_
U.S. Securities and Exchange Commission
Washington, D.C. 20549
------
FORM 10-Q
------
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarter ended June 30, 2004
[ ] 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 Identification No.)
of incorporation or organization)
322 East Main
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
August 2, 2004 was 2,822,111.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share and per share data)
June 30, December 31,
ASSETS 2004 2003
------------ -------------
Unaudited)
CASH AND DUE FROM BANKS........................... $ 11,905 $ 12,520
------------ -------------
Cash and cash equivalents.................... 11,905 12,520
INVESTMENT SECURITIES AVAILABLE FOR SALE.......... 263,395 262,568
FEDERAL RESERVE BANK AND FEDERAL HOME
LOAN BANK STOCK.................................. 7,442 7,596
LOANS HELD FOR SALE............................... 15,022 --
LOANS AND LEASES, net............................. 273,891 283,555
ALLOWANCE FOR CREDIT LOSSES....................... (3,443) (4,763)
------------ -------------
Net loans and leases......................... 270,448 278,792
PREMISES AND EQUIPMENT, net....................... 20,715 18,570
INTEREST RECEIVABLE............................... 2,491 2,462
OTHER ASSETS...................................... 14,665 15,507
GOODWILL.......................................... 18,432 15,089
OTHER INTANGIBLE ASSETS, net...................... 8,580 8,373
------------ -------------
$ 633,095 $ 621,477
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS:
Noninterest-bearing............................. $ 49,225 $ 44,725
Interest-bearing -
Savings, interest checking and money market.. 193,882 215,525
Time deposits $100,000 and over.............. 65,482 46,569
Other time deposits.......................... 96,904 89,123
------------ -------------
Total deposits.................................. 405,493 395,942
SHORT-TERM BORROWINGS............................. 43,977 31,383
FEDERAL HOME LOAN BANK ADVANCES................... 102,200 112,200
LONG-TERM BORROWINGS.............................. 10,110 8,640
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN
COMPANY'S SUBORDINATED DEBENTURES.............. 22,440 22,397
OTHER LIABILITIES................................. 8,723 10,729
------------ -------------
Total liabilities................... 592,943 581,291
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value - 2,000,000
shares authorized; 0 and 150 shares
issued and outstanding on June 30, 2004
and December 31, 2003, respectively.......... -- --
Capital surplus - preferred stock............... -- 1,500
Common stock, $.01 par value - 10,000,000
shares authorized; 2,822,111 and
2,749,196 shares issued and outstanding
(excluding 42,880 shares held in treasury)
on June 30, 2004 and December 31, 2003,
respectively................................. 29 28
Capital surplus - common stock.................. 18,164 17,074
Retained earnings............................... 23,578 21,119
Treasury stock (42,880 shares).................. (513) (513)
Accumulated other comprehensive income,
net of income taxes.......................... (1,106) 978
------------ -------------
Total stockholders' equity............. 40,152 40,186
------------ -------------
$ 633,095 $ 621,477
============ =============
See accompanying notes to consolidated financial statements.
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(In thousands, except per share data)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
----------------------------- ----------------------------
2004 2003 2004 2003
------------- ------------- ------------ -------------
INTEREST INCOME: (unaudited) (unaudited)
Interest and fees on loans.................... $ 4,139 $ 5,238 $ 8,863 $ 10,422
Interest and dividends on investments -
Taxable.................................... 2,367 1,584 5,058 3,451
Tax-exempt................................. 402 380 803 735
Dividends.................................. 46 62 89 124
Other......................................... -- 1 -- 1
------------- ------------- ------------ -------------
Total interest income............. 6,954 7,265 14,813 14,733
------------- ------------- ------------ -------------
INTEREST EXPENSE:
Deposits...................................... 1,538 1,923 3,156 4,029
Short-term borrowings......................... 118 113 217 221
Federal Home Loan Bank advances............... 1,208 1,332 2,461 2,608
Long-term borrowings.......................... 88 96 181 195
Subordinated debentures....................... 427 433 853 870
------------- ------------- ------------ -------------
Total interest expense............ 3,379 3,897 6,868 7,923
------------- ------------- ------------ -------------
Net interest income............... 3,575 3,368 7,945 6,810
PROVISION FOR CREDIT LOSSES..................... -- 400 -- 1,175
------------- ------------- ------------ -------------
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES....................... 3,575 2,968 7,945 5,635
------------- ------------- ------------ -------------
NONINTEREST INCOME:
Insurance commissions......................... 4,422 3,423 8,984 7,485
Fees on loans................................. 339 482 915 943
Service charges............................... 210 218 421 428
Brokerage income.............................. 174 99 353 150
Trust and financial services.................. 134 631 258 817
