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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 0-26290
BNCCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 45-0402816
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
322 East Main 58501
Bismarck, North Dakota (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (701) 250-3040
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant at March 15, 2000 was $10,626,000.
The number of shares of the Registrant's common stock outstanding on March
15, 2000 was 2,399,980.
Documents incorporated by reference. Portions of the Registrant's proxy
statement to be filed with the Securities and Exchange Commission in connection
with the Registrant's 2000 annual meeting of stockholders are incorporated by
reference into Part III hereof.
BNCCORP, INC.
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
Page
PART I
Item 1. Business......................................................... 3
Item 2. Properties....................................................... 9
Item 3. Legal Proceedings................................................ 9
Item 4. Submission of Matters to a Vote of Security Holders.............. 10
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters....................................................... 10
Item 6. Selected Financial Data.......................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................... 12
Item 7a.Quantitative and Qualitative Disclosures about Market Risk....... 33
Item 8. Financial Statements and Supplementary Data...................... 37
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure............................................. 76
PART III
Item 10 Directors and Executive Officers of the Registrant............... 76
Item 11.Executive Compensation........................................... 76
Item 12.Security Ownership of Certain Beneficial Owners and Management... 76
Item 13.Certain Relationships and Related Transactions................... 76
PART IV
Item 14.Exhibits, Financial Statement Schedules and Reports on Form 8-K.. 76
PART I
Item 1. Business
General
BNCCORP, Inc. ("BNCCORP"), a Delaware corporation, is a multibank holding
company registered under the Bank Holding Company Act of 1956 (the "BHCA")
headquartered in Bismarck, North Dakota. BNCCORP (together with its consolidated
subsidiaries, "BNC" or the "Company") provides a broad range of banking and
financial services to small and mid-size businesses, private banking clients and
consumers through its 17 facilities in North Dakota and Minnesota. BNCCORP
operates primarily through its two commercial banking subsidiaries, BNC National
Bank (together with its wholly-owned subsidiaries, BNC Insurance, Inc. and BNC
Asset Management, Inc., "BNC--North Dakota"), which is headquartered in Bismarck
and has 15 additional offices in North Dakota, and BNC National Bank of
Minnesota ("BNC--Minnesota," together with BNC--North Dakota, the "Banks"),
which is located in Minneapolis, Minnesota. On December 31, 1999, the Company
sold its asset-based lending subsidiary, BNC Financial Corporation ("BNC
Financial"). See Note 2 to the Consolidated Financial Statements included under
Item 8 of Part II for further details related to the sale of BNC Financial.
Growth Strategy
BNCCORP was formed in 1987 with the objective of acquiring and improving the
performance of strategically located banks in North Dakota. Since that time, the
banking industry has undergone rapid change. Many non-bank competitors have
entered into the banking business. The proliferation of non-bank competitors has
resulted in the availability of a multitude of financial products and services.
Technological advances have improved delivery systems and given customers
immediate access to these products and services. To remain competitive in this
rapidly changing environment, BNCCORP has expanded its objectives. See
"--Products and Services." The Company is committed to moving into the future as
a full-service provider of financial services including traditional banking,
trust, asset management, brokerage, insurance, financial planning and other
services.
BNC aims to achieve its objectives through expanded product and service
offerings and an emphasis on customer service and local relationship banking
with small and mid-size businesses, private banking clients and consumers.
Management believes that the Company's entrepreneurial approach to banking and
the introduction of new products and services will continue to attract small and
mid-size businesses which often are not of sufficient size to be of interest to
the larger banks in its market areas. See "--Market Areas." Such businesses
frequently have difficulty finding banking services that meet their specific
needs and have sought, and management believes will continue to seek, banking
institutions that are more relationship-oriented.
Acquisitions have played an important role in BNC's growth strategy. The Company
has completed several bank and non-bank acquisitions. The largest of these
acquisitions was the Company's July 1995 acquisition of seven North Dakota
branches, with aggregate deposits of approximately $104.8 million, from First
Bank fsb. See Note 2 to the Consolidated Financial Statements included under
Item 8 of Part II for a summary of mergers and acquisitions consummated during
the three-year period ended December 31, 1999. Management believes that its
increased product and service offerings and acquisitions have generated
significant growth for the Company. BNC's total assets have increased from
$118.0 million at December 31, 1992 to $456.9 million at December 31, 1999. The
Company's goal continues to be the creation of a well-capitalized $500 million
to $1 billion financial services organization focused on local relationship
banking. Efforts are ongoing to ensure that the executive management team and
operating systems are in place to achieve this goal. The Company's management
team combines experienced, conscientious overseers of traditional banking
services with aggressive and innovative marketers and managers of diversified
financial services. BNC will continue to emphasize internally-generated growth.
The Company will also seek growth opportunities through acquisition of financial
services companies or de novo branching in North and South Dakota, Minnesota
and, possibly, Iowa, Nebraska and Wisconsin. The Company expanded its growth
opportunities by opening a branch in Fargo, North Dakota during February 1999.
Segments
The Company has provided disclosure of financial and descriptive information
about reportable operating segments, including revenues from external customers,
a measure of profit or loss and total assets for each of the last three fiscal
years in Note 20 to the Consolidated Financial Statements included under Item 8
of Part II.
Market Areas
BNC's primary market areas are the Bismarck/Mandan and Fargo (North Dakota)
metropolitan areas, the Minneapolis/St.Paul (Minnesota) metropolitan area and
the rural communities surrounding the branch offices of BNC--North Dakota
(Crosby, Ellendale, Garrison, Kenmare, Linton, Stanley and Watford City, North
Dakota). During 1999, BNC--Minnesota continued to generate loan growth in the
Minnesota market area. BNC--North Dakota's Fargo branch also contributed to the
Company's loan growth. As of December 31, 1999, 46 percent of the Company's
loans were to borrowers located in North Dakota and 43 percent were to borrowers
located in Minnesota. The remaining 11 percent represents loans to borrowers in
other states. Other than brokered certificates of deposit and direct
non-brokered certificates of deposit obtained through national deposit networks,
each banking branch draws most of its deposits from its general market area. The
following table presents total deposits and loans originated by segment and at
each of BNC's geographic locations:
December 31, 1999
-----------------------
Year
Opened
or Total Loans
Location Acquired Deposits Originated
----------------------------- ---------- ---------- ----------
(in thousands)
BNC--North Dakota...........
Bismarck................. 1990 $ 125,924 $ 124,852
Crosby................... 1995 18,702 191
Ellendale................ 1995 9,901 758
Fargo.................... 1999 7,939 8,541
Garrison................. 1995 14,292 292
Kenmare.................. 1995 15,900 180
Linton................... 1987 47,379 9,699
Stanley.................. 1995 14,597 502
Watford City............. 1995 11,306 115
BNC--Minnesota.............. 1996 58,771 117,124
BNCCORP (parent company)... 1987 -- 16
---------- ----------
Total ................ $ 324,711 $ 262,270
========== ==========
Products and Services
Loans. The Company's loans, generated by both the North Dakota and Minnesota
segments, primarily consist of commercial and industrial loans, real estate
mortgage loans, real estate construction loans, agricultural loans, consumer
loans and lease financing. In allocating its assets among loans, investments and
other earning assets, BNC attempts to maximize return while managing risk at
acceptable levels. BNC's primary lending focus is on commercial loans and
owner-occupied real estate loans to small and mid-size businesses and
professionals. The Company offers a broad range of commercial and retail lending
services, including commercial revolving lines of credit, residential and
commercial real estate mortgage loans, consumer loans and equipment financing.
For more information on the lending activities of the Company, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Financial Condition--Loan Portfolio" included under Item 7 of Part
II.
Interest rates charged on loans may be fixed or variable and vary with the
degree of risk, loan term, underwriting and servicing costs, loan amount and the
extent of other banking relationships maintained with customers. Rates are
further subject to competitive pressures, the current interest rate environment,
availability of funds and government regulations.
Deposits. Each of BNC's bank branches for both the North Dakota and Minnesota
segments offers the usual and customary range of depository products provided by
commercial banks, including checking, savings and money market deposits and
certificates of deposit. During 1999, the Company introduced its Wealthbuilder
NOW and money market deposit accounts into each of its markets. These are
floating rate accounts indexed to the three-month Treasury Bill. The accounts
have been well-received by the public and have enabled the Company to increase
core deposits significantly. Deposits are insured by the Federal Deposit
Insurance Corporation ("FDIC") up to statutory limits. The Banks also purchase
brokered deposits and obtain direct non-brokered certificates of deposit through
national deposit networks when such transactions are beneficial to the Banks.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Financial Condition--Deposits" included under Item 7 of Part II.
Trust and Financial Services. Since January 1997, BNC--North Dakota's Financial
Services Division has provided a wide array of trust and other financial
services. Such services include employee benefit and personal trust
administration services, financial, tax, business and estate planning, estate
administration, agency accounts, employee benefit plan design and
administration, individual retirement accounts ("IRAs"), including custodial
self-directed IRAs, asset management, tax preparation, accounting and payroll
services.
Brokerage Services. BNC--North Dakota's subsidiary, BNC Asset Management, Inc.,
with offices in Bismarck, North Dakota and Minneapolis, Minnesota, provides
access to trading, investment management of institutional and individual
accounts, company-sponsored mutual funds and investment banking.
Insurance Services. Insurance services are offered through BNC--North Dakota's
subsidiary, BNC Insurance, Inc. Such services include: personal insurance
products such as home, automobile and other vehicle insurance, liability, and
universal and mortgage life insurance; business insurance such as commercial
property and general liability, workers' compensation, business automobile and
excess liability coverage; bonds; life, health and annuities; farm and crop
insurance; and commercial trucking insurance. The broad base of products and
services offered by the Company provides opportunities to solidify customer
relationships by meeting more of the banking and financial needs of the
Company's current customer base. They also present opportunities to establish
new customer relationships in the markets served by BNC.
