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, 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
November 5, 2000 was 2,395,030.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share and per share data)
ASSETS
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
(unaudited)
<S> <C> <C>
CASH AND DUE FROM BANKS........................ $ 9,820 $ 12,816
INTEREST-BEARING DEPOSITS WITH BANKS........... 3,840 5,565
FEDERAL FUNDS SOLD............................. 3,500 3,500
INVESTMENT SECURITIES AVAILABLE FOR SALE....... 262,517 150,992
LOANS AND LEASES, net of unearned income....... 255,467 262,051
ALLOWANCE FOR CREDIT LOSSES.................... (3,428) (2,872)
------------ ------------
Net loans and leases......................... 252,039 259,179
PREMISES, LEASEHOLD IMPROVEMENTS AND
EQUIPMENT, net............................... 14,743 12,006
INTEREST RECEIVABLE............................ 4,217 2,613
OTHER ASSETS................................... 6,055 6,945
DEFERRED CHARGES AND INTANGIBLE
ASSETS, net.................................. 2,842 3,261
------------ ------------
$ 559,573 $ 456,877
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS:
Noninterest-bearing.......................... $ 31,797 $ 29,798
Interest-bearing -
Savings, NOW and money market.............. 144,589 127,454
Time deposits $100,000 and over............ 59,757 46,779
Other time deposits........................ 104,001 120,680
------------ ------------
Total Deposits............................... 340,144 324,711
SHORT-TERM BORROWINGS.......................... 166,755 88,700
LONG-TERM BORROWINGS........................... 12,827 14,470
OTHER LIABILITIES.............................. 6,263 5,847
------------ ------------
Total liabilities............................ 525,989 433,728
------------ ------------
GUARANTEED PREFERRED BENEFICIAL INTERESTS
IN COMPANY'S SUBORDINATED DEBENTURES.......... 7,372 --
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 September
30, 2000 and December 31, 1999,
respectively................................ 24 24
Capital surplus............................... 14,032 13,976
Retained earnings............................. 13,662 11,893
Treasury stock (42,880 shares)................ (513) (513)
Accumulated other comprehensive loss,
net of income tax effects
of $415 and $1,288 at September 30,
2000 and December 31, 1999,
respectively.............................. (993) (2,231)
------------ ------------
Total stockholders' equity.................. 26,212 23,149
------------ ------------
$ 559,573 $ 456,877
============ ============
<FN>
The accompanying notes are an integral part of these consolidated balance
sheets.
</FN>
</TABLE>
<PAGE>
<TABLE>
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(In thousands, except per share data)
(unaudited)
<CAPTION>
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
------------------- ------------------
2000 1999 2000 1999
--------- -------- -------- --------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans............ $ 6,384 $ 5,610 $18,138 $16,371
Interest and dividends on
investment securities -
Taxable............................ 4,090 1,536 11,260 4,079
Tax-exempt......................... 234 121 697 242
Dividends.......................... 179 67 466 177
Other................................. 63 19 176 37
--------- -------- -------- --------
Total interest income.............. 10,950 7,353 30,737 20,906
--------- -------- -------- --------
INTEREST EXPENSE:
Interest on deposits.................. 4,517 3,208 12,346 9,077
Interest on short-term
borrowings.......................... 2,661 856 7,321 2,128
Interest on long-term
borrowings.......................... 304 176 953 509
--------- -------- -------- --------
Total interest expense.............. 7,482 4,240 20,620 11,714
--------- -------- -------- --------
Net interest income................. 3,468 3,113 10,117 9,192
PROVISION FOR CREDIT LOSSES............ 107 354 926 876
--------- -------- -------- --------
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES........... 3,361 2,759 9,191 8,316
--------- -------- -------- --------
NONINTEREST INCOME:
Fees on loans......................... 587 361 1,388 1,028
Insurance commissions................. 475 460 1,530 1,556
Brokerage income...................... 371 199 1,061 508
Service charges....................... 165 138 447 392
Net gain on sales of
securities.......................... 36 66 82 160
Rental income......................... 17 48 37 108
Other................................. 332 214 1,071 724
--------- -------- -------- --------
Total noninterest income............ 1,983 1,486 5,616 4,476
--------- -------- -------- --------
NONINTEREST EXPENSE:
Salaries and employee benefits........ 2,408 2,321 6,446 6,736
Depreciation and amortization......... 439 401 1,214 1,181
Occupancy............................. 387 336 962 920
Professional services................. 253 395 960 894
Office supplies, telephone
and postage......................... 248 261 695 732
Minority interest in income
of subsidiaries..................... 166 -- 166 --
Marketing and promotion............... 123 172 403 487
Repossessed and impaired
assets expenses/write-offs.......... 84 124 463 204
FDIC and other assessments............ 52 48 147 143
Other................................. 403 221 1,120 905
--------- -------- -------- --------
Total noninterest expense........... 4,563 4,279 12,576 12,202
--------- -------- -------- --------
INCOME (LOSS) BEFORE TAXES............. 781 (34) 2,231 590
INCOME TAXES........................... 249 (38) 706 202
--------- -------- -------- --------
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income, continued
(In thousands, except per share data)
(unaudited)
<CAPTION>
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
------------------- ------------------
2000 1999 2000 1999
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Income from continuing
operations........................... $ 532 $ 4 $ 1,525 $ 388
Discontinued Operation:
Income from operations of
discontinued asset-based lending
subsidiary, net of income taxes
of $126 and $292..................... -- 186 -- 429
Gain on disposal of asset-based
lending subsidiary, net of income
tax effects.......................... -- -- 10 --
--------- -------- -------- --------
Income before extraordinary item
and cumulative effect of change
in accounting principle.............. 532 190 1,535 817
Extraordinary item-gain on early
extinguishment of debt, net of
income taxes of $33 and $120......... 65 -- 234 --
Cumulative effect of change in
accounting principle, net of
income tax effects................... -- -- -- (96)
--------- -------- -------- --------
NET INCOME............................ $ 597 $ 190 $ 1,769 $ 721
========= ======== ======== ========
BASIC AND DILUTED EARNINGS
PER COMMON SHARE:
Income from continuing
