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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, 2000
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 (I.R.S. Employer Identification No.)
of incorporation or organization)
322 East Main 58501
Bismarck, North Dakota (Zip Code)
(Address of principal executive office)
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. [ X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant at March 15, 2001 was $12,195,000.
The number of shares of the Registrant's common stock outstanding on March
15, 2001 was 2,394,330.
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 2001 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, 2000
TABLE OF CONTENTS
Page
PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 9
Item 3. Legal Proceedings........................................... 10
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..................................... 10
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............. 12
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk........................................... 36
Item 8. Financial Statements and Supplementary Data.................. 40
Item 9. Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure...................... 79
PART III
Item 10. Directors and Executive Officers of the Registrant........... 79
Item 11. Executive Compensation....................................... 79
Item 12. Security Ownership of Certain Beneficial
Owners and Management....................................... 79
Item 13. Certain Relationships and Related Transactions............... 79
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K......................................... 79
PART I
Item 1. Business
General
BNCCORP, Inc. ("BNCCORP"), a Delaware corporation, is a bank 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, Minnesota and Arizona. BNCCORP operates
primarily through its commercial banking subsidiary, BNC National Bank (together
with its wholly-owned subsidiaries, BNC Insurance, Inc. and BNC Asset
Management, Inc., "BNC National Bank" or the "Bank"), with 17 offices in
Minnesota, North Dakota and Arizona.
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 products and services.
The Company is committed to acting as a full-service provider of financial
services, including traditional banking, trust, asset management, brokerage,
insurance, financial planning and other services. See "-Products and Services."
BNC aims to achieve its objectives through 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. Such
businesses frequently have difficulty finding banking services that meet their
specific needs and have sought, and management believes will continue to seek,
banking institutions that are more relationship-oriented.
BNC's total assets have increased from $118.0 million at December 31, 1992 to
$570.0 million at December 31, 2000. The Company's goal is the creation of a
well-capitalized $1 billion financial services organization focused on local
relationship banking. 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 early 2001, the Bank
expanded its growth opportunities by opening a loan and deposit production
office in Tempe, Arizona.
Market Areas
BNC's primary market areas are the Minneapolis/St. Paul (Minnesota) metropolitan
area, the Bismarck/Mandan and Fargo (North Dakota) metropolitan areas and the
rural communities surrounding the branch offices of the bank (Crosby, Ellendale,
Garrison, Kenmare, Linton, Stanley and Watford City, North Dakota). The recently
opened loan and deposit production office will serve the Tempe/Phoenix/Mesa
(Arizona) metropolitan area. As of December 31, 2000, 47 percent of the
Company's loans were to borrowers located in Minnesota, 33 percent were to
borrowers located in North Dakota and 13 percent were to borrowers located in
South Dakota. The remaining 7 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 net loans outstanding at each of BNC's
locations:
December 31, 2000
---------------------------------
Location Total Net Loans
Deposits Outstanding
- ------------------------------------------ -------------- ----------------
(in thousands)
BNC-National Bank:
Bismarck.............................. $ 161,665 $ 126,647
Crosby................................ 18,929 288
Ellendale............................. 11,684 715
Fargo................................. 29,556 16,710
Garrison.............................. 15,240 331
Kenmare............................... 15,353 189
Linton................................ 43,753 10,160
Minneapolis........................... 38,283 113,341
Stanley............................... 16,023 645
Watford City.......................... 11,978 153
BNCCORP (parent company)................ -- 16
-------------- ----------------
Total ............................. $ 362,464 $ 269,195
============== ================
Products and Services
Loans. The Company's loans primarily consist of commercial and industrial loans,
real estate mortgage loans, real estate construction loans, agricultural loans,
consumer loans and lease financing. In allocating its assets among loans,
investments and other earning assets, BNC attempts to maximize return while
managing risk at acceptable levels. BNC's primary lending focus is on commercial
loans and owner-occupied real estate loans to small and mid-size businesses and
professionals. The Company offers a broad range of commercial and retail lending
services, including commercial revolving lines of credit, residential and
commercial real estate mortgage loans, consumer loans and equipment financing.
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 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 2000, the Company
continued to increase core deposits largely through the success of its
Wealthbuilder NOW and money market deposit accounts introduced during 1999.
These are floating rate accounts indexed to the three-month Treasury Bill.
Deposits are insured by the Federal Deposit Insurance Corporation ("FDIC") up to
statutory limits. The Bank also purchases brokered deposits and obtains direct
non-brokered certificates of deposit through national deposit networks when such
transactions are beneficial to the Bank. 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. The Bank's Financial Services Division provides 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. The Bank's subsidiary, BNC Asset Management, Inc. ("BNC
AMI"), with offices in Bismarck and Fargo, North Dakota and Minneapolis,
Minnesota, provides trading, investment management of institutional and
individual accounts, company-sponsored mutual funds and investment banking.
Insurance Services. Insurance services are provided through the Bank's
subsidiary, BNC Insurance, Inc. ("BNC Insurance"). These services include
personal insurance products such as home, automobile and other vehicle
insurance; universal and mortgage life insurance; business insurance such as
commercial property and general liability, workers' compensation, business
automobile and excess liability coverage; life, health and annuities; farm and
crop insurance; and commercial trucking insurance.
The variety 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 offices. In addition, the
Company offers 24-hour telephone banking services through its voice response
system, BNC Bankline. The Company also provides internet banking and cash
management services through its internet banking site at www.bncbank.com. This
system allows customers to process account transactions, funds transfers, wires,
automated clearing house (ACH) transactions, stop payments and obtain account
history and other information using their personal computers and modems. A
mobile branch operating in Fargo, North Dakota is also of great convenience to
Bank customers.
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 members (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 and the increasing availability of
nationwide interstate banking have increased the level of competition in the
Company's already intensely competitive market areas. 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 Wells Fargo,
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 Bank 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 Bank 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 Bank. 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 Legislation."
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 Bank is a national banking association and is subject
to supervision, regulation and examination by the Office of the Comptroller of
the Currency ("OCC"). Since the deposits of the Bank are insured by the FDIC,
the Bank is also subject to regulation and supervision by the FDIC.
Additionally, the Bank is a member 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 Bank to BNCCORP who is defined as an "affiliate" of the Bank under the
Act. Section 23B of the Act places standards of fairness and reasonableness on
other of the Bank's transactions with its 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
Bank seeks participations to accommodate borrowers whose financing needs exceed
its lending limits.
