U.S. Securities and Exchange Commission
Washington, D.C. 20549
------
FORM 10-Q
-----
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarter ended September 30, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________ to ________
Commission File No. 0-26290
BNCCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 45-0402816
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
322 East Main
Bismarck, North Dakota 58501
(Address of principal executive offices)
(701) 250-3040
(Registrant's telephone number)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No ___
The number of shares of the registrant's outstanding common stock on
November 5, 1999 was 2,399,980
1
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share and per share data)
ASSETS September 30, December 31,
1999 1998
------------- -------------
(unaudited)
CASH AND DUE FROM BANKS..............................$ 11,106 $ 7,475
INTEREST - BEARING DEPOSITS WITH BANKS............... 5,310 2,809
INVESTMENT SECURITIES AVAILABLE FOR SALE............. 123,349 96,601
LOANS AND LEASES, net of unearned income............. 282,207 270,876
ALLOWANCE FOR CREDIT LOSSES.......................... (3,263) (3,093)
--------- --------
Net loans and leases.............................. 278,944 267,783
PREMISES, LEASEHOLD IMPROVEMENTS AND EQUIPMENT, net.. 10,758 8,827
INTEREST RECEIVABLE.................................. 2,932 2,618
OTHER ASSETS......................................... 8,578 6,163
DEFERRED CHARGES AND INTANGIBLE ASSETS, net.......... 3,475 4,056
--------- --------
$ 444,452 $396,332
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS:
Noninterest-bearing...............................$ 28,138 $ 28,475
Interest-bearing -
Savings, NOW and money market.................. 111,113 89,887
Time deposits $100,000 and over................ 48,724 39,162
Other time deposits............................ 120,271 126,975
--------- --------
Total Deposits.................................... 308,246 284,499
SHORT-TERM BORROWINGS................................ 67,673 49,290
LONG-TERM BORROWINGS................................. 38,954 30,646
OTHER LIABILITIES.................................... 5,074 6,642
--------- --------
Total liabilities.............................. 419,947 371,077
--------- --------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 2,000,000 shares
authorized; -- --
no shares issued or outstanding................
Common stock, $.01 par value, 10,000,000 shares
authorized; 2,399,980 and 2,390,184 shares
issued and outstanding (excluding 42,880
shares held in treasury) at September 30,
1999 and December 31, 1998, respectively....... 24 24
Capital surplus................................... 13,955 13,951
Retained earnings................................. 12,372 11,651
Treasury stock (42,880 shares).................... (513) (513)
Accumulated other comprehensive income, net of
income tax effects of ($819) and $90 at
September 30, 1999 and December 31, 1998,
respectively................................... (1,333) 142
--------- --------
Total stockholders' equity..................... 24,505 25,255
--------- --------
$ 444,452 $396,332
========= ========
The accompanying notes are an integral part of these consolidated balance
sheets.
2
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(In thousands, except per share data)
For the Three For the Nine
Months Ended Months
September 30, Ended
September 30,
-------------- ---------------
1999 1998 1999 1998
------- ------ ------- ------
(unaudited) (unaudited)
INTEREST INCOME:
Interest and fees on loans................. $6,685 $ 6,609 $19,072 $18,435
Interest and dividends on investment
securities -
Taxable................................. 1,536 1,256 4,079 3,822
Tax-exempt.............................. 121 25 242 56
Dividends............................... 67 61 177 245
Other...................................... 26 89 52 267
-------- ------- -------- -------
Total interest income................... 8,435 8,040 23,622 22,825
-------- ------- -------- -------
INTEREST EXPENSE:
Interest on deposits....................... 3,208 3,077 9,077 8,762
Interest on short-term borrowings.......... 856 715 2,128 2,060
Interest on long-term borrowings........... 779 604 2,077 1,623
-------- ------- -------- -------
Total interest expense.................. 4,843 4,396 13,282 12,445
-------- ------- -------- -------
Net interest income..................... 3,592 3,644 10,340 10,380
PROVISION FOR CREDIT LOSSES................... 379 762 1,005 960
-------- ------- -------- -------
NET INTEREST INCOME AFTER PROVISION FOR
CREDIT LOSSES.............................. 3,213 2,882 9,335 9,420
-------- ------- -------- -------
NONINTEREST INCOME:
Insurance commissions...................... 460 431 1,556 1,269
Fees on loans.............................. 384 365 1,216 1,096
Brokerage income........................... 199 22 508 48
Service charges............................ 138 145 392 420
Net gain on sales of securities............ 66 51 160 68
Rental income.............................. 48 10 108 32
Other...................................... 232 227 766 734
-------- ------- -------- -------
Total noninterest income................ 1,527 1,251 4,706 3,667
-------- ------- -------- -------
NONINTEREST EXPENSE:
Salaries and employee benefits............. 2,414 2,041 7,005 5,733
Depreciation and amortization.............. 411 385 1,212 1,126
Professional services...................... 408 197 932 525
Occupancy.................................. 351 252 971 769
Office supplies, telephone and postage..... 266 189 747 553
Marketing and promotion.................... 172 82 487 322
FDIC and other assessments................. 48 47 143 138
Other...................................... 392 356 1,233 949
-------- ------- -------- -------
Total noninterest expense............... 4,462 3,549 12,730 10,115
-------- ------- -------- -------
INCOME BEFORE TAXES........................... 278 584 1,311 2,972
INCOME TAXES.................................. 88 242 494 1,172
-------- ------- -------- -------
3
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income, con't
(In thousands, except per share data)
For the Three For the Nine
Months Ended Months
September 30, Ended
September 30,
-------------- ---------------
1999 1998 1999 1998
------ ------- ------- -------
(unaudited) (unaudited)
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE .....
IN ACCOUNTING PRINCIPLE................... 190 342 817 1,800
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, NET OF INCOME TAX EFFECTS........ -- -- $ (96) --
------- ------- -------- -------
NET INCOME.....................................$ 190 $ 342 $ 721 $1,800
======= ======= ======== =======
BASIC EARNINGS PER COMMON SHARE:
Income before cumulative effect of change in
accounting principle........................ $ 0.08 $ 0.14 $ 0.34 $ 0.75
Cumulative effect of change in accounting
principle, net of income tax effects........ -- -- (0.04) --
------- ------- -------- -------
Net income..................................$ 0.08 $ 0.14 $ 0.30 $ 0.75
======= ======= ======== =======
DILUTED EARNINGS PER COMMON SHARE:
Income before cumulative effect of change in
accounting principle........................$ 0.08 $ 0.14 $ 0.34 $ 0.73
Cumulative effect of change in accounting
principle, net of income tax effects........ -- -- (0.04) --
------- ------- -------- -------
Net income..................................$ 0.08 $ 0.14 $ 0.30 $ 0.73
======= ======= ======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(In thousands)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
1999 1998 1999 1998
-------- ---------- -------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
NET INCOME............................ $ 190 $ 342 $ 721 $ 1,800
OTHER COMPREHENSIVE INCOME --
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during the period, net of
income tax effects of $(178) and
$172 for the three months ended
September 30, 1999 and 1998,
respectively, and $(908) and $159
for the nine months ended
September 30, 1999 and 1998,
respectively.................... (289) 279 (1,475) 242
Less: reclassification adjustment
for gains included in net income,
net of income tax effects of $21
for the three months ended
September 30, 1999 and 1998, and
$60 and $27 for the nine months
ended September 30, 1999 and
1998, respectively.............. (45) (30) (100) (41)
------------ ----------- ---------- ---------
OTHER COMPREHENSIVE INCOME (LOSS)..... (334) 249 (1,575) 201
------------ ----------- ---------- ---------
============ =========== ========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
For the Nine Months Ended September 30, 1999
(In thousands, except share data)
<TABLE>
<CAPTION>
Accumulated
Other
Common Stock Capital Retained Treasury Comprehensive
Shares Amount Surplus Earnings Stock Income Total
----------------- --------- -------- --------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998.2,433,064 $ 24 $ 13,951 $11,651 $ (513) $ 142 $25,255
Net income (unaudited).. -- -- -- 721 -- -- 721
Other comprehensive loss --
Change in unrealized
holding gain on
securities
available for sale,
net of income tax
effects
(unaudited)....... -- -- -- -- -- (1,475) (1,475)
Other (unaudited)..... 9,796 -- 4 -- -- -- 4
--------- ------- --------- --------- --------- ------------- --------
Balance, September 30,
1999 (unaudited)....... 2,442,860 $ 24 $ 13,955 $ 12,372 $ (513) $ (1,333) $24,505
========= ======= ========= ========= ========== ============= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30
(In thousands)
1999 1998
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income.............................................. $ 721 $ 1,800
Adjustments to reconcile net income to net cash
provided by operating activities --
Provision for credit losses.......................... 1,005 960
Depreciation and amortization........................ 784 662
Amortization of intangible assets.................... 410 450
Net premium amortization (discount accretion) on 445 (7)
investment securities................................