operations........................... $ 0.22 $ 0.00 $ 0.63 $ 0.16
Income from operations of
discontinued asset-based
lending subsidiary, net of
income tax effects................... -- 0.08 -- 0.18
Gain on disposal of asset-based
lending subsidiary, net of
income tax effects................... -- -- 0.01 --
Extraordinary item-gain on early
extinguishment of debt, net
of income tax effects................ 0.03 -- 0.10 --
Cumulative effect of change in
accounting principle, net of
income tax effects................... -- -- -- (0.04)
--------- -------- -------- --------
Earnings per share.................... $ 0.25 $ 0.08 $ 0.74 $ 0.30
========= ======== ======== ========
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(In thousands)
<CAPTION>
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
------------------- ------------------
2000 1999 2000 1999
--------- -------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
NET INCOME............................ $ 597 $ 190 $ 1,769 $ 721
OTHER COMPREHENSIVE INCOME -
Unrealized gains (losses) on
securities:
Unrealized holding
gains (losses) arising during
the period, net of income tax
effects of $(456) and $179
for the three months ended
September 30, 2000 and 1999,
respectively, and $(873) and
$909 for the nine months ended
September 30, 2000 and 1999,
respectively..................... 967 (289) 1,238 (1,475)
Less: reclassification
adjustment for gains included
in net income, net of income
tax effects of $12 and $21 for
the three months ended September
30, 2000 and 1999, respectively,
and $26 and $60 for the nine
months ended September 30,
2000 and 1999, respectively...... (24) (45) (56) (100)
--------- -------- -------- --------
OTHER COMPREHENSIVE INCOME (LOSS)..... 943 (334) 1,182 (1,575)
--------- -------- -------- --------
COMPREHENSIVE INCOME (LOSS)........... $ 1,540 $ (144) $ 2,951 $ (854)
========= ======== ======== ========
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
For the Nine Months Ended September 30, 2000
(In thousands, except share data)
<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, 1999...... 2,442,860 $ 24 $ 13,976 $ 11,893 $ (513) $ (2,231) $ 23,149
Net income (unaudited).......... -- -- -- 1,769 -- -- 1,769
Other comprehensive loss -
Change in unrealized
holding loss on
securities available
for sale, net of income
tax effects (unaudited)..... -- -- -- -- -- 1,238 1,238
Other (unaudited)............. (4,950) -- 56 -- -- -- 56
--------- -------- --------- ---------- --------- ------------- ---------
Balance, September 30,
2000 (unaudited).............. 2,437,910 $ 24 $ 14,032 $ 13,662 $ (513) $ (993) $ 26,212
========= ======== ========= ========== ========= ============= =========
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30
(In thousands)
<CAPTION>
2000 1999
------------ ------------
(unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income................................... $ 1,769 $ 721
Adjustments to reconcile
net income to net cash
provided by operating activities -
Provision for credit losses............... 926 1,005
Depreciation and amortization............. 808 784
Amortization of intangible assets......... 406 410
Net premium amortization on
investment securities................... 536 445
Proceeds from loans recovered............. 212 129
Change in interest receivable
and other assets, net................... (1,448) (1,606)
Net realized gains on sales
of securities........................... (82) (160)
Change in other liabilities, net.......... 416 (1,568)
Originations of loans to be sold.......... (113,360) (55,096)
Proceeds from sale of loans............... 113,360 55,096
------------ ------------
Net cash provided by operating
activities............................ 3,543 160
------------ ------------
INVESTING ACTIVITIES:
Purchases of investment securities........... (157,012) (147,271)
Proceeds from sales of investment
securities................................. 7,916 33,899
Proceeds from maturities of
investment securities...................... 39,087 83,955
Net (increase) decrease in
loans...................................... 6,002 (12,294)
Additions to premises, leasehold
improvements and equipment, net............ (3,545) (2,775)
------------ ------------
Net cash used in investing
activities............................ (107,552) (44,486)
------------ ------------
FINANCING ACTIVITIES:
Net increase in demand, savings,
NOW and money market accounts.............. 19,134 20,889
Net increase (decrease) in time
deposits................................... (3,701) 2,858
Net increase in short-term
borrowings................................. 78,055 18,383
Repayments of long-term borrowings........... (1,861) (24,860)
Proceeds from long-term borrowings........... 88 33,100
Proceeds from trust preferred
offering................................... 7,372 --
Other........................................ 201 88
------------ ------------
Net cash provided by financing
activities............................ 99,288 50,458
------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS............................. (4,721) 6,132
CASH AND CASH EQUIVALENTS, beginning
of period.................................... 18,381 10,284
------------ ------------
CASH AND CASH EQUIVALENTS, end
of period.................................... $ 13,660 $ 16,416
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid................................ $ 20,217 $ 14,335
============ ============
Income taxes paid............................ $ 366 $ 643
============ ============
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
</TABLE>
<PAGE>
BNCCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 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 September 30, 2000 and for
the three and nine month periods ended September 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 nine months
ended September 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 September 30:
<TABLE>
<CAPTION>
Net Per-Share
Income Shares Amount
------------- ---------- ---------
2000
<S> <C> <C> <C>
Basic earnings per share:
Income from continuing operations........ $ 532,000 2,395,030 $ 0.22
Extraordinary item - gain on
early extinguishment of debt, net
of income taxes........................ 65,000 2,395,030 0.03
------------- ---------
Income available to common
stockholders........................... $ 597,000 2,395,030 $ 0.25
============= =========
Effect of dilutive shares -
Options.............................. 291
----------
Diluted earnings per share:
Income from continuing operations........ $ 532,000 2,395,321 $ 0.22
Extraordinary item - gain on
early extinguishment of debt,
net of income taxes.................... 65,000 2,395,321 0.03
------------- ---------
Income available to common
stockholders........................... $ 597,000 2,395,321 $ 0.25
============= =========
1999
Basic earnings per share:
