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U.S. Securities and Exchange Commission
Washington, D.C. 20549
------
FORM 10-Q
------
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarter ended September 30, 2003
[ ] TRANSITION REPORT UNDER 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
of incorporation or organization) Identification No.)
322 East Main Avenue
Bismarck, North Dakota 58501
(Address of principal executive office)
(701) 250-3040
(Registrant's telephone number)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No ___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes ___ No X
The number of shares of the registrant's outstanding common stock on
November 1, 2003 was 2,722,495.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share and per share data)
September 30, December 31,
ASSETS 2003 2002
---------------- ----------------
(unaudited)
CASH AND DUE FROM BANKS..................... $ 12,588 $ 16,978
INTEREST-BEARING DEPOSITS WITH BANKS........ 34 159
---------------- ----------------
Cash and cash equivalents.............. 12,622 17,137
INVESTMENT SECURITIES AVAILABLE FOR SALE.... 246,268 208,072
FEDERAL RESERVE BANK AND FEDERAL HOME LOAN
BANK STOCK............................. 7,551 7,071
LOANS AND LEASES, net....................... 279,391 335,794
ALLOWANCE FOR CREDIT LOSSES................. (4,827) (5,006)
---------------- ----------------
Net loans and leases................... 274,564 330,788
PREMISES AND EQUIPMENT, net................. 15,886 11,100
INTEREST RECEIVABLE......................... 2,634 2,856
OTHER ASSETS................................ 13,399 4,119
GOODWILL.................................... 14,526 12,210
OTHER INTANGIBLE ASSETS, net................ 8,077 8,875
$ 595,527 $ 602,228
================= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS:
Noninterest-bearing................... $ 41,019 $ 44,362
Interest-bearing -
Savings, interest checking and
money market..................... 191,870 187,531
Time deposits $100,000 and over... 53,173 64,905
Other time deposits............... 90,363 101,447
---------------- ----------------
Total deposits........................ 376,425 398,245
SHORT-TERM BORROWINGS...................... 21,948 28,120
FEDERAL HOME LOAN BANK ADVANCES............ 117,200 97,200
LONG-TERM BORROWINGS....................... 8,655 8,561
GUARANTEED PREFERRED BENEFICIAL INTERESTS
IN COMPANY'S SUBORDINATED DEBENTURES..... 22,148 --
OTHER LIABILITIES.......................... 9,442 10,053
---------------- ----------------
Total liabilities............ 555,818 542,179
GUARANTEED PREFERRED BENEFICIAL INTERESTS
IN COMPANY'S SUBORDINATED DEBENTURES..... -- 22,326
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value -
2,000,000 shares authorized;
150 shares issued and outstanding... -- --
Capital surplus - preferred stock..... 1,500 1,500
Common stock, $.01 par value -
10,000,000 shares authorized;
2,709,995 and 2,700,929 shares
issued and outstanding (excluding
42,880 shares held in treasury)..... 28 27
Capital surplus - common stock........ 16,684 16,614
Retained earnings..................... 20,412 17,395
Treasury stock (42,880 shares)........ (513) (513)
Accumulated other comprehensive
income, net of income taxes....... 1,598 2,700
---------------- ----------------
Total stockholders' equity... 39,709 37,723
---------------- ----------------
$ 595,527 $ 602,228
================= ===============
See accompanying notes to consolidated
financial statements.
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except per share data)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
----------------------------- ----------------------------
2003 2002 2003 2002
------------- ------------- ------------ -------------
INTEREST INCOME: (unaudited) (unaudited)
Interest and fees on loans.................................. $ 4,536 $ 5,433 $ 14,958 $ 15,206
Interest and dividends on
investment securities -
Taxable.................................................. 1,723 2,668 5,174 7,707
Tax-exempt............................................... 400 250 1,135 689
Dividends................................................ 66 54 190 164
Other....................................................... 9 26 10 71
------------- ------------- ------------ -------------
Total interest income........................... 6,734 8,431 21,467 23,837
------------- ------------- ------------ -------------
INTEREST EXPENSE:
Deposits.................................................... 1,741 2,599 5,770 7,927
Short-term borrowings....................................... 84 23 305 75
Federal Home Loan Bank advances............................. 1,345 1,616 3,953 4,793
Long-term borrowings........................................ 97 109 292 201
Interest on subordinated debentures......................... 430 -- 430 --
------------- ------------- ------------ -------------
Total interest expense.......................... 3,697 4,347 10,750 12,996
------------- ------------- ------------ -------------
Net interest income............................. 3,037 4,084 10,717 10,841
PROVISION FOR CREDIT LOSSES................................... 300 400 1,475 802
------------- ------------- ------------ -------------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES......... 2,737 3,684 9,242 10,039
------------- ------------- ------------ -------------
NONINTEREST INCOME:
Insurance commissions....................................... 3,498 3,044 10,983 5,928
Fees on loans............................................... 698 521 1,641 1,532
Net gain on sales of securities............................. 448 819 869 1,615
Service charges............................................. 239 203 667 543
Brokerage income............................................ 141 239 291 963
Trust and financial services................................ 95 172 912 603
Rental income............................................... 68 23 145 67
Other....................................................... 215 102 524 336
------------- ------------- ------------ -------------
Total noninterest income........................ 5,402 5,123 16,032 11,587
------------- ------------- ------------ -------------
NONINTEREST EXPENSE:
Salaries and employee benefits.............................. 4,113 4,085 12,075 10,741
Occupancy................................................... 564 558 1,750 1,601
Depreciation and amortization............................... 369 339 1,085 973
Professional services....................................... 288 329 857 1,105
Office supplies, telephone and postage...................... 284 283 893 828
Amortization of intangible assets........................... 265 265 797 615
Marketing and promotion..................................... 227 183 522 554
FDIC and other assessments.................................. 50 52 152 161
Interest on subordinated debentures......................... -- 464 870 1,376
Other....................................................... 674 797 1,858 1,962
------------- ------------- ------------ -------------
Total noninterest expense....................... 6,834 7,355 20,859 19,916
------------- ------------- ------------ -------------
Income before income taxes.................................... 1,305 1,452 4,415 1,710
Income tax provision.......................................... 389 430 1,308 494
------------- ------------- ------------ -------------
Income from continuing operations............................. 916 1,022 3,107 1,216
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations, continued
(In thousands, except per share data)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
---------------------------- -----------------------------
2003 2002 2003 2002
------------ ------------ ------------- -------------
(unaudited) (unaudited)
Discontinued Operations:
Income (loss) from operations of
discontinued Fargo branch,
net of income taxes........................ -- (69) -- 29
------------ ------------ ------------- -------------
NET INCOME .................................... $ 916 $ 953 $ 3,107 $ 1,245
============ ============ ============= =============
Dividends on preferred stock................... $ (30) $ (30) $ (90) $ (49)
------------ ------------ ------------- -------------
Income available to common stockholders........ $ 886 $ 923 $ 3,017 $ 1,196
============ ============ ============= =============
BASIC EARNINGS PER COMMON SHARE:
Income from continuing operations.............. $ 0.33 $ 0.37 $ 1.12 $ 0.45
Income (loss) from discontinued
Fargo branch, net of income taxes............ -- (0.03) -- 0.01
------------ ------------ ------------- -------------
Basic earnings per common share................ $ 0.33 $ 0.34 $ 1.12 $ 0.46
============ ============ ============= =============
DILUTED EARNINGS PER COMMON SHARE:
Income from continuing operations.............. $ 0.32 $ 0.37 $ 1.10 $ 0.45
Income (loss) from discontinued
Fargo branch, net of income taxes............ -- (0.03) -- 0.01
------------ ------------ ------------- -------------
Diluted earnings per common share.............. $ 0.32 $ 0.34 $ 1.10 $ 0.46
============ ============ ============= =============
See accompanying notes to consolidated financial statements.
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(In thousands)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------------ ------------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
(unaudited) (unaudited)
NET INCOME............................................ $ 916 $ 953 $ 3,107 $ 1,245
OTHER COMPREHENSIVE INCOME (LOSS) -
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising
during the period, net of income taxes....... (727) 737 (563) 1,946
Less: reclassification adjustment for
securities gains included in net income, net
of income taxes.............................. (278) (541) (539) (1,078)
------------- ------------- ------------- -------------
OTHER COMPREHENSIVE INCOME (LOSS)..................... (1,005) 196 (1,102) 868
------------- ------------- ------------- -------------
COMPREHENSIVE INCOME (LOSS)........................... $ (89) $ 1,149 $ 2,005 $ 2,113
============= ============= ============= =============
See accompanying notes to consolidated financial statements.