Distribution Methods
BNC offers its banking and financial products and services through traditional
industry distribution methods including its network of bank, branch and other
offices. In addition, the Company offers 24-hour telephone banking services
through its voice response system, BNC Bankline. The Company also provides cash
management services to its commercial customers through its Xpress Cash
Management system. This system allows customers to process funds transfers,
wires, automated clearing house (ACH) transactions, stop payments and account
history inquiries using their office computers and modems. During 1999,
BNC--North Dakota obtained regulatory approval to operate mobile branches in the
Bismarck and Fargo, North Dakota market areas. Once operational, these branches
are expected to be of great convenience to bank customers. The Company has also
established an internet web site which is currently being used to provide
corporate financial information, current investment news and stock prices. The
Company anticipates that it will begin offering full Internet banking during
2000 in order to provide online banking to customers at any time and from
anywhere.
Risk Management
The uncertainty of whether events, expected or otherwise, will have an adverse
impact on the Company's capital or earnings is an inevitable component of the
business of banking. To ensure that the risks inherent in BNC's business are
identified, measured, controlled and monitored, the Company has established a
management committee composed of senior management from across the organization
(the "Management Committee"). The Management Committee is responsible for
determining the desired risk profile of the Company, allocating resources to the
lines of business, approving major investment programs that are consistent with
strategic priorities and risk appetite and making capital management decisions
to appropriately fund the Company's portfolio of investments. The Management
Committee addresses each of the major risk categories identified by the banking
regulators, if applicable, as well as any additional identified risks inherent
in the Company's business. Such risks include, but are not limited to, credit,
liquidity, interest rate, transaction, compliance, strategic and reputation
risk. In each identified risk area, the Management Committee measures the level
of risk to the Company based on the business it conducts and develops plans to
bring risks within acceptable tolerances. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Financial
Condition--Loan Portfolio and --Liquidity, Market and Credit Risk" included
under Item 7 of Part II and Item 7a of Part II, "Quantitative and Qualitative
Disclosures About Market Risk," for further discussion of credit, liquidity and
interest rate risk.
Competition
The deregulation of the banking industry, the increasing number of state laws
that permit multi-bank holding companies and the increasing availability of
nationwide interstate banking have heightened the level of competition in an
already intensely competitive market. The North Dakota and Minnesota market
areas are highly competitive banking environments. Competition is encountered in
seeking deposits, obtaining loan customers and in providing all of the other
banking and financial products and services offered by BNC. Principal
competitors include multi-regional financial institutions such as Norwest
Corporation, U.S. Bancorp and Community First Bankshares, Inc. as well as large
and small thrifts, independent banks, credit unions and many national and
regional brokerage houses. BNC also competes with other non-bank financial
institutions, including retail stores that maintain their own credit programs
and government agencies that make low cost or guaranteed loans available to
certain borrowers. Some of these competitors have substantially greater
resources and lending limits than BNC, and may offer certain services that BNC
does not provide. In addition, some of the non-bank financial institutions that
compete with BNC are not subject to the extensive federal regulations that
govern BNC. Management believes that many competitors have emphasized retail
banking and financial services, leaving the small and mid-size business market
underserved. This has allowed BNC to compete effectively by emphasizing customer
service, establishing long-term customer relationships and providing services
meeting the needs of such businesses and the individuals associated with them.
The banking and financial services industries are highly competitive, and the
future profitability of the Company will depend on its ability to continue to
compete successfully in its market areas. See "Supervision and
Regulation--Recently Enacted Legislation."
Supervision and Regulation
General. BNCCORP and the Banks are extensively regulated under federal and state
laws and regulations. These laws and regulations are primarily intended to
protect depositors and the federal deposit insurance funds, not investors in the
securities of BNCCORP. The following information briefly summarizes certain
material statutes and regulations affecting BNCCORP and the Banks and is
qualified in its entirety by reference to the particular statutory and
regulatory provisions. Any change in applicable laws, regulations or regulatory
policies may have a material effect on the business, operations and prospects of
BNCCORP and the Banks. The Company is unable to predict the nature or extent of
the effects that fiscal or monetary policies, economic controls or new federal
or state legislation may have on its business and earnings in the future. See
"--Recently Enacted Legisation."
Primary Regulators. BNCCORP is a bank holding company registered under the BHCA,
and is subject to regulation, supervision and examination by the Board of
Governors of the Federal Reserve System ("FRB"). BNCCORP is required to file
periodic reports with the FRB and such other reports as the FRB may require
pursuant to the BHCA. The Banks are national banking associations and are
subject to supervision, regulation and examination by the Office of the
Comptroller of the Currency ("OCC"). Since the deposits of the Banks are insured
by the FDIC, the Banks are also subject to regulation and supervision by the
FDIC. Additionally, the Banks are members of the Federal Reserve System.
Acquisitions and Permissible Activities. As a registered bank holding company,
BNCCORP is restricted in its acquisitions, certain of which are subject to
approval by the FRB. A bank holding company may not acquire, or may be required
to give certain notice regarding acquisitions of, companies considered to engage
in activities other than those determined by the FRB to be closely related to
banking or managing banks.
Transactions with Affiliates. Under Section 23A of the Federal Reserve Act (the
"Act"), certain restrictions are placed on loans and other extensions of credit
by the Banks to BNCCORP who is defined as an "affiliate" of the Banks under the
Act. Section 23B of the Act places standards of fairness and reasonableness on
other of the Banks' transactions with their affiliates.
Anti-Tying Restrictions. Bank holding companies and their affiliates are
prohibited from tying the provision of certain services, such as extensions of
credit, to other services offered by a holding company or its affiliates.
Restrictions on Loans to One Borrower. Under federal law, permissible loans to
one borrower by banks are generally limited to 15 percent of the bank's
unimpaired capital, surplus, undivided profits and credit loss reserves. The
Banks seek participations to accommodate borrowers whose financing needs exceed
their lending limits.
Loans to Executive Officers, Directors and Principal Stockholders. Certain
limitations and reporting requirements are also placed on extensions of credit
by the Banks to principal stockholders of BNCCORP and to directors and certain
executive officers of the Banks (and BNCCORP and its nonbank subsidiaries
provided certain criteria are met) and to "related interests" of such principal
stockholders, directors and officers. In addition, any director or officer of
BNCCORP or the Banks or principal stockholder of BNCCORP may be limited in his
or her ability to obtain credit from financial institutions with which the Banks
maintain correspondent relationships.
Interstate Banking and Branching. Interstate banking and branching provisions of
federal and state laws may place certain limitations on expansion by bank
holding companies or banks.
Capital Adequacy. The capital adequacy of BNCCORP and the Banks is monitored by
the federal regulatory agencies using a combination of risk-based and leverage
ratios. Failure to meet the applicable capital guidelines could subject BNCCORP
or the Banks to supervisory or enforcement actions. In addition, BNCCORP could
be required to guarantee a capital restoration plan of one or more of its Banks,
should such Banks become "undercapitalized" under capital guidelines. See Note
11 to the Consolidated Financial Statements included under Item 8 of Part II for
further discussion regarding the capital status of BNCCORP and its subsidiaries.
Dividend Restrictions. Federal rules also limit a bank's ability to pay
dividends to its parent bank holding company in excess of certain amounts or if
the payment would result in the bank being considered "undercapitalized" under
capital guidelines.
Community Reinvestment Act. Under the Community Reinvestment Act ("CRA"), the
Banks are encouraged to respond to the credit and other needs of the communities
they serve. Bank performance under the CRA is periodically tested and the
federal bank regulatory agencies consider CRA ratings in connection with
acquisitions involving the change in control of a financial institution.
Deposit Insurance. FDIC-insured depository institutions that are members of the
FDIC's Bank Insurance Fund and Savings Association Insurance Fund pay insurance
premiums at rates based on their assessment risk classification, which is
determined in part based on the Bank's capital ratios and in part on factors
that the FDIC deems relevant to determine the risk of loss to the insurance
funds. The Banks also pay additional assessments that are used to pay certain
Financing Corporation obligations issued between 1987 and 1989 to resolve failed
savings and loan associations.
Cross-Guarantee. The Financial Institutions, Reform, Recovery and Enforcement
Act of 1989 provides for cross-guarantees of the liabilities of insured
depository institutions pursuant to which any bank subsidiary of a bank holding
company may be required to reimburse the FDIC for any loss or anticipated loss
to the FDIC that arises from a default of any of such holding company's other
subsidiary banks or assistance provided to such an institution in danger of
default.
Support of Banks. Bank holding companies are also subject to the "source of
strength doctrine" which requires such holding companies to serve as a source of
"financial and managerial" strength for their subsidiary banks.
Conservator and Receivership Powers. Federal banking regulators have broad
authority to place depository institutions into conservatorship or receivership
to include, among other things, appointment of the FDIC as conservator or
receiver of an undercapitalized institution under certain circumstances. If
either of the Banks was placed into conservatorship or receivership, because of
the cross-guarantee provisions of the Federal Deposit Insurance Act, as amended,
BNCCORP, as the sole stockholder of the Bank, would likely lose its investment
in the Bank.
Consumer Laws and Regulations. In addition to the laws and regulations discussed
herein, the Banks are also subject to certain consumer laws and regulations that
are designed to protect customers in transactions with banks. These include, but
are not limited to, the Truth in Lending Act, the Truth in Savings Act, the
Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal
Credit Opportunity Act and the Fair Housing Act. These laws mandate certain
disclosure requirements and regulate the manner in which financial institutions
must deal with customers when taking deposits or making loans to such customers.
Recently Enacted Legislation. In November 1999, President Clinton signed into
law the Gramm-Leach-Bliley Act, wide-reaching legislation which modernizes the
laws governing the financial services industry (the "Financial Modernization
Act"). This comprehensive legislative package contains provisions of benefit to
the banking industry, including language which expands the powers of banks and
bank holding companies to sell any financial product or service, closes the
unitary thrift loophole, reforms the Federal Home Loan Bank ("FHLB") System to
increase community banks' access to loan funding, protects banks from
discriminatory state insurance regulation and establishes a new framework for
the regulation of bank and bank holding company securities brokerage and
underwriting activities. The law also includes new provisions in the privacy
area, restricting the ability of financial institutions to share nonpublic
personal customer information with third parties.
The Company is in the process of reviewing the provisions of the Financial
Modernization Act as well as related implementing regulations as these
regulations are being released by the respective bank regulatory or other
federal agencies. A comprehensive action plan for implementing the new law and
regulations is in the process of being developed. This plan will include such
revisions to BNC's operations, policies and procedures as are deemed appropriate
to ensure compliance with the new legislation and its implementing regulations.