Net gain on sales of securities............... 51 301 51 421
Rental income................................. 26 55 61 77
Other......................................... 699 202 1,019 309
------------- ------------- ------------ -------------
Total noninterest income.......... 6,055 5,411 12,062 10,630
------------- ------------- ------------ -------------
NONINTEREST EXPENSE:
Salaries and employee benefits................ 5,259 3,997 10,173 7,962
Occupancy..................................... 670 564 1,255 1,186
Professional services......................... 415 309 734 569
Depreciation and amortization................. 412 368 810 716
Office supplies, telephone and postage........ 360 355 671 609
Amortization of intangible assets............. 312 266 620 532
Marketing and promotion....................... 268 176 539 295
FDIC and other assessments.................... 51 51 102 102
Other......................................... 916 615 1,646 1,184
------------- ------------- ------------ -------------
Total noninterest expense......... 8,663 6,701 16,550 13,155
------------- ------------- ------------ -------------
Income before income taxes...................... 967 1,678 3,457 3,110
Income tax provision............................ 261 504 938 919
------------- ------------- ------------ -------------
Net income...................................... $ 706 $ 1,174 $ 2,519 $ 2,191
============= ============= ============ =============
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income, continued
(In thousands, except per share data)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------ ------------ ------------- -------------
2004 2003 2004 2003
------------ ------------ ------------- -------------
(unaudited) (unaudited)
Dividends on preferred stock............. $ 30 $ 30 $ 60 $ 60
------------ ------------ ------------- -------------
Income available to common stockholders.. $ 676 $ 1,144 $ 2,459 $ 2,131
============ ============ ============= =============
BASIC EARNINGS PER COMMON SHARE:
Basic earnings per common share.......... $ 0.24 $ 0.42 $ 0.89 $ 0.79
============ ============ ============= =============
DILUTED EARNINGS PER COMMON SHARE:
Diluted earnings per common share........ $ 0.23 $ 0.41 $ 0.86 $ 0.78
============ ============ ============= =============
See accompanying notes to consolidated financial statements.
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(In thousands)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------------ ------------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
(unaudited) (unaudited)
NET INCOME............................................ $ 706 $ 1,174 $ 2,519 $ 2,191
OTHER COMPREHENSIVE INCOME (LOSS) -
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising
during the period, net of income taxes....... (3,991) 493 (2,047) 202
Less: reclassification adjustment for
securities gains included in net income, net
of income taxes.............................. (37) (211) (37) (299)
------------- ------------- ------------- -------------
OTHER COMPREHENSIVE INCOME (LOSS)..................... (4,028) 282 (2,084) (97)
------------- ------------- ------------- -------------
COMPREHENSIVE INCOME (LOSS)........................... $ (3,322) $ 1,456 $ 435 $ 2,094
============= ============= ============= =============
See accompanying notes to consolidated financial statements.
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(In thousands, except share data)
For the Six Months Ended June 30, 2004
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,
2003.................... 150 $ -- $ 1,500 2,792,076 $ 28 $ 17,074 $ 21,119 $ (513) $ 978 $ 40,186
Net income (unaudited).. -- -- -- -- -- -- 2,519 -- -- 2,519
Other comprehensive
income -
Change in unrealized
holding gains on
securities
available for
sale, net of
income taxes and
reclassification
adjustment
(unaudited)......... -- -- -- -- -- -- -- -- (2,084) (2,084)
Preferred stock
dividends (unaudited).. -- -- -- -- -- -- (60) -- -- (60)
Repurchase of preferred
stock (unaudited)...... (150) -- (1,500) -- -- -- -- -- -- (1,500)
Other (unaudited) ....... -- -- -- 72,915 1 1,090 -- -- -- 1,091
--------- --------- ---------- --------- ------- --------- --------- --------- -------------- ---------
Balance, June 30, 2004
(unaudited)........... -- $ -- $ -- 2,864,991 $ 29 $ 18,164 $ 23,578 $ (513) $ (1,106) $ 40,152
========= ========= ========== ========= ======= ========= ========= ========= ============== =========
For the Six Months Ended June 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,
2002.................... 150 $ -- $ 1,500 2,743,809 $ 27 $ 16,614 $ 17,395 $ (513) $ 2,700 $ 37,723
Net income (unaudited).. -- -- -- -- -- -- 2,191 -- -- 2,191
Other comprehensive
income -
Change in unrealized
holding gains on
securities
available for
sale, net of
income taxes and
reclassification
adjustment
(unaudited)......... -- -- -- -- -- -- -- -- (97) (97)
Preferred stock
dividends
(unaudited)........... -- -- -- -- -- -- (60) -- -- (60)
Other (unaudited) ....... -- -- -- 2,366 -- 20 -- -- -- 20
--------- --------- ---------- --------- ------- --------- --------- --------- -------------- ---------
Balance, June 30, 2003
(unaudited)........... 150 $ -- $ 1,500 2,746,175 $ 27 $ 16,634 $ 19,526 $ (513) $ 2,603 $ 39,777
========= ========= ========== ========= ======= ========= ========= ========= ============== =========
See accompanying notes to consolidated financial statements.