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(In thousands, except share data)
For the Nine Months Ended September 30, 2003
Capital Capital Accumulated
Preferred Stock Surplus Common Stock Surplus Other
---------------- Preferred ------------------ Common Retained Treasury Comprehensive
Shares Amount Stock Shares Amount Stock Earnings Stock Income Total
--------- ------- --------- --------- -------- ------- -------- -------- ------------- -------
Balance, December 31, 150 $ -- $ 1,500 2,743,809 $ 27 $16,614 $ 17,395 $ (513) $ 2,700 $37,723
2002.....................
Net income (unaudited).. -- -- -- -- -- -- 3,107 -- -- 3,107
Other comprehensive
income -
Change in unrealized
holding gains on
securities
available for
sale, net of
income taxes and
reclassification
adjustment
(unaudited).......... -- -- -- -- -- -- -- -- (1,102) (1,102)
Preferred stock
dividends
(unaudited).......... -- -- -- -- -- -- (90) -- -- (90)
Other (unaudited) ...... -- -- -- 9,066 1 70 -- -- -- 71
--------- ------- --------- --------- -------- ------- -------- -------- ------------- -------
Balance, September 30,
2003 (unaudited)....... 150 $ -- $ 1,500 2,752,875 $ 28 $16,684 $ 20,412 $ (513) $ 1,598 $39,709
--------- ------- --------- --------- -------- ------- -------- -------- ------------- -------
For the Nine Months Ended September 30, 2002
Capital Capital Accumulated
Preferred Stock Surplus Common Stock Surplus Other
---------------- Preferred ------------------ Common Retained Treasury Comprehensive
Shares Amount Stock Shares Amount Stock Earnings Stock Income Total
-------- ------- --------- --------- -------- ------- -------- -------- ------------- --------
Balance, December 31,
2001..................... -- $ -- $ -- 2,442,050 $ 24 $14,084 $ 15,435 $ (513) $ 1,649 $ 30,679
Net income (unaudited) -- -- -- -- -- -- 1,245 -- -- 1,245
Other comprehensive
income -
Change in
unrealized
holding gains on
securities
available for
sale, net of
income taxes and
reclassification
adjustment
(unaudited)........ -- -- -- -- -- -- -- -- 868 868
Issuance of preferred
stock (unaudited).... 150 -- 1,500 -- -- -- -- -- -- 1,500
Preferred stock
dividends
(unaudited).......... -- -- -- -- -- -- (49) -- -- (49)
Issuance of common
stock (unaudited).... -- -- -- 297,759 3 2,497 -- -- -- 2,500
Other (unaudited)....... -- -- -- 1,000 -- 13 -- -- -- 13
-------- ------- --------- --------- -------- ------- -------- -------- ------------- --------
Balance, September 30,
2002(unaudited)........... 150 $ -- $ 1,500 2,740,809 $ 27 $16,594 $ 16,631 $ (513) $ 2,517 $ 36,756
======== ======= ========= ========= ======== ======= ======== ======== ============= ========
See accompanying notes to consolidated financial statements.
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30
(In thousands)
2003 2002
-------------- --------------
OPERATING ACTIVITIES: (unaudited) (unaudited)
Net income....................................................... $ 3,107 $ 1,245
Adjustments to reconcile net income to net cash provided
by (used in) operating activities -
Provision for credit losses.................................. 1,475 802
Depreciation and amortization................................ 1,085 1,142
Amortization of intangible assets............................ 797 615
Net premium amortization on investment securities............ 3,372 1,850
Proceeds from loans recovered................................ 71 45
Write down of other real estate owned and repossessed assets. 5 75
Change in interest receivable and other assets, net.......... (11,396) 669
Gain on sale of bank premises and equipment.................. (1) 9
Net realized gains on sales of investment securities......... (869) (1,615)
Deferred income taxes........................................ 533 1,670
Change in dividend distribution payable...................... (243) (236)
Change in other liabilities, net............................. (480) (1,937)
Originations of loans to be sold............................. (63,122) (69,188)
Proceeds from sale of loans.................................. 63,122 69,188
-------------- --------------
Net cash provided by (used in) operating activities.... (2,544) 4,334
-------------- --------------
INVESTING ACTIVITIES:
Purchases of investment securities............................... (158,271) (109,470)
Proceeds from sales of investment securities..................... 71,542 70,313
Proceeds from maturities of investment securities................ 43,802 35,681
Net (increase) decrease in loans................................. 54,677 (16,025)
Additions to premises and equipment.............................. (5,977) (2,579)
Proceeds from sale of premises and equipment..................... 107 --
Cash paid for acquisition, net................................... -- (13,964)
Sale of branch, net.............................................. -- (4,365)
-------------- --------------
Net cash provided by (used in) investing activities.... 5,880 (40,409)
-------------- --------------
FINANCING ACTIVITIES:
Net increase in demand, savings, interest checking and money
market accounts.............................................. 996 44,600
Net decrease in time deposits.................................... (22,816) (23,009)
Net increase (decrease) in short-term borrowings................. (6,172) 14,630
Repayments of Federal Home Loan Bank advances.................... (117,300) (20,000)
Proceeds from Federal Home Loan Bank advances.................... 137,300 --
Repayments of long-term borrowings............................... (47) --
Proceeds from long-term borrowings............................... 141 8,560
Proceeds from issuance of stock.................................. -- 1,500
Payment of preferred stock dividends............................. (90) (49)
Amortization of discount on subordinated debentures.............. 65 65
Other, net....................................................... 72 14
-------------- --------------
Net cash provided by (used in) financing activities.... (7,851) 26,311
-------------- --------------
NET DECREASE IN CASH AND CASH EQUIVALENTS........................... (4,515) (9,764)
CASH AND CASH EQUIVALENTS, beginning of period...................... 17,137 23,972
-------------- --------------
CASH AND CASH EQUIVALENTS, end of period............................ $ 12,622 $ 14,208
============== ==============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid.................................................... $ 12,442 $ 15,673
============== ==============
Income taxes paid................................................ $ 814 $ 137
============== ==============
See accompanying notes to consolidated financial statements.
BNCCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2003
NOTE 1 - BNCCORP, Inc.
BNCCORP, Inc. ("BNCCORP") is a registered bank holding company incorporated
under the laws of Delaware. It is the parent company of BNC National Bank
(together with its wholly owned subsidiaries, Milne Scali & Company, BNC
Insurance, Inc. and BNC Asset Management, Inc., the "Bank"). BNCCORP, through
these wholly owned subsidiaries, which operate from 22 locations in Arizona,
Minnesota and North Dakota, provides a broad range of banking, insurance,
brokerage, trust and other financial services to small and mid-sized businesses
and individuals.
The accounting and reporting policies of BNCCORP and its subsidiaries
(collectively, the "Company") conform to accounting principles generally
accepted in the United States of America and general practices within the
financial services industry. The consolidated financial statements included
herein are for BNCCORP, Inc. and its subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
NOTE 2 - Basis of Presentation
The accompanying interim consolidated financial statements have been prepared by
the Company, without audit, in accordance with accounting principles generally
accepted in the United States of America for interim financial information and
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations, although
the Company believes that the disclosures made are adequate to make the
information presented not misleading.
The unaudited consolidated financial statements as of September 30, 2003 and for
the three-month and nine-month periods ended September 30, 2003 and 2002
include, in the opinion of management, all adjustments, consisting solely of
normal recurring adjustments, necessary for a fair presentation of the financial
results for the respective interim periods and are not necessarily indicative of
results of operations to be expected for the entire fiscal year ending December
31, 2003.
The accompanying interim consolidated financial statements have been prepared
under the presumption that users of the interim consolidated financial
information have either read or have access to the audited consolidated
financial statements for the year ended December 31, 2002. Accordingly, footnote
disclosures which would substantially duplicate the disclosures contained in the
December 31, 2002 audited consolidated financial statements have been omitted
from these interim consolidated financial statements. It is suggested that these
interim consolidated financial statements be read in conjunction with the
audited consolidated financial statements for the year ended December 31, 2002
and the notes thereto.
NOTE 3 - Reclassifications
Certain of the 2002 amounts have been reclassified to conform to the 2003
presentations. These reclassifications had no effect on net income or
stockholders' equity.
