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 June 30, 2000
[ ] 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 August
5, 2000 was 2,395,030.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share and per share data)
December
June 30, 31,
ASSETS 2000 1999
---------- ---------
(unaudited)
CASH AND DUE FROM BANKS.............................. $ 12,603 $ 12,816
INTEREST-BEARING DEPOSITS WITH BANKS................. 3,171 5,565
FEDERAL FUNDS SOLD................................... -- 3,500
INVESTMENT SECURITIES AVAILABLE FOR SALE............. 275,346 150,992
LOANS AND LEASES, net of unearned income............. 264,229 262,051
ALLOWANCE FOR CREDIT LOSSES.......................... (3,259) (2,872)
---------- ---------
Net loans and leases.............................. 260,970 259,179
PREMISES, LEASEHOLD IMPROVEMENTS AND EQUIPMENT, net.. 14,364 12,006
INTEREST RECEIVABLE.................................. 3,699 2,613
OTHER ASSETS......................................... 6,969 6,945
DEFERRED CHARGES AND INTANGIBLE ASSETS, net.......... 2,982 3,261
---------- ---------
$ 580,104 456,877
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS:
Noninterest-bearing............................... $ 33,496 $ 29,798
Interest-bearing -
Savings, NOW and money market................... 137,825 127,454
Time deposits $100,000 and over................. 61,147 46,779
Other time deposits............................. 106,882 120,680
---------- ---------
Total Deposits.................................. 339,350 324,711
SHORT-TERM BORROWINGS................................. 197,024 88,700
LONG-TERM BORROWINGS.................................. 13,499 14,470
OTHER LIABILITIES..................................... 5,602 5,847
---------- ---------
Total liabilities............................... 555,475 433,728
---------- ---------
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; 2,395,030 and 2,399,980 shares
issued and outstanding (excluding 42,880 shares
held in treasury) at June 30, 2000 and
December 31, 1999, respectively.................. 24 24
Capital surplus.................................... 14,013 13,976
Retained earnings.................................. 13,065 11,893
Treasury stock (42,880 shares)..................... (513) (513)
Accumulated other comprehensive loss, net of
income tax effects of $870 and $1,288 at
June 30, 2000 and December 31, 1999,
respectively..................................... (1,960) (2,231)
---------- ---------
Total stockholders' equity....................... 24,629 23,149
---------- ---------
$ 580,104 $ 456,877
========== =========
The accompanying notes are an integral part of these consolidated balance
sheets.
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(In thousands, except per share data)
<TABLE>
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
----------------- -----------------
2000 1999 2000 1999
------- -------- -------- -------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans............$ 6,049 $ 5,375 $11,754 $10,761
Interest and dividends on
investment securities -
Taxable............................ 4,091 1,210 7,170 2,543
Tax-exempt......................... 234 70 463 121
Dividends.......................... 167 55 287 110
Other................................. 63 7 113 18
------- -------- -------- -------
Total interest income.............. 10,604 6,717 19,787 13,553
------- -------- -------- -------
INTEREST EXPENSE:
Interest on deposits.................. 4,101 2,850 7,829 5,869
Interest on short-term borrowings..... 2,785 665 4,660 1,272
Interest on long-term borrowings...... 313 165 649 333
------- -------- -------- -------
Total interest expense............. 7,199 3,680 13,138 7,474
------- -------- -------- -------
Net interest income................ 3,405 3,037 6,649 6,079
PROVISION FOR CREDIT LOSSES.............. 337 309 819 522
------- -------- -------- -------
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES...................... 3,068 2,728 5,830 5,557
------- -------- -------- -------
NONINTEREST INCOME:
Fees on loans........................ 537 361 751 667
Insurance commissions................ 487 558 1,055 1,096
Brokerage income..................... 269 184 690 309
Service charges...................... 149 129 282 254
Rental income........................ 4 49 20 60
Net gain on sales of securities...... -- 41 46 94
Other................................ 424 244 789 510
------- -------- -------- -------
Total noninterest income.......... 1,870 1,566 3,633 2,990
------- -------- -------- -------
NONINTEREST EXPENSE:
Salaries and employee benefits....... 2,008 2,224 4,038 4,415
Depreciation and amortization........ 388 394 775 780
Other repossessed assets expenses/
write-offs......................... 356 36 379 80
Professional services................ 310 221 707 499
Occupancy............................ 248 298 575 584
Office supplies, telephone
and postage........................ 230 248 447 471
Marketing and promotion.............. 166 159 280 315
FDIC and other assessments........... 48 48 95 95
Other................................ 358 381 717 684
------- -------- -------- -------
Total noninterest expense......... 4,112 4,009 8,013 7,923
------- -------- -------- -------
INCOME BEFORE TAXES..................... 826 285 1,450 624
INCOME TAXES............................ 266 116 457 240
------- -------- -------- -------
</TABLE>
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income, continued
(In thousands, except per share data)
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
----------------- ---------------
2000 1999 2000 1999
------- ------- ------- -------
(unaudited) (unaudited)
Income from continuing operations............. $ 560 $ 169 $ 993 $ 384
Discontinued Operation:
Income from operations of discontinued
asset-based lending subsidiary,
net of income taxes of $71 and $166...... -- 104 -- 243
Gain on disposal of asset-based lending
subsidiary, net of income tax effects.... 10 -- 10 --
------- ------- ------- -------
Income before extraordinary item and
cumulative effect of change in
accounting principle..................... 570 273 1,003 627
Extraordinary item-gain on early
extinguishment of debt, net of
income taxes of $25 and $87.............. 47 -- 169 --
Cumulative effect of change in accounting
principle, net of income tax effects...... -- -- -- (96)
------- ------- ------- -------
NET INCOME.................................... $ 617 $ 273 $ 1,172 $ 531
======= ======= ======= =======
BASIC AND DILUTED EARNINGS PER COMMON SHARE:
Income from continuing operations............. $ 0.23 $ 0.07 $ 0.41 $ 0.16
