
common stock at $17 per share and 4,550 shares of common stock at $17.75 per
share were outstanding during 1998 but were not included in the computation of
diluted EPS for the second half of 1998 because their effects were antidilutive.
The following transaction occurred after December 31, 1998, which, had it taken
place during fiscal 1998, would have changed the number of shares used in the
EPS computations: 10,500 shares of restricted stock were issued on January 1,
1999.
19. 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 - Minnesota, and 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, 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.
The following tables present segment profit or loss, assets and a reconciliation
of segment information as of, and for the periods ended, December 31 (in
thousands):
<PAGE>
1998
-----------------------------------------------------
BNC-
North BNC- BNC- Other
Dakota Minnesota Financial (a) Total
--------- --------- --------- --------- ---------
Net interest income........$ 9,830 $ 3,422 $ 1,069 $ (603) $ 13,718
Other revenue-external
customers............... 3,944 868 208 30 5,050
Other revenue - from other
segments................ 216 -- -- 4,423 4,639
Depreciation and
amortization............ 1,303 124 27 71 1,525
Equity in the net income
of investees............ -- -- -- 2,997 2,997
Other significant noncash
items:
Provision for loan
losses.................. 871 330 89 -- 1,290
Income tax expense......... 710 661 263 (341) 1,293
Segment profit............. 1,662 950 385 2,267 5,264
Segment assets............. 318,216 74,226 24,768 55,334 472,544
Expenditures for additions
to assets............... 877 176 10 74 1,137
1998
-----------------------------------------------------
Inter-
Reportable Other segment Consolidated
Segments (a) Elimination Other Total
---------- -------- ----------- ------- -------------
Net interest income........$ 14,321 $ (603) -- -- $ 13,718
Other revenue-external
customers............... 5,020 30 -- -- 5,050
Other revenue - from
other segments.......... 216 4,423 $ (4,639) -- 0
Depreciation and
amortization............ 1,454 71 -- -- 1,525
Equity in the net income
of investees............ -- 2,997 (2,997) -- 0
Other significant noncash
items:
Provision for loan
losses.................. 1,290 -- -- -- 1,290
Income tax expense......... 1,634 (341) -- -- 1,293
Segment profit............. 2,997 2,267 (2,997) -- 2,267
Segment assets............. 417,210 55,334 (76,212) -- 396,332
Expenditures for additions
to assets............... 1,063 74 -- -- 1,137
- ---------------
(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.
<PAGE>
1997
-----------------------------------------------------
BNC-
North BNC- BNC- Other
Dakota Minnesota Financial (a) Total
--------- --------- --------- --------- ---------
Net interest income........$ 10,168 $ 2,388 $ 528 $ (501) $ 12,583
Other revenue-external
customers............... 3,469 450 196 9 4,124
Other revenue - from
other segments.......... 155 -- -- 2,972 3,127
Depreciation and
amortization............ 1,141 111 17 58 1,327
Equity in the net income
of investees............ -- -- -- 2,006 2,006
Other significant noncash
items:
Provision for loan
losses.................. 2,260 258 101 -- 2,619
Income tax expense......... 909 328 89 (282) 1,044
Segment profit............. 1,405 474 127 1,381 3,387
Segment assets............. 309,946 57,796 15,373 45,768 428,883
Expenditures for additions
to assets............... 2,628 46 7 12 2,693
1997
-----------------------------------------------------
Inter-
Reportable Other segment Consolidated
Segments (a) Elimination Other Total
---------- -------- ----------- ------- -------------
Net interest income........$ 13,084 $ (501) -- $ 45 $ 12,628
Other revenue-external
customers............... 4,115 9 -- -- 4,124
Other revenue - from
other segments.......... 155 2,972 $ (3,127) -- 0
Depreciation and
amortization............... 1,269 58 -- -- 1,327
Equity in the net income
of investees............ -- 2,006 (2,006) -- 0
Other significant noncash
items:
Provision for loan
losses.................. 2,619 -- -- -- 2,619
Income tax expense......... 1,326 (282) -- -- 1,044
Segment profit............. 2,006 1,381 (2,006) 45 1,426
Segment assets............. 383,115 45,768 (67,880) -- 361,003
Expenditures for additions
to assets............... 2,681 12 -- -- 2,693
- ---------------
(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.
<PAGE>
1996
-----------------------------------------------------
BNC-
North BNC- BNC- Other
Dakota Minnesota Financial (a) Total
--------- --------- --------- --------- ---------
Net interest income........$ 8,827 $ 1,160 $ 203 $ (336) $ 9,854
Other revenue-external
customers............... 3,379 149 108 139 3,775
Other revenue - from
other segments.......... 294 -- -- 2,668 2,962
Depreciation and
amortization............ 931 92 16 49 1,088
Equity in the net income
of investees............ -- -- -- 1,741 1,741
Other significant noncash
items:
Provision for loan
losses.................. 525 294 50 -- 869
Income tax expense......... 1,536 (102) 16 (281) 1,169
Segment profit............. 1,910 (193) 24 1,215 2,956
Segment assets............. 258,662 39,086 5,763 31,311 334,882
Expenditures for additions
to assets............... 838 553 57 14 1,462
1997
-----------------------------------------------------
Inter-
Reportable Other segment Consolidated
Segments (a) Elimination Other Total
---------- -------- ----------- ------- -------------
Net interest income........$ 10,190 $ (336) -- -- $ 9,854
Other revenue-external
customers............... 3,636 139 -- $ (45) 3,730
Other revenue - from
other segments.......... 294 2,668 $ (2,962) -- 0
Depreciation and
amortization............ 1,039 49 -- -- 1,088
Equity in the net income
of investees............ -- 1,741 (1,741) -- 0
Other significant noncash
items:
Provision for loan
losses.................. 869 -- (130) -- 739
Income tax expense......... 1,450 (281) -- -- 1,169
Segment profit............. 1,741 1,215 (1,741) (45) 1,170
Segment assets............. 303,511 31,311 (45,343) -- 289,479
Expenditures for additions
to assets............... 1,448 14 -- -- 1,462
- ---------------
(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.