NOTE 4 - Earnings Per Share
The following table shows the amounts used in computing earnings per share
("EPS") and the effect on weighted average number of shares of potential
dilutive common stock issuances for the three-month periods ended September 30:
Net Per-Share
Income Shares Amount
---------------- ---------------- ---------------
2003
Basic earnings per common share:
Income from continuing operations............. $ 916,000
Less: Preferred stock dividends............... (30,000)
----------------
Income from continuing operations
available to common stockholders........... $ 886,000 2,706,323 $ 0.33
================ ===============
Effect of dilutive shares -
Options.................................... 59,795
----------------
Diluted earnings per common share:
Income from continuing operations............. $ 916,000
Less: Preferred stock dividends............... (30,000)
----------------
Income from continuing operations
available to common stockholders............ $ 886,000 2,766,118 $ 0.32
================ ===============
2002
Basic earnings per common share:
Income from continuing operations............. $1,022,000
Less: Preferred stock dividends............... (30,000)
----------------
Income from continuing operations
available to common stockholders............ 992,000 2,697,929 $ 0.37
Loss from discontinued Fargo branch,
net of income taxes......................... (69,000) 2,697,929 (0.03)
---------------- ---------------
Income available to common stockholders....... $ 923,000 2,697,929 $ 0.34
================ ===============
Effect of dilutive shares -
Options.................................... 7,780
----------------
Diluted earnings per common share:
Income from continuing operations............. $1,022,000
Less: Preferred stock dividends............... (30,000)
----------------
Income from continuing operations
available to common stockholders........... 992,000 2,705,709 $ 0.37
Loss from discontinued Fargo branch,
net of income taxes......................... (69,000) 2,705,709 (0.03)
---------------- ---------------
Income available to common stockholders....... $ 923,000 2,705,709 $ 0.34
================ ===============
The following table shows the amounts used in computing EPS and the effect on
weighted average number of shares of potential dilutive common stock issuances
for the nine-month periods ended September 30:
Net Per-Share
Income Shares Amount
---------------- ---------------- ---------------
2003
Basic earnings per common share:
Income from continuing operations............. $3,107,000
Less: Preferred stock dividends............... (90,000)
----------------
Income from continuing operations
available to common stockholders............ $3,017,000 2,703,577 $ 1.12
================ ===============
Effect of dilutive shares -
Options.................................... 48,272
----------------
Diluted earnings per common share:
Income from continuing operations............. $3,107,000
Less: Preferred stock dividends............... (90,000)
----------------
Income from continuing operations
available to common stockholders............ $3,017,000 2,751,849 $ 1.10
================ ===============
2002
Basic earnings per common share:
Income from continuing operations............. $1,216,000
Less: Preferred stock dividends............... (49,000)
----------------
Income from continuing operations
available to common stockholders............ 1,167,000 2,581,865 $ 0.45
Income from discontinued Fargo branch,
net of income taxes......................... 29,000 2,581,865 0.01
---------------- ---------------
Income available to common stockholders....... $1,196,000 2,581,865 $ 0.46
================ ===============
Effect of dilutive shares -
Options.................................... 19,441
----------------
Diluted earnings per common share:
Income from continuing operations............. $1,216,000
Less: Preferred stock dividends............... (49,000)
----------------
Income from continuing operations
available to common stockholders............ 1,167,000 2,601,306 $ 0.45
Income from discontinued Fargo branch,
net of income taxes......................... 29,000 2,601,306 0.01
---------------- ---------------
Income available to common stockholders....... $1,196,000 2,601,306 $ 0.46
================ ===============
The following number of options, with exercise prices ranging from $7.25 to
$17.75, were outstanding during the periods indicated but were not included in
the computation of diluted EPS because their exercise prices were higher than
the average price of BNCCORP's common stock for the respective period:
2003 2002
---------------- ---------------
Quarter ended March 31............. 77,185 97,508
Quarter ended June 30.............. 63,500 96,145
Quarter ended September 30......... 62,027 103,498
NOTE 5 - Segment Disclosures
The Company segments its operations into three separate business activities,
based on the nature of the products and services for each segment: banking
operations, insurance operations and brokerage, trust and financial services
operations.
Banking operations provide traditional banking services to individuals and small
and mid-sized businesses, such as accepting deposits, consumer and mortgage
banking activities and making commercial loans. The mortgage and commercial
banking activities include the origination and purchase of loans as well as the
sale to and servicing of commercial loans for other institutions.
Insurance operations broker a full range of insurance products and services
including commercial insurance, surety bonds, employee benefits-related
insurance, personal insurance and claims management.
Brokerage, trust and financial services operations provide securities brokerage,
trust and other financial services to individuals and businesses. Brokerage
investment options include individual equities, fixed income investments and
mutual funds. Trust and financial services operations provide a wide array of
trust and other financial services including 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.
The accounting policies of the three segments are the same as those described in
the summary of significant accounting policies included in Note 1 to the
consolidated financial statements for the year ended December 31, 2002.
The Company's financial information for each segment is derived from the
internal profitability reporting system used by management to monitor and manage
the financial performance of the Company. The operating segments have been
determined by how executive management has organized the Company's business for
making operating decisions and assessing performance.
During the second and third quarters of 2002, the Company presented the
following segments: banking operations, insurance operations and brokerage
operations with brokerage operations not meeting the thresholds for separate
presentation in the interim financial statement disclosures. Due to the changing
nature of the brokerage operations segment and its closer alignment with the
trust and financial services operations of the Bank, the Company has elected to
redefine its reporting segments as noted above. Therefore, it has included two
sets of segment disclosures below representing segments as defined in 2002 and
as defined in 2003.
The following tables present, for segments as currently defined, segment profit
or loss, assets and a reconciliation of segment information as of, and for the
three months ended September 30 (in thousands):
2003 2003
-------------------------------------------------- -------------------------------------------------
Brokerage/
Trust/ Reportable Intersegment Consolidated
Banking Insurance Financial Other(a) Totals Segments Other(a) Elimination Total
---------- ---------- ---------- -------- -------- ---------- -------- ------------ --------------
Net interest income.........$ 3,539 $ 13 $ -- $ (528) $ 3,024 $ 3,552 $(528) $ 13 $ 3,037
Other revenue-external
customers................. 2,047 3,532 236 21 5,836 5,815 21 (434) 5,402
Other revenue-from other
segments.................. 32 -- 27 174 233 59 174 (233) --
Depreciation and
amortization.............. 413 215 3 3 634 631 3 -- 634
Equity in the net
income of investees....... 332 -- -- 1,226 1,558 332 1,226 (1,558) --
Other significant
noncash items:
Provision for credit
losses................... 300 -- -- -- 300 300 -- -- 300
Segment profit (loss) from
continuing operations.... 1,218 732 (37) (608) 1,305 1,913 (608) -- 1,305
Income tax provision
(benefit)................ 334 387 (34) (298) 389 687 (298) -- 389
Segment profit (loss)....... 884 345 (3) (310) 916 1,226 (310) -- 916
Segment assets.............. 593,784 28,373 1,265 70,006 693,428 623,422 70,006 (97,901) 595,527
2002 2002
-------------------------------------------------- -------------------------------------------------
Brokerage/
Trust/ Reportable Intersegment Consolidated
Banking Insurance Financial Other(a) Totals Segments Other(a) Elimination Total
---------- ---------- ---------- -------- -------- ---------- -------- ------------ --------------
Net interest income.........$ 4,160 $ 13 $ -- $ (566) $ 3,607 $ 4,173 $ (566) $ 478 $ 4,085
Other revenue-external
customers................. 1,845 3,075 474 25 5,419 5,394 25 (296) 5,123
Other revenue-from other
segments.................. 24 -- 27 180 231 51 180 (231) --
Depreciation and
amortization.............. 380 214 7 4 605 601 4 -- 605
Equity in the net income
of investees.............. 311 -- -- 1,434 1,745 311 1,434 (1,745) --
Other significant
noncash items:
Provision for credit
losses................... 400 -- -- -- 400 400 -- -- 400
Segment profit (loss) from
continuing operations.... 1,737 645 (273) (657) 1,452 2,109 (657) -- 1,452
Income tax provision
(benefit)................. 489 188 (71) (176) 430 606 (176) -- 430
Loss from discontinued
Fargo branch, net of
income taxes.............. (69) -- -- -- (69) (69) -- -- (69)
Segment profit (loss)....... 1,179 457 (202) (481) 953 1,434 (481) -- 953
Segment assets.............. 587,475 28,186 1,911 66,444 684,016 617,572 66,444 (92,272) 591,744
- -------------
(a) The financial information in the "Other" column is for the bank holding
company.