Income from operations of discontinued
asset-based lending subsidiary,
net of income tax effects................ -- 0.04 -- 0.10
Gain on disposal of asset-based lending
subsidiary, net of income tax effects.... 0.01 -- 0.01 --
Extraordinary item-gain on early
extinguishment of debt, net of income
tax effects.............................. 0.02 -- 0.07 --
Cumulative effect of change in accounting
principle, net of income tax effects...... -- -- -- (0.04)
------- ------- ------- -------
Earnings per share............................ $ 0.26 $ 0.11 $ 0.49 $ 0.22
======= ======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(In thousands)
For the Three
Months Ended For the Six months
June 30, Ended June 30,
--------------------- ---------------------
2000 1999 2000 1999
-------- -------- -------- --------
(unaudited) (unaudited)
NET INCOME........................... $ 617 $ 273 $ 1,172 $ 531
OTHER COMPREHENSIVE INCOME --
Unrealized gains (losses) on
securities:
Unrealized holding gains
(losses) arising during
the period, net of income
tax effects of $156 and $522
for the three months ended
June 30, 2000 and 1999,
respectively, and $417 and
$730 for the six months
ended June 30, 2000
and 1999, respectively.......... 877 (850) 271 (1,186)
Less: reclassification
adjustment for gains
included in net income,
net of income tax effects
of $16 for the three months
ended June 30, 1999, and $14
and $35 for the six months
ended June 30, 2000 and
1999, respectively.............. -- (25) (32) (59)
-------- -------- -------- --------
OTHER COMPREHENSIVE INCOME (LOSS).... 877 (875) 239 (1,245)
-------- -------- -------- --------
COMPREHENSIVE INCOME (LOSS).......... $ 1,494 $ (602) $ 1,411 $ (714)
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
For the Six Months Ended June 30, 2000
(In thousands, except share data)
<TABLE>
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,
1999............ 2,442,860 $ 24 $ 13,976 $ 11,893 $ (513) $ (2,231) $ 23,149
Net income
(unaudited)........ -- -- -- 1,172 -- -- 1,172
Other comprehensive
loss --
Change in unrealized
holding loss on
securities available
for sale, net of
income tax effects
(unaudited)...... -- -- -- -- -- 271 271
Other (unaudited). (4,950) -- -- -- -- -- 37
--------- -------- --------- ---------- ---------- --------------- --------
Balance, June 30,
2000 (unaudited)... 2,437,910 $ 24 $ 14,013 $ 13,065 $ (513) $ (1,960) $ 24,629
========= ======== ========= ========== ========== =============== ========
</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 Six Months Ended June 30
(In thousands)
<TABLE>
2000 1999
----------- ----------
(unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income........................................... $ 1,172 $ 531
Adjustments to reconcile net income
to net cash provided by
operating activities --
Provision for credit losses....................... 819 626
Depreciation and amortization..................... 505 517
Amortization of intangible assets................. 271 274
Net premium amortization on
investment securities........................... 336 192
Proceeds from loans recovered..................... 68 120
Change in interest receivable
and other assets, net........................... (1,529) (29)
Net realized gains on sales of
securities...................................... (46) (94)
Change in other liabilities, net.................. (245) (1,506)
Originations of loans to be sold.................. (79,009) (33,912)
Proceeds from sale of loans....................... 79,009 33,912
----------- ----------
Net cash provided by operating
activities................................... 1,351 631
----------- ----------
INVESTING ACTIVITIES:
Net decrease in federal funds sold................... 3,500 --
Purchases of investment securities................... (137,677) (121,522)
Proceeds from sales of investment
securities......................................... 898 30,190
Proceeds from maturities of
investment securities.............................. 12,823 79,888
Net increase in loans................................ (2,678) (14,947)
Additions to premises, leasehold
improvements and equipment, net.................... (2,863) (620)
----------- ----------
Net cash used in investing
activities................................... (125,997) (27,011)
----------- ----------
FINANCING ACTIVITIES:
Net increase (decrease) in demand,
savings, NOW and money market accounts............. 14,069 (2,573)
Net increase in time deposits........................ 570 3,590
Net increase in short-term borrowings................ 108,324 17,753
Repayments of long-term borrowings................... (1,144) (22,346)
Proceeds from long-term borrowings................... 88 29,045
Other................................................ 132 129
----------- ----------
Net cash provided by financing
activities................................... 122,039 25,598
---------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS............... (2,607) (782)
CASH AND CASH EQUIVALENTS, beginning
of period............................................. 18,381 10,284
----------- ----------
CASH AND CASH EQUIVALENTS, end
of period............................................. $ 15,774 $ 9,502
=========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid........................................ $ 13,400 $ 8,964
=========== ==========
Income taxes paid.................................... $ 359 $ 378
=========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2000
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
accounting principles generally accepted in the United States 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 June 30, 2000 and for the
three and six month periods ended June 30, 2000 and 1999 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, 2000.
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, 1999. Accordingly, footnote
disclosures which would substantially duplicate the disclosures contained in the
December 31, 1999 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, 1999
and the notes thereto.
NOTE 2 -- Reclassifications
Certain of the 1999 amounts have been reclassified to conform with the 2000
presentations. These reclassifications had no effect on net income or
stockholders' equity.
NOTE 3 -- Acquisitions and Divestitures
On December 31, 1999, the Company sold its asset-based lending subsidiary, BNC
Financial Corporation ("BNC Financial"), to Associated Banc-Corp of Green Bay,
Wisconsin. Operating results of BNC Financial for the three and six months ended
June 30, 1999 are shown separately in the accompanying consolidated statements
of income.