<PAGE>
20. Condensed Financial Information-Parent Company Only:
Condensed financial information of BNCCORP on a parent company only basis is as
follows:
Parent Company Only
Condensed Balance Sheets
As of December 31
(In thousands, except share and per share data)
1998 1997
---------- ------------
Assets:
Cash and short-term investments............... $ 353 $ 1,068
Investment in subsidiaries.................... 33,151 28,847
Loans......................................... 341 499
Receivable from subsidiaries.................. 20,106 14,248
Deferred changes and intangible assets, net... 360 407
Other......................................... 1,023 699
---------- ------------
$ 55,334 $ 45,768
========== ============
Liabilities and stockholders= equity:
Notes payable................................. $ 29,148 $ 21,979
Accrued expenses and other liabilities........ 931 641
---------- ------------
30,079 22,620
---------- ------------
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) in 1998 and
1997, respectively.......................... 24 24
Capital surplus............................... 13,951 13,786
Retained earnings............................. 11,651 9,384
Treasury stock (42,880 and 25,380 shares,
respectively).............................. (513) (216)
Unrealized holding gain on securities available
for sale................................... 142 170
---------- ------------
25,255 23,148
---------- ------------
$ 55,334 $ 45,768
========== ============
<PAGE>
Parent Company Only
Condensed Statements of Income
For the Years Ended December 31
(In thousands)
1998 1997 1996
---------- ---------- --------
Income:
Management fee income....................... $ 1,426 $ 965 $ 927
Interest.................................... 1,623 847 210
Other....................................... 30 9 138
---------- ---------- --------
Total income............................. 3,079 1,821 1,275
---------- ---------- --------
Expenses:
Interest.................................... 2,226 1,348 546
Personnel expense........................... 1,268 849 965
Legal and other professional................ 188 103 155
Depreciation and amortization............... 71 58 49
Other....................................... 397 370 367
---------- ---------- --------
Total expenses........................... 4,150 2,728 2,082
---------- ---------- --------
Loss before income tax benefit and equity in
undistributed income of subsidiaries........ (1,071) (907) (807)
Income tax benefit............................. 341 282 281
---------- ---------- --------
Loss before equity in undistributed income of
subsidiaries................................ (730) (625) (526)
Equity in undistributed income of subsidiaries. 2,997 2,006 1,741
---------- ---------- --------
Net income............................... $ 2,267 $ 1,381 $ 1,215
========== ========== ========
<PAGE>
Parent Company Only
Condensed Statements of Cash Flows
For the Years Ended December 31
(In thousands)
1998 1997 1996
-------- -------- --------
Cash flows from operating activities:
Net income....................................... $ 2,267 $ 1,381 $ 1,215
Adjustments to reconcile net income to net cash
used in operating activities -
Depreciation and amortization................. 53 48 49
Equity in undistributed income of subsidiaries (2,997) (2,006) (1,741)
Change in prepaid expenses and other
receivables................................ (5,858) (10,174) (3,816)
Change in accrued expenses and other
liabilities................................ 290 456 (71)
Other......................................... 7 64 (392)
--------- -------- -------
Net cash used in operating activities...... (6,238) (10,231) (4,756)
--------- -------- -------
Cash flows from investing activities:
Net increase (decrease) in loans................. (158) (46) 1
Increase in investment in subsidiaries .......... (1,307) (641) (8,700)
Sale (purchases) of premises, leasehold
improvements and equipment.................... (67) (12) 50
Dividends received............................... -- -- 700
--------- -------- -------
Net cash used in investing activities...... (1,532) (699) (7,949)
--------- -------- -------
Cash flows from financing activities:
Repayments of long-term borrowings............... (9,785) (21,190) (1,004)
Proceeds from long-term borrowings............... 16,870 32,875 7,899
Amortization of discount on subordinated notes... 84 46 --
Amortization of deferred charges................. 18 10 --
Purchase of treasury stock (297) -- --
Other, net....................................... 165 -- (7)
--------- -------- -------
Net cash provided by financing activities.. 7,055 11,741 6,888
--------- -------- -------
Net increase (decrease) in cash and cash equivalents (715) 811 (5,817)
Cash and cash equivalents, beginning of year........ 1,068 257 6,074
========= ======== =======
Cash and cash equivalents, end of year.............. $ 353 $ 1,068 $ 257
========= ======== =======
Supplemental cash flow information:
Interest paid.................................... $ 2,187 $ 1,262 $ 524
========= ======== =======
Income tax payments received from subsidiary
banks, net of income taxes paid............... $ 438 $ 322 $ 441
========= ======== =======
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 9. Directors, Executive Officers, Promotors and Control Persons; Section
16(a) Beneficial Ownership Reporting Compliance
Information concerning the Company's directors and officers called for by this
item will be included in the Company's definitive Proxy Statement prepared in
connection with the 1999 Annual Meeting of Stockholders and is incorporated
herein by reference.
Item 10. Executive Compensation
Information concerning the compensation of the Company's executives called for
by this item will be included in the Company's definitive Proxy Statement
prepared in connection with the 1999 Annual Meeting of Stockholders and is
incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners and
management called for by this item will be included in the Company's definitive
Proxy Statement prepared in connection with the 1999 Annual Meeting of
Stockholders and is incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions
Information concerning certain relationships and related transactions called for
by this item will be included in the Company's definitive Proxy Statement
prepared in connection with the 1999 Annual Meeting of Stockholders and is
incorporated herein by reference.
PART IV
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits.
Reference is made to the Exhibit Index beginning on page E-1 hereby. The
Company will furnish to any eligible stockholder, upon written request of
such stockholder, a copy of any exhibit listed upon the payment of a
reasonable fee equal to the Company's expenses in furnishing such exhibit.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended December 31,
1998.
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on March 24, 1999.
Name of Issuer
By: /s/ Tracy Scott
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities indicated,
on March 29, 1999.
Chairman of the Board, Chief Executive
/s/ Tracy Scott Officer and Director
(Principal Executive Officer)
President, Chief Operating Officer and
/s/ Gregory K. Cleveland Director
(Principal Financial Officer)
(Principal Accounting Officer)
/s/ Jon E. Strinden Director
/s/ Kevin D. Pifer Director
/s/ John A. Hipp, M.D. Director
/s/ Richard M. Johnson, Jr. Director
/s/ John M. Schaffer Director
/s/ Jerry R. Woodcox Director
/s/ Brad J. Scott Director
<PAGE>
EXHIBIT INDEX
- --------------------------------------------------------------------------------
Exhibit
No. Exhibit Description
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2.1 Plan of merger of BNCCORP, Inc., a North Dakota corporation into
BNCCORP, INC., a Delaware corporation, incorporated by reference to
Exhibit 2.1 to the Registrant's Registration Statement on Form SB-2
(Registration No. 33-92369).
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2.2 Branch Purchase and Assumption Agreement dated as of January 31,
1995 between Metropolitan Federal Bank, fsb and Bismarck National
Bank, a national banking association, incorporated by reference to
Exhibit 2.2 to the Registrant's Registration Statement on Form SB-2
(Registration No. 33-92369).
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2.3 Stock Purchase Agreement dated as of June 7, 1995, by and among the
Company, Gregory Cleveland, Tracy Scott and Community First
Bankshares, Inc., incorporated by reference to Exhibit 2.3 to
Amendment No. 1 to the Registrant's Registration Statement on Form
SB-2 (Registration No. 33-92369).
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2.4 Agreement and Plan of Merger of the First National Bank of Linton
with and into BNC National Bank dated as of July 28, 1995,
incorporated by reference to Exhibit 2.4 to the Registrant's Form
10-KSB dated as of March 29, 1996.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2.5 Contract for Sale of Assets dated December 31, 1996 by and between
Gregory K. Cleveland, P.C. and BNC National Bank, incorporated by
reference to Exhibit 2.5 to the Registrant's Form 10-KSB dated as of
March 26, 1997.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2.6 Stock Purchase Agreement dated February 26, 1997 by and between BNC
National Bank and Shareholders of J.D. Meier Insurance Agency,
incorporated by reference to Exhibit 2.6 to the Registrant's Form
10-KSB dated as of March 26, 1997.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2.7 Amended and Restated Agreement and Plan of Merger dated December 19,
1997 among BNCCORP, Inc., J.D. Meier Insurance Agency, Inc. and Lips &
Lahr, Inc., William Wade, Dale Ely, Laif Olson, Richard Lahr and David
Clausnitzer, incorporated by reference to Exhibit 2.7 to the
Registrant's Form 10-KSB dated as of March 25, 1998.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3.1 Certificate of Incorporation of the Company, incorporated by
reference to Exhibit 3.1 to the Registrant's Registration Statement
on Form SB-2 (Registration No. 33-92369).