The following tables present, for segments as currently defined, segment profit
or loss, assets and a reconciliation of segment information as of, and for the
nine months ended September 30 (in thousands):
2003 2003
-------------------------------------------------- -------------------------------------------------
Brokerage/
Trust/ Reportable Intersegment Consolidated
Banking Insurance Financial Other(a) Totals Segments Other(a) Elimination Total
---------- ---------- ---------- -------- -------- ---------- -------- ------------ --------------
Net interest income.........$ 11,346 $ 57 $ -- $(1,595) $ 9,808 $ 11,403 $ (1,595) $ 909 $ 10,717
Other revenue-external
customers................. 4,844 11,086 1,213 101 17,244 17,143 101 (1,212) 16,032
Other revenue-from other
segments.................. 99 -- 49 493 641 148 493 (641) --
Depreciation and
amortization.............. 1,216 645 9 12 1,882 1,870 12 -- 1,882
Equity in the net income
of investees.............. 1,807 -- -- 4,188 5,995 1,807 4,188 (5,995) --
Other significant
noncash items:
Provision for credit
losses................... 1,475 -- -- -- 1,475 1,475 -- -- 1,475
Segment profit (loss) from
continuing operations.... 2,761 3,031 436 (1,813) 4,415 6,228 (1,813) -- 4,415
Income tax provision
(benefit)................. 754 1,177 109 (732) 1,308 2,040 (732) -- 1,308
Segment profit (loss)....... 2,007 1,854 327 (1,081) 3,107 4,188 (1,081) -- 3,107
Segment assets.............. 593,784 28,373 1,265 70,006 693,428 623,422 70,006 (97,901) 595,527
2002 2002
-------------------------------------------------- -------------------------------------------------
Brokerage/
Trust/ Reportable Intersegment Consolidated
Banking Insurance Financial Other(a) Totals Segments Other(a) Elimination Total
---------- ---------- ---------- -------- -------- ---------- -------- ------------ --------------
Net interest income.........$ 10,948 $ 23 $ -- $(1,548) $ 9,423 $ 10,971 $ (1,548) $ 1,418 $ 10,841
Other revenue-external
customers................. 4,786 6,003 1,629 94 12,512 12,418 94 (925) 11,587
Other revenue-from other
segments.................. 80 -- 43 492 615 123 492 (615) --
Depreciation and
amortization.............. 1,128 418 29 13 1,588 1,575 13 -- 1,588
Equity in the net income
of investees.............. 233 -- -- 2,410 2,643 233 2,410 (2,643) --
Other significant
noncash items:
Provision for credit
losses................... 802 -- -- -- 802 802 -- -- 802
Segment profit (loss) from
continuing operations.... 3,214 832 (539) (1,797) 1,710 3,507 (1,797) -- 1,710
Income tax provision
(benefit)................ 1,053 266 (192) (633) 494 1,127 (633) -- 494
Income from discontinued
Fargo branch, net of
income taxes............. 29 -- -- -- 29 29 -- -- 29
Segment profit (loss)....... 2,190 566 (347) (1,164) 1,245 2,409 (1,164) -- 1,245
Segment assets.............. 587,475 28,186 1,911 66,444 684,016 617,572 66,444 (92,272) 591,744
- -------------
(a) The financial information in the "Other" column is for the bank holding
company.
The following tables present, for segments as defined in 2002, segment profit or
loss, assets and a reconciliation of segment information as of, and for the
three months ended September 30 (in thousands):
2003 2003
----------------------------------------- -------------------------------------------------
Reportable Intersegment Consolidated
Banking Insurance Other(a) Totals Segments Other(a) Elimination Total
---------- ---------- ---------- -------- ---------- -------- ------------ --------------
Net interest income.........$ 3,539 $ 13 $ (528) $ 3,024 $ 3,552 $ (528) $ 13 $ 3,037
Other revenue-external
customers................. 2,142 3,532 162 5,836 5,674 162 (434) 5,402
Other revenue-from other
segments.................. 59 -- 174 233 59 174 (233) --
Depreciation and
amortization.............. 416 215 3 634 631 3 -- 634
Equity in the net income
of investees.............. 332 -- 1,226 1,558 332 1,226 (1,558) --
Other significant
noncash items:
Provision for credit
losses.................. 300 -- -- 300 300 -- -- 300
Segment profit (loss) from
continuing operations..... 1,202 732 (629) 1,305 1,934 (629) -- 1,305
Income tax provision
(benefit)................. 307 387 (305) 389 694 (305) -- 389
Segment profit (loss)....... 895 345 (324) 916 1,240 (324) -- 916
Segment assets.............. 594,395 28,373 70,660 693,428 622,768 70,660 (97,901) 595,527
2002 2002
----------------------------------------- -------------------------------------------------
Reportable Intersegment Consolidated
Banking Insurance Other(a) Totals Segments Other(a) Elimination Total
---------- ---------- ---------- -------- ---------- -------- ------------ --------------
Net interest income.........$ 4,160 $ 13 $ (566) $ 3,607 $ 4,173 $ (566) $ 478 $ 4,085
Other revenue-external
customers................. 2,000 3,075 344 5,419 5,075 344 (296) 5,123
Other revenue-from
other segments............ 51 -- 180 231 51 180 (231) --
Depreciation and
amortization.............. 383 214 8 605 597 8 -- 605
Equity in the net income
of investees.............. 311 -- 1,434 1,745 311 1,434 (1,745) --
Other significant
noncash items:
Provision for credit
losses................... 400 -- -- 400 400 -- -- 400
Segment profit (loss) from
continuing operations.... 1,738 645 (931) 1,452 2,383 (931) -- 1,452
Income tax provision
(benefit)................ 460 188 (218) 430 648 (218) -- 430
Loss from discontinued
Fargo branch, net
of income taxes.......... (69) -- -- (69) (69) -- -- (69)
Segment profit (loss)....... 1,209 457 (713) 953 1,666 (713) -- 953
Segment assets.............. 588,150 28,186 67,680 684,016 616,336 67,680 (92,272) 591,744
- -------------
(a) The financial information in the "Other" column is for the bank holding
company and the brokerage segment.
The following tables present, for segments as defined in 2002, segment profit or
loss, assets and a reconciliation of segment information as of, and for the nine
months ended September 30 (in thousands):
2003 2003
----------------------------------------- -------------------------------------------------
Reportable Intersegment Consolidated
Banking Insurance Other(a) Totals Segments Other(a) Elimination Total
---------- ---------- ---------- -------- ---------- -------- ------------ --------------
Net interest income.........$ 11,346 $ 57 $ (1,595) $ 9,808 $ 11,403 $(1,595) $ 909 $ 10,717
Other revenue-external
customers................. 5,718 11,086 440 17,244 16,804 440 (1,212) 16,032
Other revenue-from other
segments.................. 148 -- 493 641 148 493 (641) --
Depreciation and
amortization.............. 1,223 645 14 1,882 1,868 14 -- 1,882
Equity in the net income
of investees.............. 1,807 -- 4,188 5,995 1,807 4,188 (5,995) --
Other significant
noncash items:
Provision for credit
losses.................. 1,475 -- -- 1,475 1,475 -- -- 1,475
Segment profit (loss) from
continuing operations.... 3,276 3,031 (1,892) 4,415 6,307 (1,892) -- 4,415
Income tax provision
(benefit)................ 894 1,177 (763) 1,308 2,071 (763) -- 1,308
Segment profit (loss)....... 2,382 1,854 (1,129) 3,107 4,236 (1,129) -- 3,107
Segment assets.............. 594,395 28,373 70,660 693,428 622,768 70,660 (97,901) 595,527
2002 2002
----------------------------------------- -------------------------------------------------
Reportable Intersegment Consolidated
Banking Insurance Other(a) Totals Segments Other(a) Elimination Total
---------- ---------- ---------- -------- ---------- -------- ------------ --------------
Net interest income.........$ 10,948 $ 23 $ (1,548) $ 9,423 $ 10,971 $(1,548) $ 1,418 $ 10,841
Other revenue-external
customers................. 5,269 6,003 1,240 12,512 11,272 1,240 (925) 11,587
Other revenue-from other
segments.................. 123 -- 492 615 123 492 (615) --
Depreciation and
amortization.............. 1,145 418 25 1,588 1,563 25 -- 1,588
Equity in the net income
of investees.............. 233 -- 2,410 2,643 233 2,410 (2,643) --
Other significant
noncash items:
Provision for credit
losses.................. 802 -- -- 802 802 -- -- 802
Segment profit (loss) from
continuing operations.... 3,191 832 (2,313) 1,710 4,023 (2,313) -- 1,710
Income tax provision
(benefit)................ 1,046 266 (818) 494 1,312 (818) -- 494
Income from discontinued
Fargo branch, net
of income taxes.......... 29 -- -- 29 29 -- -- 29
Segment profit (loss)....... 2,174 566 (1,495) 1,245 2,740 (1,495) -- 1,245
Segment assets.............. 588,150 28,186 67,680 684,016 616,336 67,680 (92,272) 591,744
- -------------
(a) The financial information in the "Other" column is for the bank holding
company and the brokerage segment.
NOTE 6 - Stock-Based Compensation
At September 30, 2003, the Company had two stock-based employee compensation
plans. The Company applies the recognition and measurement principles of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," ("APB 25") and related interpretations in accounting for those
plans. No stock-based employee compensation expense is reflected in net income
for stock options granted under the plans as all options granted under those
plans had an exercise price equal to the market value of the underlying common
stock on the date of grant. Compensation expense is reflected in net income for
the periods presented below for restricted stock issued under the stock plans
and its net effect on net income is reflected in the table below.