<PAGE>
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 June 30:
<TABLE>
Net Per-Share
Income Shares Amount
----------- ----------- -----------
<S> <C> <C> <C>
2000
Basic earnings per share:
Income from continuing
operations.......................... $ 560,000 2,399,436 $ 0.23
Gain on disposal of asset-
based lending subsidiary,
net of income taxes................. 10,000 2,399,436 0.01
Extraordinary item - gain
on early extinguishment
of debt, net of income taxes........ 47,000 2,399,436 0.02
----------- -----------
Income available to common
stockholders........................ $ 617,000 2,399,436 $ 0.26
=========== ===========
Effect of dilutive shares --
Options............................. 399
-----------
Diluted earnings per share:
Income from continuing operations........ $ 560,000 2,399,835 $ 0.23
Gain on disposal of asset-based
lending subsidiary,
net of income taxes.................... 10,000 2,399,835 0.01
Extraordinary item - gain on
early extinguishment of debt,
net of income taxes.................... 47,000 2,399,835 0.02
----------- -----------
Income available to common
stockholders........................... $ 617,000 2,399,835 $ 0.26
============ ===========
1999
Basic earnings per share:
Income from continuing operations........ $ 169,000 2,410,980 $ 0.07
Income from operations of
discontinued asset-based
lending subsidiary, net
of income taxes........................ 104,000 2,410,980 0.04
------------ -----------
Income available to common
stockholders........................... $ 273,000 2,410,980 $ 0.11
============ ===========
Effect of dilutive shares --
Options................................ 19
-----------
Diluted earnings per share:
Income from continuing operations........ $ 169,000 2,410,999 $ 0.07
Income from operations of
discontinued asset-based lending
subsidiary, net of income taxes........ 104,000 2,410,999 0.04
------------ -----------
Income available to common stockholders.. $ 273,000 2,410,999 $ 0.11
============ ===========
</TABLE>
<PAGE>
The following table shows the amounts used in computing EPS and the effect on
weighted average number of shares of potential dilutive common stock issuances
for the six month periods ended June 30:
<TABLE>
Net Per-Share
Income Shares Amount
------------ ------------ -----------
<S> <C> <C> <C>
2000
Basic earnings per share:
Income from continuing
operations........................ $ 993,000 2,399,708 $ 0.41
Gain on disposal of asset-
based lending subsidiary,
net of income taxes............... 10,000 2,399,708 0.01
Extraordinary item-gain on
early extinguishment of debt,
net of income taxes............... 169,000 2,399,708 0.07
------------ -----------
Income available to common
stockholders...................... $ 1,172,000 2,399,708 $ 0.49
============ ===========
Effect of dilutive shares --
Options........................... 453
------------
Diluted earnings per share:
Income from continuing operations... $ 993,000 2,400,161 $ 0.41
Gain on disposal of asset-based
lending subsidiary, net of
income taxes...................... 10,000 2,400,161 0.01
Extraordinary item - gain on
early extinguishment of debt,
net of income taxes............... 169,000 2,400,161 0.07
------------ ------------ -----------
Income available to common
stockholders...................... $ 1,172,000 2,400,161 $ 0.49
============ ===========
1999
Basic earnings per share:
Income from continuing operations... $ 384,000 2,408,450 $ 0.16
Income from operations of
discontinued asset-based
lending subsidiary, net
of income taxes................... 243,000 2,408,450 0.10
Cumulative effect of change
in accounting principle,
net of income taxes............... (96,000) 2,408,450 (0.04)
------------ -----------
Income available to common
stockholders...................... $ 531,000 2,408,450 $ 0.22
============ ===========
Effect of dilutive shares--
Options........................... 10
------------
Diluted earnings per share:
Income from continuing operations... $ 384,000 2,408,460 $ 0.16
Income from operations of
discontinued asset-based
lending subsidiary, net
of income taxes................... 243,000 2,408,460 0.10
Cumulative effect of change in
accounting principle, net of
income taxes...................... (96,000) 2,408,460 (0.04)
------------ -----------
Income available to common
stockholders...................... $ 531,000 2,408,460 $ 0.22
============ ===========
</TABLE>
The following options and warrants, with exercise prices ranging from $6.31 to
$17.75, were outstanding during the periods indicated but were not included in
the computation of diluted EPS because their effects were antidilutive:
6/2000 3/2000 6/1999 3/1999
------------------ ----------------- ----------------- -----------------
152,548 159,934 170,234 170,134
NOTE 5 -- Segment Disclosures
BNCCORP segments its operations into two separate business activities, based on
the nature of the products and services for each segment: BNC National Bank
("BNC--North Dakota") and BNC National Bank of Minnesota ("BNC--Minnesota").
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 servicing of loans to others. In addition to these
banking services, BNC--North Dakota also provides brokerage, trust and other
financial 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.
The accounting policies of the two 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, 1999, which
conform to accounting principles generally accepted in the United States.
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.
<PAGE>
The following tables present segment profit or loss, assets and a reconciliation
of segment information as of, and for the quarter ended June 30 (in thousands):
<TABLE>
2000 1999
------------------------------ -------------------------------
Other BNC- Other
BNC-ND BNC-MN (a) Total ND BNC-MN (a) Total
------- ------ ------ ------- ------- ----- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest
income....... $ 2,539 $ 1,147 $(281) $ 3,405 $ 2,371 $ 827 $(161) $ 3,037
Other revenue
- external
customers.... 1,532 332 6 1,870 1,286 280 -- 1,566
Intersegment
revenue...... 92 5 1,151 1,245 63 -- 872 935
Income tax
expense
(benefit).... 206 191 (131) 266 106 127 (117) 116
Segment
profit
(loss) from
continuing
operations... 509 274 (223) 560 199 179 (209) 169
Income from
operations
of
discontinued
asset-based
lending
subsidiary,
net of
income taxes. -- -- -- -- -- -- 104 104
Gain on
disposal of
asset-based
lending
subsidiary,
net of
income taxes. -- -- 10 10 -- -- -- --
Extraordinary
item-gain
on early
extinguishment
of debt,
net of
income taxes. -- -- 47 47 -- -- -- --
Segment
profit (loss) 509 274 (166) 617 199 179 (105) 273
Segment assets. 412,099 175,186 40,866 628,151 334,933 74,909 55,855 465,697
</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.
<PAGE>
The following tables present segment profit or loss, assets and a reconciliation
of segment information as of, and for the six months ended June 30 (in
thousands):
<TABLE>
2000 1999
------------------------------ -------------------------------
Other BNC- Other
BNC-ND BNC-MN (a) Total ND BNC-MN (a) Total
------- ------ ------ ------- ------- ----- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest
income........ $ 5,000 $2,231 $(582) $6,649 $4,721 $1,683 $(325) 6,079
Other revenue
-external
customers.... 3,107 509 17 3,633 2,498 492 -- 2,990
Intersegment
revenue...... 155 5 2,166 2,325 126 -- 1,585 1,711
Income tax
expense
(benefit).... 327 379 (249) 457 213 230 (203) 240
Segment
profit
(loss) from
continuing
operations... 907 540 (454) 993 447 324 (387) 384
Income from
operations
of
discontinued
asset-based
lending
subsidiary,
net of
income
taxes........ -- -- -- -- -- -- 243 243
Gain on
disposal of
asset-based
lending
subsidiary,
net of
income
taxes........ -- -- 10 10 -- -- -- --
Extraordinary
item-gain
on early
extinguishment
of debt,
net of
income
taxes........ -- -- 169 169 -- -- -- --
Cumulative
effect of
change in
accounting
principle,
net of
income
taxes........ -- -- -- -- (43) (35) (18) (96)
Segment
profit (loss) 907 540 (275) 1,172 404 289 (162) 531
Segment
assets....... 412,099 175,186 40,866 628,151 334,933 74,909 55,855 465,697
</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.
<PAGE>
Reconciliation of segment profit to consolidated results (in thousands):
<TABLE>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- -----------------------
2000 1999 2000 1999
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Segment profit before
taxes.................... $ 826 $ 285 $ 1,451 $ 624
Income tax expense......... (266) (116) (458) (240)
---------- ---------- ---------- -----------
Segment profit from
continuing operations.... 560 169 993 384
Income from operations
of discontinued
asset-based lending
subsidiary, net of
income taxes............. -- 104 -- 243
Gain on disposal of
asset-based lending
subsidiary, net of
income taxes............. 10 -- 10 --
Extraordinary item-gain
on early extinguishment
of debt, net of income
taxes.................... 47 -- 169 --
Cumulative effect of
change in accounting
principle, net of
income taxes............. -- -- -- (96)
Elimination of
intersegment profit...... -- -- -- --
---------- ---------- ---------- -----------
Consolidated net income.... $ 617 $ 273 $ 1,172 $ 531
========== ========== ========== ===========
</TABLE>
NOTE 6 -- Retirement of Subordinated Notes
During the six months ended June 30, 2000, the Company retired $1.1 million of
its 8 5/8 percent subordinated notes due 2004. The Company purchased the notes
at a discount, and the transactions resulted in extraordinary gains of $169,000
($.07 per share), net of income taxes of $87,000. The notes were retired using
cash generated from the sale of BNC Financial.