Changing Regulatory Structure. The FRB, OCC and FDIC have extensive authority to
police unsafe or unsound practices and violations of applicable laws and
regulations by depository institutions and their holding companies. The
agencies' authority has been expanded by federal legislation in recent years. In
addition, the North Dakota Department of Banking and Financial Institutions and
the Minnesota Department of Commerce possess significant authority to address
violations of their respective state's banking laws by banks operating in their
respective states by enforcement and other supervisory actions. Additionally,
under the Financial Modernization Act some bank and bank holding company
securities brokerage activities could become regulated by the Securities and
Exchange Commission.
As indicated above, the laws and regulations affecting banks and bank holding
companies have changed significantly in recent years, and there is reason to
expect that changes will continue in the future, although it is difficult to
predict the outcome of these changes.
Monetary Policy. The monetary policy of the FRB has a significant effect on the
operating results of bank holding companies and their subsidiaries. The FRB uses
the various means at its disposal to influence overall growth and distribution
of bank loans, investments and deposits and interest rates charged on loans or
paid on deposits. FRB monetary policies have materially affected the operations
of commercial banks in the past and are expected to continue to do so in the
future. The nature of future monetary policies and the effect of such policies
on the business and earnings of BNCCORP and its subsidiaries cannot be
predicted.
Employees
At December 31, 1999, BNC had 190 employees, including 179 full-time equivalent
employees. None of BNC's employees is covered by a collective bargaining
agreement and management believes that its relationship with its employees is
good.
Item 2. Properties
The principal offices of BNCCORP and BNC--North Dakota are located in BNC's main
office building at 322 East Main Avenue, Bismarck, North Dakota. The building is
owned by BNC--North Dakota. BNC--North Dakota also owns branch offices at 219
South 3rd Street and 807 East Century Avenue and an additional office building
at 116 North 4th Street in Bismarck. It also owns its banking facilities in
Linton, Crosby, Ellendale, Kenmare and Stanley, North Dakota as well as a
temporary facility located on its permanent site in Fargo, North Dakota. The
Company plans to complete construction of a permanent facility in Fargo by May
2000.
BNC--North Dakota's facilities at 100 West Main Street (Mandan), 500 North 9th
Street (Bismarck), Watford City and Garrison, North Dakota and the land at South
3rd Street (Bismarck) are leased. BNC-North Dakota is also leasing a facility at
4656 Amber Valley Parkway in Fargo, pending completion of its permanent facility
to be located at 3137 32nd Avenue SW. The facilities occupied by BNC--Minnesota
and BNC Asset Management, Inc. at 333 South Seventh Street, Minneapolis,
Minnesota are also leased.
All owned and leased properties are considered in good operating condition and,
except for the Fargo location, are believed adequate for the Company's present
and foreseeable future operations. BNC does not anticipate any difficulty in
leasing additional suitable space upon expiration of present lease terms. See
Note 16 to the Consolidated Financial Statements included under Item 8 of part
II for additional information concerning lease and other commitments and
construction of the Fargo facility.
Item 3. Legal Proceedings
The Company's material pending legal actions are discussed in Note 17 to the
Consolidated Financial Statements included under Item 8 of Part II and are
incorporated herein by reference.
The Company is currently not a party to any other material legal proceedings.
Periodically, and in the ordinary course of business, various claims and
lawsuits which are incidental to BNC's business may be brought against or by
BNC, such as claims to enforce liens, condemnation proceedings on properties in
which BNC holds security interests, claims involving the making and servicing of
real property loans and other issues incidental to the Company's business. In
the opinion of management, the resolution of these matters will not have a
material adverse effect on the Company's financial position or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the quarter ended
December 31, 1999.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
BNCCORP's common stock, $.01 par value ("Common Stock"), is traded on the Nasdaq
Stock Market under the symbol "BNCC".
The following table lists the high and low sales prices of the Common Stock for
the periods indicated as reported by the Nasdaq Stock Market. The quotes
represent "inter-dealer" prices without adjustment or mark-ups, mark-downs or
commissions and may not represent actual transactions.
January 1 - Current date For the Years Ended December 31,
------------------------ -----------------------------------
2000 1999 1998
------------------------ ---------------- -----------------
Period High Low High Low High Low
----------- ------------ ------- ------- ------- -------
First Quarter...... $ 7.25 $ 5.81 $ 11.25 $ 8.63 $ 20.50 $ 16.25
Second Quarter..... -- -- $ 9.38 $ 7.63 $ 23.25 $ 16.88
Third Quarter...... -- -- $ 9.00 $ 7.25 $ 19.00 $ 12.88
Fourth Quarter..... -- -- $ 8.25 $ 5.75 $ 13.00 $ 9.00
On March 15, 1999, there were 110 record holders and approximately 1,300
beneficial owners of the Company's Common Stock.
BNCCORP's policy is to retain its earnings to support the growth of its
business. The board of directors of BNCCORP has never declared cash dividends on
its Common Stock and does not plan to do so in the foreseeable future. The
ability of BNCCORP to pay cash dividends largely depends on the amount of cash
dividends paid to it by the Banks. Capital distributions, including dividends,
by the Banks are subject to federal regulatory restrictions tied to each
institution's earnings and capital. See "Supervision and Regulation--Dividend
Restrictions" included under Item 1 of Part I.
Item 6. Selected Financial Data
The selected consolidated financial data presented below under the captions
"Income Statement Data" and "Balance Sheet Data" as of and for the years ended
December 31, 1999, 1998, 1997, 1996 and 1995 are derived from the historical
audited consolidated financial statements of the Company. The Consolidated
Balance Sheets as of December 31, 1999, 1998, 1997 and 1996 and the related
Consolidated Statements of Income, Comprehensive Income, Stockholders' Equity
and Cash Flows for each of the five years in the period ended December 31, 1999
were audited by Arthur Andersen LLP, independent public accountants. The
financial data below should be read in conjunction with and are qualified by the
Consolidated Financial Statements and the notes thereto included under Item 8.
Selected Financial Data (1)
For the Years Ended December 31,
---------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- ---------
(dollars in thousands, except share data)
Income Statement Data:
Total interest income............ $ 28,931 $ 27,801 $ 25,232 $ 20,597 $ 15,289
-------- -------- -------- -------- ---------
Total interest expense........... 16,574 15,152 13,132 10,945 8,583
-------- -------- -------- -------- ---------
Net interest income.............. 12,357 12,649 12,100 9,652 6,706
Provision for credit losses...... 1,138 1,201 2,518 690 168
Noninterest income............... 6,068 4,843 3,928 3,622 3,397
Noninterest expense.............. 18,215 13,379 11,256 10,286 8,094
Income taxes (benefit)........... (399) 1,030 955 1,152 679
-------- -------- -------- --------- ---------
Income (loss) from continuing
operations.................... $ (529) $ 1,882 $ 1,299 $ 1,146 $ 1,162
======== ======== ======== ======== =========
Balance Sheet Data: (at end of
period)
Total assets..................... $456,877 $372,240 $345,630 $283,716 $241,014
Investments and federal funds
sold.......................... 154,492 96,601 94,624 66,391 97,366
Loans............................ 262,051 247,181 220,149 197,435 120,683
Allowance for credit losses...... (2,872) (2,854) (2,919) (1,545) (1,048)
Total deposits................... 324,711 284,499 262,824 239,770 211,048
Short-term borrowings............ 88,700 49,290 46,503 11,437 1,000
Long-term borrowings............. 14,470 9,195 8,285 5,937 3,354
Stockholders' equity............. 23,149 25,255 23,148 21,595 20,628
Book value per common share
outstanding................... $ 9.65(2) $ 10.57(3)$ 9.64(4) $ 8.99(4)$ 8.59(4)
Earnings Performance Data:
Return on average total assets... (.14)% .54% .42% .44% .59%
Return on average stockholders'
equity........................ (2.50)% 8.48% 6.16% 5.52% 8.25%
Net interest margin.............. 3.41% 3.88% 4.27% 4.05% 3.69%
Net interest spread.............. 3.09% 3.43% 3.82% 3.61% 3.26%
Basic earnings (loss) per common
share.........................$ (0.22) $0.79 $0.54 $0.48 $0.63
Diluted earnings (loss) per
common share..................$ (0.22) $0.75 $0.54 $0.48 $0.63
Balance Sheet and Other Key
Ratios:
Nonperforming assets to total
assets........................ 0.63% 1.21% .43% .16% .20%
Nonperforming loans to total
loans......................... 0.63% .97% .68% .15% .40%
Net loan charge-offs to average
loans......................... (.45)% (.54)% (.53)% (.11)% (.03)%
Allowance for credit losses to
total loans................... 1.10% 1.15% 1.33% .78% .87%
Allowance for credit losses
to nonperforming loans........ 273% 119% 195% 540% 218%
Average stockholders' equity to
average total assets.......... 5.41% 6.33% 6.89% 8.05% 7.11%
- -------------------------
(1) From continuing operations for all periods presented.
(2) Based on total common shares outstanding of 2,399,980.
(3) Based on total common shares outstanding of 2,390,184.
(4) Based on total common shares outstanding of 2,402,126
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company's financial performance in 1999 reflected the growing customer
acceptance of BNC's broadened financial services offerings as well as an
expanding deposit base, although the benefits of the deposit growth were more
than offset by changes in market interest rates. Net interest income for the
year ended December 31, 1999, was $12.4 million, as compared with $12.6 and
$12.1 million reported in the previous two years. Noninterest income, largely
from insurance commissions, loan fees and brokerage income, rose sharply to $6.1
million in 1999 from $4.8 and $3.9 million in 1998 and 1997, respectively, due
primarily to the dramatic growth of BNC's insurance and brokerage businesses.
1999 results reflected a one-time $438,000 gain on the sale of the Company's
former asset-based lending subsidiary, as well as $2.3 million in write-downs to
the value of certain nonperforming assets. The Company sold BNC Financial
effective December 31, 1999. The Company recorded 1999 net income of $242,000,
or $0.10 per share on a diluted basis, compared with net income of $2.3 million,
or $0.91 per share (diluted), for 1998 and net income of $1.4 million, or $0.59
per share (diluted), for 1997.