Proceeds from loans recovered........................ 129 144
Change in interest receivable and other assets, net.. (1,606) (1,315)
Net realized gains on sales of securities............ (160) (68)
Change in other liabilities, net..................... (1,568) 374
Originations of loans to be sold..................... (55,096) (52,602)
Proceeds from sale of loans.......................... 55,096 52,602
--------- ---------
Net cash provided by operating activities......... 160 3,000
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities......................(147,271) (71,528)
Proceeds from sales of investment securities............ 33,899 53,547
Proceeds from maturities of investment securities....... 83,955 20,731
Net increase in loans................................... (12,294) (39,996)
Additions to premises, leasehold improvements and
equipment, net........................................ (2,775) (700)
---------- ---------
Net cash used in investing activities............. (44,486) (37,946)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand, savings, NOW and
money market accounts........................... 20,889 (1,860)
Net increase in time deposits........................... 2,858 9,554
Net increase in short-term borrowings................... 18,383 11,913
Repayments of long-term borrowings...................... (24,860) (9,807)
Proceeds from long-term borrowings...................... 33,100 18,670
Repurchase of stock..................................... -- (297)
Other................................................... 88 227
--------- ---------
Net cash provided by financing activities......... 50,458 28,400
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....... 6,132 (6,546)
CASH AND CASH EQUIVALENTS, beginning of period............. 10,284 15,415
--------- ---------
CASH AND CASH EQUIVALENTS, end of period...................$ 16,416 $ 8,869
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid...........................................$ 14,335 $ 12,771
========= =========
Income taxes paid....................................... $ 643 $ 1,020
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1999
NOTE 1 -- Basis of Presentation
The accompanying interim consolidated financial statements have been prepared by
BNCCORP, Inc. ("BNCCORP" or the "Company"), without audit, in accordance with
generally accepted accounting principles for interim financial information and
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations, although
the Company believes that the disclosures made are adequate to make the
information presented not misleading.
The unaudited consolidated financial statements as of September 30, 1999 and for
the three and nine month periods ended September 30, 1999 and 1998 include, in
the opinion of management, all adjustments, consisting solely of normal
recurring adjustments, necessary for a fair presentation of the financial
results for the respective interim periods and are not necessarily indicative of
results of operations to be expected for the entire fiscal year ending December
31, 1999.
The accompanying interim consolidated financial statements have been prepared
under the presumption that users of the interim consolidated financial
information have either read or have access to the audited consolidated
financial statements for the year ended December 31, 1998. Accordingly, footnote
disclosures which would substantially duplicate the disclosures contained in the
December 31, 1998 audited consolidated financial statements have been omitted
from these interim consolidated financial statements. It is suggested that these
interim consolidated financial statements be read in conjunction with the
audited consolidated financial statements for the year ended December 31, 1998
and the notes thereto.
NOTE 2 -- Reclassifications
Certain of the 1998 amounts have been reclassified to conform with the 1999
presentations. These reclassifications had no effect on net income or
stockholders' equity.
NOTE 3 -- Acquisitions
The Company continues to engage in an acquisition program. Pursuant to that
program, the Company periodically considers or participates in discussions
concerning acquisitions. At the present time, the Company has no binding
commitments or agreements regarding acquisitions, but agreements may be
negotiated and entered into in the future.
NOTE 4 -- Earnings per Share
The following table shows the amounts used in computing earnings per share
("EPS") and the effect on weighted average number of shares of potential
dilutive common stock issuances for the three month periods ended September 30:
8
<PAGE>
Net Per-Share
Income Shares Amount
----------- ------------- -----------
1999
Basic earnings per share:
Income available to common stockholders.. $ 190,000 2,409,654 $ 0.08
==========
Effect of dilutive shares --
Options............................ 381
Warrants........................... --
-----------
Diluted earnings per share:
Income available to common stockholders.. $ 190,000 2,410,035 $ 0.08
============ =========== ==========
1998
Basic earnings per share:
Income available to common stockholders..$ 342,000 2,391,939 $ 0.14
==========
Effect of dilutive shares --
Options............................ 9,399
Warrants........................... 12,832
-----------
Diluted earnings per share:
Income available to common stockholders..$ 342,000 2,414,170 $ 0.14
============ =========== ===========
The following table shows the amounts used in computing EPS and the effect on
weighted average number of shares of potential dilutive common stock issuances
for the nine month periods ended September 30:
Net Per-Share
Income Shares Amount
---------- ------------ ---------
1999
Basic earnings per share:
Income before cumulative effect of change in
accounting principle.............. $ 817,000 2,408,855 $ 0.34
Cumulative effect of change in accounting
principle, net of income tax effects (96,000) 2,408,855 (0.04)
---------- ------------ ---------
Income available to common stockholders... $ 721,000 2,408,855 $ 0.30
========== =========
Effect of dilutive shares --
Options................................ 300
Warrants............................... --
------------
Diluted earnings per share:
Income before cumulative effect of change in
accounting principle................... $ 817,000 2,409,155 $ 0.34
Cumulative effect of change in accounting
principle, net of income tax effects... (96,000) 2,409,155 (0.04)
----------- ------------ ---------
Income available to common stockholders... $ 721,000 2,409,155 $ 0.30
=========== ============ =========
9
<PAGE>
Net Per-Share
Income Shares Amount
---------- ------------ ----------
1998
Basic earnings per share:
Net income available to common stockholders $1,800,000 2,399,367 $ 0.75
==========
Effect of dilutive shares --
Options................................ 42,919
Warrants............................... 36,136
------------
Diluted earnings per share:
Net income available to common stockholders $1,800,000 2,478,422 $ 0.73
=========== =========== ==========
Warrants to purchase 50,000 shares of common stock at $12.00 per share and
options to purchase between 117,634 and 166,750 shares of common stock at prices
ranging from $10.00 to $17.50 were outstanding during all periods presented, but
were not included in the computation of diluted EPS for the three and nine month
periods ended September 30, 1999 because their effects were antidilutive.
Additionally, options to purchase 7,500 shares of common stock at prices ranging
from $7.56 to $8.75 were outstanding during the three month period ended
September 30, 1999. Only a portion of the options were included in the
computation of diluted EPS because the remainder of the options were
antidilutive.
NOTE 5 -- Segment Disclosures
BNCCORP segments its operations into three separate business activities, based
on the nature of the products, services and customers for each segment: BNC
National Bank ("BNC--North Dakota"), BNC National Bank of Minnesota
("BNC--Minnesota") and BNC Financial Corporation ("BNC Financial").
The operations of BNC-North Dakota provide traditional community banking
services to individuals and small and mid-sized businesses, such as accepting
deposits and making consumer, mortgage and 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 and sells
insurance products.
BNC-Minnesota also provides traditional banking services, but this segment is
identified primarily from its commercial banking activities in Minnesota.
BNC Financial offers asset-based commercial financing. In addition, it also
manages a consulting services division, which provides a number of services
including pre-funding due diligence, collateral review, problem loan consulting,
bankruptcy support and asset valuation.
The accounting policies of the three segments are the same as those described in
the summary of significant accounting policies included in the audited
consolidated financial statements for the year ended December 31, 1998, which
conform to generally accepted accounting principles.
The 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 quarter ended September 30 (in
thousands):
10
<PAGE>
<TABLE>
<CAPTION>
1999 1998
--------------------------------------- ----------------------------------------
BNC Other BNC Other
BNC-ND BNC-MN Financial (a) Total BNC-ND BNC-MN Financial (a) Total
------ ------ -------- ------ ------ ------- ------ -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest
income...... $2,427 $ 866 $ 479 $ (180) $3,592 $2,590 $ 910 $ 290 $ (146) $3,644
Other
revenue-
external
customers... 1,173 313 41 -- 1,527 964 230 56 1 1,251
Intersegment
revenue. 82 -- -- 758 840 52 -- -- 820 872
Segment
profit
before taxes. 9 228 312 (271) 278 192 483 166 (257) 584
Income tax
expense
(benefits). (10) 95 126 (123) 88 67 199 67 (91) 242
Segment
profit...... 19 133 186 (148) 190 125 284 99 (166) 342
Segment
assets...... 331,255 94,941 32,927 21,256 480,379 318,517 69,481 24,893 23,055 435,946
</TABLE>
- -----------------
(a) The financial information presented in the "Other" column is for the bank
holding company. This component of the Company is not intended to earn
revenue and does not qualify as an operating segment.