NOTE 7 -- Other Real Estate Owned and Repossessed Assets
The Company recorded write downs to estimated net realizability and other
expenses associated with repossessed assets of $356,000 and $379,000 for the
three and six month periods ended June 30, 2000. The Company's investment in
other real estate owned and repossessed assets of $936,000 as of June 30, 2000
represented management's current estimate of net realizable value based upon
estimated fair value or offers received by the Company. During July 2000, the
Company sold all other real estate owned and all but $79,000 of the repossessed
assets. The net effect of the sales transactions was a positive adjustment to
earnings of approximately $64,000 ($.03 per share), net of income taxes of
approximately $30,000.
<PAGE>
NOTE 8 -- 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, 2000 and 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.
NOTE 9 -- Subsequent Event, Trust Preferred Securities
On July 26, 2000, BNC Capital Trust I, a Delaware business trust and a wholly
owned subsidiary of the Company, issued $7,500,000 of 12.045 percent trust
preferred securities to investors and $232,000 of 12.045 percent common
securities to the Company. Proceeds from the issuance of the securities were
immediately used by the Trust to purchase $7,732,000 of 12.045 percent junior
subordinated notes maturing 2030 from the Company. The trust preferred
securities also have a thirty year maturity and may be redeemed at the option of
the Trust after ten years. The trust preferred securities are secured by the
junior subordinated notes and the guarantee of the Company. The trust preferred
securities qualify as Tier 1 capital or core capital with respect to the Company
under the risk-based capital guidelines established by the Federal Reserve.
Under such guidelines, the trust preferred securities cannot constitute more
than 25 percent of the total core capital of the Company. The amount of trust
preferred securities in excess of the 25 percent limitation will constitute Tier
2 capital, or supplementary capital, of the Company.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Comparison of Financial Condition at June 30, 2000 and December 31, 1999
Assets. Total assets increased $123.2 million, or 27 percent, from $456.9
million at December 31, 1999 to $580.1 million at June 30, 2000. The following
table presents the Company's assets by category as of June 30, 2000 and December
31, 1999, as well as the amount and percent of change between the two dates.
Material changes are discussed in lettered notes following the table (amounts
are in thousands):
<PAGE>
<TABLE>
Assets
<CAPTION>
Change
---------------------
June 30, December
2000 31, 1999 $ %
------------ ------------ ---------- ---------
<S> <C> <C> <C> <C>
Cash and due from
banks.................. $ 12,603 $ 12,816 $ (213) (2)%
Interest-bearing
deposits with banks.... 3,171 5,565 (2,394) (43)%
Federal funds sold....... -- 3,500 (3,500) (100)%
Investment securities
available for sale..... 275,346 150,992 124,354 82% (a)
Loans and leases, net.... 260,970 259,179 1,791 1%
Premises, leasehold
improvements and
equipment, net......... 14,364 12,006 2,358 20%
Interest receivable...... 3,699 2,613 1,086 42%
Other assets............. 6,969 6,945 24 0%
Deferred charges and
intangible
assets, net............ 2,982 3,261 (279) (9)%
------------ ------------ ----------
Total assets....... $ 580,104 $ 456,877 $123,227 27%
============ ============ ==========
</TABLE>
(a) The Company increased its earning asset portfolio by purchasing additional
investment securities funded primarily by borrowings from the Federal Home
Loan Bank ("FHLB").
Allowance for Credit Losses. The following table sets forth information
regarding changes in the Company's allowance for credit losses for the three and
six month periods ending June 30, 2000 (amounts are in thousands):
<TABLE>
Three Months Six Months
Ended Ended
June 30, 2000 June 30, 2000
---------------- ---------------
(Unaudited) (Unaudited)
<S> <C> <C>
Balance, beginning of period................ $ 2,991 $ 2,872
Provision for credit losses................. 337 819
Loans charged off........................... (91) (500)
Loans recovered............................. 22 68
------------ ------------
Balance, end of period...................... $ 3,259 $ 3,259
============ ============
Ending loan portfolio ...................... $ 264,229
============
Allowance for credit losses as a percentage
of ending loan portfolio.............. 1.23%
</TABLE>
As of June 30, 2000, the Company's allowance for credit losses stands at 1.23
percent of total loans as compared to 1.10 percent at December 31, 1999. Net
charge-offs as a percentage of average loans for the three and six month periods
ended June 30, 2000 were .03 and .17 percent, respectively, as compared to .01
and .13 percent, respectively, for the same periods last year.
<PAGE>
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 and
lease portfolio that have been incurred as of each balance sheet date. The loan
and lease portfolio and other credit exposures are reviewed regularly to
evaluate the adequacy of the allowance for credit losses. In determining the
level of the allowance, the Company evaluates the allowance necessary for
specific nonperforming loans and also estimates losses inherent in other credit
exposures. Continuous credit monitoring processes and the quarterly analysis is
the principal method relied upon by management to ensure that changes in
estimated credit loss levels are reflected in the Company's allowance for credit
losses on a timely basis.
Estimating the risk and amount of loss on any loan is subjective and ultimate
losses may vary from current estimates. Although management believes that the
allowance for credit losses is adequate to cover losses inherent in the loan
portfolio as well as other credit exposures, there can be no assurance that the
allowance will prove sufficient to cover actual losses in the future. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the adequacy of the Company's allowance for credit
losses. Such agencies may require the Company to make additional provisions to
the allowance based upon their judgments about information available to them at
the time of the examination.
Nonperforming Assets. The following table sets forth information concerning the
Company's nonperforming assets as of the dates indicated (amounts are in
thousands):
<TABLE>
June 30, December 31,
2000 1999
------------- ------------
(Unaudited)
<S> <C> <C>
Nonperforming loans:
Loans 90 days or more delinquent
and still accruing interest........... $ 237 $ 22
Nonaccrual loans........................ 1,252 1,620
Restructured loans...................... 11 16
Total nonperforming loans................. 1,500 1,658
Other real estate owned and
repossessed assets...................... 936 1,207
Total nonperforming assets................ 2,436 2,865
Allowance for credit losses............... 3,259 2,872
Ratio of total nonperforming
assets to total assets.................. .42% .63%
Ratio of total nonperforming
loans to total loans.................... .57% .63%
Ratio of allowance for credit
losses to total nonperforming loans..... 217.26% 173.22%
</TABLE>
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.