Performance highlights include:
*Deposits increased 14 percent during 1999, to $324.7 million; the growth
was driven by the introduction of the Wealthbuilder family of indexed NOW
and money market accounts and the opening of BNC-North Dakota's Fargo
branch.
*Loans and leases increased 6 percent, to $262.1 million due primarily to
loan growth in the Fargo and Minneapolis markets.
*Total assets increased 15 percent, to $456.9 million.
*Long-term debt was reduced by $24.5 million during the 4th quarter of
1999; the Company used proceeds from the sale of BNC Financial to pay down
long-term debt which had been incurred primarily for purposes of funding
BNC Financial's asset-based loan portfolio.
Results of Operations
Net Interest Income. Net interest income, the difference between total interest
income earned on earning assets and total interest expense paid on
interest-bearing liabilities, is the Company's principal source of earnings. The
amount of net interest income is affected by changes in the volume and mix of
earning assets, the level of rates earned on those assets, the volume and mix of
interest-bearing liabilities and the level of rates paid on those liabilities.
The following table sets forth, for the periods indicated, certain information
relating to BNC's average balance sheets and reflects the yield on average
assets and costs of average liabilities. Such yields and costs are derived by
dividing income and expense by the average balance of assets and liabilities.
All average balances have been derived from monthly averages which are
indicative of daily averages.
Analysis of Average Balances, Interest and Yields/Rates (1)
For the Years ended December 31,
--------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------ ------------------------------- -----------------------------
Interest Average Interest Average Interest Average
Average earned yield Average earned Yield Average earned yield
Balance or or Balance or or Balance or or
paid cost paid Cost paid cost
---------- --------- --------- ---------- ---------- --------- ---------- --------- --------
(dollars in thousands)
Assets
Federal funds sold....... $ 1,818 $ 90 4.95% $ 5,336 $ 289 5.42% $ 5,650 $ 306 5.42%
Taxable investments...... 105,145 6,372 6.06% 87,464 5,269 6.02% 64,803 4,158 6.42%
Tax-exempt investments... 7,788 386 4.96% 1,775 95 5.35% 1,112 71 6.38%
Loans (2)................ 250,158 22,083 8.83% 234,342 22,148 9.45% 214,053 20,697 9.67%
Allowance for credit
losses................ (2,890) -- (2,941) -- (2,205) --
---------- --------- ---------- ---------- ---------- ---------
Total interest-earning
assets (3)....... 362,019 28,931 7.99% 325,976 27,801 8.53% 283,413 25,232 8.90%
Noninterest-earning assets:
Cash and due from
banks.......... 7,704 6,733 6,074
Other.............. 22,584 17,728 16,726
---------- ---------- ----------
Total assets.. $ 392,307 $ 350,437 $ 306,213
========== ========== ==========
Liabilities and Stockholders'
Equity
Deposits:
NOW and money market
accounts......... $ 91,671 3,632 3.96% $ 63,115 2,128 3.37% $ 50,582 1,580 3.12%
Savings............. 6,294 129 2.05% 8,717 197 2.26% 8.904 206 2.31%
Certificates of deposit:
Under $100,000...... 125,470 6,469 5.16% 130,759 7,332 5.61% 127,092 7,110 5.59%
$100,000 and over... 43,140 2,307 5.35% 36,704 2,152 5.86% 41,581 2,386 5.74%
---------- --------- ---------- ---------- ---------- ---------
Total interest-bearing
deposits.............. 266,575 12,537 4.70% 239,295 11,809 4.93% 228,159 11,282 4.94%
Short-term borrowings:
Securities and loans
sold under
agreements to
repurchase and
federal funds
purchased........ 21,685 1,129 5.21% 6,745 348 5.16% 7,262 413 5.69%
FHLB notes payable. 40,308 2,174 5.39% 42,831 2,346 5.48% 15,468 881 5.70%
Long-term borrowings..... 9,872 734 7.44% 8,290 649 7.83% 7,599 556 7.32%
---------- --------- ---------- ---------- ---------- ---------
Total interest-
bearing
liabilities.... 338,440 16,574 4.90% 297,161 15,152 5.10% 258,488 13,132 5.08%
Noninterest-bearing demand
accounts................... 27,094 24,827 20,357
---------- ---------- ----------
Total deposits and
interest-bearing
liabilities........... 365,534 321,988 278,845
Other noninterest-bearing
liabilities................ 5,567 6,264 6,262
---------- ---------- ----------
Total liabilities....... 371,101 328,252 285,107
Stockholders' equity.......... 21,206 22,185 21,106
---------- ---------- ----------
Total liabilities and
stockholders'
equity............... $ 392,307 $ 350,437 $ 306,213
========== ========== ==========
Net interest income.......... $ 12,357 $ 12,649 $ 12,100
========= ========= =========
Net interest spread........... 3.09% 3.43% 3.82%
======== ======== ========
Net interest margin........... 3.41% 3.88% 4.27%
======== ======== ========
Ratio of average
interest-earning assets
to average interest-
bearing liabilities...... 106.97% 109.70% 109.64%
=========== ========== ==========
--------------------
(1) From continuing operations for all periods presented.
(2) Interest income does not include loan origination fees other than those
amortized and included as an adjustment to loan yield as required under
Statement of Financial Accounting Standards No. 91, "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring
Loans and Initial Direct Costs of Leases." Average nonaccrual loans are
included in average loans outstanding.
(3) Yields do not include adjustments for tax-exempt interest because such
interest is not material.
The following table illustrates, for the periods indicated, the dollar amount of
changes in BNC's interest income and interest expense for the major components
of interest-earning assets and interest-bearing liabilities and distinguishes
between the increase related to higher outstanding balances and the volatility
of interest rates. Changes in net interest income due to both volume and rate
have been included in the changes due to rate:
Analysis of Changes in Net Interest Income (1)
For the Years Ended December 31,
----------------------------------------------
1999 Compared to 1998 1998 Compared to 1997
--------------------- ------------------------
Change Due to Change Due to
---------------- ----------------
Volume Rate Total Volume Rate Total
------- ------- ------ ------- ------ -------
(in thousands)
Interest-Earning Assets
Federal funds sold....................$ (190) $ (9) $ (199)$ (17)$ -- $ (17)
Investments........................... 1,424 (30) 1,394 1,496 (361) 1,135
Loans................................. 1,495 (1,560) (65) 1,962 (511) 1,451
------- ------- ------ ------- ------ -------
Total increase (decrease) in
interest income................. 2,729 (1,599) 1,130 3,441 (872) 2,569
------- ------- ------ ------- ------ -------
Interest-Bearing Liabilities
NOW and money market accounts......... 962 542 1,504 392 156 548
Savings............................... (55) (13) (68) (4) (5) (9)
Certificates of Deposit:
Under $100,000..................... (297) (566) (863) 206 16 222
$100,000 and over.................. 377 (222) 155 (280) 46 (234)
Short-term borrowings:
Securities and loans sold under
agreements to repurchase and
federal funds purchased......... 771 10 781 (29) (36) (65)
FHLB notes payable................. (138) (34) (172) 1,558 (93) 1,465
Long-term borrowings.................. 124 (39) 85 50 43 93
------- ------- ------ ------- ------ -------
Total increase (decrease) in
interest expense.............. 1,744 (322) 1,422 1,893 127 2,020
======= ======= ====== ======= ====== =======
Increase (decrease) in net
interest income................ $ 985 $(1,277)$ (292)$1,548 $ (999)$ 549
======= ======= ====== ======= ====== =======
- ----------------------
(1) From continuing operations for all periods presented.
Year ended December 31, 1999 compared to year ended December 31, 1998. Net
interest income decreased $292,000, or 2.3 percent, to $12.4 million as compared
to $12.6 million. Net interest spread and net interest margin declined to 3.09
and 3.41 percent, respectively. The following condensed information summarizes
the major factors combining to create the changes to net interest income, spread
and margin. Lettered explanations following the summary describe causes of the
changes in these major factors.
Net Interest Income Analysis (1)
For the Years
Ended December Change
31,
------------------ ----------------
1999 1998
------- ---------
(amounts in
millions)
Total interest income increased............. $ 28.9 $ 27.8 $ 1.1 4%
Due to:
Increase in average earning assets...... $ 362.0 $ 326.0 $ 36.0 11%
Driven by:
Increase in average loans (a)........... $ 250.2 $ 234.3 $ 15.9 7%
Increase in average investments (b). $ 112.9 $ 89.2 $ 23.7 27%
The increases in average earning assets
volume were offset by:
Decreased yield on earning assets....... 7.99% 8.53% -0.54% -6%
Driven by:
Decreased yield on loans (c)............ 8.83% 9.45% -0.62% -7%
Mix change in earning asset portfolio--
Average loans as a percent of total
interest-earning assets ........... 69% 72% -3.0% -4%
Total interest expense increased............ $ 16.6 $ 15.2 $ 1.4 9%
Due to:
Increase in average interest-bearing
liabilities.......................... $ 338.4 $ 297.2 $ 41.2 14%
Driven by:
Increase in average interest-bearing
deposits (d)......................... $ 266.6 $ 239.3 $ 27.3 11%
Increase in average borrowings (e)...... $ 71.9 $ 57.9 $ 14.0 24%
These increases were somewhat offset by:
Decrease in cost of interest-bearing
deposits (f)......................... 4.70% 4.93% -0.23% -5%
Decrease in cost of borrowings (g)...... 5.62% 5.78% -0.16% -3%
- --------------------
(1) From continuing operations for all periods presented.
(a) Loan growth primarily attributable to increases in loans originated at
BNC-Minnesota and BNC-North Dakota's Fargo location.
(b) The Company has increased its investment securities holdings primarily
through FHLB borrowings.
(c) The decreased loan yield is reflective of the 75 basis point decline in the
prime rate late in 1998 as well as a decrease in loan pricing spread to prime
rate due to competitive pressures in all markets.
(d) Deposit growth primarily attributable to the introduction of the
Wealthbuilder NOW and money market accounts.
(e) Increased FHLB borrowings for the purpose of purchasing investment
securities.