Income from continuing operations........ $ 4,000 2,409,654 $ 0.00
Income from operations of
discontinued asset-based
lending subsidiary, net of
income taxes........................... 186,000 2,409,654 0.08
------------- ---------
Income available to common
stockholders........................... $ 190,000 2,409,654 $ 0.08
============= =========
Effect of dilutive shares -
Options.............................. 381
----------
Diluted earnings per share:
Income from continuing operations........ $ 4,000 2,410,035 $ 0.00
Income from operations of
discontinued asset-based lending
subsidiary, net of income taxes........ 186,000 2,410,035 0.08
------------- ---------
Income available to common
stockholders........................... $ 190,000 2,410,035 $ 0.08
============= =========
</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 nine month periods ended September 30:
<TABLE>
<CAPTION>
Net Per-Share
Income Shares Amount
------------- ---------- ---------
2000
<S> <C> <C> <C>
Basic earnings per share:
Income from continuing operations........ $ 1,525,000 2,398,137 $ 0.63
Gain on disposal of asset-based
lending subsidiary, net of
income taxes........................... 10,000 2,398,137 0.01
Extraordinary item - gain on early
extinguishment of debt, net of
income taxes........................... 234,000 2,398,137 0.10
------------- ---------
Income available to common
stockholders........................... $ 1,769,000 2,398,137 $ 0.74
============= =========
Effect of dilutive shares -
Options.............................. 898
-----------
Diluted earnings per share:
Income from continuing operations........ $ 1,525,000 2,399,035 $ 0.63
Gain on disposal of asset-based
lending subsidiary, net of
income taxes........................... 10,000 2,399,035 0.01
Extraordinary item - gain on early
extinguishment of debt, net of
income taxes........................... 234,000 2,399,035 0.10
------------- ---------
Income available to common
stockholders........................... $ 1,769,000 2,399,035 $ 0.74
============= =========
1999
Basic earnings per share:
Income from continuing operations........ $ 388,000 2,408,855 $ 0.16
Income from operations of
discontinued asset-based
lending subsidiary, net of
income taxes........................... $ 429,000 2,408,855 0.18
Cumulative effect of change in
accounting principle, net of
income taxes........................... (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
-----------
Diluted earnings per share:
Income from continuing operations........ $ 388,000 2,409,155 $ 0.16
Income from operations of
discontinued asset-based
lending subsidiary, net of
income taxes........................... 429,000 2,409,155 0.18
Cumulative effect of change in
accounting principle, net of
income taxes........................... (96,000) 2,409,155 (0.04)
------------- ---------
Income available to common
stockholders........................... $ 721,000 2,409,155 $ 0.30
============= =========
</TABLE>
<PAGE>
The following number of options and warrants, with exercise prices ranging from
$6.31 to $17.75, were outstanding during the three month periods indicated but
were not included in the computation of diluted EPS because their effects were
antidilutive:
9/2000 6/2000 3/2000 9/1999 6/1999 3/1999
--------- --------- --------- --------- --------- ---------
154,348 152,548 159,934 170,034 170,234 170,134
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 for 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 community banking services, but this
segment is distinguished primarily by its emphasis on 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 September 30 (in
thousands):
<TABLE>
2000 1999
---------------------------------------- ----------------------------------------
Other Other
BNC-ND BNC-MN (a) Total BNC-ND BNC-MN (a) Total
--------- --------- --------- ---------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income.... $ 2,492 $ 1,163 $ (187) $ 3,468 $ 2,427 $ 866 $ (180) $ 3,113
Other revenue -
external customers... 1,633 323 22 1,978 1,174 313 -- 1,487
Intersegment revenue... 80 -- 1,171 1,251 82 -- 758 840
Income tax expense
(benefit)............ 126 260 (137) 249 (10) 95 (123) (38)
Segment profit
(loss) from
continuing
operations........... 423 386 (277) 532 19 133 (148) 4
Income from
operations of
discontinued
asset-based
lending
subsidiary, net
of income taxes...... -- -- -- -- -- -- 186 186
Extraordinary
item-gain on
early
extinguishment of
debt, net of
income taxes......... -- -- 65 65 -- -- -- --
Segment profit
(loss)............... 423 386 (212) 597 19 133 (38) 190
Segment assets......... 390,405 177,707 56,404 624,516 331,255 94,941 21,256 447,452
-----------------
<FN>
(a) The financial information presented in the "Other" column is for the parent
company and BNC Capital Trust I, the business trust established for the
purpose of issuing trust preferred securities. These components do not
generate revenue or qualify as operating segments.
</FN>
</TABLE>
<PAGE>
The following tables present segment profit or loss, assets and a reconciliation
of segment information as of, and for the nine months ended September 30 (in
thousands):
<TABLE>
2000 1999
---------------------------------------- ----------------------------------------
Other Other
BNC-ND BNC-MN (a) Total BNC-ND BNC-MN (a) Total
--------- --------- --------- ---------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income.... $ 7,491 $ 3,394 $ (768) $ 10,117 $ 7,148 $ 2,549 $ (505) $ 9,192
Other revenue -
external customers... 4,740 837 39 5,616 3,672 805 0 4,477
Intersegment
revenue.............. 237 -- 3,337 3,574 208 -- 2,343 2,551
Income tax expense
(benefit)............ 453 639 (386) 706 202 325 (325) 202
Segment profit
(loss) from
continuing
operations........... 1,330 926 (731) 1,525 466 457 (535) 388
Income from
operations of
discontinued
asset-based
lending
subsidiary, net
of income taxes...... -- -- -- -- -- -- 429 429
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......... -- -- 234 234 -- -- -- --
Cumulative effect
of change in
accounting
principle, net
of income taxes...... -- -- -- -- (43) (35) (18) (96)
Segment profit
(loss)............... 1,330 926 (487) 1,769 423 422 (124) 721
Segment assets......... 390,405 177,707 56,404 624,516 331,255 94,941 21,256 447,452
-----------------
<FN>
(a) The financial information presented in the "Other" column is for the parent
company and BNC Capital Trust I. These components do not generate revenue
or qualify as operating segments.
</FN>
</TABLE>
<PAGE>
Reconciliation of segment profit to consolidated results (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Segment profit before taxes............ $ 781 $ (34) $ 2,231 $ 590
Income tax expense (benefit)........... 249 (38) 706 202
-------- -------- -------- --------
Segment profit from continuing 532 4 1,525 388
operations...........................