<PAGE>
Liabilities. Total liabilities increased $121.7 million, or 28 percent, from
$433.7 million at December 31, 1999 to $555.5 million at June 30, 2000. The
following table presents the Company's liabilities by category as of June 30,
2000 and December 31, 1999 as well as the amount and percent of change between
the two dates. Material changes are discussed in lettered notes following the
table (amounts are in thousands):
<TABLE>
Liabilities
Change
----------------------
June 30, December
2000 31, 1999 $ %
------------- ------------- ----------- --------
<S> <C> <C> <C> <C>
Deposits:
Noninterest - bearing... $ 33,496 $ 29,798 $ 3,698 12%
Interest - bearing --
Savings, NOW and
money market........ 137,825 127,454 10,371 8% (a)
Time deposits
$100,000 and over... 61,147 46,779 14,368 31% (b)
Other time deposits... 106,882 120,680 (13,798) (11)% (a)
Short-term borrowings... 197,024 88,700 108,324 122% (c)
Long-term borrowings.... 13,499 14,470 (971) (7)%
Other liabilities....... 5,602 5,847 (245) (4)%
------------- ------------- -----------
Total liabilities..... $ 555,475 $ 433,728 $ 121,747 28%
============= ============= ===========
</TABLE>
-------------------
(a) The continued popularity of the Company's Wealthbuilder deposit products
has contributed to an increase in NOW and money market deposit accounts and
a decrease in other time deposits. Some customers have elected to transfer
maturing time deposits to the more liquid, competitively priced
Wealthbuilder NOW and money market deposit products.
(b) Increased balances in brokered deposits.
(c) Increased borrowings from the FHLB to fund purchases of investment
securities.
Stockholders' Equity. The Company's equity capital increased $1.5 million
between December 31, 1999 and June 30, 2000. This increase resulted from $1.2
million of earnings recorded for the six months ended June 30, 2000, restricted
and other stock transactions netting to a $37,000 increase and a $271,000
decrease in the net unrealized holding loss on securities available for sale.
<PAGE>
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 June 30, 2000:
<TABLE>
Tier 1 Total Tier 1
Risk-Based Risk-Based Leverage
Ratio Ratio Ratio
----------- ------------ -----------
<S> <C> <C> <C>
Consolidated............. 6.67% 9.87% 4.32%
BNC -- North Dakota...... 9.47% 10.27% 6.43%
BNC -- Minnesota ........ 10.34% 11.59% 5.43%
</TABLE>
As of June 30, 2000, BNCCORP and its subsidiary banks exceeded capital adequacy
requirements and the banks were considered "well capitalized" under prompt
corrective action provisions.
On July 26, 2000, the Company issued $7.5 million in trust preferred securities
to enhance its regulatory capital base and provide added liquidity. The trust
preferred securities qualify as Tier 1 capital or core capital with respect to
the Company under the risk-based capital guidelines established by the Federal
Reserve. Under such guidelines, the trust preferred securities cannot constitute
more than 25 percent of the total core capital of the Company. The amount of
trust preferred securities in excess of the 25 percent limitation will
constitute Tier 2 capital, or supplementary capital, of the Company.
The Company is completing the final phases of construction on an office building
in Fargo, North Dakota. Capital expenditures for Fargo were approximately $ 1.1
and $ 2.3 million, respectively, during the three and six month periods ended
June 30, 2000 and $680,000 for the three and six month periods ended June 30,
1999. There were no other major capital expenditures made during these periods.
Total expenditures to date for the Fargo building are approximately $5.9
million. The office building was occupied during the second quarter of 2000 with
some excess space having been leased.
Comparison of Operating Results for the
Three and Six Month Periods Ended June 30, 2000 and 1999
General. The Company's net income for the second quarter of 2000 was $617,000,
or $0.26 per share on a basic and diluted basis. These results included income
from continuing operations of $0.23 per share, a gain on disposal of the
Company's asset-based lending subsidiary of $0.01 per share and an extraordinary
gain from early extinguishment of debt of $0.02 per share. This compares with
net income for the second quarter of 1999 of $273,000, or basic and diluted
earnings per share of $0.11. The 1999 net income included income from continuing
operations of $0.07 per share, and income from the discontinued asset-based
lending subsidiary of $0.04 per share. The returns on average assets and equity
for the quarter ended June 30, 2000, on a continuing operations basis, were 0.41
and 9.67 percent, respectively, as compared to 0.19 and 2.70 percent,
respectively, for the same period one year earlier.
<PAGE>
For the six months ended June 30, 2000, the net income was nearly $1.2 million,
or basic and diluted earnings per share of $0.49. This included income from
continuing operations of $0.41 per share, a gain on disposal of the asset-based
lending subsidiary of $0.01 per share, and an extraordinary gain from early
extinguishment of debt of $0.07 per share. For the first half of 1999, net
income was $531,000, or $0.22 basic and diluted earnings per share. This
included income from continuing operations of $0.16 per share, income from the
discontinued asset-based lending subsidiary of $0.10 per share, and a charge of
$0.04 per share from the cumulative effect of a change in accounting principle.
The returns on average assets and equity for the six month period ended June 30,
2000, on a continuing operations basis, were 0.38 and 8.68 percent,
respectively, as compared to 0.21 and 3.08 percent, respectively, for the same
period one year earlier.
Net Interest Income. Net interest income for the three-month period ended June
30, 2000 increased $368,000, or 12.2 percent. Net interest margin decreased to
2.66 percent for the quarter ended June 30, 2000 from 3.62 percent for the same
period one year earlier.