(f) Reduced costs on certificates of deposit ("CDs") caused by the overall
decreased rate environment and related lower CD renewal and offering rates.
These rate reductions were somewhat offset by increased costs in the NOW and
money market deposit category (related to the Wealthbuilder accounts).
(g) Rates are reflective of the overall decreased rate environment.
Net interest income and margin in future periods are expected to be impacted by
several factors. Recent increases in the prime rate will improve interest
income and yields on loans. Additionally, the Company has increased its earning
asset portfolio by purchasing investment securities funded primarily through
FHLB borrowings. While the additional investments will increase interest
income, net interest income and earnings, they can be expected to negatively
impact yield on earning assets and net interest margin because yields on such
investments are typically lower than those achieved in the loan portfolio.
Many factors, including, but not limited to, the competitive environment in the
markets in which the Company operates, the multitude of financial and investment
products available to the public and the monetary policies of the FRB, can
materially impact the Company's operating results. Therefore, management cannot
predict, with any degree of certainty, prospects for net interest income in
future periods. See "Supervision and Regulation Monetary Policy" included under
Item 1 of Part I. See also Item 7a, "Quantitative and Qualitative Disclosures
About Market Risk," for information relating to the impact of fluctuating
interest rates on the Company's net interest income.
Year ended December 31, 1998 compared to year ended December 31, 1997. Net
interest income increased $549,000, or 5 percent, to $12.6 million as compared
to $12.1 million. Net interest spread and net interest margin declined to 3.43
and 3.88 percent, respectively. The following condensed information summarizes
the major factors combining to create the changes to net interest income, spread
and margin. Lettered explanations following the summary describe causes of the
changes in these major factors:
Net Interest Income Analysis (1)
For the Years
Ended December 31, Change
------------------ ----------------
1998 1997
------- ---------
(amounts in
millions)
Total interest income increased............. $ 27.8 $ 25.2 $ 2.6 10%
Due to:
Increase in average earning assets...... $326.0 $ 283.4 $ 42.6 15%
Driven by:
Increase in average loans (a)........... $234.3 $ 214.1 $ 20.2 9%
Increase in average taxable
investments (b).................. $ 87.5 $ 64.8 $ 22.7 35%
The increases in average earning assets
volume were offset by:
Decreased yield on earning assets....... 8.53% 8.90% -0.37% -4%
Driven by:
Decreased yield on loans (c)............ 9.45% 9.67% -0.22% -2%
Decreased yield on taxable
investments (d).................. 6.02% 6.42% -0.40% -6%
Mix change in earning asset portfolio --
Average loans as a percent of total
interest-earning assets (e)........ 72% 76% -4.0% -5%
Total interest expense increased............ $ 15.2 $ 13.1 $ 2.1 16%
Due to:
Increase in average interest-bearing
liabilities.......................... $297.2 $ 258.5 $ 38.7 15%
Increased cost on interest-bearing
liabilities.......................... 5.10% 5.08% 0.02% 0.4%
Driven by:
Increase in average interest-bearing
deposits (f)......................... $239.3 $ 228.2 $ 11.1 5%
Increase in average borrowings (g)...... $ 57.9 $ 30.3 $ 27.6 91%
Mix change in interest-bearing liability
portfolio --
Average borrowings as a percent of
total interest-bearing liabilities(h) 19% 12% 7% 58%
These increases with somewhat offset by:
Decrease in cost of borrowings (i)...... 5.78% 6.10% -0.32% -5%
- --------------------
(1) From continuing operations for all periods presented.
(a) Loan growth primarily attributable to increases in loans originated at
BNC-Minnesota.
(b) Increase in average taxable investments is primarily attributable to the
purchase of $18.8 million of fixed rate mortgage-backed securities late in 1997
as part of an interest rate risk management strategy.
(c) 75 basis point decline in prime rate late in 1998 coupled with decreases in
loan pricing spread to prime rate due to competitive pressures in all markets.
(d) Primarily attributable to the significant decrease in the Treasury yield
curve that occurred during the second half of 1998 and the reinvestment of cash
flows from maturing mortgage-backed securities and other investments at then
current, lower rates.
(e) Average loans increased by 9 percent. However, average taxable investments
increased by $22.7 million, or 35 percent. Late in 1997, the Company purchased
$18.8 million of fixed rate mortgage-backed securities funded with an advance
from the FHLB as part of an interest rate risk management strategy.
(f) Deposit growth from both BNC-North Dakota and BNC-Minnesota, primarily money
market deposit accounts.
(g) The Company relied more heavily on borrowings to fund growth, including
increased FHLB borrowings. The borrowing rates charged by the FHLB were often
cost effective compared to offering top of market rates for time CD's. Increase
also reflects issuance of the Company's 8 5/8 percent Subordinated Notes in May
1997 (outstanding 12 months during 1998 versus 7 months during 1997).
(h) Increased reliance on borrowing caused a higher percentage of the
interest-bearing liabilities portfolio to be comprised of borrowings with
generally higher costs than interest-bearing deposits. However, the borrowing
rates charged by the FHLB were often cost effective compared to offering top of
market rates for time certificates of deposits, although these borrowing rates
are higher than costs of interest-bearing checking and money market accounts.
(i) Lower overall average cost on federal funds purchased and FHLB borrowings
due to 75 basis point decline in federal funds rate late in 1998 along with a
similar decrease in rates at the FHLB.
Provision for Credit Losses. Management determines a provision for credit losses
which it considers sufficient to maintain the Company's 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. See Note 1 to the Consolidated Financial Statements
included under Item 8 and "--Financial Condition--Loan Portfolio--Allowance for
Credit Losses" for further discussion of the components of the allowance for
credit losses and the Company's methodology for assessing the adequacy of the
allowance.
The provision for credit losses for the year ended December 31, 1999 was $1.1
million as compared to $1.2 million in 1998 and $2.5 million in 1997.
Noninterest Income. The following table presents, for the periods indicated, the
major categories of the Company's noninterest income as well as the amount and
percent of change between each of the periods presented. Related information and
material changes are discussed in lettered explanations following the table:
Noninterest Income (1)
Increase (Decrease)
-------------------------------------
For the Years Ended 1999 - 1998 1998 -1997
December 31,
--------------------------- ----------------- ----------------
1999 1998 1997 $ % $ %
-------- -------- ------- ------- ------- ----- ---------
(in thousands)
Insurance Commissions $2,045 $1,769 $1,694 $ 276 16% (a) $ 75 4%
Fees on loans........ 1,435 1,376 884 59 4% 492 56% (b)
Brokerage income..... 797 53 46 744 1,404% (c) 7 15%
Service charges...... 536 566 471 (30) (5)% 95 20%
Net gain on sales of
securities ........ 198 130 8 68 52% 122 1,525% (d)
Rental income........ 121 43 56 78 181% (13) (23)%
Other................ 936 906 769 30 3% 137 18% (e)
-------- -------- ------- ------- -----
Total noninterest
income............... $6,068 $4,843 $3,928 $1,225 25% 915 23%
======== ======== ======= ======= =====
- --------------------
(1) From continuing operations for all periods presented.
(a) Increased insurance commissions resulted from an increase in the average
number of insurance producers as well as successful efforts to cross-sell
insurance to bank customers.
(b) The increase in loan fees is largely attributable to loans generated and
sold by BNC-Minnesota. Management cannot predict with any degree of certainty
the amount of loans which will be originated and related loan fees which will
be recognized in future periods.
(c) Increase is attributable to the addition of brokerage staff in BNC-North
Dakota's subsidiary, BNC Asset Management, Inc.
(d) Proceeds from securities sold were $58.9 million in 1998 as compared to
$27.2 million in 1997. See Note 4 to the Consolidated Financial Statements
included under Item 8 for further information related to sales of investment
securities.
(e) The increase in other noninterest income in 1998 was attributable to a
combination of factors including increased revenue from trust and other
professional services and increased income from automated teller machines.
Noninterest Expense. The following table presents, for the periods indicated,
the major categories of the Company's noninterest expense as well as the amount
and percent of change between each of the periods presented. Related information
and material changes are discussed in lettered explanations below the table:
Noninterest Expense (1)
Increase (Decrease)
-------------------------------------
For the Years Ended
December 31, 1999 - 1998 1998 - 1997
--------------------------- ------------------ -----------------
1999 1998 1997 $ % $ %
------- -------- -------- ------- -------- ------- ------
(in thousands)
Salaries and employee
benefits............ $ 8,854 $ 7,463 $ 6,184 $ 1,391 19% (a)$ 1,279 21% (a)
Write-down of other real
estate owned and
repossessed assets.... 2,271 2 -- 2,269 (b) 2 --
Depreciation and
amortization........ 1,586 1,498 1,310 88 6% 188 14% (c)
Occupancy.............. 1,248 988 948 260 26% (a) 40 4%
Professional services.. 1,214 766 552 448 58% (d) 214 39% (d)
Office supplies,
telephone and postage. 941 749 647 192 26% (a) 102 16% (a)
Marketing and promotion 621 455 363 166 36% (e) 92 25%
FDIC and other assessments 191 184 171 7 4% 13 8%
Other.................. 1,289 1,274 1,081 15 1% 193 18% (a)
------- -------- ------- -------- -------
Total noninterest
expense............. $ 18,215 $13,379 $11,256 $ 4,836 36% 2,123 19%
======= ======== ======= ======== =======
Efficiency ratio (f)... 98.86% 76.49% 70.23% 22.37% (f) 6.26%
- --------------------
(1) From continuing operations for all periods presented.
(a) Increases represent personnel additions at BNC Asset Management, Inc., BNC
Insurance, Inc. and BNC-North Dakota's Fargo branch as well as related
occupancy, supplies, telephone, postage and other miscellaneous expenses.
(b)Write-downs to estimated net realizability of other real estate owned and
repossessed assets.
(c) Increase in the amount of fixed assets being depreciated including assets
related to BNC Asset Management, Inc. and BNC-North Dakota's Fargo branch.
(d)Increase represents an increase in brokerage costs at BNC Asset Management,
Inc., legal fees related to the proceedings against a former loan officer and
other costs associated with other real estate owned and repossessed assets.