Income from operations of
discontinued asset-based
lending subsidiary, net of
income taxes......................... -- 186 -- 429
Gain on disposal of asset-based
lending subsidiary, net of
income taxes......................... -- -- 10 --
Extraordinary item-gain on early
extinguishment of debt, net of
income taxes......................... 65 -- 234 --
Cumulative effect of change in
accounting principle, net of
income taxes......................... -- -- -- (96)
-------- -------- -------- --------
Consolidated net income................ $ 597 $ 190 $ 1,769 $ 721
======== ======== ======== ========
</TABLE>
NOTE 6 - Retirement of Subordinated Notes
During the nine months ended September 30, 2000, the Company retired $1.8
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
$234,000 ($.10 per share), net of income taxes of $120,000. The notes were
retired using cash generated from the sale of BNC Financial.
NOTE 7 - Trust Preferred Securities
In July 2000, the Company established a special purpose trust, BNC Capital Trust
I, for the purpose of issuing $7.5 million of 12.045 percent trust preferred
securities. The proceeds from the issuance, together with the proceeds of the
related issuance of $232,000 of 12.045 percent common securities of the trust,
were invested in $7.7 million of 12.045 percent junior subordinated deferrable
interest debentures of the Company. Concurrent with the issuance of the
preferred securities by the trust, the Company fully and unconditionally
guaranteed all obligations of the special purpose trust related to the trust
preferred securities. The trust preferred securities provide the Company with a
more cost-effective means of obtaining Tier 1 capital for regulatory purposes
than if the Company itself were to issue preferred stock because the Company is
allowed to deduct, for income tax purposes, amounts paid in respect of
debentures and ultimately distributed to the holders of the trust preferred
securities. The sole assets of the special purpose trust are the debentures. The
Company owns all of the common securities of the trust. The common securities
and debentures, along with the related income effects, are eliminated within the
consolidated financial statements. The preferred securities issued by the trust
rank senior to the common securities.
<PAGE>
The trust preferred securities are subject to mandatory redemption on July 19,
2030, the stated maturity date of the debentures, or upon repayment of the
debentures, or earlier, pursuant to the terms of the trust agreement. On or
after July 19, 2010, the trust preferred securities may be redeemed and the
corresponding debentures may be prepaid at the option of the Company, subject to
Federal Reserve Board approval, at declining redemption prices. Prior to July
19, 2010, the securities may be redeemed at the option of the Company on the
occurrence of certain events that result in a negative tax impact, negative
regulatory impact on the trust preferred securities or negative legal or
regulatory impact on the special purpose trust which would cause it to be deemed
to be an "investment company" for regulatory purposes. In addition, the Company
has the right to defer payment of interest on the debentures and, therefore,
distributions on the trust preferred securities for up to five years.
NOTE 8 - Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") 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 treatment.
In June 1999, the FASB issued Statement of Financial Accounting Standards No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133," ("SFAS 137") which delayed the
effective date of SFAS 133 to fiscal years beginning after June 15, 2000. In
June 2000, the FASB issued Statement of Financial Accounting Standards No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities -
An Amendment of FASB Statement No. 133," ("SFAS 138"). The Company will adopt
SFAS 133, as amended by SFAS 137 and SFAS 138 on January 1, 2001.
From time to time, the Company enters into derivative contracts such as interest
rate swaps, caps and floors. Interest rate swaps are contracts to exchange fixed
and floating rate interest payment obligations based on a notional principal
amount and are used to hedge the Company's balance sheet against fluctuations in
interest rates. Interest rate caps and floors are also used to minimize the
impact of fluctuating interest rates on earnings. If such contracts meet certain
requirements, they may qualify as fair value or cash flow hedges under SFAS 133.
SFAS 133 provides that the gain or loss on a derivative instrument designated
and qualifying as a fair value hedging instrument, as well as the offsetting
loss or gain on the hedged item attributable to the hedged risk, be recognized
currently in earnings in the same accounting period. The standard provides that
the effective portion of the gain or loss on a derivative instrument designated
and qualifying as a cash flow hedging instrument be reported as a component of
other comprehensive income and be classified into earnings in the same period or
periods in which the hedged transaction affects earnings. The remaining gain or
loss on the derivative instrument, if any, must be recognized currently in
earnings.
The Company has established a hedging policy statement which sets forth the
documentation and other requirements necessary to achieve hedge accounting under
SFAS 133. The Company's currently outstanding $25 million prime based interest
rate floor qualifies, and will be classified as, a cash flow hedge. On January
1, 2001, the Company will recognize the interest rate floor on its balance sheet
at its fair value on that date and, in subsequent periods, apply the cash flow
hedge accounting rules explained above. The Company is currently in the process
of reviewing other financial instruments and contracts so that it may identify
any additional items impacted by SFAS 133, as amended, and account for them
accordingly beginning on January 1, 2001. As demonstrated above, the adoption of
SFAS 133 could increase volatility in earnings and other comprehensive income or
involve changes in certain of the Company's business practices.
<PAGE>
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements,"
("SAB 101"). SAB 101, indicates that if a transaction is within the scope of
specific authoritative literature that provides revenue recognition guidance,
SEC registrants should apply such literature. In the absence of authoritative
literature addressing a specific arrangement or a specific industry, the
registrant should consider the existing authoritative accounting standards as
well as the broad revenue recognition criteria specified in the FASB's
conceptual framework that contain basic guidelines for revenue recognition.
Based on these guidelines, revenue should not be recognized until it is realized
or realizable and earned. Subsequent to the issuance of SAB 101, the SEC issued
two amendments, SABs 101A and 101B. These amendments delayed the effective date
of implementation of the guidance in SAB 101 for registrants that have not
previously applied the accounting and disclosures described in the bulletin. The
new effective date for SAB 101, as amended, is no later than the fourth fiscal
quarter of fiscal years beginning after December 15, 1999, or the fourth quarter
of 2000 for the Company. The Company has reviewed the guidance provided in SAB
101, as amended, and does not expect any changes in its practices related to
revenue recognition because those practices are in accordance with currently
existing accounting and industry standards. Additionally, a summary of the
Company's revenue recognition policies will be included in its Consolidated
Financial Statements for the period ending December 31, 2000.