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Six Months Ended June 30
(In thousands)
2004 2003
-------------- --------------
OPERATING ACTIVITIES: (unaudited) (unaudited)
Net income....................................................... $ 2,519 $ 2,191
Adjustments to reconcile net income to net cash provided by
operating activities -
Provision for credit losses.................................. -- 1,175
Depreciation and amortization................................ 810 716
Amortization of intangible assets............................ 620 532
Net premium amortization on investment securities............ 1,567 2,224
Proceeds from loans recovered................................ 254 59
Write down of other real estate owned and repossessed assets. 31 4
Change in interest receivable and other assets, net.......... (1,793) (2,472)
(Gain) loss on sale of bank premises and equipment........... 2 (6)
Net realized gains on sales of investment securities......... (51) (421)
Deferred income taxes........................................ 639 272
Change in dividend distribution payable...................... -- (12)
Change in other liabilities, net............................. (1,386) 532
Originations of loans to be sold............................. (32,716) (31,094)
Proceeds from sale of loans.................................. 32,716 31,094
-------------- --------------
Net cash provided by operating activities.............. 3,212 4,794
-------------- --------------
INVESTING ACTIVITIES:
Purchases of investment securities............................... (45,544) (62,963)
Proceeds from sales of investment securities..................... 16,601 32,817
Proceeds from maturities of investment securities................ 23,206 26,372
Purchases of Federal Reserve and Federal Home Loan Bank Stock.... (4,107) --
Sales of Federal Reserve and Federal Home Loan Bank Stock........ 4,261 --
Net (increase) decrease in loans................................. (6,932) 12,094
Additions to premises and equipment.............................. (2,972) (5,775)
Proceeds from sale of premises and equipment..................... 23 99
Cash paid for acquisition of insurance subsidiaries.............. (545) --
Cash paid for acquisition of mortgage company.................... (150) --
-------------- --------------
Net cash provided by (used in) investing activities.... (16,159) 2,644
-------------- --------------
FINANCING ACTIVITIES:
Net decrease in demand, savings, interest checking and money
market accounts.............................................. (17,143) (8,612)
Net increase (decrease) in time deposits......................... 26,694 (18,330)
Net increase in short-term borrowings............................ 12,594 4,450
Repayments of Federal Home Loan Bank advances.................... (260,000) (97,300)
Proceeds from Federal Home Loan Bank advances.................... 250,000 107,300
Repayments of long-term borrowings............................... (30) (29)
Proceeds from long-term borrowings............................... 1,500 140
Payment of preferred stock dividends............................. (60) (60)
Repurchase of preferred stock.................................... (1,500) --
Amortization of discount on subordinated debentures.............. 43 43
Other, net....................................................... 234 20
-------------- --------------
Net cash provided by (used in) financing activities.... 12,332 (12,378)
-------------- --------------
NET DECREASE IN CASH AND CASH EQUIVALENTS........................... (615) (4,940)
CASH AND CASH EQUIVALENTS, beginning of period...................... 12,520 17,137
-------------- --------------
CASH AND CASH EQUIVALENTS, end of period............................ $ 11,905 $ 12,197
============== ==============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid.................................................... $ 7,022 $ 8,210
============== ==============
Income taxes paid................................................ $ 566 $ 678
============== ==============
See accompanying notes to consolidated financial statements.
BNCCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2004
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, Inc. and
BNC Asset Management, Inc., the "Bank"). BNCCORP, through these wholly owned
subsidiaries, which operate from 24 locations in Arizona, Minnesota, North
Dakota, Utah and Colorado, 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 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
("SEC"). Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures made are
adequate to make the information presented not misleading.
The unaudited consolidated financial statements as of June 30, 2004 and for the
three-month and six-month periods ended June 30, 2004 and 2003 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, 2004.
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, 2003. Accordingly, footnote
disclosures which would substantially duplicate the disclosures contained in the
December 31, 2003 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, 2003
and the notes thereto.