The following table illustrates the effect on net income and EPS if the Company
had applied the fair value recognition provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123") to stock-based employee compensation (dollars in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2003 2002 2003 2002
------------- ------------- -------------- ------------
Net income, as reported.............................. $ 916 $ 953 $3,107 $1,245
Add: total stock-based employee compensation expense
included in reported net income, net of related
tax effects..................................... 2 2 5 5
Deduct: total stock-based employee compensation
expense determined under fair value method for
all awards, net of related tax effects.......... (22) (10) (46) (30)
------------- ------------- ------------- ------------
Pro forma net income................................ $ 896 $ 945 $3,066 $1,220
============= ============= ============= ============
Earnings per share:
Basic - as reported............................ $ 0.33 $ 0.34 $ 1.12 $ 0.46
Basic - pro forma.............................. $ 0.30 $ 0.32 $ 1.04 $ 0.43
Diluted - as reported.......................... $ 0.32 $ 0.34 $ 1.10 $ 0.46
Diluted - pro forma............................ $ 0.30 $ 0.32 $ 1.02 $ 0.43
NOTE 7 - Derivative Activities
During May and June 2001, the Company purchased interest rate cap contracts with
notional amounts totaling $40.0 million to mitigate interest rate risk in
rising-rate scenarios. The referenced interest rate is three-month LIBOR with
$20.0 million of 4.50 percent contracts having three-year original maturities
and $20.0 million of 5.50 percent contracts having five-year original
maturities. The total amount paid for the contracts was $1.2 million. The
contracts are reflected in the Company's consolidated balance sheet at their
current combined fair value of approximately $60,000. The contracts are not
being accounted for as hedges under Statement of Financial Accounting Standards
No. 133, "Accounting for Derivatives and Hedging Activities." As a result, the
impact of marking the contracts to fair value has been, and will continue to be,
included in net interest income. During the three months ended September 30,
2003 and 2002, the impact of marking the contracts to market, reflected as
additional interest income (expense) on Federal Home Loan Bank ("FHLB")
advances, was an adjustment to net interest income of approximately $20,000 and
($253,000), respectively. During the nine months ended September 30, 2003 and
2002, the impact of marking the contracts to market was a reduction to net
interest income of approximately ($76,000) and ($721,000), respectively.
NOTE 8 - Guarantees
As of September 30, 2003, the Company had entered into the following guarantee
arrangements:
Contingent Consideration in Business Combination. Pursuant to the terms of the
agreement related to the acquisition of Milne Scali & Company ("Milne Scali") in
April 2002, additional consideration of up to $6.2 million may be payable to the
former shareholders of Milne Scali, subject to Milne Scali achieving certain
financial performance targets. In accordance with Statement of Financial
Accounting Standards No. 141, "Business Combinations" ("SFAS 141"), there is no
current carrying amount associated with this guarantee. Additionally, there are
no recourse provisions associated with this guarantee that would enable the
Company to recover from third parties any of the amounts paid under the
guarantee and there are no assets held either as collateral or by third parties
that, upon the occurrence of any triggering event or condition under the
guarantee that the Company could obtain and liquidate to recover all or a
portion of the amounts paid under the guarantee.
Guaranteed Preferred Beneficial Interests in Company's Subordinated Debentures.
BNCCORP, concurrent with the issuance of preferred securities in July 2000 by
BNC Capital Trust I and in July 2001 by BNC Statutory Trust II, fully and
unconditionally guaranteed all obligations of the special purpose trusts related
to the trust preferred securities. There are no recourse provisions associated
with these guarantees that would enable BNCCORP to recover from third parties
any of the amounts paid under the guarantees and there are no assets held either
as collateral or by third parties that, upon the occurrence of any triggering
event or condition under the guarantees that BNCCORP could obtain and liquidate
to recover all or a portion of the amounts paid under the guarantees.
Performance Standby Letters of Credit. As of September 30, 2003, the Bank had
outstanding $787,000 of performance standby letters of credit. Performance
standby letters of credit are irrevocable obligations to the beneficiary on the
part of the Bank to make payment on account of any default by the account party
in the performance of a nonfinancial or commercial obligation. Under these
arrangements, the Bank could, in the event of the account party's
nonperformance, be required to pay a maximum of the amount of issued letters of
credit. Under the agreements, the Bank has recourse against the account party up
to and including the amount of the performance standby letter of credit. The
Bank evaluates each account party's creditworthiness on a case-by-case basis and
the amount of collateral obtained varies and is based on management's credit
evaluation of the account party. Effective January 1, 2003, such guarantees are
required to be recognized as liabilities at their fair values as they are
modified or entered into, in accordance with Financial Accounting Standards
Board ("FASB") Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees Including Indirect Guarantees of Indebtedness of
Others" ("FIN 45").
Financial Standby Letters of Credit. As of September 30, 2003, the Bank had
outstanding $5.5 million of financial standby letters of credit. Financial
standby letters of credit are irrevocable obligations to the beneficiary on the
part of the Bank to repay money borrowed by or advanced to or for the account of
the account party or to make payment on account of any indebtedness undertaken
by the account party, in the event that the account party fails to fulfill its
obligation to the beneficiary. Under these arrangements, the Bank could, in the
event of the account party's nonperformance, be required to pay a maximum of the
amount of issued letters of credit. Under the agreements, the Bank has recourse
against the account party up to and including the amount of the financial
standby letter of credit. The Bank evaluates each account party's
creditworthiness on a case-by-case basis and the amount of collateral obtained
varies and is based on management's credit evaluation of the account party.
Effective January 1, 2003, such guarantees are required to be recognized as
liabilities at their fair value as they are modified or entered into, in
accordance with FIN 45.
NOTE 9 - Recently Adopted Accounting Standards
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143 amends
FASB Statement No. 19, "Financial Accounting and Reporting by Oil and Gas
Producing Companies," and applies to all entities. The statement addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. It applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and / or the normal operation of a long-lived asset, except for certain
obligations of lessees. The Company adopted this standard on January 1, 2003;
however, adoption of this statement did not have a material impact.
In April 2002, the FASB issued Statement of Financial Accounting Standards No.
145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections" ("SFAS 145"). SFAS 145 rescinds
FASB Statement No. 4, "Reporting Gains and Losses from Extinguishment of Debt,"
and an amendment of that Statement, FASB Statement No. 64, "Extinguishments of
Debt Made to Satisfy Sinking-Fund Requirements." SFAS 145 also rescinds FASB
Statement No. 44, "Accounting for Intangible Assets of Motor Carriers." Finally,
SFAS 145 amends FASB Statement No. 13, "Accounting for Leases," to eliminate
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions and amends other
existing authoritative pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under changed conditions. The
provisions of SFAS 145 related to the rescission of FASB Statement No. 4 are to
be applied in fiscal years beginning after May 15, 2002 (January 1, 2003 for the
Company) with any gain or loss on extinguishment of debt that was classified as
an extraordinary item in prior periods presented that does not meet the criteria
in Accounting Principles Board Opinion 30 for classification as an extraordinary
item being reclassified. The provisions of SFAS 145 related to FASB Statement
No. 13 that relate to modifications of a capital lease that make it an operating
lease became effective for transactions occurring after May 15, 2002. The
Company adopted this standard as indicated above; however, adoption did not have
a material impact.
In June 2002, the FASB issued Statement of Financial Accounting Standards No.
146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS
146"). SFAS 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)" ("EITF Issue 94-3"). One of the principal differences
between SFAS 146 and EITF Issue 94-3 pertains to the criteria for recognizing a
liability for exit or disposal costs. Under EITF Issue 94-3, a liability for
such costs was recognized as of the date of an entity's commitment to an exit
plan. Pursuant to SFAS 146, a liability is recorded as of the date an obligation
is incurred. SFAS 146 requires that an exit or disposal liability be initially
measured at fair value. Provisions of SFAS 146 are effective for exit or
disposal activities that are initiated after December 31, 2002. The Company
adopted SFAS 146 on January 1, 2003 with no material impact.
In October 2002, the FASB issued Statement of Financial Accounting Standards No.
147, "Acquisition of Certain Financial Institutions, an Amendment to FASB
Statements No. 72 ("SFAS 72") and 144 and FASB Interpretation No. 9 ("FIN 9")"
("SFAS 147"). SFAS 147 removes acquisitions of financial institutions from the
scope of both SFAS 72 and FIN 9 and requires that those transactions be
accounted for in accordance with SFAS 141 and Statement of Financial Accounting
Standards No. 142, "Goodwill and Intangible Assets" ("SFAS 142"). Thus, the
requirement to recognize (and subsequently amortize) any excess of the fair
value of liabilities assumed over the fair value of tangible and identifiable
intangible assets acquired as an unidentifiable intangible asset no longer
applies to acquisitions within the scope of SFAS 147. Entities with previously
recognized unidentifiable intangible assets that are still amortizing them in
accordance with SFAS 72 must, effective the latter of the date of the
acquisition or the full adoption of SFAS 142, reclassify those intangible assets
to goodwill and terminate amortization on them. The Company adopted SFAS 147 on
October 1, 2002 and the adoption resulted in no reclassification or revisions to
prior period financial statements.