Loans to Executive Officers, Directors and Principal Stockholders. Certain
limitations and reporting requirements are also placed on extensions of credit
by the Bank to principal stockholders of BNCCORP and to directors and certain
executive officers of the Bank (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 Bank or principal stockholder of BNCCORP may be limited in his or
her ability to obtain credit from financial institutions with which the Bank
maintains 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 Bank 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 Bank to supervisory or enforcement actions. In addition, BNCCORP could be
required to guarantee a capital restoration plan of the Bank, should the Bank
become "undercapitalized" under capital guidelines. See Note 12 to the
Consolidated Financial Statements included under Item 8 of Part II for further
discussion regarding the capital status of BNCCORP and the Bank.
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
Bank is encouraged to respond to the credit and other needs of the communities
it serves. 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.
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 the
Bank 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.
Bank Secrecy Act. The Bank Secrecy Act requires financial institutions to keep
records and file reports that are determined to have a high degree of usefulness
in criminal, tax and regulatory matters, and to implement counter-money
laundering programs and compliance procedures.
Consumer Laws and Regulations. In addition to the laws and regulations discussed
herein, the Bank is 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, the Home Mortgage Disclosure Act, the Real Estate
Settlement Procedures Act, the Fair Credit Reporting Act, the Flood Disaster
Protection Act, the Fair Housing Act and the Right to Financial Privacy 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.
Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act (the "Financial Modernization
Act") has expanded the powers of banks and bank holding companies to sell any
financial product or service, closed the unitary thrift loophole, reformed the
Federal Home Loan Bank ("FHLB") System to increase community banks' access to
loan funding, protected banks from discriminatory state insurance regulation and
established a new framework for the regulation of bank and bank holding company
securities brokerage and underwriting activities. The Financial Modernization
Act also included new provisions in the privacy area, restricting the ability of
financial institutions to share nonpublic personal customer information with
third parties. Throughout 2000, the Company has been reviewing implementing
regulations and other guidance issued by bank regulatory agencies in response to
the Financial Modernization Act and establishing policies, procedures and
programs required or recommended by such regulations and guidelines.
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, state banking authorities possess significant authority to address
violations of their state's banking laws by banks operating in their respective
states by enforcement and other supervisory actions.
As indicated above, the laws and regulations affecting banks and bank holding
companies are numerous and have changed significantly in recent years. There is
reason to expect that changes will continue in the future, although it is
difficult to predict the outcome of these changes or the impact such changes
will have on BNC.
Monetary Policy. The monetary policy of the FRB has a significant effect on the
operating results of bank holding companies and their subsidiaries. The FRB uses
the various means at its disposal to influence overall growth and distribution
of bank loans, investments and deposits and interest rates charged on loans or
paid on deposits. FRB monetary policies have materially affected the operations
of commercial banks in the past and are expected to continue to do so in the
future. The nature of future monetary policies and the effect of such policies
on the business and earnings of BNCCORP and its subsidiaries cannot be
predicted.
Employees
At December 31, 2000, BNC had 190 employees, including 181 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 are located at 322 East Main Avenue, Bismarck,
North Dakota. The building is owned by BNC National Bank. The principal office
of BNC National Bank is located at 333 South Seventh Street, Minneapolis,
Minnesota. BNC National Bank 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 Crosby, Ellendale,
Fargo, Kenmare, Linton and Stanley, North Dakota.
BNC National Bank's facilities at 100 West Main Street (Mandan), Garrison and
Watford City, North Dakota and the land at South 3rd Street (Bismarck) are
leased. The facilities occupied by BNC National Bank and BNC AMI at 333 South
Seventh Street, Minneapolis, Minnesota, and facilities at 660 South Mill Avenue,
Tempe, Arizona are also leased.
All owned and leased properties are considered in good operating condition and
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 20 to the
Consolidated Financial Statements included under Item 8 of part II for
additional information concerning lease and other commitments.
Item 3. Legal Proceedings
The Company's material pending legal actions are discussed in Note 20 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, 2000.
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.
2001 2000 1999
---------------- ---------------- ----------------
Period High Low High Low High Low
------- ------- ------- ------- ------- -------
First Quarter....... $ 8.56 $ 5.94 $ 7.25 $ 5.81 $ 11.25 $ 8.63
Second Quarter...... -- -- $ 6.94 $ 5.88 $ 9.38 $ 7.63
Third Quarter....... -- -- $ 6.56 $ 5.75 $ 9.00 $ 7.25
Fourth Quarter...... -- -- $ 6.50 $ 5.38 $ 8.25 $ 5.75
On March 15, 2001, there were 97 record holders and approximately 963 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 Bank. Capital distributions, including dividends, by
the Bank are subject to federal regulatory restrictions tied to the bank'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, 2000, 1999, 1998, 1997 and 1996 are derived from the historical
audited consolidated financial statements of the Company. The Consolidated
Balance Sheets as of December 31, 2000, 1999, 1998 and 1997 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, 2000
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,
------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(dollars in thousands, except share and per share data)
Income Statement Data:
Total interest income...........$ 41,763 $ 28,931 $ 27,801 $ 25,232 $ 20,597
Total interest expense.......... 28,117 16,574 15,152 13,132 10,945
---------- ---------- ---------- ---------- ----------
Net interest income............. 13,646 12,357 12,649 12,100 9,652
Provision for credit losses..... 1,202 1,138 1,201 2,518 690
Noninterest income.............. 7,773 6,068 4,843 3,928 3,622
Noninterest expense............. 17,430 18,215 13,379 11,256 10,286
Income taxes (benefit).......... 906 (399) 1,030 955 1,152
---------- ---------- ---------- ---------- ----------
Income (loss) from
continuing operations.........$ 1,881 $ (529) $ 1,882 $ 1,299 $ 1,146
========== ========== ========== ========== ==========
Balance Sheet Data:
(at end of period)
Total assets....................$ 570,016 $ 456,877 $ 372,240 $ 345,630 $ 283,716
Investments and federal
funds sold.................... 263,185 154,492 96,601 94,624 66,391
Loans........................... 268,925 262,051 247,181 220,149 197,435
Allowance for credit losses..... (3,588) (2,872) (2,854) (2,919) (1,545)
Total deposits.................. 362,464 324,711 284,499 262,824 239,770
Short-term borrowings........... 150,428 88,700 49,290 46,503 11,437
Long-term borrowings............ 12,642 14,470 9,195 8,285 5,937
Stockholders' equity............ 29,457 23,149 25,255 23,148 21,595
Book value per common share
outstanding...................$ 12.30 $ 9.65 $ 10.57 $ 9.64 $ 8.99
Earnings Performance Data (1):
Return on average total
assets........................ 0.35% (.13)% .54% .42% .44%
Return on average
stockholders' equity.......... 7.68% (2.13)% 8.48% 6.16% 5.52%
Net interest margin............. 2.72% 3.41% 3.88% 4.27% 4.05%
Net interest spread............. 2.41% 3.09% 3.43% 3.82% 3.61%
Basic earnings (loss) per
common share..................$ 0.78 $ (0.22) $ 0.79 $ 0.54 $ 0.48
Diluted earnings (loss) per
common share..................$ 0.78 $ (0.22) $ 0.75 $ 0.54 $ 0.48
Balance Sheet and Other Key
Ratios (1):
Nonperforming assets to
total assets.................. 0.12% 0.63% 1.21% .43% .16%
Nonperforming loans to total
loans......................... 0.22% 0.63% .97% .68% .15%
Net loan charge-offs to
average loans................. (.19)% (.45)% (.54)% (.53)% (.11)%
Allowance for credit
losses to total loans......... 1.33% 1.10% 1.15% 1.33% .78%
Allowance for credit losses
to nonperforming loans........ 619% 173% 119% 195% 540%
Average stockholders' equity
to average total assets....... 4.56% 6.32% 6.33% 6.89% 8.05%
- -------------------------
(1) From continuing operations for all periods presented.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company's financial performance in 2000 reflected continued growth in
noninterest income, increases in the asset and deposit base and stronger credit
quality. Net interest income for the year ended December 31, 2000, was $13.6
million, as compared with $12.4 and $12.6 million reported in the previous two
years. Noninterest income, largely from insurance commissions, loan fees,
brokerage income and trust and financial services, rose sharply to $7.8 million
in 2000 from $6.1 and $4.8 million in 1999 and 1998, respectively.