11
<PAGE>
The following tables present segment profit or loss, assets and a reconciliation
of segment information as of, and for the nine month periods ended September 30
(in thousands):
<TABLE>
<CAPTION>
1999 1998
--------------------------------------- ----------------------------------------
BNC Other BNC Other
BNC-ND BNC-MN Financial (a) Total BNC-ND BNC-MN Financial (a) Total
------ ------ -------- ------ ------ ------- ------ -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest
income....... $7,148 $2,549 $ 1,149 $ (506) $10,340 $7,516 $2,523 $ 797 $ (456) $10,380
Other
revenue-
external
customers.... 3,681 804 219 2 4,706 2,886 615 136 30 3,667
Intersegment
revenue.. 208 -- 11 2,483 2,702 165 -- -- 3,383 3,548
Segment
profit
before taxes. 668 782 721 (860) 1,311 1,834 1,434 487 (783) 2,972
Income tax
expense
(benefit). 202 325 292 (325) 494 647 587 197 (259) 1,172
Segment
profit
before
cumulative
effect
of change
in
accounting
principle.... 466 457 429 (535) 817 1,187 847 290 (524) 1,800
Cumulative
effect
of change
in
accounting
principle,
net
of
income
tax
effects...... 43 35 -- 18 96 -- -- -- -- --
Segment
profit....... 423 422 429 (553) 721 1,187 847 290 (524) 1,800
Segment
assets....... 331,255 94,941 32,927 21,256 480,379 318,517 69,481 24,893 23,055 435,946
</TABLE>
- -----------------------
(a) The financial information presented in the "Other" column is for the bank
holding company. This component of the Company is not intended to earn
revenue and does not qualify as an operating segment.
12
<PAGE>
Reconciliation of segment profit to consolidated results (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ---------- -----------
Segment profit before taxes $ 278 $ 584 $ 1,311 $ 2,972
Income tax expense......... (88) (242) (494) (1,172)
---------- ---------- ---------- -----------
Segment profit
before cumulative effect
of change in accounting
principle............... 190 342 817 1,800
Cumulative effect of change
in accounting principle,
net of income tax
effects................. -- -- (96) --
Elimination of intersegment
profit.................. -- -- -- --
---------- ---------- ---------- -----------
Consolidated net income.... $ 190 $ 342 $ 721 $ 1,800
========== ========== ========== ===========
NOTE 6 -- Recently Issued Accounting Standards
On January 1, 1999, the Company adopted Statement of Position 98-5, "Reporting
on the Costs of Start-Up Activities" ("SOP 98-5"), which requires costs of
start-up activities and organization costs to be expensed as incurred. SOP 98-5
did not require restatement of prior period financial statements. The impact of
adoption of SOP 98-5 is presented in the interim consolidated financial
statements as a cumulative effect of change in accounting principle.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
133 requires that changes in the derivative's fair value be recognized currently
in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting.
SFAS 133 is effective for fiscal years beginning after June 15, 2000. A company
may also implement SFAS 133 as of the beginning of any fiscal quarter after
issuance (that is, fiscal quarters beginning June 16, 1998 and thereafter). SFAS
133 cannot be applied retroactively. SFAS 133 must be applied to (a) derivative
instruments and (b) certain derivative instruments embedded in hybrid contracts
that were issued, acquired, or substantively modified after December 31, 1997
(and, at the company's election, before January 1, 1998).
The Company plans to adopt SFAS 133 on January 1, 2001 and is currently in the
process of developing applicable policy statements, effecting any necessary
system changes and quantifying the impact of the adoption of SFAS 133 on its
financial statements. Adoption of the accounting standard could increase
volatility in earnings and other comprehensive income.
13
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Comparison of Financial Condition at September 30, 1999 and December 31, 1998
Assets. Total assets increased $48.1 million, or 12 percent, from $396.3 million
at December 31, 1998 to $444.5 million at September 30, 1999. The following
table presents the Company's assets by category as of September 30, 1999 and
December 31, 1998, as well as the amount and percent of change between the two
dates (amounts are in thousands):
Assets
Change
--------------------
September 30, December 31,
1999 1998 $ %
------------ ------------ ---------- --------
Cash and due from banks...... $ 11,106 $ 7,475 $ 3,631 49%
Interest-bearing deposits
with banks................ 5,310 2,809 2,501 89%
Investment securities
available for sale........ 123,349 96,601 26,748 28% (a)
Loans and leases, net........ 278,944 267,783 11,161 4% (b)
Premises, leasehold
improvements and
equipment, net............ 10,758 8,827 1,931 22%
Interest receivable.......... 2,932 2,618 314 12%
Other assets................. 8,578 6,163 2,415 39%
Deferred charges and
intangible assets,
net....................... 3,475 4,056 (581) (14)%
============ ============ ==========
Total assets........... $444,452 $ 396,332 $ 48,120 12%
============ ============ ==========
- --------------------
(a) The Company purchased additional investment securities funded by short-term
borrowings. See "--Liabilities."
(b) The increase in loans is primarily attributable to loan growth at
BNC-Minnesota and in asset-based loans at BNC Financial.
While prospects for continued loan growth appear favorable, particularly in the
Minnesota market, management cannot predict, with any degree of certainty, the
Company's future loan growth potential. Future loan growth will be impacted by
many factors beyond the control of the Company including, but not limited to,
general economic conditions and the competitive environment in the markets in
which the Company operates.
Allowance for Credit Losses. The following table sets forth information
regarding changes in the Company's allowance for credit losses for the three and
nine month periods ending September 30, 1999 (amounts are in thousands):
14
<PAGE>
Three Months Nine Months
Ended Ended
September September
30, 1999 30, 1999
--------------- --------------
(Unaudited) (Unaudited)
Balance, beginning of period................ $ 3,388 $ 3,093
Provision for credit losses................. 379 1,005
Loans charged off........................... (513) (964)
Loans recovered............................. 9 129
-------------- -------------
Balance, end of period...................... $ 3,263 $ 3,263
============== =============
Ending loan portfolio ...................... $ 282,207
==============
Allowance for credit losses as a
percentage of ending loan portfolio... 1.16%
As of September 30, 1999, the Company's allowance for credit losses stands at
1.16 percent of total loans as compared to 1.14 percent at December 31, 1998.
Net charge-offs as a percentage of average loans for the three and nine month
periods ended September 30, 1999 were .18 and .30 percent, respectively, as
compared to .05 and .16 percent, respectively, for the same periods last year.
The Company maintains its allowance for credit losses at a level considered
adequate to provide for an estimate of probable losses related to specifically
identified loans as well as probable losses inherent in the remaining loan
portfolio that have been incurred as of each balance sheet date. Management
generally estimates inherent loss by applying loss factors to grades of loans.
These loss factors are developed initially from the Company's historical
experience with similar loans and are adjusted, as necessary, for currently
existing conditions, both positive and negative, which may not necessarily be
reflected in prior loss experience. Considerations include, but are not limited
to, loan portfolio volume and composition, 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 to the extent the Company can identify probable year 2000-related
losses as of each balance sheet date.
Estimating the risk of loss and amount of loss on any loan is subjective and
ultimate losses may vary from current estimates. These estimates are reviewed
periodically and, as adjustments become necessary, they are reported in income
through the provision for credit losses in the periods in which they become
known. The adequacy of the allowance for credit losses is monitored by
management and reported to the Company's board of directors. Although management
believes that the allowance for credit losses is adequate to absorb any losses
on existing loans that may become uncollectible, judgment of the adequacy of the
allowance is necessarily approximate and imprecise, and there can be no
assurance that the allowance will prove sufficient to cover actual losses. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the adequacy of the Company's allowance for credit
losses. Such agencies may require the Company to make additional provisions to
the allowance based upon their judgments about information available to them at
the time of the examination.
Nonperforming Assets. The following table sets forth information concerning the
Company's nonperforming assets as of the dates indicated (amounts are in
thousands):
15
<PAGE>
September 30, December 31,
1999 1998
-------------- -------------
(Unaudited)
Nonperforming loans:
Loans 90 days or more delinquent and still
accruing interest..................... $ 213 $ 307
Nonaccrual loans............................ 1,719 2,042
Restructured loans.......................... 17 44
-------------- -------------
Total nonperforming loans......................... 1,949 2,393
Other real estate owned and repossessed
assets................................... 3,399 2,112
-------------- -------------
Total nonperforming assets........................ $ 5,348 $ 4,505
============== =============
Allowance for credit losses....................... $ 3,263 $ 3,093
============== =============
Ratio of total nonperforming assets to total assets 1.20% 1.14%
Ratio of total nonperforming loans to total loans. 0.69% 0.88%
Ratio of allowance for credit losses to total
nonperforming loans......................... 167.38% 129.25%
Nonperforming loans consist of loans 90 or more days past due for which the
Company continues to accrue interest, nonaccrual loans and loans on which the
original terms have been restructured.
Restructured loans are those for which concessions, including the reduction of
interest rates below a rate otherwise available to that borrower or the deferral
of interest or principal, have been granted due to the borrower's weakened
financial condition. Other real estate owned and repossessed assets includes
property acquired by the Company in foreclosure proceedings or under agreements
with delinquent borrowers.