Net interest income for the six-month period ended June 30, 2000 increased
$570,000, or 9.4 percent. Net interest margin decreased to 2.75 percent for the
six months ended June 30, 2000 from 3.61 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 six month periods ended June 30, 2000 and 1999, as
well as the changes between the periods presented. Significant factors
contributing to the increase in net interest income and the decrease in net
interest margin are discussed in lettered notes below the tables:
<PAGE>
<TABLE>
Three Months ended June 30,
-----------------------------------------------------
2000 1999 Change
-------------------------- -------------------------- --------------------------
Interest Average Interest Average Interest Average
Average earned yield or Average earned yield or Average earned yield or
balance or paid cost balance or paid cost balance or paid cost
-------- -------- -------- -------- -------- -------- -------- -------- --------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning
assets
Federal funds
sold/interest
bearing
due from......... $ 6,352 $ 63 3.99% $ 3,192 $ 7 .88% $ 3,160 $ 56 3.11%
Investments........ 253,013 4,492 7.14% 89,983 1,335 5.95% 163,030 3,157 1.19%(a)
Loans.............. 258,422 6,049 9.41% 246,478 5,375 8.75% 11,944 674 0.66%(b)
Allowance for
loan losses..... (3,255) -- (2,910) -- (345) --
-------- -------- -------- -------- -------- --------
Total interest-
earning assets.. 514,532 10,604 8.29% 336,743 6,717 8.00% 177,789 3,887 0.29%
======== -------- ======== -------- ======== --------
Interest-bearing
liabilities
NOW & money
market accounts.. 136,765 1,792 5.27% $ 78,870 689 3.50% $ 57,895 1,103 1.77%(c)
Savings.......... 4,130 21 2.05% 6,599 33 2.01% (2,469) (12) 0.04%
Certificates of
deposit under
$100,000......... 106,786 1,441 5.43% 128,514 1,644 5.13% (21,728) (203) 0.30%(c)
Certificates of
deposit $100,000
and over......... 54,838 847 6.21% 36,229 484 5.36% 18,609 363 0.85%(d)
-------- -------- -------- -------- -------- --------
Interest -
bearing
deposits........ 302,519 4,101 5.45% 250,212 2,850 4.57% 52,307 1,251 0.88%
Short-term
borrowings:
Securities & loans
sold under
agreements to
repurchase and
federal funds
purchased....... 115,794 1,836 6.38% 20,744 255 4.93% 95,050 1,581 1.45%(e)
FHLB notes
payable......... 62,326 949 6.12% 31,089 410 5.29% 31,237 539 0.83%(e)
Long-term
borrowings...... 13,618 313 9.24% 9,473 165 6.99% 4,145 148 2.25%
-------- -------- -------- -------- -------- --------
Total borrowings.. 191,738 3,098 6.50% 61,306 830 5.43% 130,432 2,268 1.07%
-------- -------- -------- -------- -------- --------
Total
interest-
bearing
liabilities.... $494,257 7,199 5.86% $311,518 3,680 4.74% $182,739 3,519 1.12%
======== -------- ======== -------- ======== --------
Net interest
income/spread.. $ 3,405 2.43% $ 3,037 3.26% $ 368 -0.83%(f)
======== ======== ======= ======= ======== =======
Net interest
margin......... 2.66% 3.62% -0.96%(f)
======== ======= =======
Notation:
Noninterest-
bearing
deposits......... 26,592 -- 25,355 -- 1,237 --
-------- -------- --------
Total deposits.... $329,111 $ 4,101 5.01% $275,567 $ 2,850 4.15% $ 53,544 $ 1,251 0.86%
======== ======== ======= ======== ======== ======= ======== ======== =======
</TABLE>
<PAGE>
<TABLE>
Six Months ended June 30,
-----------------------------------------------------
2000 1999 Change
-------------------------- -------------------------- -------------------------
Interest Average Interest Average Interest Average
Average earned yield or Average earned yield or Average earned yield or
balance or paid cost balance or paid cost balance or paid cost
-------- -------- -------- -------- -------- -------- -------- -------- -------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning
assets
Federal funds
sold/interest
bearing due
from............. $ 6,001 $ 113 3.79% $ 3,130 $ 18 1.16% $ 2,871 $ 95 2.63%
Investments........ 226,590 7,920 7.03% 94,082 2,774 5.95% 132,508 5,146 1.08%(a)
Loans.............. 256,102 11,754 9.23% 245,458 10,761 8.84% 10,644 993 0.39%(b)
Allowance for
loan losses..... (3,203) -- (2,832) -- (371) --
-------- -------- -------- -------- -------- --------
Total interest-
earning assets.. $485,490 19,787 8.20% $339,838 13,553 8.04% $145,652 6,234 0.16%
======== -------- ======== -------- ======== --------
Interest-bearing
liabilities
NOW & money market
accounts......... $130,986 3,339 5.13% $ 80,556 1,407 3.52% $ 50,430 1,932 1.61%(c)
Savings............ 4,392 45 2.06% 6,882 69 2.02% (2,490) (24) 0.04%
Certificates of
deposit under
$100,000......... 112,133 2,959 5.31% 128,753 3,336 5.22% (16,620) (377) 0.09%(c)
Certificates of
deposit $100,000
and over......... 49,903 1,486 5.99% 39,478 1,057 5.40% 10,425 429 0.59%(d)
-------- -------- -------- -------- -------- --------
Interest -
bearing deposits. 297,414 7,829 5.29% 255,669 5,869 4.63% 41,745 1,960 0.66%
Short-term
borrowings:
Securities & loans
sold under
agreements to
repurchase
and federal
funds
purchased....... 94,384 2,899 6.18% 20,884 513 4.95% 73,500 2,386 1.23%(e)
FHLB notes
payable......... 58,923 1,761 6.01% 28,794 759 5.32% 30,129 1,002 0.69%(e)
Long-term
borrowings....... 13,893 649 9.39% 9,379 333 7.16% 4,514 316 2.23%
-------- --------- -------- -------- -------- --------
Total borrowings.. 167,200 5,309 6.39% 59,057 1,605 5.48% 108,143 3,704 0.91%
-------- --------- -------- -------- -------- --------
Total interest-
bearing
liabilities.... 464,614 13,138 5.69% 314,726 7,474 4.79% 149,888 5,664 0.90%
======== -------- ======== -------- ======== --------
Net interest
income/spread.. $ 6,649 2.51% $6,079 3.25% $ 570 -0.74%(f)
======== ======== ======= ======== ======== =======
Net interest
margin......... 2.75% 3.61% -0.86%(f)
======== ======== =======
Notation:
Noninterest-bearing
deposits......... 26,925 -- 25,371 -- 1,554 --
-------- -------- --------
Total
deposits....... $270,489 $ 7,829 4.85% $230,298 $ 5,869 4.21% $ 40,191 $ 1,960 0.64%
======== ======== ======== ======== ======== ======== ======== ======== =======
</TABLE>
(a) The Company has increased its investment securities holdings primarily
through FHLB borrowings. The improved yield reflects the current interest
rate environment as well as the current mix of the investment types in the
Company's investment portfolio.
(b) The loan volume increase is attributable to increases in loans originated
at BNC--Minnesota and BNC--North Dakota. The improved loan yield is
reflective of the recent prime rate increases offset by some decreases in
loan pricing spread to prime rate due to competitive pressures in the
markets in which the Company operates.
(c) The increases in volume and cost of the NOW and money market deposit
accounts and the decreased volume in certificates of deposit under $100,000
is reflective of the continued success of the Company's Wealthbuilder
deposit products. Some customers have transferred maturing time deposits to
the more liquid and competitively priced Wealthbuilder accounts.