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3.2 Bylaws of the Company, incorporated by reference to Exhibit 3.2 to
the Registrant's Registration Statement on Form SB-2 (Registration
No. 33-92369).
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4.1 Specimen of Common Stock Certificate, incorporated by reference to
Exhibit 4 to Amendment No. 1 to the Registrant's Registration
Statement on Form SB-2 (Registration No. 33-92369).
E-1
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4.2 Warrant to Subscribe for and Purchase Common Stock of BNCCORP, Inc.
by and between the Company and Dain Bosworth Incorporated,
incorporated by reference to Exhibit 4.2 to the Registrant's Form
10-KSB dated as of March 29, 1996.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4.3 Form of Indenture by and between BNCCORP, Inc. and Firstar Trust
Company, as Trustee, incorporated by reference to Exhibit 4.1 to the
Registrant's Registration Statement on Form SB-2 (Registration No.
333-26703).
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
10.1 Form of Indemnity Agreement by and between the Company and each of
the Company's Directors, incorporated by reference to Exhibit 10.1
to the Registrant's Registration Statement on Form SB-2
(Registration No. 33-92369).
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
10.2 Form of Employment Agreement between the Company and each of Tracy
J. Scott, Gregory K. Cleveland, and Brad J. Scott, incorporated by
reference to Exhibit 10.2 to the Registrant's Registration Statement
on Form SB-2 (Registration No. 33-92369).
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
10.3 Form of BNCCORP, INC. Stock Incentive Plan, incorporated by
reference to Exhibit 10.3 to the Registrant's Registration Statement
on Form SB-2 (Registration No. 33-92369).
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
10.4 Employment Agreement between the Company, Bismarck National Bank and
Thomas Resch, incorporated by reference to Exhibit 10.8 to Amendment
No. 1 to the Registrant's Registration Statement on Form SB-2
(Registration No. 33-92369) as amended by Amendment dated June 1,
1996.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
10.5 Form of Stock Option Agreement for the Grant of Non-Qualified Stock
Options Under the BNCCORP, INC. 1995 Stock Incentive Plan dated as of
June 7, 1995, incorporated by reference to Exhibit 10.5 to the
Registrant's Form 10-KSB dated as of March 29, 1996.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
10.6 Term Loan Agreement dated February 19, 1996 by and between Firstar
Bank Milwaukee, N.A. and BNCCORP, Inc., incorporated by reference to
Exhibit 10.6 to the Registrant's Form 10-KSB dated as of March 29,
1996.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
10.7 Revolving Credit Agreement dated February 19, 1996 by and between
Firstar Bank Milwaukee, N.A. and BNCCORP, Inc., incorporated by
reference to Exhibit 10.7 to the Registrant's Form 10-KSB dated as of
March 29, 1996.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
10.8 Amendment to Term Loan Agreement and Term Note dated February 11,
1997 by and between Firstar Bank Milwaukee, N.A. and BNCCORP, Inc.,
incorporated by reference to Exhibit 10.8 to the Registrant's Form
10-KSB dated as of March 26, 1997.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
10.9 Amendment to Revolving Credit Agreement and Revolving Credit Note
dated February 11, 1997 by and between Firstar Bank Milwaukee, N.A.
and BNCCORP, Inc., incorporated by reference to Exhibit 10.9 to the
Registrant's Form 10-KSB dated March 26, 1997.
E-2
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
10.10 Revolving Credit Agreement dated September 27, 1996 by and between
BNC Financial Corporation and Bank Windsor, incorporated by
reference to Exhibit 10.10 to the Registrant's Form 10-KSB dated March
26, 1997.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
10.11 Second Amendment to Term Loan Agreement and Term Note dated July 16,
1997 by and between Firstar Bank Milwaukee, N.A. and BNCCORP, Inc.,
incorporated by reference to Exhibit 10.11 to the Registrant's Form
10-QSB dated August 13, 1997.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
10.12 Second Amendment to Revolving Credit Agreement and Revolving Credit
Note dated July 16, 1997 by and between Firstar Bank Milwaukee, N.A.
and BNCCORP, Inc., incorporated by reference to Exhibit 10.12 to the
Registrant's Form 10-QSB dated August 13, 1997.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
10.13 Third Amendment to Term Loan Agreement and Term Note dated February
19, 1998 by and between Firstar Bank Milwaukee, N.A. and BNCCORP,
Inc., incorporated by reference to Exhibit 10.13 to the Registrant's
Form 10-KSB dated as of March 25, 1998.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
10.14 Third Amendment to Revolving Credit Agreement and Revolving Credit
Note dated February 19, 1998 by and between Firstar Bank Milwaukee,
N.A. and BNCCORP, Inc., incorporated by reference to Exhibit 10.14 to
the Registrant's Form 10-KSB dated as of March 25, 1998.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
10.15 Form of Stock Option Agreement for the Grant of Incentive Stock
Options Under the BNCCORP, Inc. 1995 Stock Incentive Plan dated as of
January 2, 1998 between the Company and each of Tracy J. Scott,
Gregory K. Cleveland, Brad J. Scott, Thomas J. Resch and John A.
Malmberg, incorporated by reference to Exhibit 10.15 to the
Registrant's Form 10-KSB dated as of March 25, 1998.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
10.16 Contract of Sale dated as of August 29, 1997, by and between BNC
National Bank and Preferred Investment Services, Inc., incorporated by
reference to Exhibit 10.16 to the Registrant's Form 10-KSB dated
as of March 25, 1998.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
10.17 Assignment Agreement dated as of August 29, 1997, by and between
Preferred Investment Services, Inc. and BNC National Bank,
incorporated by reference to Exhibit 10.17 to the Registrant's Form
10-KSB dated as of March 25, 1998.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
10.18 Form of Amended and Restated Employment Agreement Between J.D. Meier
Insurance Agency, Inc. and each of David Clausnitzer, Dale Ely,
Richard Lahr and Laif Olson, dated as of June 30, 1998, incorporated
by reference to Exhibit 10.18 to the Registrant's Form 10-QSB dated as
of August 13, 1998.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
10.19 Letter of Amendment to Term Loan Agreement and Subsequent Amendments
by and between Firstar Bank Milwaukee, N.A. and BNCCORP, Inc., dated
as of July 14, 1998, incorporated by reference to Exhibit 10.19 to the
Registrant's Form 10-QSB dated as of August 13, 1998.