NOTE 3 - Reclassifications
Certain of the 2003 amounts may have been reclassified to conform to the 2004
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 June 30:
Net Per-Share
Income Shares Amount
---------------- ---------------- ---------------
2004
Basic earnings per common share:
Net income................................ $ 706,000
Less: Preferred stock dividends........... (30,000)
----------------
Income available to common stockholders... $ 676,000 2,793,045 $ 0.24
================ ===============
Effect of dilutive shares -
Options and contingent stock........... 89,522
----------------
Diluted earnings per common share:
Net income................................ $ 706,000
Less: Preferred stock dividends........... (30,000)
----------------
Income available to common stockholders... $ 676,000 2,882,567 $ 0.23
================ ===============
2003
Basic earnings per common share:
Net income................................ $ 1,174,000
Less: Preferred stock dividends........... (30,000)
----------------
Income available to common stockholders... $ 1,144,000 2,703,071 $ 0.42
================ ===============
Effect of dilutive shares -
Options................................ 55,100
----------------
Diluted earnings per common share:
Net income................................ $ 1,174,000
Less: Preferred stock dividends........... (30,000)
----------------
Income available to common stockholders... $ 1,144,000 2,758,171 $ 0.41
================ ===============
The following table shows the amounts used in computing EPS and the effect on
weighted average number of shares of potential dilutive common stock issuances
for the six-month periods ended June 30:
Net Per-Share
Income Shares Amount
---------------- ---------------- ---------------
2004
Basic earnings per common share:
Net income.................................. $ 2,519,000
Less: Preferred stock dividends............. (60,000)
----------------
Income available to common stockholders..... $ 2,459,000 2,775,464 $ 0.89
================ ===============
Effect of dilutive shares -
Options and contingent stock............. 91,976
----------------
Diluted earnings per common share:
Net income.................................. $ 2,519,000
Less: Preferred stock dividends............. (60,000)
----------------
Income available to common stockholders..... $ 2,459,000 2,867,440 $ 0.86
================ ===============
2003
Basic earnings per common share:
Net income.................................. $ 2,191,000
Less: Preferred stock dividends............. (60,000)
----------------
Net income available to common stockholders. $ 2,131,000 2,702,183 $ 0.79
================ ===============
Effect of dilutive shares -
Options.................................. 42,515
----------------
Diluted earnings per common share:
Net income.................................. $ 2,191,000
Less: Preferred stock dividends............. (60,000)
----------------
Net income available to common stockholders. $ 2,131,000 2,744,698 $ 0.78
================ ===============
The following number of options, with exercise prices ranging from $10.00 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 period:
2004 2003
---------------- ---------------
Quarter ended March 31............. 3,250 77,185
Quarter ended June 30.............. 61,850 63,500
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 provide a full range of insurance brokerage 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, 2003.
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.
The following tables present segment profit or loss, assets and a reconciliation
of segment information as of, and for the three months ended June 30 (in
thousands):
2004 2004
-------------------------------------------------------- --------------------------------------------------
Brokerage/
Trust/ Reportable Intersegment Consolidated
Banking Insurance Financial Other (a) Totals Segments Other (a) Elimination Total
--------- ---------- ---------- --------- --------- ---------- --------- ------------ -------------
Net interest income.....$ 4,041 $ 18 $ 23 $ (520) $ 3,562 $ 4,082 $ (520) $ 13 $ 3,575
Other revenue-external
customers.............. 1,847 4,991 306 21 7,165 7,144 21 (1,110) 6,055
Other revenue-from
other segments......... 165 -- 20 230 415 185 230 (415) --
Depreciation and
amortization........... 417 271 33 3 724 721 3 -- 724
Equity in the net
income of investees.... 751 -- -- 1,179 1,930 751 1,179 (1,930) --
Other significant
noncash items:
Provision for
credit losses........ -- -- -- -- -- -- -- -- --
Segment pre-tax
profit (loss).......... 433 1,261 (51) (676) 967 1,643 (676) -- 967
Income tax
provision (benefit).... (8) 492 (20) (203) 261 464 (203) -- 261
Segment profit (loss)... 441 769 (31) (473) 706 1,179 (473) -- 706
Segment assets.......... 611,797 31,914 19,283 75,081 738,075 662,994 75,081 (104,980) 663,095
2003 2003
-------------------------------------------------------- --------------------------------------------------
Brokerage/
Trust/ Reportable Intersegment Consolidated
Banking Insurance Financial Other (a) Totals Segments Other (a) Elimination Total
--------- ---------- ---------- --------- --------- ---------- --------- ------------ -------------
Net interest income.....$ 3,865 $ 22 $ -- $ (531) $ 3,356 $ 3,887 $ (531) $ 12 $ 3,368
Other revenue-external
customers.............. 1,599 3,461 732 54 5,846 5,792 54 (435) 5,411
Other revenue-from
other segments......... 35 -- 10 164 209 45 164 (209) --
Depreciation and
amortization........... 413 214 3 4 634 630 4 -- 634
Equity in the net
income of investees.... 422 -- -- 1,501 1,923 422 1,501 (1,923) --
Other significant
noncash items:
Provision for
credit losses....... 400 -- -- -- 400 400 -- -- 400
Segment pre-tax
profit (loss).......... 1,006 803 466 (597) 1,678 2,275 (597) -- 1,678
Income tax provision
(benefit).............. 267 361 146 (270) 504 774 (270) -- 504
Segment profit (loss)... 739 442 320 (327) 1,174 1,501 (327) -- 1,174
Segment assets.......... 588,635 28,643 1,396 69,164 687,838 618,674 69,164 (95,156) 592,682
- -------------
(a) The financial information in the "Other" column is for the bank holding
company.