In November 2002, the FASB issued FIN 45, which addresses the disclosures to be
made by a guarantor in its interim and annual financial statements about its
obligations under guarantees. FIN 45 also requires the recognition of a
liability by a guarantor at the inception of certain guarantees. FIN 45 requires
the guarantor to recognize a liability for the non-contingent component of the
guarantee, which is the obligation to stand ready to perform in the event that
specified triggering events or conditions occur. The initial measurement of this
liability is the fair value of the guarantee at inception. The recognition of
the liability is required even if it is not probable that payments will be
required under the guarantee or if the guarantee was issued with a premium
payment or as part of a transaction with multiple elements. The Company has
adopted the disclosure requirements of FIN 45 and has applied the recognition
and measurement provisions for guarantees entered into or modified after
December 31, 2002. Between January 1, 2003 and September 30, 2003, the Bank
originated performance and financial standby letters of credit totaling $102.5
million. Of that amount, $74.8 million was participated to other financial
institutions. The current balance of performance and financial standby letters
of credit outstanding on September 30, 2003 was $38.4 million, $32.1 million of
which was participated to other financial institutions and $6.3 million for
which the Bank remained obligated to the beneficiaries of the letters of credit.
The currently outstanding guarantees are recognized as liabilities on the Bank's
balance sheet at their current estimated combined fair value of approximately
$71,000.
In December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148, "Accounting for Stock-Based Compensation; Transition and Disclosure"
("SFAS 148"). SFAS 148 amends SFAS 123 to provide new guidance concerning
transition when an entity changes from the intrinsic value method to the fair
value method of accounting for employee stock-based compensation cost. As
amended by SFAS 148, SFAS 123 now also requires additional information to be
disclosed regarding such cost in annual financial statements and in condensed
interim statements of public companies. In general, the new transition
requirements are effective for financial statements for fiscal years ending
after December 15, 2002. Earlier application was permitted if statements for a
fiscal year ending prior to December 15, 2002 had not yet been issued as of
December 2002. Interim disclosures are required for reports containing condensed
financial statements for periods beginning after December 15, 2002. The Company
accounts for stock-based compensation using the intrinsic method under APB 25
while providing the disclosures provided for in SFAS 123. The Company adopted
the annual disclosure requirements for SFAS 148 for purposes of its December 31,
2002 consolidated financial statements and has adopted the interim disclosure
requirements of SFAS 148 for purposes of these consolidated financial
statements. Interim disclosures related to stock-based compensation are
presented in Note 6 to these consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 addresses consolidation by
business enterprises of variable interest entities which have certain
characteristics by requiring that if a business enterprise has a controlling
interest in a variable interest entity (as defined by FIN 46), the assets,
liabilities and results of activities of the variable interest entity be
included in the consolidated financial statements with those of the business
enterprise. FIN 46 applies to variable interest entities created after January
31, 2003 and to variable interest entities in which an enterprise obtains an
interest after that date. For variable interests acquired before February 1,
2003, FIN 46 applies in the first fiscal year or interim period beginning after
June 15, 2003. The Company has, and will continue to, adopt the various
provisions of FIN 46 as indicated above but presently does not have any variable
interest entities that would be required to be included in its consolidated
financial statements. The Company previously reported that it would adopt FIN 46
for variable interests acquired before February 1, 2003 on July 1, 2003;
however, the FASB staff has delayed the implementation date for these provisions
until the fourth quarter of 2003.
In April 2003, the FASB issued Statement of Financial Accounting Standards No.
149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities" ("SFAS 149"). SFAS 149 amends Statement 133 for decisions made (1)
as part of the Derivatives Implementation Group process that effectively
required amendments to Statement 133, (2) in connection with other FASB projects
dealing with financial instruments, and (3) in connection with implementation
issues raised in relation to the application of the definition of a derivative,
in particular, the meaning of "an initial net investment that is smaller than
would be required for other types of contracts that would be expected to have a
similar response to changes in market factors," the meaning of "underlying," and
the characteristics of a derivative that contains financing components. SFAS 149
is generally effective for contracts entered into or modified after June 30,
2003 and for hedging relationships designated after June 30, 2003. The Company
adopted SFAS 149 On July 1, 2003 and such adoption did not have a material
effect on its financial position or results of operations.
NOTE 10 - Adoption of SFAS 150; Inclusion of Non-GAAP Financial Measures
In May 2003, the FASB issued Statement of Financial Accounting Standards No.
150, "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity" ("SFAS 150"). SFAS 150 established standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or
asset in some circumstances). Many of those instruments were previously
classified as equity. SFAS 150 is effective for financial instruments entered
into or modified after May 31, 2003, and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003, except for
mandatorily redeemable financial instruments of nonpublic entities. The Company
adopted SFAS 150 on July 1, 2003. Adoption of the standard requires
classification of the Company's subordinated debentures (commonly referred to as
"trust preferred securities") as liabilities versus the previous classification
between liabilities and equity. Additionally, the standard requires that the
interest expense associated with the securities be included in interest expense
and, hence, included in the computation of net interest income and net interest
margin.
Included under Item 2, "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Comparison of Operating Results for the
Three and Nine Months Ended September 30, 2003 and 2002 - Net Interest Income,"
and - "Noninterest Expense" are comparative amounts and ratios relating to net
interest income, net interest margin, noninterest expense, efficiency ratio and
the ratio of noninterest expenses to average assets. These comparative amounts
and ratios are "non-GAAP financial measures" within the meaning of the
Securities and Exchange Commission's rules and regulations. The Company has
presented this comparative information due to the inconsistencies in reporting
that result from the July 1, 2003 adoption of SFAS 150 and the fact that SFAS
150 does not allow restatement of prior periods. Effective July 1, 2003,
interest expense on the Company's subordinated debentures is required to be
classified in interest expense versus its prior classification in noninterest
expense. This results in amounts and ratios compliant with generally accepted
accounting principles ("GAAP") that are not comparative between the periods
presented. In the comparative amounts and ratios presented, the Company has
assumed that SFAS 150 had been effective for all periods presented and,
therefore, that interest expense associated with the subordinated debentures was
included in net interest income in all the periods presented. This results in
amounts and ratios that are comparative between periods and assists in
identifying the true impact of other factors on net interest income and the
comparative ratios. The comparative amounts and ratios are presented immediately
following the related GAAP amounts and ratios that result from and reflect the
adoption of SFAS 150 on July 1, 2003. A quantitative reconciliation of all
included non-GAAP financial measures is presented under Item 2, "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Comparison of Operating Results for the Three and Nine Months Ended September
30, 2003 and 2002 - Non-GAAP Financial Measures."
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
For purposes of Items 2, 3 and 4 of Part I of this Form 10-Q, we refer to "we,"
"our" or the "Company" when such reference includes BNCCORP, Inc. and its
consolidated subsidiaries, collectively; "BNCCORP" when referring only to
BNCCORP, Inc.; the "Bank" when referring only to BNC National Bank; "Milne
Scali" when referring only to Milne Scali & Company, Inc.; "BNC Insurance" when
referring only to BNC Insurance, Inc.; and "BNC AMI" when referring only to BNC
Asset Management, Inc.
Comparison of Financial Condition at September 30, 2003 and December 31, 2002
Assets. Our total assets decreased $6.7 million, from $602.2 million at December
31, 2002 to $595.5 million at September 30, 2003. The following table presents
our assets by category as of September 30, 2003 and December 31, 2002, as well
as the amount and percent of change between the two dates. Significant changes
are discussed in lettered explanations below the table (amounts are in
thousands):
Change
----------------------------
September 30, December 31,
Assets 2003 2002 $ %
- ----------------------------------------- ------------------- ------------------ ------------- -----------
Cash and due from banks.................. $ 12,588 $ 16,978 $ (4,390) (25.9)% (a)
Interest-bearing deposits with banks..... 34 159 (125) (78.6)%
Investment securities available for sale. 246,268 208,072 38,196 18.4% (b)
Federal Reserve Bank and Federal Home
Loan Bank Stock...................... 7,551 7,071 480 6.8%
Loans and leases, net.................... 274,564 330,788 (56,224) (17.0)% (c)
Premises and equipment, net.............. 15,886 11,100 4,786 43.1% (d)
Interest receivable...................... 2,634 2,856 (222) (7.8)%
Other assets............................. 13,399 4,119 9,280 225.3% (e)
Goodwill................................. 14,526 12,210 2,316 19.0% (f)
Other intangible assets, net............. 8,077 8,875 (798) (9.0)%
------------------- ------------------ ------------- -----------
Total assets.................... $ 595,527 $ 602,228 $ (6,701) (1.1)%
=================== ================== ============= ===========
- -------------------
(a) Cash and due from banks - The decrease in cash and due from banks is
primarily attributable to an account reclassification program that was
implemented during 2003 and results in the Bank holding less cash at the
Federal Reserve.