E-3
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
10.20 Letter of Amendment to Revolving Credit Agreement and Subsequent
Amendments by and between Firstar Bank Milwaukee, N.A. and BNCCORP,
Inc. dated as of July 14, 1998, incorporated by reference to Exhibit
10.20 to the Registrant's Form 10-QSB dated as of August 13, 1998.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
10.21 Restricted Stock Agreement Under the BNCCORP, Inc. 1995 Stock
Incentive Plan dated as of June 15, 1998 between BNCCORP, Inc. and
Kevin Pifer, incorporated by reference to Exhibit 10.21 to the
Registrant's Form 10-QSB dated as of August 13, 1998.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
10.22 Employment Agreement Among BNCCORP, Inc., BNC National Bank and
Kevin D. Pifer dated as of June 15, 1998, incorporated by reference
to Exhibit 10.22 to the Registrant's Form 10-QSB dated as of August
13, 1998.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
10.23 Employment Agreement Among BNCCORP, Inc., BNC National Bank and
David J. Sorum dated as of October 13, 1998, incorporated by
reference to Exhibit 10.23 to the Registrant's Form 10-QSB dated as of
November 13, 1998.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
10.24 Revolving Credit Agreement dated August 14, 1998 by and between BNC
Financial Corporation and Firstar Bank Milwaukee, N.A., incorporated
by reference to Exhibit 10.24 to the Registrant's Form 10-QSB dated as
of November 13, 1998.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
10.25 Employment Agreement Among BNCCORP, Inc., BNC National Bank of
Minnesota and James LaBreche dated as of March 1, 1999, incorporated
by reference to Exhibit 10.25 to the Registrant's Form 10-KSB dated as
of March 29, 1999.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
10.26 Employment Agreement Among BNCCORP, Inc., BNC National Bank and
Kevin D. Pifer, amended, dated as of June 15, 1998, incorporated by
reference to Exhibit 10.26 to the Registrant's Form 10-KSB dated as of
March 29, 1999.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
10.27 Employment Agreement Among BNCCORP, Inc., BNC National Bank and Jon
Strinden, dated as January 1, 1999, incorporated by reference to
Exhibit 10.27 to the Registrant's Form 10-KSB dated as of March 29,
1999.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
10.28 Form of Restricted Stock Agreement Under the BNCCORP, Inc. 1995 Stock
Incentive Plan dated as of October 15, 1998, January 1, 1999 and March
1, 1999 between BNCCORP, Inc. and David J. Sorum, Jon E. Strinden and
James D. LaBreche, incorporated by reference to Exhibit 10.28 to the
Registrant's Form 10-KSB dated as of March 29, 1999.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
10.29 Amendment to Term Loan Agreement and Term Note by and between Firstar
Bank Milwaukee, N.A. and BNCCORP, Inc., dated as of February 19, 1999,
incorporated by reference to Exhibit 10.29 to the Registrant's Form
10-KSB dated as of March 29, 1999.
E-4
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
10.30 Amendment to Revolving Credit Agreement and Revolving Credit Note by
and between Firstar Bank Milwaukee, N.A. and BNCCORP, Inc., dated as
of February 19, 1999, incorporated by reference to Exhibit 10.30 to
the Registrant's Form 10-KSB dated as of March 29, 1999.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
21.1 Subsidiaries of Company.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
23.1 Consent of Arthur Andersen LLP
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
27 Financial Data Schedule
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
E-5
EXHIBIT 10.25
- ------------------------------------------------------------------------------
EMPLOYMENT AGREEMENT
Among
BNCCORP, Inc.,
BNC National Bank of Minnesota
and
James D. LaBreche
Dated as of March 1, 1999
- ------------------------------------------------------------------------------
<PAGE>
EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement") among BNCCORP, Inc., a
Delaware corporation (the "Company"), BNC National Bank of Minnesota, a national
banking association (the "Bank"), and James D. LaBreche (the "Executive"), is
dated as of March 1, 1999 (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 Bank 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 premises 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 Bank for the period beginning on the
Commencement Date, through February 28, 2002, 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.
2
<PAGE>
2. Duties; Place of Performance.
a. Duties. As the President of the Bank, 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 Company President and/or
the Bank CEO and such duties as are described in the Bank's Bylaws as being
duties or responsibilities of the President of the Bank. Executive shall report
to and be subject to the supervision of the President of the Company and CEO 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 and the Company, the Executive shall be based at the
principal office of the Bank in Minneapolis, Minnesota, 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 $140,000, 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.
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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 provide the
Executive a family golf membership at Golden Valley Country Club. The Executive
agrees to reimburse the Company or the Bank for the Country Club's initiation
fee, if the Executive's Employment is terminated for any reason other than by
the Employer without cause or the Employee for Good Reason as follows:
1. Termination prior to expiration of three years of employment - 100% of
initiation fee.
2. Termination after three years but prior to five years of employment -
50% of initiation fee.
3. Termination after five years of employment - 0% of initiation fee.
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
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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 or inability, 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.
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. By the Executive for Good Reason. The Executive may terminate
his status as an employee for Good Reason by notifying the Company, in writing,
of such termination in accordance with Section 5(e). The termination by the
Executive of his status as an employee for Good Reason shall be deemed to be a
justifiable termination and shall excuse the Executive from further duties under
this Agreement. As used herein, the term "Good Reason" shall mean:
(i) 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
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or reelect the Executive to, the position of President of the Bank, 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;
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, the demotion of the Executive or the
failure of the Company or the Bank to perform the obligations under Section 3 or
4, which failure continues for a period of ten days after the Executive gives
the Company notice thereof;
C. requiring the Executive to be based anywhere other than in Minneapolis,
Minnesota, except for required travel in the ordinary course of the Company's or
Bank's business;
(ii) a reduction in the Executive's annual salary or a
failure to pay to the Executive any installment of his annual salary or to pay
any other amounts required to be paid under this Agreement, which failure
continues for a period of 30 days after written notice thereof is given by the
Executive to the Company;
(iii) the failure by the Company to obtain the assumption of
its obligations under this Agreement by any successor or assign as contemplated
in Section 8;
(iv) any purported termination of the Executive's status as
an employee which is not effected pursuant to a Notice of Termination satisfying
the requirements of Section 5(e), or which is not justified as a termination
based on Cause;
(v) any material breach of this Agreement by the Company or
the Bank which has not been cured within 30 days following the giving of notice
by the Executive to the Company of such breach; or
(vi) any Change in Control.
As used in this Agreement a "Change of Control" is deemed to have
occurred at such time as: (A) 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),
(B) 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), (C) BNCCORP is to be dissolved or liquidated, (D) 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 (E) 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.
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e. 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.
f. 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.
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.
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d. Other than Death, Disability or Cause; Good Reason; Change in
Control. If during the term of this Agreement:
(i) the Company or the Bank shall terminate Executive's
employment, other than for death, disability or Cause, or Executive shall
terminate his employment for Good Reason, except in event of Change In Control,
Executive shall receive as severance pay an amount equal to 1/12th of his
Compensation Amount multiplied by the number of partial or full months remaining
in his employment term.
(ii) if Executive's employment shall terminate following a
Change in Control of the Company, then, Executive shall received as severance
pay an amount equal to three times his Compensation Amount.