The following tables present segment profit or loss, assets and a reconciliation
of segment information as of, and for the six months ended June 30 (in
thousands):
2004 2004
-------------------------------------------------------- --------------------------------------------------
Brokerage/
Trust/ Reportable Intersegment Consolidated
Banking Insurance Financial Other (a) Totals Segments Other (a) Elimination Total
--------- ---------- ---------- --------- --------- ---------- --------- ------------ -------------
Net interest income.....$ 8,908 $ 31 $ 23 $ (1,043) $ 7,919 $ 8,962 $(1,043) $ 26 $ 7,945
Other revenue-external
customers.............. 3,961 9,621 610 44 14,236 14,192 44 (2,174) 12,062
Other revenue-from
other segments......... 315 -- 41 416 772 356 416 (772) --
Depreciation and
amortization........... 820 539 65 6 1,430 1,424 6 -- 1,430
Equity in the net
income of investees.... 1,485 -- -- 3,294 4,779 1,485 3,294 (4,779) --
Other significant
noncash items:
Provision for
credit losses....... -- -- -- -- -- -- -- -- --
Segment pre-tax
profit (loss).......... 2,401 2,488 (138) (1,294) 3,457 4,751 (1,294) -- 3,457
Income tax
provision (benefit).... 545 967 (55) (519) 938 1,457 (519) -- 938
Segment profit (loss)... 1,856 1,521 (83) (775) 2,519 3,294 (775) -- 2,519
Segment assets.......... 611,797 31,914 19,283 75,081 738,075 662,994 75,081 (104,980) 663,095
2003 2003
-------------------------------------------------------- --------------------------------------------------
Brokerage/
Trust/ Reportable Intersegment Consolidated
Banking Insurance Financial Other (a) Totals Segments Other (a) Elimination Total
--------- ---------- ---------- --------- --------- ---------- --------- ------------ -------------
Net interest income.....$ 7,808 $ 44 $ -- $ (1,067) $ 6,785 $ 7,852 $(1,067) $ 25 $ 6,810
Other revenue-external
customers.............. 2,797 7,554 977 80 11,408 11,328 80 (778) 10,630
Other revenue-from
other segments......... 67 -- 22 319 408 89 319 (408) --
Depreciation and
amortization........... 803 430 6 9 1,248 1,239 9 -- 1,248
Equity in the net
income of investees.... 1,475 -- -- 2,962 4,437 1,475 2,962 (4,437) --
Other significant
noncash items:
Provision for
credit losses........ 1,175 -- -- -- 1,175 1,175 -- -- 1,175
Segment pre-tax
profit (loss).......... 1,543 2,299 473 (1,205) 3,110 4,315 (1,205) -- 3,110
Income tax provision
(benefit).............. 420 790 143 (434) 919 1,353 (434) -- 919
Segment profit (loss)... 1,123 1,509 330 (771) 2,191 2,962 (771) -- 2,191
Segment assets.......... 588,635 28,643 1,396 69,164 687,838 618,674 69,164 (95,156) 592,682
- -------------
(a) The financial information in the "Other" column is for the bank holding
company.
NOTE 6 - Stock-Based Compensation
At June 30, 2004, 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" 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" to
stock-based employee compensation (dollars in thousands):
For the three months ended For the six months ended
June 30, June 30,
-------------------------------- -----------------------------
2004 2003 2004 2003
---------------- ------------ -------------- -----------
Net income, as reported................................ $ 706 $ 1,174 $ 2,519 $ 2,191
Add: total stock-based employee compensation expense
included in reported net income, net of related
tax effects....................................... 24 3 46 5
Deduct: total stock-based employee compensation
expense determined under fair value method for
all awards, net of related tax effects............ (34) (11) (66) (21)
---------------- ------------ -------------- -----------
Pro forma net income................................... $ 696 $ 1,166 $ 2,499 $ 2,175
================ ============ ============== ===========
Earnings per share:
Basic - as reported............................... $ 0.24 $ 0.42 $ 0.89 $ 0.79
Basic - pro forma................................. $ 0.23 $ 0.42 $ 0.83 $ 0.78
Diluted - as reported............................. $ 0.23 $ 0.41 $ 0.86 $ 0.78
Diluted - pro forma............................... $ 0.22 $ 0.41 $ 0.81 $ 0.77
NOTE 7 - Derivative Activities
The Company has interest rate cap contracts with notional amounts totaling $20.0
million that were purchased to mitigate interest rate risk in rising-rate
scenarios. The referenced interest rate is three-month LIBOR with the 5.50
percent contracts having five-year maturities (maturing during May and June of
2006). An additional $20.0 million of 4.50 percent contracts having three-year
original maturities expired during May and June of 2004. The total amount paid
for the contracts was $1.2 million. The remaining contracts are reflected in the
Company's consolidated balance sheet at their current combined fair value of
approximately $29,000. 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 June 30, 2004 and 2003, the impact of marking the
contracts to market, reflected as additional (or reduced) interest expense on
Federal Home Loan Bank ("FHLB") advances, was an increase (reduction) to net
interest income of approximately $9,000 and ($70,000), respectively. During the
six months ended June 30, 2004 and 2003, the impact of marking the contracts to
market was a reduction to net interest income of approximately ($28,000) and
($97,000), respectively.