The Company recorded 2000 net income of $2.3 million, or $0.96 per share on a
diluted basis, compared with net income of $242,000, or $0.10 per share
(diluted), for 1999 and net income of $2.3 million, or $0.91 per share
(diluted), for 1998.
Performance highlights in the year 2000 included:
* Investment securities increased 74 percent, to $263.2 million
reflecting further implementation of the balance sheet leveraging
strategy initiated late in 1999. Total assets increased 25 percent, to
$570.0 million.
* Loans and leases increased 3 percent, to $268.9 million. While net
loans outstanding did not increase materially, gross loans originated
did as the total loans sold to other financial institutions on a
nonrecourse basis increased $69.7 million, or 58%, to $189.8 million.
* A determined focus by senior management on loan portfolio management
resulted in a dramatic improvement in credit quality.
* Deposits increased 12 percent, to $362.5 million. The deposit growth
was driven by continued success of the Wealthbuilder family of indexed
NOW and money market accounts.
* Noninterest income increased 28 percent to $7.8 million.
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 primary 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 sheet 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,
-----------------------------------------------------------------------------------
2000 1999 1998
--------------------------- --------------------------- ---------------------------
Interest Average Interest Average Interest Average
Average earned yield or Average earned Yield or Average earned yield or
Balance or paid cost balance or paid Cost Balance or paid cost
--------- -------- -------- --------- -------- -------- --------- -------- --------
(dollars in thousands)
Assets
Federal funds sold/interest-
bearing due from................ $ 5,660 $ 242 4.28% $ 1,818 $ 90 4.95% $ 5,336 $ 289 5.42%
Taxable investments............. 225,559 16,054 7.12% 105,145 6,372 6.06% 87,464 5,269 6.02%
Tax-exempt investments.......... 17,624 940 5.33% 7,788 386 4.96% 1,775 95 5.35%
Loans (2)....................... 255,798 24,527 9.59% 250,158 22,083 8.83% 234,342 22,148 9.45%
Allowance for credit losses..... (3,405) -- (2,890) -- (2,941) --
--------- -------- --------- -------- --------- --------
Total interest-earning
assets (3)................. 501,236 41,763 8.33% 362,019 28,931 7.99% 325,976 27,801 8.53%
Noninterest-earning assets:
Cash and due from banks..... 8,939 7,704 6,733
Other....................... 27,579 22,584 17,728
--------- --------- ---------
Total assets.......... $ 537,754 $ 392,307 $ 350,437
========= ========= =========
Liabilities and Stockholders'
Equity
Deposits:
NOW and money market
accounts.................... $ 136,450 7,341 5.38% $ 91,671 3,632 3.96% $ 63,115 2,128 3.37%
Savings....................... 4,097 86 2.10% 6,294 129 2.05% 8,717 197 2.26%
Certificates of deposit:
Under $100,000................ 108,170 6,033 5.58% 125,470 6,469 5.16% 130,759 7,332 5.61%
$100,000 and over............. 54,177 3,406 6.29% 43,140 2,307 5.35% 36,704 2,152 5.86%
--------- -------- --------- -------- --------- --------
Total interest-bearing
deposits...................... 302,894 16,866 5.57% 266,575 12,537 4.70% 239,295 11,809 4.93%
Short-term borrowings:
Securities and loans
sold under agreements
to repurchase and
federal funds purchased..... 97,682 6,326 6.48% 21,685 1,129 5.21% 6,745 348 5.16%
FHLB notes payable............ 60,561 3,673 6.07% 40,308 2,174 5.39% 42,831 2,346 5.48%
Long-term borrowings.............. 13,497 1,252 9.28% 9,872 734 7.44% 8,290 649 7.83%
--------- -------- --------- -------- --------- --------
Total interest-
bearing
liabilities......... 474,634 28,117 5.92% 338,440 16,574 4.90% 297,161 15,152 5.10%
Noninterest-bearing demand
accounts........................ 28,656 27,094 24,827
--------- --------- ---------
Total deposits and
interest-bearing
liabilities......... 503,290 365,534 321,988
Other noninterest-bearing
liabilities..................... 6,850 5,567 6,264
--------- --------- ---------
Total liabilities..... 510,140 371,101 328,252
Subordinated debentures........... 3,108 -- --
Stockholders' equity.............. 24,506 21,206 22,185
--------- --------- ---------
Total liabilities
and stockholders'
equity.............. $ 537,754 $ 392,307 $ 350,437
========= ========= =========
Net interest income............... $ 13,646 $ 12,357 $ 12,649
======== ======== ========
Net interest spread............... 2.41% 3.09% 3.43%
========= ======== ========
Net interest margin............... 2.72% 3.41% 3.88%
========= ======== ========
Ratio of average interest-
earning assets to
average interest-
bearing liabilities........... 105.60% 106.97% 109.70%
========= ========= =========
--------------------
(1) From continuing operations for all periods presented.