(iii) all severance payments will be payable in a lump
sum within 30 days of the Date of Termination.
(iv) for the 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.
(v) in addition to the severance payment provided for above
the Executive will be entitled to all other amounts or compensation pursuant to
the Company's or Bank's termination policies and plans then in effect.
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
Minneapolis or the County of Hennepin, Minnesota; 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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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: Gregory K. Cleveland
If to the Executive, addressed to:
James D. LaBreche
4739 Forest Circle
Minnetonka, MN 55345
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.
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11. Entire Agreement. This Agreement, together with the offer letter
dated January 20, 1999 and the documents referred to in this Agreement or the
offer letter contain the 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
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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 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 OF MINNESOTA
By: /s/ Gregory K. Cleveland
Gregory K. Cleveland
Authorized Officer
Executive:
/s/ James D. LaBreche
James D. LaBreche
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EXHIBIT 10.26
- ------------------------------------------------------------------------------
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
Among
BNCCORP, Inc.,
BNC National Bank
and
Kevin Pifer
Dated as of June 15, 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 Kevin Pifer (the "Executive"), is dated as of June
15, 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 Bank 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 premises 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 Bank for the period beginning on the
Commencement Date, through June 15, 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.
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2. Duties; Place of Performance.
a. Duties. As the President of the Bank, 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 Company President and/or
the Bank CEO and such duties as are described in the Bank's Bylaws as being
duties or responsibilities of the President of the Bank. Executive shall report
to and be subject to the supervision of the President of the Company and CEO 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 and the Company, the Executive shall be based at the
principal office of the Bank in Bismarck, 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 $140,000, 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.
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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.
e. Life Insurance. The Company or the Bank shall maintain a life
insurance policy on the Executive in an amount not less than $1 million and the
Executive shall have the right to name the beneficiaries under such policy. Upon
termination of the Executive's employment, the Executive shall have the option
of purchasing the policy from the Company or the Bank for the cash surrender
value of the policy.
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 Bismarck/Mandan 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
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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 or inability,
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.
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. By the Executive for Good Reason. The Executive may terminate
his status as an employee for Good Reason by notifying the Company, in writing,
of such termination in accordance with Section 5(e). The termination by the
Executive of his status as an employee for Good Reason shall be deemed to be a
justifiable termination and shall excuse the Executive from further duties under
this Agreement. As used herein, the term "Good Reason" shall mean:
(i) 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 Bank, 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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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, the demotion of the Executive or the failure
of the Company or the Bank to perform the obligations under Section 3 or 4,
which failure continues for a period of ten days after the Executive gives the
Company notice thereof;
C. requiring the Executive to be based anywhere other than in Bismarck,
North Dakota, except for required travel in the ordinary course of the Company's
or Bank's business;
(ii) a reduction in the Executive's annual salary or a
failure to pay to the Executive any installment of his annual salary or to pay
any other amounts required to be paid under this Agreement, which failure
continues for a period of 30 days after written notice thereof is given by the
Executive to the Company;
(iii) the failure by the Company to obtain the assumption of
its obligations under this Agreement by any successor or assign as contemplated
in Section 8;
(iv) any purported termination of the Executive's status as
an employee which is not effected pursuant to a Notice of Termination satisfying
the requirements of Section 5(e), or which is not justified as a termination
based on Cause;
(v) any material breach of this Agreement by the Company or
the Bank which has not been cured within 30 days following the giving of notice
by the Executive to the Company of such breach; or
(vi) any Change in Control.
As used in this Agreement a "Change of Control" is deemed to have
occurred at such time as: (A) 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),
(B) 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), (C) BNCCORP is to be dissolved or liquidated, (D) 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 (E) 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. 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
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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.
f. 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.
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. Other than Death, Disability or Cause; Good Reason; Change in
Control. If during the term of this Agreement:
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(i) the Company or the Bank shall terminate Executive's
employment, other than for death, disability or Cause, or Executive shall
terminate his employment for Good Reason, except in event of Change In Control,
Executive shall receive as severance pay an amount equal to 1/12th of his
Compensation Amount multiplied by the number of partial or full months remaining
in his employment term.
(ii) if Executive's employment shall terminate following a
Change in Control of the Company, then, Executive shall received as severance
pay an amount equal to three times his Compensation Amount.
(iii) all severance payments will be payable in a lump sum
within 30 days of the Date of Termination.
(iv) for the 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.
(v) in addition to the severance payment provided for above
the Executive will be entitled to all other amounts or compensation pursuant to
the Company's or Bank's termination policies and plans then in effect.
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
Bismarck or the County of Burleigh, 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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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: Gregory K. Cleveland
If to the Executive, addressed to:
Kevin Pifer
2201 Boston Drive
Bismarck, ND 58504
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.
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11. Entire Agreement. This Agreement and the documents referred to herein
contain the 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
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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 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/ Gregory K. Cleveland
Gregory K. Cleveland
Authorized Officer
Executive:
/s/ Kevin Pifer
Kevin Pifer
11
EXHIBIT 10.27
- ------------------------------------------------------------------------------
EMPLOYMENT AGREEMENT
Among
BNCCORP, Inc.,
BNC National Bank
and
Jon Strinden
Dated as of January 1, 1999
- ------------------------------------------------------------------------------
<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 Jon Strinden (the "Executive"), is dated as of
January 1, 1999 (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 Executive Vice President Financial Services and General Counsel of
the Company 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 premises 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 Executive Vice President Financial Services of the Bank and
General Counsel of the Company for the period beginning on the Commencement
Date, through January 1, 2002, 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
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party's rights and obligations upon the termination of Executive's employment
shall survive the termination of this Agreement.
2. Duties; Place of Performance.
a. Duties. As the Executive Vice President Financial Services of
the Bank and General Counsel of the Company, 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 Company President and/or the Bank President
and such duties as are described in the Bank's Bylaws as being duties or
responsibilities of the Executive Vice President Financial Services of the Bank
and General Counsel of the Company. Executive shall report to and be subject to
the supervision of the President of the Company and 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 and the Company, the Executive shall be based at the
principal office of the Company and 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 $140,000, 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
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<PAGE>
or arrangement, the Executive's credited service for the Company shall be deemed
to have commenced on the Commencement Date.
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.
e. Life Insurance. The Company or the Bank shall maintain a life
insurance policy on the Executive in an amount not less than $1 million and the
Executive shall have the right to name the beneficiaries under such policy. Upon
termination of the Executive's employment, the Executive shall have the option
of purchasing the policy from the Company or the Bank for the cash surrender
value of the policy.
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
Executive'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
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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 or inability, 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.