NOTE 8 - Annual Goodwill Impairment Assessment
In accordance with its accounting policy, during the second quarter of 2004 the
Company completed the annual assessment of its goodwill asset and such
assessment did not indicate any impairment.
NOTE 9 - Change in Goodwill
During the second quarter of 2004, the Company paid the second earnout payment
related to the acquisition of Milne Scali & Company ("Milne Scali") in April
2002. The earnout payment was approximately $2.6 million and increased goodwill
by that amount.
NOTE 10 - Acquisition
On June 30, 2004, in order to further grow its insurance segment, Milne Scali
acquired certain assets and assumed certain liabilities of Finkbeiner Insurance,
Inc., a Prescott Valley, Arizona-based insurance agency, for 26,607 shares of
newly issued BNCCORP common stock (valued at $ 466,000) and $545,000 of cash.
Acquisitions of insurance agencies generally result in the recognition of
goodwill due to the service nature of the business, the lack of tangible assets
acquired and the profitability of the acquired agency. Of the total $1.0 million
purchase price, $487,000 was allocated to the net assets acquired (including
intangible assets) and the excess of the purchase price of approximately
$523,000 over the fair value of the net assets was recorded as goodwill.
Additional consideration of up to $180,000 is payable to Finkbeiner Insurance,
Inc. subject to the insurance operation achieving certain performance targets.
In accordance with purchase method accounting requirements, such payments would
increase the cost of the transaction in future periods and are not reflected as
liabilities in the Company's current consolidated balance sheet. The goodwill,
all of which is attributable to the Company's insurance segment, will be
evaluated for possible impairment under the provisions of Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets." Other
acquired intangible assets related to personal and commercial insurance lines
books of business and totaling approximately $459,300, will be amortized using a
method that approximates the anticipated useful life of the associated customer
lists, which will cover a period of 10 years. The results of operations of the
acquired assets are being included in the Company's consolidated financial
statements effective July 1, 2004.
NOTE 11 - Loans Held for Sale
Loans held for sale at June 30, 2004 consist of $15.0 million of residential
mortgage loans. It is expected that such loans will be sold within 90 days.
Additional loans are anticipated as the Bank has initiated a financing program
in which the Bank purchases short-term participation interests in residential
mortgage loans originated by a mortgage company.
NOTE 12 - Related Party Transaction
On June 30, 2004, BNCCORP repurchased the then-outstanding 150 shares of its
noncumulative preferred stock from Richard W. Milne, Jr. and Terrence M. Scali,
executive officers of the Company. The repurchased shares had a preferential
noncumulative dividend at an annual rate of 8.00 percent and a preferred
liquidation value of $10,000 per share.
NOTE 13 - Recently Issued or Adopted Accounting Standards
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46").
FIN 46 addressed 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 applied immediately 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 applied in the first fiscal year or
interim period beginning after June 15, 2003. The Company has adopted 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.
On December 24, 2003, the FASB issued Interpretation No. 46 (revised December
2003), "Consolidation of Variable Interest Entities" ("FIN 46R") which addresses
how a business enterprise should evaluate whether it has a controlling financial
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. FIN 46R replaces FIN 46. FIN 46R indicates that
when voting interests are not effective in identifying whether an entity is
controlled by another party, the economic risks and rewards inherent in the
entity's assets and liabilities and the way in which the various parties that
have involvement with the entity share in those economic risks and rewards
should be used to determine whether the entity should be consolidated. An
enterprise that is involved with another entity generally must assess whether
that involvement requires consolidation under FIN 46R. That involvement may
arise in a variety of ways, such as (a) lending to the entity, (b) investing in
equity (voting or nonvoting) of the entity, (c) issuing guarantees related to
the assets or liabilities of the entity, or both, (d) retaining a beneficial
interest in (or providing financial support for) assets transferred or sold to
the entity, (e) managing the assets of the entity, (f) leasing assets to or from
the entity and (g) entering into a derivative contract with the entity. The
objective of FIN 46R is to provide consolidation guidance for situations in
which voting equity interests do not adequately reflect the controlling
interests in an entity. Public entities are required to apply FIN 46 or FIN 46R
to all entities that are considered special purpose entities in practice and
under the FASB literature that was applied before the issuance of FIN 46 by the
end of the first reporting period that ends after December 31, 2003. Public
companies that are not small business issuers are required to adopt the
accounting requirements of FIN 46R by the end of the first reporting period that
ends after March 15, 2004. The Company has adopted the various provisions of FIN
46R as indicated above but presently does not have any variable interest
entities that would be required to be included in its consolidated financial
statements.