In March 2000, the FASB issued Interpretation 44, "Accounting for Certain
Transactions Involving Stock Compensation (An Interpretation of APB Opinion No.
25)," ("FIN 44"). Although FIN 44 became effective on July 1, 2000, certain
conclusions in the interpretation cover specific events that occurred after
either December 15, 1998 or January 12, 2000. FIN 44 was issued to address
application questions, and diversity in practice which has developed since the
issuance of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," ("APB 25") in October 1972. FIN 44 clarifies the
application of ABP 25 for only certain issues including, but not limited to, the
definition of "employee" for purposes of applying APB 25, the criteria for
determining whether a plan qualifies as a noncompensatory plan, the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award and the accounting for an exchange of stock compensation awards
in a business combination. The Company has reviewed FIN 44 and determined that
its accounting policies under APB 25 comply with the FASB's conclusions. Any
future transactions accounted for in accordance with the provisions of APB 25 or
related to currently outstanding stock-based compensation will follow the
guidance provided by the FASB in FIN 44 and subsequent Emerging Issues Task
Force issuances.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Comparison of Financial Condition at September 30, 2000 and December 31, 1999
Assets. Total assets increased $102.7 million, or 22 percent, from $456.9
million at December 31, 1999 to $559.6 million at September 30, 2000. The
following table presents the Company's assets by category as of September 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
--------------------
September 30, December 31,
2000 1999 $ %
------------- ------------ ----------- --------
<S> <C> <C> <C> <C>
Cash and due from banks...... $ 9,820 $ 12,816 $ (2,996) (23)%
Interest-bearing deposits
with banks................. 3,840 5,565 (1,725) (31)%
Federal funds sold........... 3,500 3,500 -- --
Investment securities
available for sale......... 262,517 150,992 111,525 74%(a)
Loans and leases, net........ 252,039 259,179 (7,140) (3)%(b)
Premises, leasehold
improvements and
equipment, net............. 14,743 12,006 2,737 23%
Interest receivable.......... 4,217 2,613 1,604 61%
Other assets................. 6,055 6,945 (890) (13)%
Deferred charges and
intangible assets, net..... 2,842 3,261 (419) (13)%
------------- ------------ -----------
Total assets............. $ 559,573 $ 456,877 $ 102,696 22%
============= ============ ===========
--------------------
<FN>
(a) The Company increased its earning asset portfolio by purchasing
additional investment securities funded primarily by borrowings from
the Federal Home Loan Bank ("FHLB").
(b) Although the above table indicates that net loans outstanding have
decreased between December 31, 1999 and September 30, 2000, gross loans
originated by the Company have actually increased over $40 million
during that time period as the Company has originated and sold portions
of loans to other lenders on a nonrecourse basis. Loans may be sold to
accommodate customers whose financing needs exceed lending limits and
internal loan restrictions relating primarily to industry
concentration.
</FN>
</TABLE>
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, 2000 (amounts are in thousands):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
2000 2000
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
Balance, beginning of period.................. $ 3,259 $ 2,872
Provision for credit losses................... 107 926
Loans charged off............................. (81) (581)
Loans recovered............................... 143 211
------------ ------------
Balance, end of period........................ $ 3,428 $ 3,428
============ ============
Ending loan portfolio ........................ $ 255,467
============
Allowance for credit losses as a
percentage of ending loan portfolio......... 1.34%
</TABLE>
As of September 30, 2000, the Company's allowance for credit losses stands at
1.34 percent of total loans as compared to 1.10 percent at December 31, 1999.
Net charge-offs (recoveries) as a percentage of average loans for the three and
nine month periods ended September 30, 2000 were (.02) and .14 percent,
respectively, as compared to .20 and .34 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>
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Nonperforming loans:
Loans 90 days or more delinquent
and still accruing interest................ $ 649 $ 22
Nonaccrual loans............................. 686 1,620
Restructured loans........................... 24 16
------------ ------------
Total nonperforming loans...................... 1,359 1,658
Other real estate owned and
repossessed assets......................... 79 1,207
------------ ------------
Total nonperforming assets..................... 1,438 2,865
============ ============
Allowance for credit losses.................... 3,428 2,872
============ ============
Ratio of total nonperforming assets
to total assets ............................. .26% .63%
Ratio of total nonperforming loans
to total loans............................... .53% .63%
Ratio of allowance for credit losses
to total nonperforming loans................. 252.24% 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 $92.3 million, or 21 percent, from
$433.7 million at December 31, 1999 to $526.0 million at September 30, 2000. The
following table presents the Company's liabilities by category as of September
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
<CAPTION>
Change
-------------------
September 30, December 31,
2000 1999 $ %
------------ ------------ ---------- --------
<S> <C> <C> <C> <C>
Deposits:
Noninterest-bearing....... $ 31,797 $ 29,798 $ 1,999 7%
Interest-bearing -
Savings, NOW and
money market.......... 144,589 127,454 17,135 13% (a)
Time deposits $100,000
and over.............. 59,757 46,779 12,978 28% (b)
Other time deposits..... 104,001 120,680 (16,679) (14)% (a)
Short-term borrowings..... 166,755 88,700 78,055 88% (c)
Long-term borrowings...... 12,827 14,470 (1,643) (11)%
Other liabilities......... 6,263 5,847 416 7%
------------ ------------ ----------
Total liabilities....... $ 525,989 $ 433,728 $ 92,261 21%
============ ============ ==========
-------------------
<FN>
(a) The popularity of the Company's Wealthbuilder deposit products has
continued to contribute 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.
</FN>
</TABLE>
Stockholders' Equity. The Company's equity capital increased $3.1 million
between December 31, 1999 and September 30, 2000. This increase resulted from
$1.8 million of earnings recorded for the nine months ended September 30, 2000,
restricted and other stock transactions netting to a $56,000 increase and a $1.2
million decrease in the net unrealized holding loss 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, 2000:
<PAGE>
<TABLE>
<CAPTION>
Tier 1 Total Tier 1
Risk-Based Risk-Based Leverage
Ratio Ratio Ratio
----------- ----------- -----------
<S> <C> <C> <C>
Consolidated.......... 9.05% 12.21% 5.77%
BNC-North Dakota...... 9.73% 10.57% 6.50%
BNC-Minnesota ........ 10.95% 12.20% 5.76%
</TABLE>
As of September 30, 2000, BNCCORP and its subsidiary banks exceeded capital
adequacy requirements and the banks were considered "well capitalized" under
prompt corrective action provisions.