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. By the Executive for Good Reason. The Executive may terminate
his status as an employee for Good Reason by notifying the Company, in writing,
of such termination in accordance with Section 5(e). The termination by the
Executive of his status as an employee for Good Reason shall be deemed to be a
justifiable termination and shall excuse the Executive from further duties under
this Agreement. As used herein, the term "Good Reason" shall mean:
(i) The occurrence of any of the following during the term of
this Agreement:
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A. any removal of the Executive from, or any failure to reappoint or
reelect the Executive to, the position of Executive Vice President of the Bank
and General Counsel of the Company, 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;
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 Executive Vice President Financial Services and General
Counsel, the demotion of the Executive or the failure of the Company or the Bank
to perform the obligations under Section 3 or 4, which failure continues for a
period of ten days after the Executive gives the Company notice thereof;
C. requiring 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;
(ii) a reduction in the Executive's annual salary or a
failure to pay to the Executive any installment of his annual salary or to pay
any other amounts required to be paid under this Agreement, which failure
continues for a period of 30 days after written notice thereof is given by the
Executive to the Company;
(iii) the failure by the Company to obtain the assumption of
its obligations under this Agreement by any successor or assign as contemplated
in Section 8;
(iv) any purported termination of the Executive's status as
an employee which is not effected pursuant to a Notice of Termination satisfying
the requirements of Section 5(e), or which is not justified as a termination
based on Cause;
(v) any material breach of this Agreement by the Company or
the Bank which has not been cured within 30 days following the giving of notice
by the Executive to the Company of such breach; or
(vi) any Change in Control.
As used in this Agreement a "Change of Control" is deemed to have
occurred at such time as: (A) 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),
(B) 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), (C) BNCCORP is to be dissolved or liquidated, (D) 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 (E) 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.
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e. 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.
f. 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.
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.
7
<PAGE>
d. Other than Death, Disability or Cause; Good Reason; Change in
Control. If during the term of this Agreement:
(i) the Company or the Bank shall terminate Executive's
employment, other than for death, disability or Cause, or Executive shall
terminate his employment for Good Reason, except in event of Change In Control,
Executive shall receive as severance pay an amount equal to 1/12th of his
Compensation Amount multiplied by the number of partial or full months remaining
in his employment term.
(ii) if Executive's employment shall terminate following a
Change in Control of the Company, then, Executive shall received as severance
pay an amount equal to three times his Compensation Amount.
(iii) all severance payments will be payable in a lump
sum within 30 days of the Date of Termination.
(iv) for the 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.
(v) in addition to the severance payment provided for above
the Executive will be entitled to all other amounts or compensation pursuant to
the Company's or Bank's termination policies and plans then in effect.
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
8
<PAGE>
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.
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: Gregory K. Cleveland
If to the Executive, addressed to:
Jon Strinden
2657 Meadowcreek Circle
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.
9
<PAGE>
11. Entire Agreement. This Agreement and the documents referred to herein
contain the 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.
10
<PAGE>
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 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/ Gregory K. Cleveland
Gregory K. Cleveland
Authorized Officer
Executive:
/s/ Jon Strinden
Jon Strinden
11
<PAGE>
ADDENDUM TO EMPLOYMENT AGREEMENT
AMONG
BNCCORP, INC.
AND
BNC NATIONAL BANK
AND
JON E. STRINDEN
BNCCORP, Inc., BNC National Bank (the "Company") and Jon E. Strinden
("Strinden") entered into an Employment Agreement, effective January 1, 1999.
The parties desire to amend the Agreement as follows:
4. Pursuant to the Employment Agreement, the Company agreed to pay for
Strinden's membership at a country club in the Fargo-Moorhead area. The Company
hereby agrees to reimburse Strinden in the amount of Six Thousand Nine Hundred
and 00/100 ($6,900.00) Dollars, which represents the face value of Strinden's
stock in the Fargo Country Club. In the event Strinden's employment terminates
prior to December 31, 2001, Strinden shall be obligated to repay the Company Six
Thousand Nine Hundred and 00/100 ($6,900.00) Dollars.
5. In the event Strinden's employment terminates subsequent to December 31,
2001, but prior to December 31, 2003, Strinden shall be obligated to repay the
Company Three Thousand Four Hundred Fifty and 00/100 ($3,450.00) Dollars. In the
event Strinden's employment terminated subsequent to December 31, 2003, there
shall be no obligation to reimburse the Bank for the cost of the Fargo Country
Club stock and Strinden shall be allowed to retain the stock for his own use.
IN WITNESS WHEREOF, the parties have executed
this Addendum as of the day of , 1999.
BNCCORP, INC.
By /s/ Gregory K. Cleveland
Gregory K. Cleveland
BNC NATIONAL BANK
By /s/ Gregory K. Cleveland
Gregory K. Cleveland
/s/ Jon E. Strinden
Jon E. Strinden, Employee
12
EXHIBIT 10.28
RESTRICTED STOCK AGREEMENT
UNDER THE
BNCCORP, INC. 1995 STOCK INCENTIVE PLAN
THIS AGREEMENT is entered into as of _______________, by and between BNCCORP,
INC. ("BNCCORP") and ______________ ("Award Recipient").
WHEREAS, BNCCORP maintains the 1995 Stock Incentive Plan (the "Plan"), under
which the Compensation Committee of the Board of Directors of BNCCORP (the
"Committee") may, among other things, grant shares of BNCCORP common stock, $.01
par value per share (the "Common Stock"), to key employees of BNCCORP or its
subsidiaries (collectively, the "Company") as the Committee may determine,
subject to terms, conditions, or restrictions as it may deem appropriate;
NOW, THEREFORE, in consideration of the premises, it is hereby agreed with
respect to the shares of Restricted Stock as follows:
1.
AWARD OF SHARES
Under the terms of the Plan, the Committee has awarded to the Award Recipient
a restricted stock award for ----- shares of Restricted Stock, subject to the
terms, conditions, and restrictions set forth in the Plan and in this Agreement.
2.
AWARD RESTRICTIONS
2.1 The shares of Restricted Stock and the right to vote the Restricted Stock
and to receive dividends thereon may not be sold, assigned, transferred,
exchanged, pledged, hypothecated or otherwise encumbered until such time as such
shares vest and the restrictions imposed thereon lapse, as provided below.
2.2 The shares of Restricted Stock will vest and the restrictions imposed
thereon will lapse as follows: 60% on the third anniversary date of this
Agreement; 20% on the fourth anniversary date of this Agreement; and 20% on the
fifth anniversary date of this Agreement, if the Award Recipient remains in the
employ of the Company on the applicable anniversary dates. Earlier vesting may
occur under Section 2.3 below or under Section 9.12 of the Plan in the event of
a change of control of BNCCORP. The period during which the restrictions imposed
on shares of Restricted Stock by the Plan and this Agreement are in effect is
referred to herein as the "Restricted Period." During the Restricted Period, the
Award Recipient shall be entitled to all rights of a shareholder of BNCCORP,
including the right to vote the shares and to receive dividends.
1
<PAGE>
2.3 All restrictions on the Restricted Stock shall immediately lapse and the
shares shall vest (a) if the Award Recipient dies while he is employed by the
Company, (b) if the Award Recipient becomes disabled within the meaning of
Section 22(e)(3) of the Internal Revenue Code of 1986, as amended ("Disability")
while he is employed by the Company, (c) if the Award Recipient retires from
employment with the Company on or after attaining the age of 65 or is granted
early retirement by a vote of the Board of Directors ("Retirement") or (d)
pursuant to the provisions of the Plan.
3.