<PAGE>
(d) The 2000 periods include increased balances of brokered deposits. The
increased cost is a result of the higher rate environment in 2000 as
compared to the same periods in 1999.
(e) The increase in short-term borrowings and the costs associated with those
borrowings is a result of the strategy discussed in (a) above and the
higher interest rate environment in 2000 as compared to the same periods in
1999.
(f) Net interest spread and margin reflect the impact of the interest rate
developments noted above but are more significantly impacted by the
Company's strategy of increasing its earning asset portfolio by purchasing
investment securities funded primarily by FHLB borrowings. While the
strategy increases net interest income and earnings per share, it
negatively impacts net interest spread and margin due to the significantly
larger portion of the earning asset portfolio which is comprised of
investment securities with yields typically lower than those earned on
loans.
Provision for Credit Losses. The provision for credit losses was $337,000 for
the quarter ended June 30, 2000 as compared to $309,000 for the same period one
year earlier. For the six months ended June 30, 2000 and 1999, the provision for
credit losses was $819,000 and $522,000, respectively. See "Comparison of
Financial Condition at June 30, 2000 and December 31, 1999CAllowance for Credit
Losses."
Noninterest Income. The following table presents the major categories of the
Company's noninterest income for the three and six month periods ended June 30,
2000 and 1999 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>
Noninterest Income
<CAPTION>
For the Three For the Six
Months Ended Months Ended
June 30, Change June 30, Change
---------------- ------------- ---------------- --------------
2000 1999 $ % 2000 1999 $ %
-------- ------- ------ ------ ------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fees on loans....... $ 537 $ 361 $ 176 49% $ 751 $ 667 $ 84 13% (a)
Insurance
commissions......... 487 558 (71) (13)% 1,055 1,096 (41) (4)% (b)
Brokerage income.... 269 184 85 46% 690 309 381 123% (c)
Service charges..... 149 129 20 16% 282 254 28 11%
Rental income....... 4 49 (45) (92)% 20 60 (40) (67)%
Net gain on
sales of
securities ......... -- 41 (41) (100)% 46 94 (48) (51)%
Other............... 424 244 180 74% 789 510 279 55% (d)
-------- ------- ------ ------- ------- ------
Total $ $ $ $
noninterest income.. 1,870 1,566 $ 304 19% 3,633 2,990 $ 643 22%
======== ======= ====== ======= ======= ======
</TABLE>
-----------------
(a) Increases in loan originations at BNC--North Dakota and BNC--Minnesota.
(b) Reduction in the number of insurance producers at BNC--North Dakota's
subsidiary, BNC Insurance, Inc.
(c) Addition of professional staff at BNC--North Dakota's brokerage subsidiary,
BNC Asset Management, Inc. and successful efforts to cross-sell brokerage
services to bank customers.
(d) Increase is primarily attributable to fees associated with the BNC U.S.
Opportunities Fund LLC which was formed on September 1, 1999 and is managed
by BNC--North Dakota's Financial Services Division.
<PAGE>
Noninterest Expense. The following table presents the major categories of the
Company's noninterest expense for the three and six month periods ended June 30,
2000 and 1999 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>
Noninterest Expense
<CAPTION>
For the Three For the Six
Months Ended Months Ended
June 30, Change June 30, Change
-------------- ------------- --------------- ----------------
2000 1999 $ % 2000 1999 $ %
------ ------ ------- ----- ------- ------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Salaries and
employee
benefits..... $2,008 $2,224 $(216) (10)% $4,038 $4,415 $(377) (9)% (a)
Depreciation
and
amortization. 388 394 (6) (2)% 775 780 (5) (1)%
Other
repossessed
assets
expenses /
write-offs... 356 36 320 889% 379 80 299 374% (b)
Professional
services..... 310 221 89 40% 707 499 208 42% (c)
Occupancy...... 248 298 (50) (17)% 575 584 (9) (2)%
Office
supplies,
telephone
and postage.. 230 248 (18) (7)% 447 471 (24) (5)%
Marketing
and
promotion.... 166 159 7 4% 280 315 (35) (11)%
FDIC and
other
assessments.. 48 48 -- 0% 95 95 -- --
Other.......... 358 381 (23) (6)% 717 684 33 5%
------- ------ ------ ------- ------- ------
Total
noninterest $
expense........ 4,112 $4,009 $ 103 3% $8,013 $7,923 $ 90 1%
======= ====== ====== ======= ======= ======
Efficiency
ratio (d).... 77.9% 87.1% (9)% 77.9% 87.4% (10)%
======= ====== ======= =======
</TABLE>
(a) General staff reductions. The Company's average full time equivalent
employees was 176 for the quarter and six months ended June 30, 2000
as compared to 189 for the same periods one year earlier.
(b) Write-down to estimated net realizability of repossessed assets
including expenses associated with disposition of such assets.
(c) Increase is primarily attributable to volume-related brokerage costs
at BNC Asset Management, Inc. and increased legal fees.
(d) Noninterest expense divided by an amount equal to net interest income
plus noninterest income. The Company's efficiency ratio has improved
due to increased net interest income and noninterest income coupled
with reduced salaries and benefits expenses and, other than
professional fees and expenses associated with repossessed assets, the
Company's ability to hold noninterest income relatively steady in the
three and six month periods ended June 30, 2000 compared with the same
periods one year earlier.
Income Tax Expense. Income tax expense for the quarter ended June 30, 2000
increased $150,000 as compared to the same period in 1999 due to the increase in
pre-tax income. The estimated effective tax rates for the three month periods
ended June 30, 2000 and 1999 were 32.2 and 40.7 percent, respectively.
<PAGE>
Income tax expense for the six months ended June 30, 2000 increased $217,000 as
compared to the same period in 1999 due to the increase in pre-tax income. The
estimated effective tax rates for the six month periods ended June 30, 2000 and
1999 were 31.5 and 38.5 percent, respectively.
The decrease in effective tax rates for the quarter and six month periods ended
June 30, 2000 as compared to the same periods one year earlier is due to
realization of the effect of certain tax planning strategies as well as an
increase in income attributable to tax-exempt investments.
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 six month periods ended June 30, 2000 and 1999.
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 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 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 investment securities. During the first six
months of 2000, the Company increased its borrowings from the FHLB and used the
proceeds to purchase investment securities with yields exceeding the cost of the
borrowings.
On July 26, 2000, the Company issued $7.5 million in trust preferred securities
to enhance its regulatory capital base and provide added liquidity. See
"Comparison of Financial Condition at June 30, 2000 and December 31,
1999CCapital Adequacy and Expenditures."