(e) Increased advertising, public relations and promotional expenses, including
fees paid to an investor relations firm engaged late in 1998.
(f) Noninterest expense divided by an amount equal to net interest income plus
noninterest income. Management does not expect this negative trend in efficiency
ratio will continue. Noninterest expense for 1999 included $2.3 million in
write-downs of nonperforming assets. Excluding these write-downs, the efficiency
ratio for 1999 would have been 86.53 percent. Additionally, during the third
quarter of 1999, the Company reorganized. Average full time equivalent employees
for the fourth quarter of 1999 and for the first two months of 2000 were 177 as
compared to 198 for the third quarter of 1999. The year-to-date efficiency ratio
for 2000 through the month of February was 79.01 percent. For the month of
February 2000, the efficiency ratio was 75.41 percent, an improvement over both
the adjusted 1999 and 1998 ratios.
Financial Condition
Investment Securities. BNC's investment policy is designed to enhance net income
and return on equity through prudent management of risk, ensure liquidity for
cash-flow requirements, help manage interest rate risk, ensure collateral is
available for public deposits, advances and repurchase agreements and manage
asset diversification. In managing the portfolio and the composition of the
entire balance sheet, the Company seeks a balance among earnings, credit and
liquidity considerations, with a goal of maximizing the longer-term overall
profitability of the Company.
Investments are centrally managed in order to maximize compliance (federal laws
and regulations place certain restrictions on the amounts and types of
investments BNC may hold) and effectiveness of overall investing activities. The
primary goal of BNC's investment policy is to contribute to the overall
profitability of the Company. The objective is to purchase and own securities
and combinations of securities with good risk/reward characteristics. "Good"
risk/reward securities are those identified through thorough analysis of the
cash flows and potential cash flows as well as market value and potential market
value of the security in question given various interest rate scenarios.
Investment strategies are developed in light of constant view of the Company's
overall asset/liability position. As it relates to investment strategies, the
focus of the Asset/Liability management committee is to determine the impact of
interest-rate changes on both future income and market value of securities in
the portfolio. See Item 7a, "Quantitative and Qualitative Disclosures about
Market Risk," for additional information relating to the impact of fluctuating
interest rates on the Company's net interest income.
The following table presents the composition of the investment portfolio by
major category as of the dates indicated:
Investment Portfolio Composition (1)
December 31,
---------------------------------------------------------------------
1999 1998 1997
--------------------- --------------------- ----------------------
Estimated Estimated Estimated
fair fair fair
Amortized market Amortized market Amortized market
cost value cost value cost value
--------- ---------- --------- --------- --------- -----------
(in thousands)
Available for Sale:
U.S. Treasury securities... $ -- $ -- $ 5,098 $ 5,109 $ 12,489 $ 12,532
U.S. government agency
Mortgage-backed
securities.............. 26,697 26,295 51,194 51,444 32,136 32,236
U.S. government agencies
securities.............. 4,654 4,468 13,096 12,998 20,039 20,006
Collateralized mortgage
obligations............. 97,243 95,038 19,602 19,607 21,291 21,325
State and municipal bonds.. 20,272 19,548 3,355 3,420 1,166 1,289
Equity securities.......... 5,643 5,643 4,024 4,023 7,236 7,236
--------- ---------- --------- --------- --------- -----------
Total investments.......... $154,509 $ 150,992 $ 96,369 $ 96,601 $ 94,357 $ 94,624
========= ========== ========= ========= ========= ===========
- ---------------------
(1) From continuing operations for all periods presented.
The following table presents maturities for all securities available for sale
(other than equity securities) and yields for all securities in the Company's
investment portfolio at December 31, 1999:
Investment Portfolio -- Maturity and Yields
Maturing
---------------------------------------------------------
After 1 but After 5 but
Within 1 within 5 within 10 After 10 Total
year years years years
------------- ------------- ------------- -------------- --------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
(1) (1) (1) (1) (1)
------- ----- ------- ----- ------- ------ ------- ------ ------- ------
Available for Sale:(2) (dollars in thousands)
U.S. government
agency Mortgage-
backed
securities (3)..... $ 973 5.62% $ 1,438 5.79% $ 4,027 6.65% $20,259 6.43% $26.697 6.40%
U.S. government
agencies
Securities......... 290 5.09% -- -- 895 5.82% 3,469 6.04% 4,654 5.94%
Collateralized
mortgage
obligations (3).... -- -- 1,252 6.20% 15,431 6.46% 80,560 6.62% 97,243 6.59%
State and municipal
bonds............. 150 9.98% 1,230 7.20% 354 7.83% 18,538 7.70% 20,272 7.69%
------- ----- ------- ----- ------- ------ ------- ------ ------- ------
Total book value
of investment
securities...... $ 1,413 5.98% $ 3,920 6.36% $20,707 6.49% $122,826 6.74% $148,866 6.69%
======= ===== ======= ===== ======= ====== ======== ===== ======== =====
Unrealized holding
loss on securities
available for
sale.............. (3,517)
Equity securities.... $ 5,643 6.26%
-------- -----
Total investment in
securities
available for
sale............ $150,992 6.83%(4)
======== =====
- --------------------
(1)Yields do not include adjustments for tax-exempt interest because such
interest is not material; yields also do not reflect changes in fair value
that are reflected as a separate component of stockholders' equity (except as
noted in (4) below).
(2) Based on amortized cost/book value.
(3)Maturities of mortgage-backed securities and collateralized mortgage
obligations are based on contractual maturities.
(4)Yield reflects changes in fair value that are reflected as a separate
component of stockholders' equity.
As of December 31, 1999, BNC had $151.0 million of securities in the investment
portfolio as compared to $96.6 and $94.6 million at December 31, 1998 and 1997,
respectively. During 1999, the Company increased its holdings in agency
collateralized mortgage obligations ("CMOs") and municipal bonds by $75.4 and
$16.1 million, respectively. During the year, the Company also reduced the
investment portfolio's allocation to U.S. Treasury securities by $5.1 million,
agency mortgage-backed securities by $25.1 million and government agency
securities by $8.5 million.
The shift between sectors was the result of the investment portfolio management
process and the investment objectives as indicated above. Over the course of
1999, principal cash flows as well as sales proceeds from mortgage-backed
securities were invested in CMOs because they offered a better risk/reward
profile (due to the structure of CMO cash flows) relative to mortgage-backed
securities. New investment purchases were primarily directed toward CMOs as well
due to their risk/reward profile and structure relative to other sectors. In
addition, proceeds from the maturity of U.S. Treasury securities and government
agency securities were reinvested into alternate sectors that offered a better
relative risk/reward profile than U.S. Treasury and government agency
securities. Consistent with the Investment Officer's objective of purchasing and
owning combinations of good risk/reward securities, the level of state and
municipal bonds increased as well. The risk/reward profile of state and
municipal bonds complimented that of the increased portfolio allocation to CMOs.
The resulting allocation among security sectors is more consistent with the
primary goal of the Company's investment policy.
At December 31, 1999, BNC held no securities of any single issuer, other than
the U.S. government agencies securities and agency mortgage-backed securities
and CMOs that exceeded ten percent of stockholders' equity. A significant
portion of the Company's investment securities portfolio (approximately 84
percent at December 31, 1999) was pledged as collateral for public deposits and
borrowings, including borrowings with the FHLB.
Loan Portfolio. The Company's primary source of income is interest earned on
loans. The Company's loan portfolio has grown significantly during the past four
years as a result of BNC's strategy of increasing the amount of high quality
loans outstanding to increase net interest income. Net loans increased $14.9
million, or 6 percent, to $259.2 million at December 31, 1999 as compared to
$244.3 million at December 31, 1998. In 1998, net loans increased $27.1 million,
or 13 percent, as compared to December 31, 1997. The following table presents
the composition of the Company's loan portfolio as of the dates indicated:
Loan Portfolio Composition (1)
December 31,
----------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------------- ----------------- ---------------- ------------------- ----------------
Amount % Amount % Amount % Amount % Amount %
-------- ------- -------- -------- -------- ------- --------- -------- -------- --------
(dollars in thousands)
Commercial and
industrial ...... $111,236 42.9 $107,886 44.2 $ 96,780 44.5 $ 89,065 45.4 $ 41,639 34.8
Real estate
mortgage......... 91,906 35.5 76,692 31.4 56,408 26.0 47,451 24.2 36,606 30.6
Real estate
construction..... 16,026 6.2 20,831 8.5 18,215 8.4 8,806 4.5 5,884 4.9
Agricultural........ 16,679 6.4 19,777 8.1 21,064 9.7 20,673 10.6 18,046 15.1
Consumer............ 15,116 5.8 14,761 6.1 18,726 8.6 18,734 9.6 9,960 8.3
Lease financing..... 11,307 4.4 7,422 3.0 9,211 4.2 12,970 6.6 8,660 7.2
-------- ------- -------- -------- -------- ------- --------- -------- -------- --------
Total face amount
of loans....... 262,270 101.2 247,369 101.3 220,404 101.4 197,699 100.9 120,795 100.9
Unearned income..... (219) (0.1) (188) (0.1) (255) (0.1) (264) (0.1) (112) (0.1)
-------- ------- -------- -------- -------- ------- --------- -------- -------- --------
Loans, net of
unearned income.. 262,051 101.1 247,181 101.2 220,149 101.3 197,435 100.8 120,683 100.8
Less allowance for
credit losses.... (2,872) (1.1) (2,854) (1.2) (2,919) (1.3) (1,545) (0.8) (1,048) (0.8)
-------- ------- -------- -------- -------- ------- --------- -------- -------- --------
Net loans........... $259,179 100.0 $244,327 100.0 $217,230 100.0 $195,890 100.0 $119,635 100.0
======== ======= ======== ======== ======== ======= ========= ======== ======== ========
- -------------------------
(1) From continuing operations for all periods presented.