The increase in the Company's other real estate owned and repossessed assets at
September 30, 1999 as compared to December 31, 1998 is attributable to one
commercial credit.
Liabilities. Total liabilities increased $48.9 million, or 13 percent, from
$371.1 million at December 31, 1998 to $419.9 million at September 30, 1999. The
following table presents the Company's liabilities by category as of September
30, 1999 and December 31, 1998 as well as the amount and percent of change
between the two dates (amounts are in thousands):
16
<PAGE>
Liabilities
Change
---------------------
September December
30, 1999 31, 1998 $ %
----------- ----------- ---------- --------
Deposits:
Noninterest - bearing...... $ 28,138 $ 28,475 $ (337) (1)%
Interest - bearing --
Savings, NOW and
money market......... 111,113 89,887 21,226 24% (a)
Time deposits
$100,000 and over.... 48,724 39,162 9,562 24% (b)
Other time deposits.. 120,271 126,975 (6,704) (5)% (a)
Short-term borrowings...... 67,673 49,290 18,383 37% (c)
Long-term borrowings....... 38,954 30,646 8,308 27% (d)
Other liabilities.......... 5,074 6,642 (1,568) (24)%
----------- ----------- ----------
Total liabilities.... $ 419,947 $ 371,077 $ 48,870 13%
=========== =========== ==========
- -------------------
(a) A deposit restructuring and repricing strategy and the introduction of the
Company's Wealthbuilder Now and money market accounts have contributed to
an increase in money market accounts and a decrease in other time
deposits.
(b) Increased balances of brokered deposits.
(c) Increased borrowings from the Federal Home Loan Bank ("FHLB") to fund
purchases of investment securities.
(d) Additional draws on BNC Financial's revolving line of credit with Firstar
Bank Milwaukee, N.A., primarily for the purpose of funding asset-based
loans.
Stockholders' Equity. The Company's equity capital decreased $750,000 between
December 31, 1998 and September 30, 1999. This decrease resulted from $721,000
of earnings recorded for the nine months ended September 30, 1999, restricted
and other stock transactions netting to a $4,000 increase and a $1,475,000
decrease in the net unrealized holding gain on securities available for sale.
Capital Adequacy and Expenditures. BNCCORP's management actively monitors
compliance with bank regulatory capital requirements, including risk-based and
leverage capital measures. Under the risk-based capital method of capital
measurement, the ratio computed is dependent on the amount and composition of
assets recorded on the balance sheet, and the amount and composition of
off-balance- sheet items, in addition to the level of capital. The following
table includes the risk-based and leverage capital ratios of the Company and its
banking subsidiaries as of September 30, 1999:
17
<PAGE>
Tier 1 Total Tier 1
Risk-Based Risk-Based Leverage
Ratio Ratio Ratio
----------- ------------ -----------
Consolidated............ 6.71% 11.04% 5.20%
BNC C North Dakota...... 9.42% 10.33% 6.17%
BNC C Minnesota ........ 9.26% 10.42% 8.83%
As of September 30, 1999, BNCCORP and its subsidiary banks exceeded capital
adequacy requirements and the banks were considered "well capitalized" under
prompt corrective action provisions.
The Company is currently in the process of constructing an office building in
Fargo, North Dakota. The total cost to complete the construction and provide
furniture and equipment for the building is estimated at between $4.0 and $4.5
million and will be funded through cash generated from operations. Capital
expenditures for Fargo were approximately $2.1 million during the nine month
period ended September 30, 1999. There were no other major capital expenditures
made during this period.
Comparison of Operating Results for the
Three and Nine Month Periods Ended September 30, 1999 and 1998
General. Net income for the three months ended September 30, 1999 was $190,000,
as compared to $342,000 recorded for the three months ended September 30, 1998.
The Company's basic and diluted EPS were $0.08 for the quarter ended September
30, 1999, as compared to basic and diluted EPS of $0.14 for the same period one
year ago. The returns on average assets and average equity for the three months
ended September 30, 1999 were .17 and 3.05 percent, respectively, as compared to
.35 and 5.47 percent, respectively, for the same period last year.
Net income for the nine months ended September 30, 1999, before the cumulative
effect of a change in accounting principle was $817,000 as compared to $1.8
million recorded for the nine months ended September 30, 1998. Net income after
the cumulative effect of a change in accounting principle was $721,000. The
Company's basic and diluted EPS for the nine months ended September 30, 1999
were $0.34 before the cumulative effect of the accounting change and $0.30 after
the accounting change as compared to $0.75 and $0.73, respectively, for the same
period one year ago. The returns on average assets and average equity for the
nine months ended September 30, 1999 were .24 and 3.86 percent, respectively, as
compared to .66 and 9.97 percent, respectively, for the same period last year.
Net Interest Income. Net interest income for the three month period ended
September 30, 1999 decreased $52,000, or 1.4 percent. Net interest margin
decreased to 3.54 percent for the quarter ended September 30, 1999 from 4.05
percent for the same period one year earlier.
Net interest income for the nine month period ended September 30, 1999 decreased
$40,000, or .39 percent. Net interest margin decreased to 3.66 percent for the
nine months ended September 30, 1999 from 4.08 percent for the same period one
year earlier.
The following tables present average balances, interest earned or paid,
associated yields on interest-earning assets and costs on interest-bearing
liabilities for the three and nine month periods ended September 30, 1999 and
1998, as well as the changes between the periods presented. Significant factors
contributing to the decrease in net interest income and the net interest margin
are discussed in lettered notes below the table:
18
<PAGE>
<TABLE>
<CAPTION>
Three Months ended September 30,
-----------------------------------------------------
1999 1998 Change
-------------------------- ------------------------- ----------------------------
Interest Average Interest Average Interest Average
Average earned yield or Average earned yield or Average earned
balance or paid cost balance or paid cost balance paid yield or cost
------- ------- ------- ------- ------- ------- ------- ------- --------------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning
assets
Investments.......... $119,006 $1,750 5.83% $ 93,846 $ 1,431 6.05% $25,160 $ 319 -0.22%(a)
Loans................ 286,961 6,685 9.24% 265,809 6,609 9.86% 21,152 76 -0.62%(b)
Allowance for
loan losses.......... (3,343) -- (3,088) -- (255) --
--------- ------- -------- -------- -------- -------
Total interest-earning
assets............ 402,624 8,435 8.31% 356,567 8,040 8.95% 46,057 $ 395 -0.64%
======== ------- ======== -------- ======== -------
Interest-bearing
liabilities
Savings, NOW & money
market accounts... 100,022 1,000 3.97% 71,784 594 3.28% 28,238 $ 406 0.69%(c)
Certificates of
deposit under
$100,000.......... 123,326 1,565 5.03% 135,737 1,920 5.61% (12,411) (355)-0.58%(c)
Certificates of
deposit $100,000
and over.......... 48,334 643 5.28% 37,870 563 5.90% 10,464 80 -0.62%(d)
--------- ------ -------- ------- -------- ------
Interest -
bearing
deposits.... 271,682 3,208 4.68% 245,391 3,077 4.97% 26,291 131 -0.29%
Short-term borrowings 64,250 856 5.29% 51,784 715 5.48% 12,466 141 -0.19%(e)
Long-term borrowings. 38,740 779 7.98% 28,274 604 8.48% 10,466 175 -0.50%(f)
--------- ------- -------- ------- -------- ------
Total borrowings 102,990 1,635 6.30% 80,058 1,319 6.54% 22,932 316 -0.24%
--------- ------- -------- ------- -------- ------
Total
interest-
bearing
liabilities...$ 374,672 4,843 5.13% $325,449 4,396 5.36% $49,223 447 -0.23%
========== ------- ========= ------- ======== ------
Net interest
income/
spread....... $3,592 3.18% $3,644 3.59% $(52)-0.41%
====== ===== ====== ===== ====== =====
Net interest
margin....... 3.54% 4.05% -0.51%
===== ===== =====
Notation:
Noninterest-bearing
deposits..........$ 29,047 -- $ 24,979 -- $ 4,068 --
---------- -------- --------
Total deposits...$ 300,729 $3,208 4.23% $270,370 $3,077 4.52% $30,359 $ 131 -0.29%
========== ======== ====== ======== ======= ====== ======= ===== =====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Nine Months ended September 30,
-----------------------------------------------------
1999 1998 Change
-------------------------- ------------------------- ----------------------------
Interest Average Interest Average Interest Average
Average earned yield or Average earned yield or Average earned
balance or paid cost balance or paid cost balance paid yield or cost
------- ------- ------- ------- ------- ------- ------- ------- --------------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning
assets
Investments.......... $ 104,671 $ 4,550 5.81% $ 95,520 $ 4,390 6.14% $ 9,151 $ 160 -0.33(a)
Loans................ 275,857 19,072 9.24% 247,595 18,435 9.95% 28,262 637 -0.71(b)
Allowance for
loan losses.. (3,182) -- (3,068) -- (114) --
---------- -------- --------- -------- --------- ---------
Total
interest-
earning
assets....... $ 377,346 $ 23,622 8.37% $340,047 $22,825 8.97% $ 37,299 $ 797 -0.60%
=========== -------- ========= -------- ========= ---------
Interest-bearing
liabilities
Savings, NOW & money
market
accounts.......... $ 91,633 $ 2,477 3.61% $ 69,691 $ 1,664 3.19% $ 21,942 $ 813 0.42%(c)
Certificates of
deposit
under
$100,000.......... 126,926 4,901 5.16% 130,648 5,518 5.65% (3,722) (617) -0.49%(c)
Certificates of
deposit
$100,000
and over.......... 42,424 1,699 5.35% 35,912 1,580 5.88% 6,512 119 -0.53%(d)
---------- ------- --------- -------- -------- --------
Interest -
bearing
deposits....... 260,983 9,077 4.65% 236,251 8,762 4.97% 24,732 315 -0.32%
Short-term borrowings 54,536 2,128 5.22% 50,163 2,060 5.49% 4,373 68 -0.27%(e)
Long-term borrowings. 34,061 2,077 8.15% 24,500 1,623 8.86% 9,561 454 -0.71%(f)
---------- -------- -------- ------- --------- --------
Total borrowings 88,597 4,205 6.35% 74,663 3,683 6.60% 13,934 522 -0.25%
---------- -------- -------- ------- --------- --------
Total
interest-
bearing
liabilities.. $ 349,580 13,282 5.08% $310,914 12,445 5.35% $ 38,666 837 -0.27%
=========== -------- ========= ------- ========= --------
Net interest
income/spread $ 10,340 3.29% $10,380 3.62% $ (40) -0.33%
========= ===== ======== ===== ======== ======
Net interest
margin............... 3.66% 4.08% -0.42%
===== ===== ======
Notation:
Noninterest-bearing
deposits.......... $ 26,620 -- $ 23,579 -- $ 3,041 --
--------- --------- ---------
Total deposits.. $287,603 $ 9,077 4.22% $259,830 $ 8,762 4.51% $ 27,773 $ 315 -0.29%
========= ======== ====== ========= ======= ====== ======== ====== ======
</TABLE>
- -------------------------
(a) The Company has increased its investment securities holdings primarily
through FHLB borrowings. The decreased yield is primarily attributable to
the decrease in the Treasury yield curve which occurred during the second
half of 1998 and the reinvestment of cash flows from maturing
mortgage-backed securities and other investments at lower rates.
(b) The loan volume increase is attributable to increases in loans originated
at BNC-Minnesota and BNC Financial. The decreased loan yield is reflective
of the 75 basis point decline in the prime rate late in 1998 as well as a
decrease in loan pricing spread to prime rate due to competitive pressures
in the markets in which the Company operates.
(c) Increase volume and cost in the savings, NOW and money market deposit
category reflect increased balances in money market deposit accounts. A
deposit restructuring and repricing strategy implemented during the second
half of 1998 and the recently introduced Wealthbuilder accounts have
contributed to the increase in money market deposits and the decrease in
volume and cost of certificates of deposit ("CDs") under $100,000.
(d) The volume of national market CDs was greater during 1999 as compared to
the same periods in 1998. The reduction in cost is reflective of lower CD
renewal rates and the overall decreased rate environment
20
<PAGE>
(e) The increase in short-term borrowings reflects increased FHLB borrowings
primarily for the purpose of purchasing investment securities.
(f) The increase in long-term borrowings reflects drawdowns on the BNCCORP and
BNC Financial lines of credit with Firstar Bank, N.A., primarily to fund
asset-based loans at BNC Financial which totaled $32 million at September
30, 1999 as compared to $24 million at September 30, 1998. The reduced
cost on borrowings is reflective of the interest rate decreases late in
1998.
Net interest income and margin in future periods are expected to be impacted by
several factors. Recent increases in prime rate will improve interest income and
yields on loans. Additionally, the Company has increased its earning asset
portfolio by purchasing investment securities funded primarily through FHLB
borrowings. While the additional investments will increase interest income, net
interest income and earnings, they can be expected to negatively impact yield on
earning assets and net interest margin because yields on such investments are
typically lower than those achieved in the loan portfolio.
Many factors, including, but not limited to, the competitive environment in the
markets in which the Company operates, the multitude of financial and investment
products available to the public and the monetary policies of the Federal
Reserve Board, can materially impact the Company's operating results. Therefore,
management cannot predict, with any degree of certainty, prospects for net
interest income in future periods. In addition to the continued implementation
of the initiatives discussed above and employment of available interest rate
risk management options, the Company expects to continue to focus on broadening
its financial product and service offerings in order to supplement earnings from
core banking activities.
Provision for Credit Losses. The provision for credit losses was $379,000 for
the quarter ended September 30, 1999 as compared to $762,000 for the same period
one year earlier. For the nine months ended September 30, 1999 and 1998, the
provision for credit losses was $1.0 million and $960,000, respectively. See
"Comparison of Financial Condition at September 30, 1999 and December 31,
1998-Allowance for Credit Losses."
Noninterest Income. The following table presents the major categories of the
Company's noninterest income for the three and nine month periods ended
September 30, 1999 and 1998 as well as the amount and percent of change between
the periods. Material changes are discussed in lettered explanations following
the table (amounts are in thousands):
<TABLE>
<CAPTION>
Noninterest Income
For the Three For the Nine
Months Ended Change Months Ended Change
September 30, September 30,
------------- -------------- --------------- -------------------
1999 1998 $ % 1999 1998 $ %
------ ----- ------- ----- ------- ------ ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Insurance
commissions...... $ 460 $ 431 $ 29 7% $ 1,556 $1,269 $ 287 23% (a)
Fees on loans....... 384 365 19 5% 1,216 1,096 120 11% (b)
Brokerage income.... 199 22 177 805% 508 48 460 958% (c)
Service charges..... 138 145 (7) (5)% 392 420 (28) (7)%
Net gain on sales
of securities ... 66 51 15 29% 160 68 92 135%
Rental income....... 48 10 38 380% 108 32 76 238%
Other noninterest
income........... 232 227 5 2% 766 734 32 4%
------ ----- ------ ----- ------ ----- ------ ------
Total
noninterest
income........... $1,527 $1,251 $ 276 22% $4,706 $3,667 $1,039 28%
====== ====== ====== ===== ====== ====== ======= =======
</TABLE>
- -----------------
(a) Increased insurance commissions resulted from an increase in the number of
insurance producers as well as successful efforts to cross-sell insurance
to bank customers.
(b) Increase is primarily attributable to an increase in commercial loan
volume and related fees.
(c) Increase is attributable to the addition of brokerage staff in BNC--North
Dakota's subsidiary, BNC Asset Management, Inc.
21
<PAGE>
Noninterest Expense. The following table presents the major categories of the
Company's noninterest expense for the three and nine month periods ended
September 30, 1999 and 1998 as well as the amount and percent of change between
the periods. Material changes are discussed in lettered explanations following
the table (amounts are in thousands):
<TABLE>
<CAPTION>
Noninterest Expense
For the Three For the Nine
Months Ended Months Ended
September 30, Change September 30, Change
---------------- ---------------- -------------- ------------------
1999 1998 $ % 1999 1998 $ %
------- ------- ------- -------- ------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Salaries and
employee
benefits......$ 2,414 $ 2,041 $ 373 18% $ 7,005 $5,733 $ 1,272 22% (a)
Depreciation
and
amortization.. 411 385 26 7% 1,212 1,126 86 8%
Professional
services...... 408 197 211 107% 932 525 407 78% (b)
Occupancy........ 351 252 99 39% 971 769 202 26% (a)
Office
supplies,
telephone and
postage....... 266 189 77 41% 747 553 194 35% (a)
Marketing
and
promotion..... 172 82 90 110% 487 322 165 51% (c)
FDIC and
other
assessments... 48 47 1 2% 143 138 5 4%
Other............ 392 356 36 10% 1,233 949 284 30% (a)
------ ------- ------ ------ ------- ------ ------ ------
Total
noninterest
expense....... $4,462 $3,549 $ 913 26% $12,730 $10,115 $2,615 26%
====== ======= ====== ======= ======= ======= ======= ======
</TABLE>
--------------------
(a) Increases represent personnel additions at BNC Asset Management, Inc.,
BNC Insurance, Inc. and BNC-North Dakota's Fargo branch as well as
related occupancy, supplies, telephone, postage and other miscellaneous
expenses.