In July 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. Any amount of
trust preferred securities in excess of the 25 percent limitation would
constitute Tier 2, or supplementary capital of the Company. As of September 30,
2000, all of the outstanding trust preferred securities qualified as Tier 1
capital.
The Company has completed construction of an office building in Fargo, North
Dakota. Capital expenditures for the office building were approximately $500,000
and $2.8 million, respectively, during the three and nine month periods ended
September 30, 2000 and $2.1 for the nine month period ended September 30, 1999.
There were no other major capital expenditures made during these periods. Total
expenditures to date for the Fargo building are approximately $6.4 million. The
office building was occupied during the second quarter of 2000 with excess space
having been leased to third parties.
Comparison of Operating Results for the
Three and Nine Month Periods Ended September 30, 2000 and 1999
General. The Company's net income for the third quarter of 2000 was $597,000, or
$0.25 per share on a basic and diluted basis. These results included income from
continuing operations of $0.22 per share and an extraordinary gain from early
extinguishment of debt of $0.03 per share. This compares with net income for the
third quarter of 1999 of $190,000, or basic and diluted earnings per share of
$0.08. The 1999 net income was comprised primarily of income from the
discontinued asset-based lending subsidiary of $0.08 per share. The returns on
average assets and equity for the quarter ended September 30, 2000, on a
continuing operations basis, were 0.38 and 8.48 percent, respectively, as
compared to 0.00 and 0.06 percent, respectively, for the same period one year
earlier.
For the nine months ended September 30, 2000, the net income was $1.8 million,
or basic and diluted earnings per share of $0.74. This included income from
continuing operations of $0.63 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 $0.10 per share. For the first nine months of 1999,
net income was $721,000, or $0.30 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 $0.18 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 nine month period ended
September 30, 2000, on a continuing operations basis, were 0.38 and 8.61
percent, respectively, as compared to 0.14 and 2.08 percent, respectively, for
the same period one year earlier.
<PAGE>
Net Interest Income. Net interest income for the three-month period ended
September 30, 2000 increased $355,000, or 11.4 percent. Net interest margin
decreased to 2.67 percent for the quarter ended September 30, 2000 from 3.33
percent for the same period one year earlier.
Net interest income for the nine-month period ended September 30, 2000 increased
$925,000, or 10.1 percent. Net interest margin decreased to 2.73 percent for the
nine months ended September 30, 2000 from 3.51 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, 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>
<CAPTION>
Three Months ended September 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............... $ 6,007 $ 63 4.17% $ 4,156 $ 19 1.72% $ 1,851 $ 44 2.45%
Investments.............. 257,112 4,503 6.97% 114,018 1,724 6.00% 143,094 2,779 0.97%(a)
Loans.................... 256,256 6,384 9.91% 255,454 5,610 8.71% 802 774 1.20%(b)
Allowance for
loan losses.......... (3,535) -- (2,987) -- (548) --
-------- -------- -------- -------- -------- --------
Total interest-
earning assets..... $515,840 10,950 8.44% $370,641 7,353 7.87% $145,199 3,597 0.57%
======== -------- ======== -------- ======== --------
Interest-bearing
liabilities
NOW & money market
accounts............... $136,765 1,919 5.58% $ 94,025 969 4.09% $ 42,740 950 1.49%(c)
Savings.................. 3,919 21 2.13% 5,997 31 2.05% (2,078) (10) 0.08%
Certificates of
deposit under
$100,000............... 106,419 1,530 5.72% 123,211 1,565 5.04% (16,792) (35) 0.68%(c)
Certificates of
deposit $100,000
and over............... 62,869 1,047 6.63% 48,289 643 5.28% 14,580 404 1.35%(d)
-------- -------- -------- -------- -------- --------
Interest-bearing
deposits............. 309,972 4,517 5.80% 271,552 3,208 4.69% 38,450 1,309 1.11%
Short-term borrowings:
Securities & loans
sold under
agreements to
repurchase and
federal funds
purchased............ 100,632 1,705 6.74% 15,750 208 5.24% 84,882 1,497 1.50%(e)
FHLB notes payable..... 62,200 956 6.11 48,500 648 5.30% 13,700 308 0.82%(e)
Long-term borrowings..... 13,469 304 8.98% 10,253 176 6.85% 3,216 128 2.13%
-------- -------- -------- -------- -------- --------
Total borrowings....... 176,301 2,965 6.69% 74,503 1,032 5.50% 101,798 1,933 1.19%
-------- -------- -------- -------- -------- --------
Total interest-
bearing
liabilities......... $486,273 7,482 6.12% $346,025 4,240 4.86% $140,248 3,242 1.26%
======== -------- ======== -------- ======== --------
Net interest
income/spread....... $ 3,468 2.32% $ 3,113 3.01% $ 355 -0.69%(f)
======== ======== ======== ======== ======== ========
Net interest margin... 2.67% 3.33% -0.66%(f)
======== ======== ========
Notations:
Noninterest-bearing
deposits............... $ 29,947 -- $ 29,208 -- $ 739 --
-------- -------- --------
Total deposits......... $339,919 $ 4,517 5.29% $300,730 $ 3,208 4.24% $ 39,189 $ 1,309 1.05%
======== ======== ======== ======== ======== ======== ======== ======== ========
Taxable equivalents:
Total interest-
earning assets....... $515,840 $ 11,060 8.53% $370,641 $ 7,420 7.94% $145,199 $ 3,640 0.59%
Net interest
income/spread........ -- $ 3,578 2.41% -- $ 3,180 3.08% -- $ 389 -0.67%(f)