The following table presents, for the periods indicated, the amount and percent
of change in each category of loans in the Company's loan portfolio. Material
changes are discussed in lettered explanations below the table:
Change in Loan Portfolio Composition (1)
Increase (Decrease)
--------------------------------------------------
1999 - 1998 1998 - 1997
--------------------- ----------------------
$ % $ %
----------- -------- ---------- ---------
(dollars in thousands)
Commercial and industrial.. $ 3,350 3% $ 11,106 11% (a)
Real estate mortgage....... 15,214 20% (b) 20,284 36% (a)
Real estate construction... (4,805) (23)% 2,616 14%
Agricultural............... (3,098) (16)% (1,287) (6)%
Consumer................... 355 2% (3,965) (21)%
Lease financing............ 3,885 52% (1,789) (19)%
----------- ----------
Total face amount of loans. 14,901 6% 26,965 12%
Unearned income............ (31) (16)% 67 26%
----------- ----------
Loans, net of unearned
income.................. 14,870 6% 27,032 12%
Allowance for credit losses (18) (1)% 65 2%
----------- ----------
Net Loans.................. $ 14,852 6% $ 27,097 12%
=========== ==========
- --------------------
(1) From continuing operations for all periods presented.
(a) Increases are primarily attributable to loan volume generated out of the
Minnesota market area.
(b) Increases are attributable to loan volume generated out of both the
Minnesota and North Dakota markets.
While prospects for continued loan growth appear favorable, particularly in the
Minnesota and Fargo markets, management cannot predict with any degree of
certainty the Company's future loan growth potential.
Credit Policy and Approval Procedures. BNC follows a uniform credit policy that
sets forth underwriting and loan administration criteria. The loan policy,
including lending guidelines for the various types of credit offered by the
Company, is established by the Board of Directors (the "Board") based upon the
recommendations of senior lending management and such credit committees as are
established at either the bank or corporate level. The loan policy is reviewed
and reaffirmed by the Board at least annually. Underwriting criteria are based
upon the risks associated with each type of credit offered, the related
borrowers and types of collateral.
The Company delegates lending decision authority among various lending officers
and the credit committees based on the size of the customer's credit
relationship with BNC. All loans and commitments approved in excess of $300,000
are presented to the Board on a monthly basis for summary review. Any exceptions
to loan policies and guidelines are subject to special approval by bank
executive lenders or the credit committees.
Loan Participations. Pursuant to BNC's lending policy, loans may not exceed 85
percent of bank legal lending limits (except to the extent collateralized by
U.S. Treasury securities or bank deposits and, accordingly, excluded from the
bank's legal lending limit). To accommodate customers whose financing needs
exceed lending limits and internal loan restrictions relating primarily to
industry concentration, the Banks sell loan participations to outside
participants without recourse. Loan participations sold on a nonrecourse basis
to outside financial institutions were as follows as of the dates indicated:
Loan Participations Sold (1)
December 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
---------- --------- --------- --------- ---------
(in thousands)
BNC--North Dakota..... $ 67,700 $ 32,300 $ 55,500 $ 54,100 $ 35,000
BNC--Minnesota........ 52,400 24,400 10,300 3,200 --
---------- --------- --------- --------- ---------
Total............... $ 120,100 $ 56,700 $ 65,800 $ 57,300 $ 35,000
========== ========= ========= ========= =========
- ----------------------
(1) From continuing operations for all periods presented.
The Banks generally retain the right to service the loans as well as the right
to receive a portion of the interest income on the loans. The vast majority of
the loans sold by the Banks are commercial lines of credit for which balances
and related payment streams cannot be reasonably estimated in order to determine
the fair value of the servicing rights and/or future interest income retained by
the Banks. See Note 1 to the Consolidated Financial Statements included under
Item 8 for further discussion of accounting policies related to loans.
Management cannot reliably predict BNC's ability to continue to generate or sell
loan participations or the terms of any such sales.
Concentrations of Credit. The Company's credit policies emphasize
diversification of risk among industries, geographic areas and borrowers. For
purposes of the analysis of concentrations of credit as of December 31, 1999,
total outstanding loans as well as all outstanding loan commitments were
included. As of December 31, 1999, the Company identified concentrations of
loans exceeding ten percent of total loans and loan commitments outstanding.
These concentrations were in construction and real estate loans which
represented 11.2 and 15.9 percent, respectively, of total loans and loan
commitments outstanding. Loans and commitments in the construction category were
extended to 76 customers who are located in Minnesota, Iowa and North and South
Dakota and who can be generally categorized as indicated below:
Percent of
total
outstanding
loans and
Number of loan
customers commitments
------------- -------------
General building contractors....... 21 3.1%
Heavy construction, excluding
building........................ 28 6.6%
Special trade contractors.......... 27 1.5%
------------- -------------
Total......................... 76 11.2%
============= =============
The contractors are involved in various aspects of the construction industry
including highway and street construction, water/sewer drilling, plumbing,
heating and air conditioning, commercial painting, electrical, concrete and
excavating and foundation contractors. Loans in this category are secured, in
many cases, by construction equipment.
The real estate loans and commitments were extended to 132 customers who are
diversified across the Company's market areas and who can be generally
categorized as indicated below:
Percent of
total
outstanding
loans and
Number of loan
customers commitments
------------- --------------
Non-residential and apartment
building operators,
developers and lessors of
real property................ 77 11.8%
Real estate holding companies.. 55 4.1%
------------- --------------
Total.......................... 132 15.9%
============= ==============
The Company continually monitors industry and other credit concentrations as
part of its credit risk management strategies. In cases where significant
concentrations exist without sufficient diversification and other mitigating
factors, BNC generally sells loans without recourse to outside financial
institutions.
Agricultural Loans. BNC's agricultural loan portfolio totals approximately $16.7
million, or 6 percent of total loans. Within the portfolio, loans are
diversified by type and include loans to grain and/or livestock producers,
agricultural real estate loans, machinery and equipment and other types of
loans. The majority of the Company's agricultural loans are extended to
borrowers located in North Dakota, and are diversified over several counties.
The Company has been monitoring its agricultural loans closely. As of December
31, 1999, nonperforming agricultural loans totaled $12,000.
Loan Maturities. The following table sets forth the remaining maturities of
loans in each major category of BNC's portfolio as of December 31, 1999. Actual
maturities may differ from the contractual maturities shown below as a result of
renewals and prepayments. Loan renewals are evaluated in the same manner as new
credit applications:
Maturities of Loans (1)
Over 1 Year
Through 5 years Over 5 Years
------------------- -----------------
One year Fixed Floating Fixed Floating
or less Rate Rate Rate Rate Total
--------- -------- --------- -------- -------- ---------
(in thousands)
Commercial and
industrial.......... $ 55,706 $ 18,042 $ 28,861 $ 2,825 $ 5,802 $ 111,236
Real estate mortgage... 7,530 12,316 27,273 25,408 19,379 91,906
Real estate
construction........ 13,767 -- 2,259 -- -- 16,026
Agricultural........... 7,683 3,456 1,330 1,426 2,784 16,679
Consumer............... 7,628 6,496 399 515 78 15,116
Lease financing........ 1,462 9,058 -- 787 -- 11,307
--------- -------- --------- -------- -------- ---------
Total face amount of
loans............... $ 93,776 $ 49,368 $ 60,122 $ 30,961 $28,043 $ 262,270
========= ======== ========= ======== ======== =========
- --------------------
(1) Maturities are based upon contractual maturities. Floating rate loans
include loans that would reprice prior to maturity if base rates change. See
Item 7a, "Quantitative and Qualitative Disclosures about Market Risk," for
further discussion regarding repricing of loans and other assets.
Interest Rate Floors. From time to time the Company may use off-balance-sheet
instruments, principally interest rate floors, to adjust the interest rate
sensitivity of on-balance-sheet items, including loans. See -"Liquidity, Market
and Credit Risk," Item 7a, "Quantitative and Qualitative Disclosures about
Market Risk," and Notes 1 and 13 to the Consolidated Financial Statements
included under Item 8 for further discussion about accounting policies
applicable to derivative financial instruments and currently outstanding
instruments.
Nonperforming Loans and Assets. BNC's lending personnel are responsible for
continuous monitoring of the quality of the loan portfolio. Officer compensation
depends, to a substantial extent, on maintaining loan quality and dealing with
credit issues in a timely and proactive manner. Lenders are not compensated for
growth at the expense of credit quality. Loan officers are responsible for
ongoing and regular review of past due loans in their respective portfolios. The
loan portfolio is also monitored regularly and examined by the Company's loan
review personnel. Loans demonstrating weaknesses are downgraded in a timely
fashion and the Board receives a listing of all such loans on a monthly basis.
The Company also has an annual independent credit review which tests credit
quality, compliance with loan policy and documentation for all loans over
$100,000 and a sampling of smaller loans.
The following table sets forth, as of the dates indicated, the amounts of
nonperforming loans and other assets, the allowance for credit losses and
certain related ratios:
Nonperforming Assets (1)
December 31,
-----------------------------------------------
1999 1998 1997 1996 1995
-------- ------- ------- ------- --------
(dollars in thousands)
Nonperforming loans:
Loans 90 days or more delinquent
and still
accruing interest............. $ 22 $ 307 $ 1,016 $ 129 $ 290
Nonaccrual loans (2) (3)......... 1,620 2,042 376 22 71
Restructured loans (2) (3)....... 16 44 104 136 119
-------- ------- ------- ------- --------
Total nonperforming loans..... 1,658 2,393 1,496 287 480
Other real estate owned and
repossessed assets............ 1,207 2,112 -- 159 --
-------- ------- ------- ------- --------
Total nonperforming assets.. $ 2,865 $ 4,505 $ 1,496 $ 446 $ 480
======== ======= ======= ======= ========
Allowance for credit losses......... $ 2,872 $ 2,854 $ 2,919 $ 1,545 $ 1,048
======== ======= ======= ======= ========
Ratio of total nonperforming loans
to total loans................... .63% .97% .68% .15% .40%
Ratio of total nonperforming assets
to total assets.................. .63% 1.21% .43% .16% .20%
- --------------------
(1) From continuing operations for all periods presented.
(2)If the Company's nonaccrual and restructured loans had been current in
accordance with their original terms, BNC would have recognized additional
interest income of $112,000, $49,000 and $30,000 for the years ended December
31, 1999, 1998 and 1997, respectively.
(3)The interest income on nonaccrual and restructured loans actually included
in the Company's net income was $29,000, $175,000 and $26,000 for the years
ended December 31, 1999, 1998 and 1997, respectively.