(b) Increase represents an increase in legal fees and an increase in
brokerage costs at BNC Asset Management, Inc.
(c) Increase is attributable to increased advertising, public relations and
promotional expenses, including fees paid to an investor relations firm
engaged late in 1998.
During the third quarter of 1999, the Company reorganized. Salary and benefits
expenses, on an annualized basis, were reduced by approximately $1.0 million,
largely through attrition which occurred over several months. Average full time
equivalent employees for the fourth quarter of 1999 is expected to approximate
191, down from 203 for the third quarter of 1999. Several of the vacated
positions were mid- and upper-level management positions. Rather than rehire
into these positions, the Company reorganized and, in several instances,
reassigned divisions to members of the currently existing corporate management
team. Management expects the new structure will allow the Company to become more
streamlined and operationally efficient. Additionally, the Company expects to
place significant emphasis on cultivating the cross-sell opportunities existing
in its current customer base and becoming a full service financial services
provider to current and future customers.
Income Tax Expense. Income tax expense for the quarter ended September 30, 1999
decreased $154,000 as compared to the same period in 1998 due to the decrease in
22
<PAGE>
pre-tax income. The estimated effective tax rates for the three month periods
ended September 30, 1999 and 1998 were 31.7 and 41.4 percent, respectively. The
decrease in effective tax rates is due to realization of the effect of certain
tax planning strategies.
Income tax expense for the nine months ended September 30, 1999 decreased
$678,000 as compared to the same period in 1998 due to the decrease in pre-tax
income. The estimated effective tax rates for the nine month periods ended
September 30, 1999 and 1998 were 37.7 and 39.4 percent, respectively.
Earnings per Common Share. See Note 4 to the interim Consolidated Financial
Statements included under Item 1 for a summary of the EPS calculation for the
three and nine month periods ended September 30, 1999 and 1998.
Liquidity
Liquidity. Liquidity risk management encompasses the Company's ability to meet
all present and future financial obligations in a timely manner. The objectives
of liquidity management are to maintain adequate liquid assets, liability
diversification among instruments, maturities and customers and a presence in
both the wholesale purchased funds market and the retail deposit market.
The Consolidated Statements of Cash Flows in the interim consolidated financial
statements included under Item 1 present data on cash and cash equivalents
provided by and used in operating, investing and financing activities. In
addition to liquidity from core deposit growth, together with repayments and
maturities of loans and investments, the Company utilizes brokered deposits,
sells securities under agreements to repurchase and borrows overnight federal
funds. The Company's banking subsidiaries are members of the FHLB, which affords
them the opportunity to borrow funds on terms ranging from overnight to ten
years and beyond. Borrowings from the FHLB are generally collateralized by the
banks' mortgage loans and various securities from their investment portfolios.
The Company has also obtained funding, primarily for the purpose of funding
asset-based loans at BNC Financial, through long-term borrowings and the
issuance of subordinated notes. The loan agreements and indenture pursuant to
which the Company's subordinated notes were issued contain a number of covenants
restricting the ability of the Company or its subsidiaries to take certain
actions and requiring maintenance of certain ratios regarding capital,
nonperforming loans, credit loss reserve coverage and other matters. At
September 30, 1999, BNCCORP and its subsidiaries were in compliance with all
material debt covenants.
The following table sets forth, for the nine months ended September 30, 1999 and
1998, a summary of the Company's major sources and (uses) of funds. The summary
information is derived from the Consolidated Statements of Cash Flows included
under Item 1:
23
<PAGE>
Major Sources and Uses of Funds
For the Nine Months
Ended September 30,
---------------------------
1999 1998
------------ -------------
(in thousands)
Purchases of investment securities...... $ (147,271) $ (71,528)
Proceeds from sales and maturities of
investment securities................ 117,854 74,278
Net increase in loans................... (12,294) (39,996)
Net increase in deposits................ 23,747 7,694
Net increase in short-term borrowings... 18,383 11,913
Net increase in long-term borrowings.... 8,240 8,863
The Company regularly measures its liquidity position and believes that its
management policies and guidelines will ensure adequate levels of liquidity to
fund anticipated needs of on- and off-balance-sheet items. The Company's
asset/liability committee has been actively involved in effecting a liquidity
plan for a period spanning the Year 2000 date change.
Year 2000 Issue
Like other financial and business organizations, the Company could be adversely
affected if its information technology (AIT@) 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.
A detailed discussion of the Company's Year 2000 program, including a summary of
its potentially impacted IT and non-IT systems, each individual program phase,
the Company's state of readiness, the state of readiness of the Company's
business partners, costs incurred, risks involved and Year 2000 contingency
plan, as well as its due diligence program related to major borrowers and
depositors, was included in the Company's Form 10-Q's for the quarters ended
June 30, 1999 (filed with the Securities and Exchange Commission on August 9,
1999, pages 27 through 31) and March 31, 1999 (filed on May 14, 1999, pages 22
through 26) and Form 10-KSB for the fiscal year ended December 31, 1998 (filed
on March 29, 1999, pages 27, 28 and 37 through 39). All aspects of the Year 2000
program remain as previously disclosed except as noted below.
To date, the Company has invested approximately $76,000 in hardware and software
(primarily for its Year 2000 lab and some non-compliant computers and software
which were replaced). Other Year 2000 program costs incurred to date have not
been material (approximately $40,000). Based on information currently available,
management feels its initial projection of $200,000 to $400,000 remains a
reasonable estimate for Year 2000 program expenses. All costs associated with
the Year 2000 program have been and are expected to continue to be funded
through current operating profits.
The Company's Year 2000 contingency plan has been tested. The test resulted in
some minor revisions to the plan and a second test of the plan has been
scheduled.
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
24
<PAGE>
could have a material adverse affect on the Company. The Company has received
initial assurances from certain of these third parties that their ability to
perform their obligations to the Company are not expected to be materially
adversely affected by the Year 2000 problem. The Company is also testing, to the
extent possible, systems, software and interfaces through which business
transactions with such third parties are effected. The Company will continue to
request updated information from these third parties in order to assess their
Year 2000 readiness. If a material third party business partner is unable to
provide reassurance to the Company that it is or will be ready for the Year
2000, the Company intends to seek an alternative business partner to the extent
practical.
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.
All forecasts, estimates and other statements relating to the Year 2000
readiness of the Company and its customers and business partners are based on
information and assumptions about future events. Such "forward looking
statements" are subject to various known and unknown risks and uncertainties
that may cause actual events to differ from such statements. These uncertainties
include, but are not limited to, the understanding of the Company that its core
application and other systems are or will be Year 2000 compliant, the ability to
identify, repair or replace mission critical non-IT equipment in a timely
fashion, the ability of certain third parties to ensure their systems are Year
2000 compliant and the ability of the Company to test interfaces with certain of
these third parties, the performance of telecommunications, data transmission
and utilities providers, the failure or impairment of certain third parties with
which the Company transacts business, systemic occurrences in the banking
industry which could impact the Company's liquidity and undiscovered problems in
the Company's Year 2000 testing plans and processes. While the Company will
exercise due diligence in the development of its Year 2000 plans and take
appropriate actions based on the best available information, there can be no
assurance that events and circumstances will transpire as expected and, as a
result, the potential of a material adverse impact on the Company cannot be
completely eliminated.
Forward Looking Statements
Statements included in Item 2, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," which are not historical in
nature are intended to be, and are hereby identified as "forward looking
statements" for purposes of the safe harbor provided by Section 21E of the
Securities Exchange Act of 1934, as amended. The Company cautions readers that
forward looking statements, including without limitation, those relating to the
Company's future business prospects, revenues, working capital, liquidity,
capital needs, interest costs, and income and the anticipated impact of the Year
2000, 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 business partners and customers; and other risks which are
difficult to predict and many of which are beyond the control of the Company.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
25
<PAGE>
The Company's business activities generate market and other risks. Market risk
arises from changes in interest rates, exchange rates, commodity prices and
equity prices and represents the possibility that changes in future market rates
and prices will have a negative impact on the Company's earnings or value. The
Company's principal market risk is interest rate risk which arises from changes
in interest rates. Interest rate risk can result from: (1) Re-pricing risk B
timing differences in the maturity/re-pricing of assets, liabilities and
off-balance sheet contracts; (2) Options risk B the effect of embedded options,
such as loan prepayments, interest rate caps/floors and deposit withdrawals; (3)
Basis risk B 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 B 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.
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 8.25 percent to 9.25 percent 12 months later. The
prime rate in this example will increase 1/12th of the overall increase of 100
basis points each month.
The net interest income simulation results for the twelve month period ending
September 30, 2000 is shown below. The growth assumption used for this
simulation was based on the growth projections built into the Company's
preliminary 2000 budget. The impact of each interest rate scenario on projected
net interest income is displayed before and after the impact of the $25.0
million notional interest rate floor on the prime rate (with an 8.50 percent
strike) which the Company purchased in September 1998.