(2) Average nonaccrual loans are included in average loans outstanding.
(3) Yields do not include adjustments for tax-exempt interest.
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,
-------------------------------------------------
2000 Compared to 1999 1999 Compared to 1998
------------------------ ------------------------
Change Due to Change Due to
--------------- ----------------
Volume Rate Total Volume Rate Total
------- ------- -------- ------- -------- -------
(in thousands)
Interest-Earning Assets
Federal funds sold/interest-
bearing due from............$ (38) $ 190 $ 152 $ (190) $ (9) $ (199)
Investments................... 2,442 7,794 10,236 1,424 (30) 1,394
Loans......................... 1,946 498 2,444 1,495 (1,560) (65)
------- ------- -------- ------- -------- -------
Total increase (decrease)
in interest income....... 4,350 8,482 12,832 2,729 (1,599) 1,130
------- ------- -------- ------- -------- -------
Interest-Bearing Liabilities
NOW and money market
accounts.................... 1,935 1,774 3,709 962 542 1,504
Savings....................... 2 (45) (43) (55) (13) (68)
Certificates of Deposit:
Under $100,000.............. 456 (892) (436) (297) (566) (863)
$100,000 and over........... 509 590 1,099 377 (222) 155
Short-term borrowings:
Securities and loans sold
under agreements to
repurchase and federal
funds purchased........... 1,240 3,957 5,197 771 10 781
FHLB notes payable.......... 407 1,092 1,499 (138) (34) (172)
Long-term borrowings.......... 248 270 518 124 (39) 85
------- ------- -------- ------- -------- -------
Total increase (decrease)
in interest expense......... 4,797 6,746 11,543 1,744 (322) 1,422
======= ======= ======== ======= ======== =======
Increase (decrease) in net
interest income.............$ (447) $ 1,736 $ 1,289 $ 985 $(1,277) $ (292)
======= ======= ======== ======= ======== =======
(1) From continuing operations for all periods presented.
Year ended December 31, 2000 compared to year ended December 31, 1999. Net
interest income increased $1.3 million, or 10.4 percent, to $13.6 million as
compared to $12.4 million. Net interest spread and net interest margin declined
to 2.41 and 2.72 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 - 2000 vs. 1999 (1)
For the Years Ended
December 31, Change
------------------- ----------------
2000 1999
-------- --------
(amounts in millions)
Total interest income
increased.................... $ 41.8 $ 28.9 $ 12.9 45%
Due to:
Increase in average
earning assets............. $ 501.2 $ 362.0 $ 139.2 38%
Driven by:
Increase in average
investments (a).......... $ 243.2 $ 112.9 $ 130.3 115%
Increase in average
loans (b)................ $ 255.8 $ 250.2 $ 5.6 2%
The increases in average
earning assets volume
were coupled with:
Increased yield on
earning assets........... 8.33% 7.99% 0.34% 4%
Driven by:
Increased yield on
loans (c)................ 9.59% 8.83% 0.76% 9%
Increased yield on
investments (d).......... 6.99% 5.98% 1.01% 17%
These increases were
somewhat offset by:
Mix change in earning
asset portfolio -
Average loans as a
percent of total
interest-earning
assets (e)............. 51% 69% (18.0)% (26)%
Total interest expense
increased.................... $ 28.1 $ 16.6 $ 11.5 69%
Due to:
Increase in average
interest-bearing
liabilities.............. $ 474.6 $ 338.4 $ 136.2 40%
Driven by:
Increase in average
interest-bearing
deposits (f)............. $ 302.9 $ 266.6 $ 36.3 14%
Increase in average
borrowings (g)........... $ 171.7 $ 71.9 $ 99.8 139%
These increases were
coupled with:
Increase in cost of
interest-bearing
deposits (h)........... 5.57% 4.70% 0.87% 19%
Increase in cost of
borrowings (i)........... 6.55% 5.62% 0.93% 17%
- --------------------
(1) From continuing operations for all periods presented.
(a) Reflecting further implementation of the balance sheet leveraging
strategy initiated late in 1999, the Company purchased investment
securities and funded them with FHLB borrowings.
(b) Loan growth is attributable to increases in loans originated in both
the Minnesota and North Dakota markets.
(c) The improved loan yield is reflective of prime rate increases in 2000
offset by some decreases in loan pricing spread to prime rate due to
competitive pressures in all markets.
(d) The improved investment yield reflects the higher rate environment in
2000 as well as the mix of investment types in the Company's
investment portfolio.
(e) The increase in investment securities noted in (a) caused this change
in the mix of the earning asset portfolio. While such a mix change has
a negative effect on yield on earning assets (because investments
typically yield less than loans), the strategy is accretive to
earnings.
(f) Deposit growth is primarily attributable to the continued success of
the Wealthbuilder family of NOW and money market accounts.
(g) Increased FHLB borrowings for the purpose of purchasing investment
securities. See (a) above.
(h) Increased cost of interest-bearing deposits is reflective of the
volume of Wealthbuilder NOW and money market accounts and the
associated increases in cost as interest rates rose during 2000. The
Wealthbuilder accounts are indexed to and float with the 90 day T-bill
rate. Additionally, in a higher rate environment, the cost of
certificates of deposit also increases with renewals and new accounts.
(i) Rates are reflective of the overall increased rate environment in 2000
as compared to 1999.
Net interest income and margin in future periods are expected to be impacted by
several factors. Recent decreases in the prime rate will negatively impact
interest income and yields on loans but will positively impact interest expense
and the cost of deposits and borrowings. Additionally, the Company has increased
its earning asset portfolio by purchasing investment securities funded primarily
through FHLB borrowings. While the additional investments have increased
interest income, net interest income and earnings, they have negatively impacted
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, 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 - 1999 vs. 1998 (1)
For the Years Ended
December 31, Change
------------------- ----------------
2000 1999
-------- --------
(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)% (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
Minneapolis and Fargo locations.
(b) The Company increased its investment securities holdings primarily
through FHLB borrowings with the implementation of the balance sheet
leveraging strategy late in 1999.
(c) The decreased loan yield was 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.
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 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, 2000 was $1.2
million as compared to $1.1 million in 1999 and $1.2 million in 1998.