Loans 90 days or more delinquent and still accruing interest include loans over
90 days past due which management believes, based on its specific analysis of
the loans, do not present doubt about the collection of interest and principal
in accordance with the loan contract. Loans in this category must be
well-secured and in the process of collection. These loans are monitored closely
by BNC lending and management personnel.
Nonaccrual loans include loans on which the accrual of interest has been
discontinued. Accrual of interest is discontinued when management believes,
after considering economic and business conditions and collection efforts, that
the borrower's financial condition is such that the collection of interest is
doubtful. A delinquent loan is generally placed on nonaccrual status when it
becomes 90 days or more past due unless the loan is well-secured and in the
process of collection. When a loan is placed on nonaccrual status, accrued but
uncollected interest income applicable to the current reporting period is
reversed against interest income of the current period. Accrued but uncollected
interest income applicable to previous reporting periods is charged against the
allowance for credit losses. No additional interest is accrued on the loan
balance until the collection of both principal and interest becomes reasonably
certain. When a problem loan is finally resolved, there may ultimately be an
actual write down or charge-off of the principal balance of the loan which may
necessitate additional charges to earnings.
Restructured loans are those for which concessions, including a reduction of the
interest rate or the deferral of interest or principal, have been granted due to
the borrower's weakened financial condition. Interest on restructured loans is
accrued at the restructured rates when it is anticipated that no loss of its
original principal will occur.
Other real estate owned represents properties acquired through, or in lieu of,
loan foreclosure. Such properties are included in other assets in the balance
sheets. They are initially recorded at fair value at the date of acquisition
establishing a new cost basis. Write-downs to fair value at the time of
acquisition are charged to the allowance for credit losses. After foreclosure,
valuations are periodically performed by management and the real estate is
carried at the lower of carrying amount or fair value less cost to sell.
Write-downs, revenues and expenses incurred subsequent to foreclosure are
charged to operations as recognized / incurred.
Potential Problem Loans. In accordance with accounting standards, the Company
identifies loans considered impaired and the valuation allowance attributable to
these loans. Impaired loans generally include loans on which management
believes, based on current information and events, it is probable that the
Company will not be able to collect all amounts due in accordance with the terms
of the loan agreement and which are analyzed for a specific reserve allowance.
BNC generally considers all loans risk-graded substandard and doubtful as well
as nonaccrual and restructured loans as impaired. Impaired loans at December 31,
1999, not including the past due, nonaccrual and restructured loans reported
above, totaled $4.3 million. A significant portion of these loans are not in
default but may have characteristics such as recent adverse operating cash flows
or general risk characteristics that the loan officer feels might jeopardize the
future timely collection of principal and interest payments. The ultimate
resolution of these credits is subject to changes in economic conditions and
other factors. These loans are closely monitored to ensure that the Company's
position as creditor is protected to the fullest extent possible.
Customer Year 2000 Issues. The Company implemented a Year 2000 due diligence
program relating to its major borrowers and depositors which incorporated
guidelines established by regulatory agencies (the "Program"). Major components
of the Program included assignment of accountability for the various Program
initiatives, establishment of critical Program completion dates, identification
of material borrowers and depositors (hereinafter collectively referred to as
"customers"), a risk assessment of all identified customers and the
establishment of risk controls.
The Company managed the Program with available staff. Therefore, no additional
salary and benefit expenses were incurred in the process of implementing and
administering the Program. Other expenses incurred, such as postage and
materials, were not significant. No material adverse circumstances related to
Year 2000 issues of customers have been identified.
Assessment of customer status with respect to Year 2000 issues, while critical
to the banking industry, is by nature subjective and imprecise. While the
Company has used due diligence in assessing customer status and taking
appropriate actions based on the results of such assessments, there can be no
assurance that each of its customers has been adequately prepared and, as a
result, the potential of an adverse impact on the Company cannot be completely
eliminated. See also "Year 2000 Issue" for further information on the Company's
Year 2000 program.
Allowance for Credit Losses. BNCCORP maintains an allowance for credit losses
sufficient to absorb inherent losses in the loan portfolio. The allowance
represents management's recognition of the risks of extending credit and its
evaluation of the quality of the loan portfolio. The allowance is adjusted
through the provision for credit losses, which is charged to income.
At yearend 1999, the Company's total allowance was $2.9 million which equates to
approximately 1.8 and 2.7 times the average charge-offs for the last three and
five years, respectively, and 2.4 and 3.8 times the average net charge-offs for
the same three- and five-year periods, respectively. Because historical
charge-offs are not necessarily indicative of future charge-off levels, the
Company also gives consideration to other risk indicators when determining the
appropriate allowance level. The Company's charge-off policy is generally
consistent with regulatory standards.
The three components to the allowance for credit losses, the specific allowance,
allocated inherent allowance and unallocated inherent allowance, are discussed
in Note 1 to the Consolidated Financial Statements included under Item 8. A
comprehensive analysis of the adequacy of the allowance for loan losses is
performed by the Company on a quarterly basis. Additionally, peer review of
allowance levels of other financial institutions is conducted on an annual
basis.
Historically, senior lending management in each of BNCCORP's banking
subsidiaries has been responsible for assessing the adequacy of the respective
subsidiary's allowance for credit losses and making provision for credit losses
recommendations to the appropriate board of directors. The Company recently
established an Allowance for Credit Losses Review Committee (the "Review
Committee"), which now has the responsibility of affirming allowance
methodology, performing an annual credit loss migration analysis and assessing
the allowance components in relation to estimated and actual charge-off trends.
The Review Committee is responsible for assessing and reporting on the
appropriateness of the allowance for credit losses as well as recommending
revisions to the Company's methodology for determining the adequacy of the
allowance as they become necessary.
Concentrations of credit risk are discussed under "--Concentrations of Credit."
Concentrations exist in construction and real estate loans. Additionally, a
geographic concentration of credit risk also arises because BNCCORP operates
primarily in the upper midwest with 89 percent of loans outstanding as of
December 31, 1999 having been extended to customers in Minnesota and North
Dakota. Other groups of credit risk may not constitute a significant
concentration, but are analyzed based on other evident risk factors for the
purpose of determining an adequate allowance level.
Nonperforming and potential problem loans are defined and discussed under
"--Nonperforming Loans and Assets" and "--Potential Problem Loans."
Nonperforming loans decreased from $4.5 million at December 31, 1998 to $2.9
million at December 31, 1999. Many of these loans are specifically analyzed for
purposes of determining the adequacy of the allowance for credit losses.
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, there can be no assurance that the allowance will prove sufficient to
cover actual credit losses in the future. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the adequacy of the Company's allowance for credit losses. Such agencies may
require BNC to make additional provisions to the allowance based upon their
judgments about information available to them at the time of their examination.
The following table summarizes, for the periods indicated, activity in the
allowance for credit losses, including amounts of loans charged-off, amounts of
recoveries, additions to the allowance charged to operating expense, the ratio
of net charge-offs to average total loans, the ratio of the allowance to total
loans at the end of each period and the ratio of the allowance to nonperforming
loans:
Analysis of Allowance for Credit Losses (1)
For the Years ended December 31,
--------------------------- -------- -------
1999 1998 1997 1996 1995
------- -------- -------- -------- -------
(dollars in thousands)
Balance of allowance for credit
losses, beginning of period ........ $ 2,854 $ 2,919 $ 1,545 $ 1,048 $ 1,021
------- -------- -------- -------- -------
Charge-offs:
Commercial and industrial.......... 1,090 1,316 1,319 104 114
Real estate mortgage............... 10 66 24 -- --
Agricultural....................... 35 -- -- 22 130
Consumer........................... 137 73 107 6 4
Lease financing.................... 18 -- 471 218 --
------- -------- -------- -------- -------
Total charge-offs............... 1,290 1,455 1,921 350 248
------- -------- -------- -------- -------
Recoveries:
Commercial and industrial.......... 86 151 744 5 116
Real estate mortgage............... 1 26 9 6 3
Agricultural....................... -- -- -- 146 84
Consumer........................... 71 12 24 -- 4
Lease financing.................... 12 -- -- -- --
------- -------- -------- -------- -------
Total recoveries................ 170 189 777 157 207
------- -------- -------- -------- -------
Net charge-offs....................... (1,120) (1,266) (1,144) (193) (41)
Provision for credit losses charged
to operations...................... 1,138 1,201 2,518 690 168
Allowance attributable to FMB sale.... -- -- -- -- (100)
------- -------- -------- -------- -------
Balance of allowance for credit
losses, end of period.............. $ 2,872 $ 2,854 $ 2,919 $ 1,545 $ 1,048
======= ======== ======== ======== =======
Ratio of net charge-offs to average
loans.............................. (.45%) (.54%) (.53%) (.11%) (.03%)
======= ======== ======== ======== =======
Average gross loans outstanding
during the period..................$250,158 $234,342 $214,053 $169,264 $117,773
======= ======== ======== ======== =======
Ratio of allowance for credit losses
to total loans..................... 1.10% 1.15% 1.33% .78% .87%
======= ======== ======== ======== =======
Ratio of allowance for credit losses
to nonperforming loans............. 273.00% 119.00% 195.00% 540.00% 218.00%
======= ======== ======== ======== =======
- ----------------------
(1) From continuing operations for all periods presented.
Included in the data above relating exclusively to a former officer are special
provisions of $454,000 and $1.9 million, charge-offs of approximately $639,000
and $1.8 million and recoveries of approximately $153,000 and $690,000 for the
years ended December 31, 1998 and 1997, respectively. The recoveries primarily
represent payments from the Company's fidelity bond carrier. See Note 17 to the
Consolidated Financial Statements included under Item 8 for further discussion
related to proceedings against the loan officer.
The table below presents, for the periods indicated, an allocation of the
allowance for credit losses among the various loan categories and sets forth the
percentage of loans in each category to gross loans. The allocation of the
allowance for credit losses as shown in the table should neither be interpreted
as an indication of future charge-offs, nor as an indication that charge-offs in
future periods will necessarily occur in these amounts or in the indicated
proportions.
Allocation of the Allowance for Loan Losses (1)
December 31,
----------------------------------------------------------------------------------------------------------------