26
<PAGE>
<TABLE>
<CAPTION>
Net Interest Income Simulation
(amounts in thousands)
Movement in interest rates -300bp -200bp -100bp Unchange +100bp +200bp +300bp
<S> <C> <C> <C> <C> <C> <C> <C>
Projected 12-month net
interest income........... $ 15,545 $15,355 $15,192 $15,030 $14,680 $14,345 $14,020
Dollar change from rates
unchanged scenario. ...... 515 325 162 -- (350) (685) (1,010)
Percentage change from rates
unchanged scenario........ 3.43% 2.16% 1.08% -- -2.33% -4.56% -6.72%
Benefit/(cost) from $25MM
floor (1)................. 252 114 23 (161) (219) (223) (224)
Total net interest income
impact with floor......... 15,797 15,469 15,215 14,869 14,461 14,122 13,796
Dollar change from flat
w/floor................... 928 600 346 -- 408 (747) (1,073)
Percentage change from
unchanged w/floor......... 6.24% 4.04% 2.33% -- -2.74% -5.02% -7.27%
Benefit from amortization of
deferred gain on
sale of interest rate
swaps (2)................. 52 52 52 52 52 52 52
Total net interest income
impact w/floor &
swap gain................. $15,849 $15,521 $15,267 $14,921 $14,513 $14,174 $13,848
Dollar change from flat
w/floor & swap............ $ 928 $ 600 $ 346 $ - $ (408)$ (747) $(1,073)
Percentage change from flat
w/floor & swap............ 6.22% 4.02% 2.32% - -2.73% -5.01% -7.19%
POLICY LIMITS............. -9.00% -6.00% -3.00% - 3.00% 6.00% 9.00%
</TABLE>
- --------------------------
(1) In September 1998, the Company purchased an interest rate floor. The
notional amount of the floor is $25.0 million with a maturity date of
September 29, 2003. The floor's reference rate is the prime rate with a
strike of 8.50 percent. The Company paid a premium of $1,120,000 (or 4.48%
per million). The premium is being amortized on a straight-line basis over
the 5-year term of the option.
(2) The swaps were sold in October and November 1997. Gains recognized upon sale
of the swaps are being amortized as a reduction of interest expense over the
remaining lives of the original swap contracts.
The Company's rate sensitivity position over the projected twelve month horizon
is liability sensitive. This is evidenced by the projected decrease of net
interest income in the rising interest rate scenarios, and the increase in net
interest income in falling rate scenarios. The primary reason for this interest
rate risk profile is the growth of the new Wealthbuilder deposit products along
with the continued growth in these products that is projected into 2000, as well
as the growth and mix of components of the asset side of the balance sheet.
The Company's general policy is to limit the percentage change in projected net
interest income to +/- 3%, 6%, and 9% from the rates unchanged scenario for the
+/-100bp, 200bp, and 300bp interest rate ramp scenarios, respectively. The
Company was within its policy limits for each projected scenario in the table
above.
Since there are limitations inherent in any methodology used to estimate the
exposure to changes in market interest rates, these analyses are not intended to
be a forecast of the actual effect of changes in market interest rates such as
those indicated above on the Company. Further, this analysis is based on the
Company's assets and liabilities as of September 30, 1999 (with forward
adjustments for planned growth and anticipated business activities) and does not
contemplate any actions the Company might undertake in response to changes in
market interest rates.
27
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings
BancInsure, Inc. vs. BNC National Bank, N.A. and Debra J. Gronlie, Civ. No.
A1-98-97, U.S.D.C. District of North Dakota. Discovery and related activities
are complete. Trial is scheduled to begin February 2000. In a related suit filed
by BNC National Bank (the "Bank") on March 11, 1999 in the United States
District Court for Bexar County, Texas (BNC National Bank v. Alamation, LLC, et
al.; Civ. No. 99-I03586), the bank alleges, among other things, fraud,
misrepresentations and breaches of fiduciary duty by Deb Gronlie ( a former loan
officer of the Bank) and that Gronlie conspired with others to improperly divert
property ( a motion simulator) and revenues generated by operation of the
simulator. The Bank is seeking, among other things, a declaratory judgement that
it is the owner of and entitled to immediate possession of the simulator,
compensatory damages and punitive damages.
In addition to the foregoing litigation, the Bank and certain of its officers
were named defendants in a suit filed on April 30, 1999 in the United States
District Court for the District of North Dakota (Bunk v. BNC National Bank, et
al.; Civ. No A1-99-41). The plaintiff alleged that the Bank, acting in concert
with Deb Gronlie (the Bank's former loan officer who was terminated and is
subject to litigation by the Bank alleging, among other things,
misrepresentations, breaches of fiduciary duty and conflicts of interest) and
the Bank's officers named in the suit, violated the U.S. and North Dakota
Racketeer Influenced and Corrupt Organization Act, committed fraud and breached
their fiduciary duties to the plaintiff by inducing plaintiff to purchase two
businesses that were customers of the Bank, forcing the plaintiff to sell
control of the businesses and then forcing the plaintiff from day-to-day control
of the businesses, requiring the plaintiff, among other things, to file for
protection under the federal bankruptcy laws. The plaintiff sought compensatory
damages of $7.5 million plus treble and punitive damages. The Bank denied
liability. This federal action was dismissed by the United States District Judge
on September 22, 1999. The action was then re-filed in Burleigh County District
Court, Bismarck, North Dakota with virtually the same allegations. The Bank,
again, denies liability, intends to pursue all available remedies and defend
this claim vigorously.
Item 6. Exhibits and Reports on Form 8-K
(a) Part I Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K
None.
28
<PAGE>
Signatures
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BNCCORP, Inc.
Date: November 12, 1999 By /s/ Gregory K. Cleveland
----------------------------------------
Gregory K. Cleveland
President
Chief Operating Officer
Only Authorized Signature
29
Exhibit 10.31
TERMINATION AGREEMENT
THIS AGREEMENT is made and entered into this 9th day of September, 1999,
by and between BNCCORP, Inc. (the "Company"); BNC National Bank (the "Bank") and
Kevin Pifer ("Pifer").
W I T N E S S E T H:
WHEREAS, Pifer is an employee of the Bank; and
WHEREAS, Pifer has voluntarily decided to terminate his employment as
President of the Bank and all other duties with the Company and the Bank due to
his acceptance of employment outside the Company and the Bank;
NOW, THEREFORE, pursuant to the foregoing recitals, which are an integral
part hereof, and in consideration of the conditions contained herein, the
sufficiency of which is hereby acknowledge, the parties hereto agree as follows:
Termination of Employment. Effective as of September 17, 1999, Pifer
hereby resigns his employment with the Company and the Bank in any and
every capacity, including his membership on all Boards of Director,
including affiliates. This Agreement is a result of Pifer's decision to
accept employment outside the Company and the Bank. By virtue of Pifer's
resignation and this Agreement, the Employment Agreement, dated June 15,
1998, between Pifer, the Company and the Bank, is cancelled and is null
and void as of the date of this Agreement. This Agreement replaces all
previous agreements between Pifer, the Company and the Bank regarding any
relationships.
Severance. The Company shall, as and for a severance payment, and in
consideration for the terms of this Agreement, transfer stock options for
Five Thousand (5000) shares of stock in BNCCORP, Inc. pursuant to the
BNCCORP, Inc. 1995 Stock Incentive Plan to Pifer. Said stock options shall
be transferred and ownership shall vest as unrestricted at the time and
date of Pifer's termination from the Company and the Bank. The exercise
price of the options shall be valued at the time of transfer by the
closing price on the NASDAQ Stock Exchange on the date of termination of
employment by Pifer.
Covenant Not to Compete. Pifer shall not, for a period of three (3) years
from the date of his termination from employment, in Cass County, North
Dakota, solicit any customers of the Company or the Bank or otherwise
disrupt any previously established relationships 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. Pifer shall not, for that period and within those
<PAGE>
geographic boundaries, engage in the occupation of or business the same or
similar to those of the subsidiaries of the Company, namely financial
services, asset management or insurance sales and services. However, Pifer
may be involved in the sales and operation of a crop insurance agency.
Pifer shall not contact or solicit any customers of BNC Insurance nor any
agents of BNC Insurance. In the event that the Company or the Bank are
sold or cease to exist, this Covenant Not to Compete shall be null and
void. Pifer agrees that the stock options received as severance pay are
ample and sufficient consideration for this Covenant Not to Compete.
Return of Property. On or before the date of termination, Pifer shall
return all property and records of or belonging to the Company and the
Bank, including specifically, but not exclusively, all keys to the Company
and the Bank's places of business, all credit cards issued in the name of
the Company or the Bank or payable by the Company or the Bank, all
cellular telephones and accessories, the Jeep Grand Cherokee and all
ignition and other keys, and all computer equipment belonging to the
Company and the Bank.