On December 12, 2003, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
03-3, "Accounting for Certain Loans or Debt Securities Acquired in a Transfer"
("SOP 03-3"). SOP 03-3 addresses accounting for differences between contractual
cash flows and cash flows expected to be collected from an investor's initial
investment in loans or debt securities ("loans") acquired in a transfer if those
differences are attributable, at least in part, to credit quality. It includes
such loans acquired in purchase business combinations and applies to all
nongovernmental entities. SOP 03-3 does not apply to loans originated by the
entity. SOP 03-3 limits the yield that may be accreted ("accretable yield") to
the excess of the investor's estimate of undiscounted expected principal,
interest and other cash flows (cash flows expected at acquisition to be
collected) over the investor's initial investment in the loan. SOP 03-3 requires
that the excess of contractual cash flows over cash flows expected to be
collected ("nonaccretable difference") not be recognized as an adjustment of
yield, loss accrual or valuation allowance. SOP 03-3 prohibits investors from
displaying accretable yield and nonaccretable difference in the balance sheet.
Subsequent increases in cash flows expected to be collected generally should be
recognized prospectively through adjustment of the loan's yield over its
remaining life. Decreases in cash flows expected to be collected should be
recognized as impairment. SOP 03-3 prohibits "carrying over" or creation of
valuation allowances in the initial accounting of all loans acquired in a
transfer that are within the scope of SOP 03-3. This prohibition of the
valuation allowance carryover applies to the purchase of an individual loan, a
pool of loans, a group of loans and loans acquired in a purchase business
combination. SOP 03-3 is effective for loans acquired in fiscal years beginning
after December 15, 2004. Early adoption is encouraged. The Company expects to
adopt SOP 03-3 on January 1, 2005. Adoption of SOP 03-3 is not expected to have
a material impact on the Company's financial position or results of operations.
On March 9, 2004, the SEC issued Staff Accounting Bulletin No. 105, "Application
of Accounting Principles to Loan Commitments" ("SAB 105"). SAB 105 summarizes
the views of the SEC staff regarding the application of generally accepted
accounting principles to loan commitments accounted for as derivative
instruments. SAB 105 will act to significantly limit opportunities to recognize
an asset related to a commitment to originate a mortgage loan that will be held
for sale prior to funding the loan. SAB 105 pertains to recognizing and
disclosing the loan commitments and is effective for commitments to originate
mortgage loans to be held for sale that are entered into after March 31, 2004.
The Company adopted the provisions of SAB 105 beginning April 1, 2004. Adoption
of SAB 105 did not have a material impact on the Company's financial position or
results of operations.
At its March 2004 meetings, the Emerging Issues Task Force ("EITF") revisited
EITF Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and its
Application to Certain Investments" (EITF No. 03-1). Effective with reporting
periods beginning after June 15, 2004, companies carrying certain types of debt
and equity securities at amounts higher than the securities' fair values will
have to use more detailed criteria to evaluate whether to record a loss and will
have to disclose additional information about unrealized losses. The Company has
reviewed the revised EITF No. 03-1 and plans to implement these additional
procedures effective with the quarter beginning on July 1, 2004. Adoption of the
new issuance could have an impact on the Company's financial position and
results of operations but the extent of any impact will vary due to the fact
that the model calls for many judgments and additional evidence gathering as
such evidence exists at each securities valuation date.
NOTE 14 - Subsequent Event
In July 2004, Terrence M. Scali ceased to be employed as the president of Milne
Scali & Company, Inc. ("Milne Scali"). Promptly following this event, the
Company paid Mr. Scali approximately $688,000, which represents the salary Mr.
Scali would have been entitled to for the remaining term of his employment
agreement. Milne Scali and Mr. Scali are currently in good faith negotiations
regarding the payment of any other amounts that Mr. Scali is contractually
entitled to under the terms of his employment agreement. The amount paid to Mr.
Scali and any other amounts that Milne Scali agrees to pay are expected to
accrue in and impact the Company's quarter ending September 30, 2004.