STOCK CERTIFICATES
3.1 The stock certificates evidencing the Restricted Stock shall be retained by
BNCCORP until the termination of the Restricted Period. The stock certificates
shall contain the legend provided in the Plan restricting the transferability of
the shares of Restricted Stock.
3.2 Upon the lapse of restrictions on shares of Restricted Stock, BNCCORP shall
cause a stock certificate without a restrictive legend representing the shares
of Restricted Stock to be issued in the name of the Award Recipient or his or
her nominee within 30 days after the end of the Restricted Period. Upon receipt
of such stock certificate, the Award Recipient is free to hold or dispose of the
shares represented by such certificate, subject to applicable securities laws.
4.
DIVIDENDS
Any dividends paid on shares of Restricted Stock shall be paid to the Award
Recipient currently.
5.
WITHHOLDING TAXES
At any time that an Award Recipient is required to pay to the Company an
amount required to be withheld under the applicable income tax laws in
connection with the lapse of restrictions on shares of Restricted Stock, the
participant may, subject to the Committee's approval, satisfy this obligation in
whole or in part by electing (the "Election") to have the Company withhold
shares of Common Stock having a value equal to the amount required to be
withheld in accordance with the terms of the Plan currently in effect or as it
may be amended.
6.
ADDITIONAL CONDITIONS
Anything in this Agreement to the contrary notwithstanding, if at any time
BNCCORP further determines, in its sole discretion, that the listing,
registration or qualification (or any updating
2
<PAGE>
thereof) of the shares of Common Stock issued or issuable pursuant hereto is
necessary on any securities exchange or under any federal or state securities
law, or that the consent or approval of any governmental regulatory body is
necessary or desirable as a condition of, or in connection with the issuance of
shares of Common Stock pursuant hereto, or the removal or any restrictions
imposed on such shares, such shares of Common Stock shall not be issued, in
whole or in part, or the restrictions thereon removed, unless such listing,
registration, qualification, consent or approval shall have been effected or
obtained free of any conditions not acceptable to BNCCORP.
7.
NO CONTRACT OF EMPLOYMENT INTENDED
Nothing in this Agreement shall confer upon the Award Recipient any right to
continue in the employment of the Company, or to interfere in any way with the
right of the Company to terminate the Award Recipient's employment relationship
with the Company at any time.
8.
BINDING EFFECT
This Agreement shall inure to the benefit of and be binding upon the parties
hereto and their respective heirs, executors, administrators and successors.
9.
INCONSISTENT PROVISIONS
The shares of Restricted Stock granted hereby are subject to the provisions
of the Plan as in effect on the date hereof and as it may be amended. If any
provision of this Agreement conflicts with a provision of the Plan, the Plan
provision shall control.
IN WITNESS WHEREOF the parties hereto have caused this Agreement to be
executed on the day and year first above written.
BNCCORP, INC.
By: /s/ John Hipp
John Hipp, Chairman,
Compensation Committee
Award Recipient
3
EXHIBIT 10.30
FIRSTAR
AMENDMENT TO REVOLVING CREDIT AGREEMENT
AND REVOLVING CREDIT NOTE
This amendment (the "Amendment"), dated as of the date specified below,
is by and between the borrower (the "Borrower") and the bank (the "Bank")
identified below.
RECITALS
A. The Borrower and the Bank have executed a - Revolving Credit Agreement
(the "Agreement") and the Borrower has executed a Revolving Credit Note (the
"Note"), both dated AUGUST 14, 1998 and as amended from time to time, and the
Borrower (and if applicable, certain third parties) have executed the collateral
documents identified in Article III of the Agreement and certain other related
documents (collectively the "Loan Documents"), setting forth the terms and
conditions upon which the Borrower may obtain loans from the Bank from time to
time in the original amount not to exceed $12,000,000.00, as may be amended from
time to time.
B. The Borrower has requested that the Bank permit certain modifications to
the Agreement and Note as described below.
C. The Bank has agreed to such modifications, but only upon the terms and
conditions outlined in this Amendment.
TERMS OF AGREEMENT
In consideration of the mutual covenants contained herein, and for other
good and valuable consideration, the Borrower and the Bank agree as follows:
Extension of Maturity Date. If checked here, the references to "
FEBRUARY 19, 1999 in Paragraph 1.1 of the Agreement and in the Note as the
maturity date of the loan and the Termination Date for advances are hereby
deleted and replaced with " AUGUST 31, 1999".
Financial Covenants (continued):
(viii) The combination of Net Income plus Loan Loss Provision for BNC- ND
and BNC-NIN combined must be at least $564,000 at 3/31/99 and $1,348,000 at
6/30/99. This covenant replaces the ROA covenants.
(ix) All Financial Covenants will be measured on a combined basis for BNC - ND
and BNC
Effectiveness of Prior Documents. Except as specifically amended hereby,
the Agreement, the Note and the other Loan Documents shall remain in full force
and effect in accordance with their respective terms. All warranties and
representations contained in the Agreement and the other Loan Documents are
hereby reconfirmed as of the date hereof. AJI collateral previously provided to
secure the Agreement and/or Note continues as security, and all guaranties
guaranteeing obligations under the Loan Documents remain in full force and
effect. This is an amendment, not a novation.
Preconditions to Effectiveness. This Amendment shall only become
effective upon execution by the Borrower and the Bank, and approval by any other
third party required by the Bank.
No Waiver of Defaults; Warranties. This Amendment shall not be construed
as or be deemed to be a waiver by the Bank of existing defaults by the Borrower,
whether known or undiscovered. All agreements, representations and warranties
made herein shall survive the execution of this Amendment.
Counterparts. This Amendment may be signed in any number of
counterparts, each of which shall be considered an original, but when taken
together shall constitute one document.
Authorization. The Borrower represents and warrants that the execution,
delivery and performance of this Amendment and the documents referenced herein
are within the authority of the Borrower and have been duly authorized by all
necessary action.
<PAGE>
Attachments. All documents attached hereto, Including any appendices,
schedules, riders, and exhibits to this Amendment, are hereby
expressly Incorporated by reference.
Dated as of: FEBRUARY 19, 1999
BNCCORP INC
(Individual Borrower) Borrower Name (Organization)
(SEAL) a DELAWARE Corporation
Borrower Name N/A BY: /s/ Gregory K. Cleveland
Name and Title GREGORY K CLEVELAND, PRESIDENT
By:
(SEAL)
Borrower Name N/A Name and Title:
Agreed to:
FIRSTAR BANK MILWAUKEE, N.A.
(Firstar Bank)
By:
LYNN F HEBEL
Name and Title: VICE PRESIDENT
EXHIBIT 10.29
AMENDMENT TO TERM LOAN-- AGREEMENT
AND TERM NOTE
This amendment (the "Amendment'), dated as of the date specified below, is
by and between the borrower (the "Borrower") and the bank (the "Bank")
identified below.