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 -----------------------------------
December 31, 2000 - 1999 1999 - 1998
-------------------------- ---------------- ----------------
2000 1999 1998 $ % $ %
-------- -------- -------- -------- ------- -------- -------
(in thousands)
Insurance commissions... $ 2,003 $ 2,045 $ 1,769 $ (42) (2)%(a) $ 276 16%(a)
Fees on loans........... 1,941 1,435 1,376 506 35%(b) 59 4%
Brokerage income........ 1,466 797 53 669 84%(c) 744 1,404%(c)
Trust and financial
services.............. 1,064 589 517 475 81%(d) 72 14%
Service charges......... 604 536 566 68 13% (30) (5)%
Net gain on sales of
securities .......... 276 198 130 78 39% 68 52%
Rental income........... 56 121 43 (65) (54)% 78 181%
Other................... 363 347 389 16 5% (42) (11)%
-------- -------- -------- -------- --------
Total noninterest
income................ $ 7,773 $ 6,068 $ 4,843 1,705 28% $ 1,225 25%
======== ======== ======== ======== ========
- --------------------
(1) From continuing operations for all periods presented.
(a) Increased insurance commissions in 1999 resulted from an increase in
the average number of insurance producers as well as successful
efforts to cross-sell insurance to bank customers. In 2000, insurance
commissions remained relatively stable in spite of a reduction in the
number of insurance agents.
(b) The increase in loan fees is largely attributable to loans originated
and sold. BNC AMI also generated some loan fees upon placement of
credit into the secondary market. Management cannot predict with any
degree of certainty the amount of loans which will be originated or
placed and related loan fees which will be recognized in future
periods.
(c) Increases are attributable to the addition of brokerage staff at BNC
AMI and successful efforts to cross-sell brokerage services to bank
customers.
(d) The 2000 increase is attributable to fees associated with the BNC U.S.
Opportunities Fund LLC which was formed on September 1, 1999 and is
managed by the Bank's Financial Services Division.
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, 2000 - 1999 1999 - 1998
----------------------------- ---------------- ----------------
2000 1999 1998 $ % $ %
--------- --------- --------- -------- ------- -------- -------
(in thousands)
Salaries and employee
benefits.............. $ 8,891 $ 8,854 $ 7,463 $ 37 -- $ 1,391 19%(a)
Depreciation and
amortization.......... 1,659 1,586 1,498 73 5% 88 6%
Occupancy............... 1,360 1,248 988 112 9% 260 26%(a)
Professional services... 1,290 1,214 766 76 6% 448 58%(b)
Office supplies,
telephone and
postage............... 940 941 749 (1) -- 192 26%(a)
Marketing and
promotion............. 597 621 455 (24) (4)% 166 36%(c)
Repossessed and
impaired asset
expenses/write-
offs.................. 470 2,271 2 (1,801) (79)%(d) 2,269 -- (d)
Minority interest in
income of
subsidiaries.......... 399 -- -- 399 -- (e) -- --
FDIC and other
assessments........... 200 191 184 9 5% 7 4%
Other................... 1,624 1,289 1,274 335 26%(f) 15 1%
--------- --------- --------- -------- --------
Total noninterest
expense............... $ 17,430 $ 18,215 $ 13,379 $ (785) (4)% $ 4,836 36%
========= ========= ========= ======== ========
Efficiency ratio (g).... 81.38% 98.86% 76.49% (17.48)% 22.37%
- --------------------
(1) From continuing operations for all periods presented.
(a) 1999 increases represent personnel additions at BNC AMI, BNC Insurance
and the Bank's Fargo branch as well as related occupancy, supplies,
telephone, postage and other miscellaneous expenses.
(b) 1999 increase represents an increase in brokerage costs at BNC AMI,
legal fees related to the proceedings against a former loan officer
and other legal costs associated with other real estate owned and
repossessed assets. Professional services expenses in 2000 remained
relatively flat.
(c) 1999 included increased advertising, public relations and promotional
expenses, including fees paid to an investor relations firm engaged
late in 1998.
(d) 1999 included write-downs to estimated net realizability of other real
estate owned and repossessed assets. The Company had no assets
classified as other real estate owned at December 31, 2000 and
repossessed assets were valued at $84,000.
(e) This is the interest expense associated with the trust preferred
securities issued in July 2000. See Note 10 to the Consolidated
Financial Statements included under Item 8 for further information
related to the trust preferred offering.
(f) Increase in 2000 represents a number of immaterial increases in
various miscellaneous expense categories.
(g) Noninterest expense divided by an amount equal to net interest income
plus noninterest income. Noninterest expense for 2000 and 1999
included $470,000 and $2.3 million, respectively, in write-downs of
nonperforming assets. Excluding these write-downs and the interest on
the trust preferred securities, the efficiency ratios for 2000 and
1999 would have been 77.30 and 86.53 percent, respectively.
Financial Condition
Overview. Although subsequent sections of this discussion and analysis of
financial condition address certain aspects of the Company's major assets and
liabilities in significant detail, the following two tables are presented as a
general overview of the financial condition of the Company.
The following table presents the Company's assets by category as of December 31,
2000, 1999 and 1998, as well as the amount and percent of change between the
dates. Material changes are discussed in lettered notes following the table
(amounts are in thousands):
Assets
Increase (Decrease)
-----------------------------------
As of December 31, 2000 - 1999 1999 - 1998
----------------------------- ---------------- ----------------
2000 1999 1998 $ % $ %
--------- --------- --------- -------- ------- -------- -------
Cash and due from
banks................. $ 14,988 $ 12,816 $ 7,475 $ 2,175 17% $ 5,341 71%
Interest-bearing
deposits with
banks................. 595 5,565 2,809 (4,970) (89)% 2,756 98%
Federal funds sold...... -- 3,500 -- (3,500) (100)% 3,500 --
Investment securities
available for sale.... 263,185 150,992 96,601 112,193 74%(a) 54,391 56%(a)
Loans and leases, net... 265,337 259,179 244,327 6,158 2%(b) 14,852 6%(b)
Premises, leasehold
improvements and
equipment, net........ 14,873 12,006 8,786 2,867 24% 3,220 37%
Interest receivable..... 3,854 2,613 2,356 1,241 47% 257 11%
Other assets............ 4,465 6,945 5,929 (2,480) (36)% 1,016 17%
Deferred charges and
intangible assets,
net................... 2,719 3,261 3,957 (542) (17)% (696) (18)%
Assets of
discontinued
operation............. -- -- 24,092 -- -- (24,092) (100)%(c)
--------- --------- --------- --------- --------
Total assets...... $ 570,016 $ 456,877 $ 396,332 $ 113,139 25% $ 60,545 15%
========= ========= ========= ========= ========
(a) The Company implemented a balance sheet leveraging strategy beginning late
in 1999 whereby the earning asset portfolio was increased through the
purchase of additional investment securities funded primarily by borrowings
from the FHLB.