(b) Investment securities available for sale - Investment securities available
for sale increased as loan volume decreased (see (c) below) and we
maintained a somewhat static earning asset portfolio.
(c) Loans and leases, net - Loans decreased between December 31, 2002 and
September 30, 2003 partly because loans typically increase at yearend as
commercial customers draw down on their lines of credit and then make
payments on the lines during the early part of the subsequent year.
Additionally, during 2003, loan volume was negatively impacted by planned
loan reductions and the completion of some financed commercial real estate
projects. The loan reductions were not offset by growth due to lack of
strong loan demand during 2003. Due to current economic conditions, it is
difficult to predict, with any degree of certainty, loan growth in future
periods.
(d) Premises and equipment, net - Premises and equipment increased due to our
purchase of the Milne Scali building in Phoenix, Arizona in March 2003 for
its appraised value of $3.9 million, the construction of a facility in
Scottsdale, Arizona, some initial leasehold improvements related to the
planned relocation of our office at 2725 East Camelback Road, Phoenix,
Arizona to 2425 East Camelback Road, and some improvements to our office
building at 322 East Main Avenue, Bismarck, North Dakota.
(e) Other assets - The increase in other assets is primarily attributable to
the purchase of $10 million of bank-owned life insurance during the third
quarter of 2003.
(f) Goodwill - Goodwill increased due to the 2003 earnout payment related to
the April 2002 acquisition of Milne Scali.
Allowance for Credit Losses. The following table sets forth information
regarding changes in our allowance for credit losses for the three- and
nine-month periods ended September 30, 2003 and 2002 (amounts are in thousands):
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------------------- ----------------------------------
2003 2002 2003 2002
----------------- ---------------- ----------------- ----------------
Balance, beginning of period.......................... $ 4,953 $ 4,627 $ 5,006 $ 4,325
Provision for credit losses........................... 300 400 1,475 802
Loans charged off..................................... (438) (102) (1,725) (233)
Loans recovered....................................... 12 14 71 45
----------------- ---------------- ----------------- ----------------
Balance, end of period................................ $ 4,827 $ 4,939 $ 4,827 $ 4,939
================= ================ ================= ================
Ending loan portfolio ................................ $ 279,391 $ 317,099
================= ================
Allowance for credit losses as a percentage of
ending loan portfolio........................ 1.73% 1.56%
As of September 30, 2003, our allowance for credit losses was 1.73 percent of
total loans as compared to 1.49 percent at December 31, 2002 and 1.56 percent at
September 30, 2002. Our allowance for credit losses as a percentage of total
loans has increased primarily due to reduced loan volume. Net charge-offs as a
percentage of average total loans for the three- and nine-month periods ended
September 30, 2003 and 2002 were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ -------------------------------
2003 2002 2003 2002
------------- ------------- ------------ ---------------
Ratio of net charge-offs to average total loans.. (0.15)% (0.03)% (0.52)% (0.06)%
Ratio of net charge-offs to average total loans,
annualized.................................... (0.58)% (0.11)% (0.70)% (0.08)%
Our provision for loan losses for the three-month period ended September 30,
2003 was $300,000 compared to $400,000 for the same period in 2002.
Our provision for loan losses for the nine-month period ended September 30, 2003
was approximately $1.5 million compared to $802,000 for the same period in 2002.
This increase is primarily a direct response to continued charge-off activity
related to loans to a commercial contractor that the Bank has been in the
process of liquidating / collecting over the past four quarters and the
continued presence of a $4.7 million nonperforming commercial real estate loan
made in the Arizona market.
Loans charged off during the third quarter of 2003 totaled $438,000,
representing a $336,000 increase over loans charged off during the third quarter
of 2002. The increase was primarily attributable to charge-offs related to one
commercial credit. The credit is the above-mentioned loan to a commercial
contractor on which we charged off $320,000 of principal during the quarter. See
comments regarding this credit relationship in the next paragraph.
Loans charged off during the nine-month period ended September 30, 2003 totaled
approximately $1.7 million, representing a $1.5 million increase over loans
charged off during the same period in 2002. The increase was primarily
attributable to loans to the above-mentioned commercial contractor. During the
nine-month period ended September 30, 2003, $1.3 million was charged off on this
credit relationship. The Bank continues the liquidation process with this
credit, which has now been fully charged off. Due to the further liquidation
efforts, the Bank may recover some previously charged off amounts.
We maintain our 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. The loan and lease portfolio
and other credit exposures are reviewed regularly to evaluate the adequacy of
the allowance for credit losses. In determining the level of the allowance, we
evaluate the allowance necessary for specific nonperforming loans and also
estimate losses in other credit exposures. The resultant three allowance
components are as follows:
Specific Reserves. The amount of specific reserves is determined through a
loan-by-loan analysis of problem loans over a minimum size that considers
expected future cash flows, the value of collateral and other factors that
may impact the borrower's ability to make payments when due. Included in
this group are those nonaccrual or renegotiated loans that meet the
criteria as being "impaired" under the definition in Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a
Loan" ("SFAS 114"). A loan is impaired when, based on current information
and events, it is probable that a creditor will be unable to collect all
amounts due according to the contractual terms of the loan agreement.
Problem loans also include those credits that have been internally
classified as credits requiring management's attention due to underlying
problems in the borrower's business or collateral concerns. Under SFAS 114,
any allowance on impaired loans is generally based on one of three methods.
It requires that impaired loans be measured at either the present value of
expected cash flows at the loan's effective interest rate, the loan's
observable market price or the fair value of the collateral of the loan.
Reserves for Homogeneous Loan Pools. We make a significant number of loans
and leases that, due to their underlying similar characteristics, are
assessed for loss as "homogeneous" pools. Included in the homogeneous pools
are consumer loans and commercial loans under a certain size, which have
been excluded from the specific reserve allocation previously discussed. We
segment the pools by type of loan or lease and, using historical loss
information, estimate a loss reserve for each pool.
Qualitative Reserve. Our senior lending management also allocates reserves
for special situations, which are unique to the measurement period. These
include, among other things, prevailing and anticipated economic trends,
such as economic conditions in certain geographical or industry segments of
the portfolio and economic trends in the retail lending sector,
management's assessment of credit risk inherent in the loan portfolio,
delinquency trends, historical loss experience, peer-group loss history and
other factors.
Continuous credit monitoring processes and the analysis of loss components is
the principal method relied upon by management to ensure that changes in
estimated credit loss levels are reflected in our allowance for credit losses on
a timely basis. Management also considers experience of peer institutions and
regulatory guidance in addition to our own experience. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the allowance for credit losses. Such agencies may require
additions to the allowance based on their judgment about information available
to them at the time of their examination.
Loans, leases and other extensions of credit deemed uncollectible are charged to
the allowance. Subsequent recoveries, if any, are credited to the allowance. The
amount of the allowance for credit losses is highly dependent upon management's
estimates of variables affecting valuation, appraisals of collateral,
evaluations of performance and status, and the amounts and timing of future cash
flows expected to be received on impaired loans. Such estimates, appraisals,
evaluations and cash flows may be subject to frequent adjustments due to
changing economic prospects of borrowers, lessees or properties. These estimates
are reviewed periodically. Actual losses may vary from current estimates and the
amount of the provision may be either greater than or less than actual net
charge-offs. The related provision for credit losses, which is charged to
income, is the amount necessary to adjust the allowance to the level determined
appropriate through application of the above processes.
Nonperforming Assets. The following table sets forth information concerning our
nonperforming assets as of the dates indicated (amounts are in thousands):
September 30, December 31,
2003 2002
---------------- ----------------
Nonperforming loans:
Loans 90 days or more delinquent and still
accruing interest................................ $ -- $ 5,081
Nonaccrual loans.................................... 5,922 2,549
Restructured loans.................................. -- --
---------------- ----------------
Total nonperforming loans.............................. 5,922 7,630
Other real estate owned and repossessed assets...... -- 8
---------------- ----------------
Total nonperforming assets............................. $ 5,922 $ 7,638
================ ================
Allowance for credit losses............................ $ 4,827 $ 5,006
================ ================
Ratio of total nonperforming assets to total assets ... 0.99% 1.27%
Ratio of total nonperforming loans to total loans...... 2.12% 2.27%
Ratio of allowance for credit losses to total
nonperforming loans................................. 82% 66%
Loans 90 days or more delinquent and still accruing interest include loans over
90 days past due which we believe, based on our 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. Our lending and management personnel monitor
these loans closely.
Nonaccrual loans include loans on which the accrual of interest has been
discontinued. Accrual of interest is discontinued when we believe, 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.
Of the $5.9 million in the nonaccrual category at September 30, 2003, $4.7
million relates to one commercial real estate loan (which was included in the
loans 90 days or more delinquent and still accruing interest category at
December 31, 2002), and the balance is made up of smaller credits.