RECITALS
A. The Borrower and the Bank have executed a Term Loan -Agreement (the
"Agreement") and the Borrower has executed Note "the "Note"), both dated
FEBRUAR 19, 1996-and as amended from time to time, and the Borrower (and if
applicable, certain third parties) have executed the collateral documents
identified in Article III of the Agreement and certain other related documents
(collectively the "Loan Documents"), setting forth the terms and conditions upon
which the Borrower may obtain loans from the Bank from time to time in the
original amount not to exceed $ 3,000,000.00 as may be amended from time to
time.
B. The Borrower has requested that the Bank permit certain modifications
to the Agreement and Note as described below.
C. The Bank has agreed to such modifications, but only upon the terms and
conditions outlined in this Amendment,
TERMS OF AGREEMENT
In consideration of the mutual covenants contained herein, and for Other good
and valuable consideration, the Borrower and the Bank agree as follows:
[x] Extension of Maturity Date. If checked here, the references to
"_FEBRUARY_1 9, 1999" in the Note as the maturity date of the Loan are hereby
deleted and replaced with * AUGUST 31, 1999
0 Change in Payment Schedule. If checked here, effective upon the date of
this Amendment, the information under the heading 'Payment Schedule" IS deleted
and replaced with the following:
Interest is payable beginning JUNE 1, 1999, and on the same date of each THIRD
month thereafter (except that if a given month does not have such a date, the
last day of such month), plus a final interest payment with the final payment of
principal.
Principal is payable- on AUGUST 31, 1999.
Financial Covenants (continued):
(viii)The RDA covenants are replaced and deleted with the following; The
combination of Net Income plus Loan Loss Provision for BNC- ND and BNC-MN
combined must be at least $564,000 at 3/31/99 and $1,348,000 at 6/30/99
(ix) All Financial Covenants will be measured on a combined basis for BNC - ND
and BNC - MN.
Change in Interest Rate. If checked here, effective upon the date of this
Amendment, the information under the heading 'Interest', on the Note, is deleted
and replaced with the following:
The unpaid principal balance will. bear interest at an annual. rate described
in the Interest Rate Rider attached to this Amendment -
Effectiveness of Prior Documents. Except as specifically amended hereby,
the Agreement, the Note and the other Loan Documents shall remain in full force
and off act in accordance with their respective terms. All warranties and
representations contained in the Agreement and the other Loan Documents are
hereby reconfirmed as of the date hereof. All collateral previously provided to
secure toe Agreement and/or Note continues AS Security, and all guaranties
guaranteeing obligations under the Loan Documents remain in full force and
effect. This is an amendment, not a novation.
Preconditions to Effectiveness. This Amendment shall only become
effective upon execution by the Borrower and the Bank, and approval by any
other third party required by the Bank,
No Waiver of Defaults; Warranties. This Amendment shall not be construed
as or be doomed to be a waiver by the Bank of existing defaults by the Borrower,
whether known or undiscovered. All agreements, representations and Warranties
made heroin shall survive the execution of this Amendment.
Counterparts. This Amendment may be signed in any number of
counterparts, each of which shall be considered an original, but when taken
together shall constitute one document.
<PAGE>
Authorization. The Borrower represents and warrants that the execution.
delivery and performance of this Amendment and the documents. referenced
herein are within the authority of the Borrower and have been duly authorized
by all necessary action.
Attachments. All documents attached hereto, including any appendices,
schedules, riders, and exhibits to this Amendment, are hereby expressly
incorporated by reference.
Dated as of: FEBRUARY 19, 1999
BNCCORP INC
(Individual Borrower) Borrower Name (Organization)
(SEAL) a DELAWARE Corporation
Borrower Name N/A BY: /s/ Gregory K. Cleveland
Name and Title GREGORY K CLEVELAND, PRESIDENT
By:
(SEAL)
Borrower Name N/A Name and Title:
Agreed to:
FIRSTAR BANK MILWAUKEE, N.A.
(Firstar Bank)
By:
LYNN F HEBEL
Name and Title: VICE PRESIDENT
<PAGE>
INTEREST RATE RIDER
This Rider is made part of the Amendment to Term Loan Agreement and Term Note
(the "Amendment") dated FEBRUARY 19, 1999 by the undersigned borrower (the
"Borrower") in favor of F1RSTAR BANK MILWLAUKEE, N.A. the "Bank" as of the
date identified below. The following interest rate description is hereby
added to the Amendment:
Interest will be now be reset on June 1st and every third month thereafter. If
that date is a weekend, the reset date will be the following Monday.
Dated as of: FEBRUARY 19, 1999
BNCCORP INC
(Individual Borrower) Borrower Name (Organization)
(SEAL) a DELAWARE Corporation
Borrower Name N/A BY: /s/ Gregory K. Cleveland
Name and Title GREGORY K CLEVELAND, PRESIDENT
By:
(SEAL)
Borrower Name N/A Name and Title:
Exhibit 21
SUBSIDIARIES OF BNCCORP, INC.
The following is a list of all subsidiaries of the Company, including their
state of incorporation or organization.
Name Incorporated In
BNC National Bank North Dakota
BNC Insurance Inc. (a subsidiary of
BNC National Bank)
BNC Asset Management (a subsidiary of
BNC National Bank)
Bismarck Properties, Inc. North Dakota
BNC National Bank of Minnesota Minnesota
BNC Financial Corporation Minnesota
1
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-KSB, into the Company's previously filed
Registration Statements, File Numbers 333-03512 and 333-24735.
ARTHUR ANDERSEN LLP
/s/ Arthur Andersen LLP
-----------------------------------
Minneapolis, Minnesota,
March 29, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted
from the balance sheet dated 12/31/98 and statement of income
for the twelve months ended 12/31/98 and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<CIK> 0000945434
<NAME> BNCCORP, INC.
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 7,475
<INT-BEARING-DEPOSITS> 2,809
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 96,601
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 270,876
<ALLOWANCE> 3,093
<TOTAL-ASSETS> 396,332
<DEPOSITS> 284,499
<SHORT-TERM> 49,290
<LIABILITIES-OTHER> 6,642
<LONG-TERM> 30,646
0
0
<COMMON> 24
<OTHER-SE> 24,231
<TOTAL-LIABILITIES-AND-EQUITY> 396,332
<INTEREST-LOAN> 24,799
<INTEREST-INVEST> 5,376
<INTEREST-OTHER> 292
<INTEREST-TOTAL> 30,467
<INTEREST-DEPOSIT> 11,809
<INTEREST-EXPENSE> 16,749
<INTEREST-INCOME-NET> 13,718
<LOAN-LOSSES> 1,290
<SECURITIES-GAINS> 130
<EXPENSE-OTHER> 13,918
<INCOME-PRETAX> 3,560
<INCOME-PRE-EXTRAORDINARY> 2,267
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,267
<EPS-PRIMARY> .95
<EPS-DILUTED> .91
<YIELD-ACTUAL> 8.83
<LOANS-NON> 2,042
<LOANS-PAST> 307
<LOANS-TROUBLED> 44
<LOANS-PROBLEM> 6,870
<ALLOWANCE-OPEN> 3,069
<CHARGE-OFFS> 1,455
<RECOVERIES> 189
<ALLOWANCE-CLOSE> 3,093
<ALLOWANCE-DOMESTIC> 2,792
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 301
</TABLE>