(b) The 1999 increase is primarily attributable to an increase in real estate
mortgage loans originated in Minnesota and North Dakota. The 2000 increase
is primarily attributable to an increase in real estate construction loans.
Although net loans outstanding have not increased materially, gross loans
originated by the Company have increased significantly as the Company has
originated and sold portions of loans to other lenders on a nonrecourse
basis. Loans may be sold to accommodate customers whose financing needs
exceed legal lending limits and/or internal loan restrictions relating
primarily to industry concentrations. Outstanding balances of loan
participations sold on a nonrecourse basis were $189.8, $120.1 and $56.7
million, respectively, as of December 31, 2000, 1999 and 1998.
(c) Sale of BNC Financial Corporation, BNCCORP's asset-based lending
subsidiary, on December 31, 1999.
The following table presents the Company's liabilities, guaranteed preferred
beneficial interests in subordinated debentures and stockholders' equity by
category as of December 31, 2000, 1999 and 1998, as well as the amount and
percent of change between the dates. Material changes are discussed in lettered
notes following the table (amounts are in thousands):
Liabilities, Subordinated Debentures and Stockholders' Equity
Increase (Decrease)
-----------------------------------
As of December 31, 2000 - 1999 1999 - 1998
----------------------------- ----------------- ----------------
2000 1999 1998 $ % $ %
--------- --------- --------- --------- ------- -------- -------
Deposits:
Noninterest-bearing..... $ 31,459 $ 29,798 $ 28,475 $ 1,661 6% $ 1,323 5%
Interest-bearing -
Savings, NOW and
money market........ 169,425 127,454 89,887 41,971 33%(a) 37,567 42%(a)
Time deposits
$100,000 and over... 61,720 46,779 39,162 14,941 32%(b) 7,617 19%(b)
Other time deposits... 99,860 120,680 126,975 (20,820) (17)%(a) (6,295) (5)%(a)
Short term borrowings... 150,428 88,700 49,290 61,728 70%(c) 39,410 80%(c)
Long term borrowings.... 12,642 14,470 9,195 (1,828) (13)% 5,275 57%
Other liabilities....... 7,419 5,847 6,362 1,572 27% (515) (8)%
Liabilities of
discontinued
operation............. -- -- 21,731 -- -- (21,731) (100)%(d)
--------- --------- --------- --------- --------
Total
liabilities..... 532,953 433,728 371,077 99,255 23% 62,651 17%
--------- --------- --------- --------- --------
Guaranteed preferred
beneficial interests
in Company's
subordinated
debentures............ 7,606 -- -- 7,606 -- (e) -- --
Stockholders' equity.... 29,457 23,149 25,255 6,308 27%(f) (2,106) (8)%
--------- --------- --------- --------- --------
Total............. $ 570,016 $ 456,877 $ 396,332 $ 113,139 25% $ 60,545 15%
========= ========= ========= ========= ========
(a) Increases in the "savings, NOW and money market" category are attributable
to the popularity of the Company's Wealthbuilder deposit products. Success
of these products has also contributed to a decrease in the "other time
deposits" category as some customers have elected to transfer maturing time
deposits to the more liquid and competitively priced Wealthbuilder
products.
(b) Brokered deposits totaled $30.7 million at December 31, 2000 compared to
$13.4 and $5.0 million at December 31, 1999 and 1998, respectively.
(c) Increases in short term borrowings are attributable to the balance sheet
leveraging strategy.
(d) Sale of BNC Financial Corporation on December 31, 1999.
(e) Issuance of trust preferred securities in July 2000. See Note 10 to the
Consolidated Financial Statements included under Item 8 for further
information related to the trust preferred securities.
(f) Increase is attributable to earnings of $2.3 million and unrealized holding
gains on securities available for sale arising during the period of $3.9
million.
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, the Company seeks a balance
among yield and the management of credit and liquidity risks 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,
----------------------------------------------------------------
2000 1999 1998
--------------------- --------------------- --------------------
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
U.S. government
agency mortgage-
backed securities... 44,272 44,468 26,697 26,295 51,194 51,444
U.S. government
agency securities... 4,880 4,890 4,654 4,468 13,096 12,998
Collateralized
mortgage
obligations......... 164,221 165,404 97,243 95,038 19,602 19,607
State and municipal
bonds............... 20,782 20,905 20,272 19,548 3,355 3,420
Corporate bonds....... 16,968 17,899 -- -- -- --
Equity securities..... 9,619 9,619 5,643 5,643 4,024 4,023
---------- ---------- ---------- ---------- --------- ---------
Total investments..... $ 260,742 $ 263,185 $ 154,509 $ 150,992 $ 96,369 $ 96,601
========== ========== ========== ========== ========= =========
(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, 2000:
Investment Portfolio - Maturity and Yields
Maturing
------------------------------------------------------------------------
After 1 but After 5 but
Within 1 Year within 5 years within 10 years After 10 years Total
----------------- ----------------- ----------------- ------------------ ------------------
Amount Yield(1) Amount Yield(1) Amount Yield(1) Amount Yield(1) Amount Yield(1)
-------- -------- -------- -------- -------- -------- --------- -------- --------- --------
Available for sale:(2)
U.S. government agency
mortgage-backed
securities (3)......... $ 44 5.42% $ 977 6.15% $ 5,497 6.46% $ 37,754 7.71% $ 44,272 7.52%
U.S. government agency
securities............. -- -- 1,411 5.78% -- -- 3,469 6.04% 4,880 5.96%
Collateralized mortgage
obligations (3)........ -- -- 2,275 7.11% 48,454 6.86% 113,492 6.85% 164,221 6.86%
State and municipal
bonds.................. 5 14.33% 1,215 8.92% 1,128 7.15% 18,434 7.30% 20,782 7.39%
Corporate bonds.......... -- -- -- -- -- -- 16,968 9.22% 16,968 9.22%
-------- -------- -------- --------- ---------
Total book value of
investment securities.. $ 49 6.32% $ 5,878 7.00% $ 55,079 6.83% $ 190,117 7.26% 251,123 7.16%
======== ======== ======== ========= ---------
Unrealized holding
gain on securities
available for sale..... 2,443
Equity securities........ 9,619 6.94%
---------
Total investment in
securities available
for sale............... $ 263,185 7.09%(4)
=========
- --------------------
(1) Yields include adjustments for tax-exempt income; yields 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, 2000, BNC had $263.2 million of securities in the investment
portfolio as compared to $151.0 and $96.6 million at December 31, 1999 and 1998,
respectively. During 2000, the Company increased its holdings in agency
collateralized mortgage obligations ("CMOs"), U.S. government agency
mortgage-backed securities and corporate bonds by $70.4, $18.2, and $17.9
million, respectively.