Net interest margin.... -- -- 2.76% -- -- 3.40% -- -- -0.64%(f)
======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Nine Months ended September 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....... $ 6,003 $ 176 3.92% $ 3,472 $ 37 1.42% $ 2,531 $ 139 2.50%
Investments.............. 236,764 12,423 7.01% 100,727 4,498 5.97% 136,037 7,925 1.04%(a)
Loans.................... 256,153 18,138 9.46% 248,790 16,371 8.80% 7,363 1,767 0.66%(b)
Allowance for
loan losses.......... (3,313) -- (2,883) -- (430) --
-------- -------- -------- -------- -------- --------
Total interest-
earning assets..... $495,607 30,737 8.28% $350,106 20,906 7.98% $145,501 9,831 0.30%
======== -------- ======== -------- ======== --------
Interest-bearing
liabilities
NOW & money market
accounts............... $132,912 5,258 5.28% $ 85,046 2,377 3.74% $ 47,886 2,881 1.54%(c)
Savings.................. 4,235 66 2.08% 6,587 100 2.03% (2,352) (34) 0.05%
Certificates of
deposit under
$100,000............... 110,224 4,489 5.44% 126,905 4,901 5.16% (16,681) (412) 0.28%(c)
Certificates of
deposit $100,000
and over............... 54,227 2,533 6.24% 42,416 1,699 5.36% 11,811 834 0.88%(d)
-------- -------- -------- -------- -------- --------
Interest-bearing
deposits............. 301,598 12,346 5.47% 260,954 9,077 4.65% 40,644 3,269 0.82%
Short-term borrowings:
Securities & loans
sold under
agreements to
repurchase and
federal funds
purchased............ 96,467 4,604 6.38% 19,173 721 5.03% 77,294 3,883 1.35%(e)
FHLB notes payable..... 60,015 2,717 6.05% 35,363 1,407 5.32% 24,652 1,310 0.73%(e)
Long-term borrowings..... 13,752 953 9.26% 9,670 509 7.05% 4,082 444 2.21%
-------- -------- -------- -------- -------- --------
Total borrowings....... 170,234 8,274 6.49% 64,206 2,637 5.49% 106,028 5,637 1.00%
-------- -------- -------- -------- -------- --------
Total interest-
bearing
liabilities......... $471,832 20,620 5.84% $ 325,160 11,714 4.82% $146,672 8,906 1.02%
======== -------- ========= -------- ======== --------
Net interest
income/spread....... $ 10,117 2.44% $ 9,192 3.16% $ 925 -0.72%(f)
======== ======== ======== ======== ======== ========
Net interest margin... 2.73% 3.51% -0.78%(f)
======== ======== ========
Notations:
Noninterest-bearing
deposits............... $ 27,933 -- $ 26,650 -- $ 1,283 --
-------- -------- --------
Total deposits......... $329,531 $ 12,346 5.00% $287,604 $ 9,077 4.22% $ 41,927 $ 3,269 0.78%
======== ======== ======== ======== ======== ======== ======== ======== ========
Taxable equivalents:
Total interest-
earning assets....... $495,607 $ 31,063 8.37% $350,106 $ 21,042 8.04% $145,501 $ 10,021 0.33%
Net interest
income/spread........ -- $ 10,443 2.53% -- $ 9,328 3.22% -- $ 1,115 -0.69%(f)
Net interest margin.... -- -- 2.81% -- -- 3.56% -- -- -0.75%(f)
======== ======== ======== ======== ======== ======== ======== ======== ========
-------------------------
<FN>
(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 average loan volume increase is attributable to increases in loans
originated at BNC-Minnesota and BNC-North Dakota. While period end net
loans outstanding have decreased between December 31, 1999 and September
30, 2000, gross loans originated and average net loans outstanding for the
three and nine month periods ended September 30, 2000 have increased as
compared to the same periods one year earlier. Some of the fluctuation of
period end balances is due to the timing of funding and usage patterns on
commercial lines of credit. 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.
<PAGE>
(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. The
interest rates on the Wealthbuilder deposit products are indexed to and
float with the 90 day T-bill rate.
(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.
</FN>
</TABLE>
Provision for Credit Losses. The provision for credit losses was $107,000 for
the quarter ended September 30, 2000 as compared to $354,000 for the same period
one year earlier. For the nine months ended September 30, 2000 and 1999, the
provision for credit losses was $926,000 and $876,000, respectively. See
"Comparison of Financial Condition at September 30, 2000 and December 31,
1999-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, 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 Nine
Months Ended Months Ended
September 30, Change September 30, Change
----------------- -------------- ----------------- ---------------
2000 1999 $ % 2000 1999 $ %
-------- -------- ------ ------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fees on loans........... $ 587 $ 361 $ 226 63% $ 1,388 $ 1,028 $ 360 35%(a)
Insurance commissions... 475 460 15 3% 1,530 1,556 (26) (2)%
Brokerage income........ 371 199 172 86% 1,061 508 553 109%(b)
Service charges......... 165 138 27 20% 447 392 55 14%
Rental income........... 17 48 (31) (65)% 37 108 (71) (66)%
Net gain on sales
of securities......... 36 66 (30) (45)% 82 160 (78) (49)%
Other................... 332 214 118 55% 1,071 724 347 48%(c)
-------- -------- ------ -------- -------- -------
Total noninterest
income.............. $ 1,983 $ 1,486 $ 497 33% $ 5,616 $ 4,476 $ 1,140 25%
======== ======== ====== ======== ======== =======
-----------------
<FN>
(a) Increases in loan fees are primarily attributable to fees generated at
BNC-North Dakota's brokerage subsidiary, BNC Asset Management, Inc. upon
placement of credit into the secondary market.
(b) Reflects the addition of professional staff at BNC Asset Management and
successful efforts to cross-sell brokerage services to bank customers.
(c) 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.