Regarding the $4.7 million credit, the Bank was scheduled to take title of the
property on April 24, 2003. The Bank and the borrower have contractually agreed
to extend the maturity of the loan to November 1, 2003 with the guarantor (an
estate) paying all past due interest and putting up a cash reserve to carry the
loan to November 1, 2003. The probate court has approved these estate payments
and the Bank has received the required payments. The borrower is currently
negotiating with a potential buyer for the property and the loan extension may
allow adequate time to consummate the sale transaction that would potentially
result in payment of the loan in full by the November 1, 2003 extension date. If
a sale of the property does not occur by November 1, 2003, the Bank expects to
commence proceedings to take title of the property and the guarantors will all
remain jointly and severally liable for any deficiency.
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
original principal will occur. We had no restructured loans in our portfolio at
September 30, 2003 or December 31, 2002.
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 consolidated 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, we perform valuations
periodically 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. We had no other real estate owned and repossessed assets at
September 30, 2003 and $8,000 at December 31, 2002.
The ratio of allowance for credit losses to total nonperforming loans was 82
percent at September 30, 2003 compared to 66 percent at December 31, 2002. The
increase reflects increased allocation of the allowance to certain nonperforming
commercial credits.
Liabilities. Our total liabilities increased approximately $13.6 million, from
$542.2 million at December 31, 2002 to $555.8 million at September 30, 2003. The
following table presents our liabilities by category as of September 30, 2003
and December 31, 2002 as well as the amount and percent of change between the
two dates. Significant changes are discussed in lettered explanations below the
table (amounts are in thousands):
Change
-------------------------------
Liabilities September 30, December 31,
2003 2002 $ %
-------------------- ------------------ -------------- ------------
DEPOSITS:
Noninterest-bearing.................. $ 41,019 $ 44,362 $ (3,343) (7.5)% (a)
Interest-bearing -
Savings, interest checking and
money market.................... 191,870 187,531 4,339 2.3% (b)
Time deposits $100,000 and over.... 53,173 64,905 (11,732) (18.1)% (c)
Other time deposits................ 90,363 101,447 (11,084) (10.9)% (c)
Short-term borrowings................ 21,948 28,120 (6,172) (21.9)% (d)
Federal Home Loan Bank advances...... 117,200 97,200 20,000 20.6% (e)
Long-term borrowings................. 8,655 8,561 94 1.1%
Subordinated Debentures.............. 22,148 -- 22,148 100.0% (f)
Other liabilities.................... 9,442 10,053 (611) (6.1)%
-------------------- ------------------ --------------
Total liabilities........... $ 555,818 $ 542,179 $ 13,639 2.5%
==================== ================== ==============
- -------------------
(a) Noninterest-bearing deposits - Our noninterest-bearing deposits typically
increase at yearend as commercial customers draw down on lines of credit
and place funds in the bank's noninterest-bearing deposit accounts.
Noninterest-bearing deposits can also fluctuate widely on a day-to-day
basis due to the number of commercial customers we serve and the nature of
their transaction account activity.
(b) Savings, interest checking and money market deposits - The increase in
savings, interest checking and money market deposits is attributable to
deposit growth in our Arizona and North Dakota markets offset by deposit
decreases in our Minnesota market. This line item can also reflect daily
fluctuations in interest checking and money market accounts, particularly
commercial accounts.
(c) Time deposits $100,000 and over; other time deposits - Time deposits
$100,000 and over and other time deposits decreased primarily because
brokered and national market certificates of deposit ("CDs") decreased
approximately $19.8 million between December 31, 2002 and September 30,
2003. Additionally, time deposits declined partly because a number of CDs,
held by credit unions and other financial institutions (with balances
averaging approximately $99,000), matured and the funds were not
reinvested.
(d) Short-term borrowings - Short-term borrowings decreased primarily because
of an $8.5 million decrease in Federal funds purchased offset by a $2.3
million increase in customer repurchase agreements between December 31,
2002 and September 30, 2003.
(e) Federal Home Loan Bank advances - $10.0 million of FHLB advances held at
December 31, 2002 matured in January 2003 and, during the third quarter of
2003, we converted $20.0 million of short-term FHLB advances to $30.0
million of longer term FHLB advances maturing in 2005 and 2006.
(f) Subordinated debentures - Due to the adoption of SFAS 150 on July 1, 2003,
our subordinated debentures are now classified as a liability. Prior to
July 1, 2003, these securities were classified between liabilities and
equity on the balance sheet.
Stockholders' Equity. Our stockholders' equity increased $2.0 million between
December 31, 2002 and September 30, 2003. This increase was primarily
attributable to earnings of approximately $3.1 million offset by a $1.1 million
decrease in accumulated other comprehensive income and $19,000 of other
transactions such as payment of preferred stock dividends, stock option
exercises and vesting of restricted stock.
Capital Adequacy and Expenditures. We actively monitor compliance with
regulatory capital requirements, including risk-based and leverage capital
measures. Under the risk-based capital method of capital measurement, the ratio
computed is dependent on the amount and composition of assets recorded on the
balance sheet, and the amount and composition of off-balance-sheet items, in
addition to the level of capital. The following table includes the risk-based
and leverage capital ratios of the Company and the Bank as of September 30,
2003:
Tier 1 Total
Risk- Risk- Tier 1
Based Based Leverage
Ratio Ratio Ratio
--------------- ---------------- --------------
BNCCORP, consolidated...... 7.10% 10.69% 4.82%
BNC National Bank.......... 10.79% 12.00% 7.33%
As of September 30, 2003, the Company and the Bank exceeded capital adequacy
requirements and the Bank was considered "well capitalized" under prompt
corrective action provisions.
During 2002, we initiated construction of an office building at 17045 North
Scottsdale Road, Scottsdale, Arizona. Total cost for the building, including
furniture and equipment (through September 30, 2003) was approximately $1.8
million. Construction was completed during the second quarter of 2003, the
office opened on May 5, 2003, and the project was funded through cash generated
from operations. In March 2003, we purchased the Milne Scali building at 1750
East Glendale Avenue, Phoenix, Arizona for its appraised price of $3.9 million.
The purchase was funded through cash generated from operations. The relocation
of our branch office at 2725 East Camelback Road, Suite 200, Phoenix, Arizona to
2425 East Camelback Road, Suite 100, Phoenix, Arizona will be completed by
November 1, 2003. Estimated leasehold improvement costs for the property at 2425
East Camelback Road are approximately $500,000, which includes furniture,
fixtures and equipment and which will be paid through cash generated from
operations. We have signed an agreement for the purchase of land and a former
banking building at 650 Douglas Drive, Golden Valley, Minnesota. The price for
the land and building is estimated to be $2.1 million and will be funded through
cash generated from operations. We do not yet have an estimated dollar amount
for improvements that may be made to the facility before we occupy and begin
operating from the facility.
Comparison of Operating Results for the Three
and Nine Months Ended September 30, 2003 and 2002
General. We reported net income of $916,000, or $0.32 per share on a diluted
basis for the third quarter of 2003. For the comparable quarter of 2002, we
reported net income of $953,000, or $0.34 per diluted share. Results for the
year-ago period included a loss of $69,000, or $0.03 per diluted share, from the
operations of the Fargo, North Dakota branch office, which was sold on September
30, 2002, and subsequently classified as a discontinued operation.
Net interest income for the third quarter of 2003 was $3.04 million, versus
$4.08 million in the same period of 2002. Due to the adoption of SFAS 150, the
expense associated with our subordinated debentures was classified in interest
expense effective July 1, 2003. Previously, that expense was included in
noninterest expense. The decrease in net interest income therefore reflects the
inclusion of $430,000 in interest expense associated with the subordinated
debentures, as well as the effect of market interest rates and the change in
earning asset mix, on net interest margin.
Noninterest income rose 5.4 percent to $5.40 million for the 2003 third quarter,
from $5.12 million for the year-ago period. Noninterest income represented 64.01
percent of gross revenues for the recent quarter, up from 55.64 percent a year
ago. Insurance commissions of $3.50 million, loan fees of $698,000, and a net
gain on the sale of securities of $448,000 were the largest contributors to
noninterest income during the 2003 third quarter.
Noninterest expense for the third quarter of 2003 was $6.83 million, down from
$7.36 million in the same quarter of 2002. The comparison was affected by the
shift in subordinated debenture expense as a result of the adoption of SFAS 150.
Further information regarding the impact of the adoption of SFAS 150 is
presented in subsequent sections of this Form 10-Q.
Our return on average common stockholders' equity, from continuing operations,
for the most recent quarter was 9.36 percent compared with 11.14 percent for the
same period one year earlier. Our return on average assets, from continuing
operations, for the most recent quarter was 0.60 percent compared with 0.69
percent for the same period one year earlier.
For the nine months ended September 30, 2003, we reported net income of $3.11
million, or $1.10 per diluted share, compared with net income of $1.25 million,
or $0.46 per diluted share, for the same period of 2002. The year-ago results
included net income of