The increased volume of these sectors and the portfolio as a whole is part of
the Company's strategy to increase its earning asset portfolio by purchasing
investment securities funded primarily through FHLB borrowings. The portfolio
management process, investment objectives, and risk/reward analysis described
above led the increase in the investment portfolio to be over-weighted toward
CMOs due to their risk/reward characteristics. In addition, over the course of
2000, principal cash flows were primarily reinvested in CMOs because they
offered a better risk/reward profile (due to the structure of the CMO cash
flows) relative to mortgage-backed securities.
At December 31, 2000, BNC held no securities of any single issuer, other than
U.S. government agency 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 82 percent at
December 31, 2000) 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. Net loans increased $6.2 million, or 2.4 percent, to $265.3 million at
December 31, 2000 as compared to $259.2 million at December 31, 1999. In 1999,
net loans increased $14.9 million, or 6 percent, as compared to December 31,
1998. The following table presents the composition of the Company's loan
portfolio as of the dates indicated:
Loan Portfolio Composition (1)
December 31,
-----------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
----------------- ----------------- ----------------- ----------------- -----------------
Amount % Amount % Amount % Amount % Amount %
--------- ------- --------- ------- --------- ------- --------- ------- --------- -------
(dollars in thousands)
Commercial and
industrial ............ $ 112,407 42.4 $ 111,236 42.9 $ 107,886 44.2 $ 96,780 44.5 $ 89,065 45.4
Real estate
mortgage............... 90,622 34.2 91,906 35.5 76,692 31.4 56,408 26.0 47,451 24.2
Real estate
construction........... 25,301 9.6 16,026 6.2 20,831 8.5 18,215 8.4 8,806 4.5
Agricultural............. 15,775 5.9 16,679 6.4 19,777 8.1 21,064 9.7 20,673 10.6
Consumer/other........... 14,888 5.6 15,116 5.8 14,761 6.1 18,726 8.6 18,734 9.6
Lease financing.......... 10,202 3.8 11,307 4.4 7,422 3.0 9,211 4.2 12,970 6.6
--------- ------- --------- ------- --------- ------- --------- ------- --------- -------
Total face amount of
loans.................. 269,195 101.5 262,270 101.2 247,369 101.3 220,404 101.4 197,699 100.9
Unearned income and
net unamortized
deferred fees and
costs.................. (270) (0.1) (219) (0.1) (188) (0.1) (255) (0.1) (264) (0.1)
--------- ------- --------- ------- --------- ------- --------- ------- --------- -------
Loans, net of unearned
income and
unamortized fees
and costs.............. 268,925 101.4 262,051 101.1 247,181 101.2 220,149 101.3 197,435 100.8
Less allowance for
credit losses........... (3,588) (1.4) (2,872) (1.1) (2,854) (1.2) (2,919) (1.3) (1,545) (0.8)
--------- ------- --------- ------- --------- ------- --------- ------- --------- -------
Net loans.................$ 265,337 100.00 $ 259,179 100.0 $ 244,327 100.0 $ 217,230 100.0 $ 195,890 100.0
========= ======= ========= ======= ========= ======= ========= ======= ========= =======
(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)
----------------------------------------
2000 - 1999 1999 - 1998
------------------ ------------------
$ % $ %
--------- ------- --------- -------
(dollars in thousands)
Commercial and industrial.... $ 1,171 1% $ 3,350 3%
Real estate mortgage......... (1,284) (1)% 15,214 20%(a)
Real estate construction..... 9,275 58%(b) (4,805) (23)%
Agricultural................. (904) (5)% (3,098) (16)%
Consumer/other............... (228) (2)% 355 2%
Lease financing.............. (1,105) (10)% 3,885 52%
--------- ---------
Total face amount of loans... 6,925 3% 14,901 6%
Unearned income/unamortized
fees and costs............. (51) (23)% (31) (16)%
--------- ---------
Loans, net of unearned
income/unamortized
fees and costs............. 6,874 3% 14,870 6%
Allowance for credit losses.. (716) (25)% (18) (1)%
--------- ---------
Net Loans.................... $ 6,158 2% $ 14,852 6%(c)
========= =========
(1) From continuing operations for all periods presented.
(a) Increase in 1999 is attributable to loan volume generated out of
Minnesota and North Dakota.
(b) Increased originations of commercial real estate construction loans.
(c) As previously noted, net loans outstanding have not increased
significantly in the last 24 months; however, this is not reflective
of the loans originated by the Company which totaled $459.0 million at
December 31, 2000 compared with $382.4 and $304.1 million at December
31, 1999 and 1998, respectively. Loans are originated and sold for
legal lending limit, concentration and other reasons. See "-Loan
Participations."
While prospects for continued loan growth appear favorable, 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 credit committees. 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, to the extent the credit relationship amount
exceeds individual loan officer lending authorities, 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 Bank sells 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,
----------------------------------------------
(in thousands)
2000................... $ 189,763
1999................... 120,100
1998................... 56,700
1997................... 65,800
1996................... 57,300
(1) From continuing operations for all periods presented.
The Bank generally retains the right to service the loans as well as the right
to receive a portion of the interest income on the loans. Many of the loans sold
by the Bank 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
Bank. 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, 2000 the
total outstanding loans as well as all outstanding loan commitments were
included. As of December 31, 2000, the Company identified three concentrations
of loans exceeding ten percent of total loans and loan commitments outstanding.
These concentrations were in real estate, lodging places and construction, which
represented 20.1, 10.4 and 10.3 percent, respectively, of total loans and loan
commitments outstanding.
The real estate loans and commitments were extended to 112 customers who are
diversified across the Company's market areas and who can be generally
categorized as indicated below:
Percent of
total
outstanding
loans
Number of and loan
customers commitments
----------- -------------
Non-residential and
apartment building
operators, developers
and lessors of real
property................... 58 15.9%
Real estate holding
companies.................. 54 4.2%
----------- -------------
Total.................. 112 20.1%
=========== =============
The lodging loans and commitments were extended to 18 customers whose properties
are located throughout the United States. Loans in this category are made to
borrowers that have seasoned hotel portfolios that are well diversified by
location, property type and flag.