</FN>
</TABLE>
<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, 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 Nine
Months Ended Months Ended
September 30, Change September 30, Change
----------------- -------------- ----------------- ---------------
2000 1999 $ % 2000 1999 $ %
-------- -------- ------ ------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Salaries and
employee benefits.... $ 2,408 $ 2,321 $ 87 4% $ 6,446 $ 6,736 $ (290) (4)%(a)
Depreciation and
amortization......... 439 401 38 9% 1,214 1,181 33 3%
Occupancy.............. 387 336 51 15% 962 920 42 5%
Professional
services............. 253 395 (142) (36)% 960 894 66 7%(b)
Office supplies,
telephone and
postage.............. 248 261 (13) (5)% 695 732 (37) (5)%
Minority interest
in income of
subsidiaries......... 166 -- 166 -- 166 -- 166 --(c)
Marketing and
promotion............ 123 172 (49) (28)% 403 487 (84) (17)%
Repossessed and
impaired assets
expenses/write-offs.. 84 124 (40) (32)% 463 204 259 127%(d)
FDIC and other
assessments.......... 52 48 4 8% 147 143 4 3%
Other.................. 403 221 182 82% 1,120 905 215 24%(e)
-------- -------- ------ -------- -------- --------
Total noninterest
expense.............. $ 4,563 $ 4,279 $ 284 7% $12,576 $12,202 $ 374 3%
======== ======== ====== ======== ======== ========
Efficiency
ratio (f).......... 83.71% 93.04% (9)% 79.93% 89.27% (9)%
======== ======== ======== ========
-------------------
<FN>
(a) The year to date decrease is primarily a result of general staff
reductions. The Company's average full time equivalent ("FTE") employees
was 175 and 181 for the quarter and nine months ended September 30, 2000,
respectively, as compared to 198 and 192 for the same periods one year
earlier. While the Company has had a reduction in FTE's in several of its
divisions and subsidiaries, staff at BNC Asset Management has increased
over the last twelve months. Increases in this expense category in the
third quarter of 2000 and anticipated increases in future periods reflect
these staffing developments at BNC Asset Management, however, compensation
expense is largely commission-based for these employees so any such
increase should be accompanied by further increases in noninterest income.
(b) The decrease in professional services expenses in the third quarter of 2000
relates primarily to the recovery of legal expenses associated with final
resolution of an asset classified previously as other real estate owned.
(c) This is the interest expense associated with the trust preferred offering.
(d) Write-down to estimated net realizability of repossessed assets including
expenses associated with disposition of such assets and other
collection-related expenses.
(e) Increases in this category are a combination of increases in several
miscellaneous expense categories.
<PAGE>
(f) 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
relatively flat or reduced salaries and benefits expenses and, other than
expenses associated with repossessed and impaired assets, the Company's
ability to hold noninterest expense relatively steady in the three and nine
month periods ended September 30, 2000 compared with the same periods one
year earlier. The Company's efficiency ratios without including the expense
associated with the trust preferred offering would be 80.66 and 78.88,
respectively, for the three and nine month periods ended September 30,
2000.
</FN>
</TABLE>
Income Tax Expense. Income tax expense for the quarter ended September 30, 2000
increased $287,000 as compared to the same period in 1999 due to the increase in
pre-tax income. The estimated effective tax rate for the three month period
ended September 30, 2000 was 31.9 percent compared with a tax benefit for the
same quarter in the prior year.
Income tax expense for the nine months ended September 30, 2000 increased
$504,000 as compared to the same period in 1999 due to the increase in pre-tax
income. The estimated effective tax rates for the nine month periods ended
September 30, 2000 and 1999 were 31.6 and 34.2 percent, respectively.
The decrease in effective tax rates for the nine month period ended September
30, 2000 as compared to the same period 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 nine month periods ended September 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 half
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.
In July 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 September 30, 2000 and December 31, 1999-Capital
Adequacy and Expenditures" and Note 7 to the Consolidated Financial Statements
included under Item 1 of Part I.
<PAGE>
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 September 30, 2000 and
December 31, 1999. During the first nine months of 2000, the Company retired
$1.8 million of the subordinated notes.
The following table sets forth, for the nine months ended September 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):
<TABLE>
Major Sources and Uses of Funds
<CAPTION>
For the Nine Months Ended
September 30,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Purchases of investment securities........... $ (157,012) $ (147,271)
Net increase in short-term borrowings........ 78,055 18,383
Proceeds from sales and
maturities of investment Securities........ 47,003 117,854
Net increase in deposits..................... 15,433 23,747
Proceeds from trust preferred offering....... 7,372 --
Net (increase) decrease in loans............. 6,002 (12,294)
Net increase (decrease) in
long-term borrowings....................... (1,773) 8,240
</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 -
timing differences in the maturity/re-pricing of assets, liabilities and
off-balance sheet contracts; (2) Options risk - the effect of embedded options,
such as loan prepayments, interest rate caps/floors and deposit withdrawals; (3)
Basis risk - risk resulting from unexpected changes in the spread between two or
more different rates of similar maturity, and the resulting impact on the
behavior of lending and funding rates; and (4) Yield curve risk - risk resulting
from unexpected changes in the spread between two or more rates of different
maturities from the same type of instrument. The Company has risk management
policies to monitor and limit exposure to interest rate risk. To date the
Company has not conducted trading activities as a 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.
<PAGE>
The net interest income simulation results for the twelve month period ending
September 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.
<TABLE>
Net Interest Income Simulation
(amounts in thousands)
<CAPTION>
Movement in interest rates -300bp -200bp -100bp Unchanged +100bp +200bp +300bp
-------- -------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Projected 12-month
net interest income...... $ 14,591 $ 14,379 $ 14,168 $ 13,957 $ 13,612 $ 13,268 $ 12,955
Dollar change from
rates unchanged
scenario. ............... 634 422 211 -- (345) (689) (1,002)
Percentage change
from rates unchanged
scenario................. 4.54% 3.02% 1.51% -- (2.47)% (4.94)% (7.18)%
Cost of $25MM floor (a).... (77) (171) (224) (224) (224) (224) (224)
Total net interest
income impact with
floor.................... 14,514 14,208 13,944 13,733 13,388 13,044 12,731
Dollar change from
flat w/floor............. 781 475 211 -- (345) (689) (1,002)
Percentage change
from unchanged w/floor... 5.69% 3.46% 1.54% -- (2.51)% (5.02)% (7.30)%
POLICY LIMITS +/-.......... 9.00% 6.00% 3.00% 0.00% 3.00% 6.00% 9.00%
--------------------------
<FN>
(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.
</FN>
</TABLE>
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 September 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.
<PAGE>
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) 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: November 6, 2000 By /s/ Gregory K. Cleveland
----------------------------------------
Gregory K. Cleveland
President
Chief Operating Officer
Duly Authorized Officer