COBRA. Pursuant to COBRA, Pifer will be offered the opportunity for
continued coverage under the Company's health insurance plans.
Confidentiality. Pifer agrees to maintain confidential any and all
confidential and proprietary information respecting the Company's
financial and business affairs that he has had access to by reason of his
position with the Company and the Bank.
Release of the Company and the Bank. Effective as of the termination of
employment, Pifer does hereby agree to hold harmless and fully, completely
and forever release, acquit and discharge the Company and the Bank, its
successors and assigns, its affiliated companies and the past, present and
future officers, directors, board of directors, employees, agents and
representatives of any and all of them, whether in their individual or
official capacities, from and against any and all claims, demands, suits,
actions and causes of actions of whatever kind, nature or description,
whether arising out of the alleged violation of any state or federal
statute, negligence, breach of contract, fraud, breach of warranty or any
other theory, where legal or equitable, and the consequences thereof,
including any claims, losses, costs of damages, known or unknown,
liquidated or unliquidated, fixed or contingent, which Pifer has or may
have or hereafter claim to have against any or all of them resulting from,
arising out of, or in any manner relating to his employment with the
Company and the Bank.
Representation as to Consideration. Pifer hereby warrants that the Release
and the Covenant Not to Compete are supported by good, valuable and
adequate consideration, the receipt and sufficiency of which is
acknowledge, and Pifer hereby waives any defense against the enforcement
or assertion of said Release and Covenant Not to Compete based upon
failure of consideration.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
BNCCORP, Inc.
BNC National Bank
-----------------------------------
By: /s/ Gregory K. Cleveland
President, BNCCORP, Inc.
/s/ Kevin D. Pifer
Kevin Pifer
Exhibit 10.32
TERMINATION AGREEMENT
THIS AGREEMENT is made and entered into this 28th day of September, 1999,
by and between BNCCORP, Inc. (the "Company"); BNC National Bank (the "Bank") and
Jon Strinden ("Strinden").
WHEREAS, Strinden is an employee of the Company and the Bank; and
WHEREAS, Strinden has voluntarily decided to terminate his employment as
Executive Vice President of Financial Services and General Counsel of the
Company, and all other duties with the Company and the Bank due to his desire to
pursue employment outside the Company and the Bank;
NOW, THEREFORE, pursuant to the foregoing recitals, which are an integral
part hereof, and in consideration of the conditions contained herein, the
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
Termination of Employment. Effective as of September 30, 1999, Strinden
hereby resigns his employment with the Company and the Bank, except that
Strinden agrees to provide non-legal advisory services to the Bank for a
period of thirty-six (36) months as are appropriate and consistent and
will not interfere with his normal practice of law or other employment.
This Agreement is a result of Strinden's desire to pursue employment
outside the Company and the Bank. By virtue of Strinden's resignation and
this Agreement, the "Employment Agreement", dated January 1, 1999, between
Strinden, the Company and the Bank, is cancelled and is null and void as
of the date of this Agreement. This Agreement replaces all previous
agreements between Strinden, the Company and the Bank regarding any
relationships.
Non-derogatory Conduct. Strinden shall not make any comments relating to
the Company and the Bank to any other person or entity which are critical,
derogatory or which are intended to injure the business or reputation of
the Company and the Bank.
Payment. Strinden shall receive, upon termination and in consideration for
his advisory services to the Bank, Seventy-five Thousand and 00/100
Dollars ($75,000.00) as compensation for such services.
Return of Property. On or before the date of termination, Strinden shall
return all property and records of or belonging to the Company and the
Bank, including specifically, but not exclusively, all keys to the Company
and the Bank's places of business, all credit cards issued in the name of
the Company or the Bank or payable by the Company or the Bank, all
cellular telephones and accessories, and all computer equipment, software
and passwords belonging to the Company and the Bank.
<PAGE>
Motor Vehicle. Strinden shall be allowed to purchase the 1998 Mercedes
Benz ML320 belonging to the Company that he has been using pursuant to his
Employment Agreement. The purchase price of the vehicle is Thirty-two
Thousand Five Hundred and 00/100 Dollars ($32,500.00) plus applicable
sales or excise tax and is due September 30, 1999 except as otherwise
agreed upon by the Bank.
Life Insurance. Strinden may purchase the life insurance policy on him
presently maintained by the Company and the Bank for the cash surrender
value of the policy. Strinden shall notify the Company and the Bank of his
exercise or non-exercise of this option no later than September 30, 1999.
Repayment of Country Club Membership. Strinden shall repay the sum of Six
Thousand Nine Hundred and 00/100 Dollars ($6,900.00) to the Company and
the Bank as reimbursement for the Fargo Country Club stock purchased and
paid on his behalf by the Company and the Bank. Said funds shall be due
and payable September 30, 1999 except as otherwise agreed by the Company
and the Bank.
Payment of Rental Due. Strinden shall repay the Company and the Bank for
the rental payments due, the amount of Fifty-four Thousand Two-Hundred
Fifty and 00/100 Dollars ($54,250.00) from his private practice conducted
on premises owned or rented by the Company and the Bank and during his
employment with the Company and the Bank. Said rental shall be due
September 30, 1999 unless otherwise agreed to by the Company and the Bank.
COBRA. Pursuant to COBRA, Strinden will be offered the opportunity for
continued coverage under the Company's health insurance plans.
Confidentiality Clause. Strinden agrees to maintain confidential any and
all confidential and proprietary information respecting the Company's
financial and business affairs and any special forms or procedures that he
has had access to by reason of his position with the Company and the Bank.
Release of the Company and the Bank. Effective as of the termination of
employment, except for any obligations which arise under this Agreement,
Strinden does hereby agree to hold harmless and fully, completely and
forever release, acquit and discharge the Company and the Bank, its
successors and assigns, its affiliated companies and the past, present and
future officers, directors, board of directors, employees, agents and
representatives of any and all of them, whether in their individual or
official capacities, from and against any and all claims, demands, suits,
actions and causes of actions of whatever kind, nature or description,
whether arising out of the alleged violation of any state or federal
statute, negligence, breach of contract, fraud, breach of warranty or any
other theory, where legal or equitable, and the consequences thereof,
including any claims, losses, costs of damages, known or unknown,
<PAGE>
liquidated or unliquidated, fixed or contingent, which Strinden has or may
have or hereafter claim to have against any or all of them resulting from,
arising out of, or in any manner relating to his employment with the
Company and the Bank. The Company and the Bank agree to release Strinden
to the same extent and degree as is contained in Strinden's above release.
Representation as to Consideration. Strinden hereby warrants that the
Release is supported by good, valuable and adequate consideration, the
receipt and sufficiency of which is acknowledged, and Strinden hereby
waives any defense against the enforcement or assertion of said Release
based upon failure of consideration.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
BNCCORP, Inc.
BNC National Bank
-----------------------------------
By: /s/ Gregory K. Cleveland
President, BNCCORP, Inc.
/s/ Jon E. Strinden
Jon Strinden
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
balance sheet dated 9/30/99 and statement of income for the nine
months ended 9/30/99 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<CIK> 0000945434
<NAME> BNCCORP, INC.
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 11,106
<INT-BEARING-DEPOSITS> 5,310
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 123,349
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 282,207
<ALLOWANCE> 3,263
<TOTAL-ASSETS> 444,452
<DEPOSITS> 308,246
<SHORT-TERM> 67,673
<LIABILITIES-OTHER> 5,074
<LONG-TERM> 38,954
0
0
<COMMON> 24
<OTHER-SE> 24,481
<TOTAL-LIABILITIES-AND-EQUITY> 444,452
<INTEREST-LOAN> 19,072
<INTEREST-INVEST> 4,498
<INTEREST-OTHER> 52
<INTEREST-TOTAL> 23,622
<INTEREST-DEPOSIT> 9,077
<INTEREST-EXPENSE> 13,282
<INTEREST-INCOME-NET> 10,340
<LOAN-LOSSES> 1,005
<SECURITIES-GAINS> 160
<EXPENSE-OTHER> 12,730
<INCOME-PRETAX> 1,311
<INCOME-PRE-EXTRAORDINARY> 817
<EXTRAORDINARY> 0
<CHANGES> (96)
<NET-INCOME> 721
<EPS-BASIC> .30
<EPS-DILUTED> .30
<YIELD-ACTUAL> 8.37
<LOANS-NON> 1,719
<LOANS-PAST> 213
<LOANS-TROUBLED> 17
<LOANS-PROBLEM> 6,252
<ALLOWANCE-OPEN> 3,093
<CHARGE-OFFS> 964
<RECOVERIES> 129
<ALLOWANCE-CLOSE> 3,263
<ALLOWANCE-DOMESTIC> 3,263
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