Loans and commitments in the construction category were extended to 56 customers
who are located primarily in Minnesota, Iowa and North and South Dakota and who
can be generally categorized as indicated below:
Percent of
total
outstanding
loans
Number of and loan
customers commitments
----------- -------------
General building
contractors................ 13 2.3%
Heavy construction,
excluding building......... 21 6.7%
Special trade contractors.... 22 1.3%
----------- -------------
Total................... 56 10.3%
=========== =============
The contractors are involved in various aspects of the construction industry,
including highway and street construction, water/sewer drilling, plumbing,
heating and air conditioning, commercial painting, electrical, concrete and
excavating and foundation contractors. Loans in this category are secured, in
many cases, by construction equipment.
The Company continually monitors industry and other credit concentrations as
part of its credit risk management strategies. In cases where significant
concentrations exist without sufficient diversification and other mitigating
factors, BNC generally sells loans without recourse to outside financial
institutions.
Agricultural Loans. BNC's agricultural loan portfolio totals approximately $15.8
million, or 6 percent of total loans at December 31, 2000. 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, 2000, there were no agricultural loans classified as nonperforming.
Loan Maturities. The following table sets forth the remaining maturities of
loans in each major category of BNC's portfolio as of December 31, 2000. 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.... $ 46,126 $ 19,293 $ 37,044 $ 3,829 $ 6,115 $ 112,407
Real estate mortgage......... 9,340 17,896 20,630 29,619 13,137 90,622
Real estate construction..... 7,400 112 16,736 -- 1,053 25,301
Agricultural................. 7,390 3,635 1,659 1,110 1,981 15,775
Consumer/other............... 8,164 4,783 1,349 520 72 14,888
Lease financing.............. 332 9,491 -- 379 -- 10,202
--------- --------- ---------- --------- --------- ----------
Total face amount of loans... $ 78,752 $ 55,210 $ 77,418 $ 35,457 $ 22,358 $ 269,195
========= ========= ========== ========= ========= ==========
- --------------------
(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 14 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 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,
------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(dollars in thousands)
Nonperforming loans:
Loans 90 days or more
delinquent and still
accruing interest........ $ 221 $ 22 $ 307 $ 1,016 $ 129
Nonaccrual loans (2)(3).... 343 1,620 2,042 376 22
Restructured loans (2)(3).. 16 16 44 104 136
-------- -------- -------- -------- --------
Total nonperforming
loans.................. 580 1,658 2,393 1,496 287
Other real estate owned
and repossessed assets... 84 1,207 2,112 -- 159
-------- -------- -------- -------- --------
Total nonperforming
assets................. $ 664 $ 2,865 $ 4,505 $ 1,496 $ 446
======== ======== ======== ======== ========
Allowance for credit
losses..................... $ 3,588 $ 2,872 $ 2,854 $ 2,919 $ 1,545
======== ======== ======== ======== ========
Ratio of total non-
performing loans
to total loans............. .22% .63% .97% .68% .15%
Ratio of total non-
performing assets
to total assets............ .12% .63% 1.21% .43% .16%
- --------------------
(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 $29,000, $112,000 and $49,000 for the years ended
December 31, 2000, 1999 and 1998, respectively.
(3) The interest income on nonaccrual and restructured loans actually included
in the Company's net income was $6,000, $29,000 and $175,000 for the years
ended December 31, 2000, 1999 and 1998, respectively.
The Company achieved significant improvement in the level of nonperforming loans
and assets during 2000. A determined focus by senior management on loan
portfolio management resulted in a dramatic improvement in credit quality.
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 and repossessed assets represents properties and other
assets acquired through, or in lieu of, loan foreclosure. Such properties and
assets 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 or assets are 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,
2000, not including the past due, nonaccrual and restructured loans reported
above, totaled $6.0 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.
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 2000, the Company's total allowance was $3.6 million which equates to
approximately 3.1 times the average charge-offs for the last three and five
years, and 3.8 and 4.3 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 allowance and unallocated 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.
Certain members of the Review Committee are 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 real estate, lodging and construction loans and
commitments. Additionally, a geographic concentration of credit risk also arises
because BNCCORP operates primarily in the upper midwest with 93 percent of loans
outstanding as of December 31, 2000 having been extended to customers in
Minnesota, North Dakota and South 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 $1.7 million at December 31, 1999 to $580,000 at December
31, 2000. 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,
------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
(dollars in thousands)
Balance of allowance for
credit losses, beginning
of period.................. $ 2,872 $ 2,854 $ 2,919 $ 1,545 $ 1,048
--------- --------- --------- --------- ---------
Charge-offs:
Commercial and
industrial............... 574 1,090 1,316 1,319 104
Real estate mortgage....... 58 10 66 24 --
Agricultural............... 16 35 -- -- 22
Consumer/other............. 39 137 73 107 6
Lease financing............ 68 18 -- 471 218
--------- --------- --------- --------- ---------
Total charge-offs........ 755 1,290 1,455 1,921 350
--------- --------- --------- --------- ---------
Recoveries:
Commercial and industrial.. 100 86 151 744 5
Real estate mortgage....... 96 1 26 9 6
Agricultural............... 33 -- -- -- 146
Consumer/other............. 25 71 12 24 --
Lease financing............ 15 12 -- -- --
--------- --------- --------- --------- ---------
Total recoveries......... 269 170 189 777 157
--------- --------- --------- --------- ---------
Net charge-offs............... (486) (1,120) (1,266) (1,144) (193)
Provision for credit losses
charged to operations....... 1,202 1,138 1,201 2,518 690
--------- --------- --------- --------- ---------
Balance of allowance for
credit losses, end of
period..................... $ 3,588 $ 2,872 $ 2,854 $ 2,919 $ 1,545
========= ========= ========= ========= =========
Ratio of net charge-offs
to average loans........... (.19%) (.45%) (.54%) (.53%) (.11%)
========= ========= ========= ========= =========
Average gross loans
outstanding during the
period..................... $ 255,798 $ 250,158 $ 234,342 $ 214,053 $ 169,264
========= ========= ========= ========= =========
Ratio of allowance for
credit losses to total
loans...................... 1.33% 1.10% 1.15% 1.33% .78%
========= ========= ========= ========= =========
Ratio of allowance for
credit losses to
nonperforming loans........ 619% 173% 119% 195% 540%
========= ========= ========= ========= =========
(1) From continuing operations for all periods presented.
Included in the data above, relating to the lending activities of 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 20 to the Consolidated Financial Statements included under
Item 8 for further discussion related to proceedings against t