The Company has also obtained funding through the issuance of subordinated
notes. The indenture pursuant to which the Company's subordinated notes were
issued contains 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,
or allow liens or other encumbrances on property owned or acquired. The Company
was in compliance with the indenture covenants as of June 30, 2000 and December
31, 1999. During the first six months of 2000, the Company retired $1.1 million
of the subordinated notes.
The following table sets forth, for the six months ended June 30, 2000 and 1999,
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 (in thousands):
<PAGE>
<TABLE>
Major Sources and Uses of Funds
<CAPTION>
For the
Six Months
Ended
June 30,
------------------
2000 1999
-------- --------
<S> <C> <C>
Purchases of investment securities...... $(137,677) $(121,522)
Net increase in short-term borrowings... 108,324 17,753
Net increase in deposits................ 14,639 1,017
Proceeds from sales and maturities of
investment securities................... 13,721 110,078
Net increase in loans................... (2,678) (14,947)
Net increase (decrease) in long-term
borrowings.............................. (1,056) 6,744
</TABLE>
Given the uncertain nature of customer 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, federal funds lines with correspondent banks, wholesale and
retail repurchase agreements, brokered certificates of deposit and direct
non-brokered national certificates of deposit through national deposit networks.
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. In addition, a
contingency funding plan identifies actions to be taken in response to an
adverse liquidity event.
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, 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 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 associated with the Company's acquisition
strategy; and other risks which are difficult to predict and many of which are
beyond the control of the Company.
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's business activities generate market and other risks. Market risk
arises from changes in interest rates, exchange rates, commodity prices and
equity prices and represents the possibility that changes in future market rates
and prices will have a negative impact on the Company's earnings or value. The
Company's principal market risk is interest rate risk which arises from changes
in interest rates. Interest rate risk can result from: (1) Re-pricing risk 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 9.50 percent to 10.50 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
June 30, 2001 is shown below. The growth assumption used for this simulation was
based on the growth projections the Company anticipates over the next 12 months
given trends since the beginning of 2000. 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.
<PAGE>
Net Interest Income Simulation
(amounts in thousands)
Movement in
interest rates -300bp -200bp -100bp Unchanged +100bp +200bp +300bp
------ ------ ------ -------- ------ ------ ------
Projected 12-month
net interest
income........... $15,686 $15,412 $15,140 $14,867 $14,461 $14,058 $13,707
Dollar change
from rates
unchanged
scenario. ....... 819 545 273 -- (406) (809) (1,160)
Percentage change
from rates
unchanged
scenario........ 5.51% 3.67% 1.84% -- (2.73)% (5.44)% (7.80)%
Cost of $25MM
floor (a)........ (77) (171) (224) (224) (224) (224) (224)
Total net
interest income
impact with
floor............ 15,609 15,241 14,916 14,643 14,237 13,834 13,483
Dollar change
from flat
w/floor.......... 966 598 273 -- (406) (809) (1,160)
Percentage
change from
unchanged
w/floor.......... 6.60% 4.08% 1.86% -- (2.77)% (5.52)% (7.92)%
POLICY LIMITS +/-.. 9.00% 6.00% 3.00% 0.00% 3.00% 6.00% 9.00%
--------------------------
(a) 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.
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 Wealthbuilder deposit products along with
the continued growth in these products that is projected over the next 12
months, 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 percent 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 June 30, 2000 (with forward adjustments
for planned growth and anticipated business activities) and does not contemplate
any actions the Company might undertake in response to changes in market
interest rates.
Part II - Other Information
Item 1. Legal Proceedings
As previously disclosed, the counterclaim portion of BancInsure v. BNC National
Bank, was severed from the main case by the US District Judge. The claim against
the former loan officer for her alleged wrongful actions while a bank officer
and related claims was scheduled to be tried in September 2000. In June 2000,
the former loan officer entered into a consent order with the Office of the
Comptroller of the Currency as a result of her alleged actions that were the
subject of the Company's counterclaim. The consent order provided that Gronlie
make a global settlement offer to the Company in the amount of $473,400 secured
by her interest in a simulator site in San Antonio, TX and her personal guaranty
for $100,000. The offer has been accepted by the various parties, effective July
30, 2000, and will result in the dismissal of all pending actions between the
Company and the former loan officer. BancInsure, the Company's fidelity bond
insurer, is claiming subrogation rights to approximately $181,000 of the
settlement amount, which the Company intends to contest vigorously.
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of stockholders of the Company was held on June 7, 2000 (the
"Annual Meeting"). Proxies were solicited pursuant to the Securities Exchange
Act of 1934, as amended. At the Annual Meeting, James D. LaBreche, Brenda L.
Rebel and Brad J. Scott were elected to serve until the 2003 annual meeting of
stockholders. The number of votes cast for or withheld from each nominee was as
follows:
Name For Withheld
------------------------- ------------------ ------------------
James D. LaBreche 1,900,520 134,550
Brenda L. Rebel 1,900,520 134,550
Brad J. Scott 1,900,520 134,550
With respect to the election of directors, there were no abstentions and
non-votes totaled 364,910.
In addition to the directors elected at the Annual Meeting, the terms of the
following directors continued after the Annual Meeting: Tracy Scott, Gregory K.
Cleveland, John A. Hipp, M.D., Richard M. Johnsen, Jr., John M. Shaffer and
Jerry R. Woodcox.
At the Annual meeting, the stockholders also voted on and approved a proposal to
ratify the appointment of Arthur Andersen LLP to act as the independent public
accountants to audit the financial statements of the Company and its
subsidiaries for the fiscal year ending December 31, 2000. Holders of 1,982,120
shares voted for, holders of 3,850 shares voted against and holders of 49,100
shares abstained from voting on such proposal. Non-votes with respect to such
proposal totaled 368,760.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 10.1, Junior Subordinated Indenture between BNCCORP, Inc. and First
Union National Bank as Trustee dated as of July 12, 2000.
Exhibit 10.2, Guarantee Agreement between BNCCORP, Inc. as Guarantor and
First Union National Bank as Guarantee Trustee dated as of July 12, 2000 -
BNC Capital Trust I.
Exhibit 10.3, Amended and Restated Trust Agreement among BNCCORP, Inc. as
Depositor, First Union National Bank as Property Trustee, First Union Trust
Company, National Association as Delaware Trustee and the Administrative
Trustees dated as of July 12, 2000 - BNC Capital Trust I.
Exhibit 27, Financial Data Schedule.
(b) Reports on Form 8-K
None.
Signatures
Pursuant to 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: August 2, 2000 By /s/ Gregory K. Cleveland
------------------------------
Gregory K. Cleveland
President
Chief Operating Officer
Duly Authorized Officer