Under the terms of the Stock Purchase Agreement pursuant to which the Company
acquired Milne Scali, Mr. Scali's departure triggers the rights of Mr. Scali and
Richard W. Milne, Jr., individually and as representatives of the former
stockholders of Milne Scali, to elect to accelerate the payment of the remaining
balance of earnout payments due to the former stockholders in future periods.
The earnout payments are partially based on the post-acquisition financial
performance of Milne Scali and represent additional consideration payable to the
former stockholders. In accordance with purchase method accounting requirements,
if Mr. Scali and Mr. Milne elect to accelerate the earnout payments, the
accelerated payments, which are expected to aggregate approximately $3.4
million, are expected to accrue in and impact the Company's quarter ending
September 30, 2004 by increasing the goodwill associated with the Milne Scali
acquisition by the amount actually paid.
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.; and "BNC AMI" when
referring only to BNC Asset Management, Inc.
Comparison of Financial Condition at June 30, 2004 and December 31, 2003
Assets. Our total assets increased $11.6 million, from $621.5 million at
December 31, 2003 to $633.1 million at June 30, 2004. The following table
presents our assets by category as of June 30, 2004 and December 31, 2003, 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
----------------------------
June 30, December 31,
Assets 2004 2003 $ %
- ------------------------------------------- -------------- ---------------- ------------- -----------
Cash and due from banks.................... $ 11,905 $ 12,520 $ (615) (4.9)%
Investment securities available
for sale.................................. 263,395 262,568 827 0.3%
Federal Reserve Bank and Federal
Home Loan Bank Stock...................... 7,442 7,596 (154) (2.0)%
Loans held for sale........................ 15,022 -- 15,022 100.0% (a)
Loans and leases, net...................... 270,448 278,792 (8,344) (3.0)% (b)
Premises and equipment, net................ 20,715 18,570 2,145 11.6% (c)
Interest receivable........................ 2,491 2,462 29 1.2%
Other assets............................... 14,665 15,507 (842) (5.4)%
Goodwill................................... 18,432 15,089 3,343 22.2% (d)
Other intangible assets, net............... 8,580 8,373 207 2.5%
------------- --------------- ------------- -----------
Total assets...................... $ 633,095 $ 621,477 $ 11,618 1.9%
============= =============== ============= ===========
- -------------------
(a) The Bank initiated a financing program in which the Bank purchases
short-term participation interests in residential mortgage loans originated
by a mortgage company, which, along with other loans held for sale at June
30, 2004, included $15.0 million of loans awaiting purchase by secondary
market lenders.
(b) Increased commercial real estate loan production in our Minnesota and
Arizona markets was more than offset by pay-downs on commercial lines of
credit along with planned loan reductions and pay-downs due to
refinancings. Given the gradually improving economic conditions, loan
demand in upcoming periods may exceed the soft loan demand conditions
experienced during 2003.
(c) The increase in premises and equipment is primarily attributable to the
renovation of a banking facility in Golden Valley, Minnesota.
(d) Goodwill increased due to the 2004 earnout payment related to the
acquisition of Milne Scali as well as the goodwill generated by two
insurance agency acquisitions and a mortgage company acquisition between
December 31, 2003 and June 30, 2004.
Allowance for Credit Losses. The following table sets forth information
regarding changes in our allowance for credit losses for the three- and
six-month periods ended June 30, 2004 and 2003 (amounts are in thousands):
Three Months Six Months
Ended June 30, Ended June 30,
----------------------------------- -----------------------------------
2004 2003 2004 2003
------------------ ---------------- ----------------- -----------------
Balance, beginning of period..... $ 3,545 $ 5,219 $ 4,763 $ 5,006
Provision for credit losses...... -- 400 -- 1,175
Loans charged off................ (300) (690) (1,573) (1,287)
Loans recovered.................. 198 24 253 59
------------------ ---------------- ----------------- -----------------
Balance, end of period........... $ 3,443 $ 4,953 $ 3,443 $ 4,953
================== ================ ================= =================
Ending loan portfolio ........... $ 288,913 $ 322,413
================== ================
Allowance for credit losses
as a percentage of
ending loan portfolio........................ 1.19% 1.54%
As of June 30, 2004, our allowance for credit losses was 1.19 percent of total
loans as compared to 1.54 percent at June 30, 2003. The decrease is reflective
of approximately $1.6 million of charge-offs and the reduced reserve requirement
related to a significant decline in nonperforming loans between December 31,
2003 and June 30, 2004. Nonperforming loans declined from approximately $8.0
million to $662,000 over the six-month period ended June 30, 2004.
There was no provision for loan losses for the three- or six-month periods ended
June 30, 2004 compared to $400,000 and $1.2 million, respectively, for the
three- and six-month periods ended June 30, 2003. This decrease is a direct
response to a significant reduction in nonperforming loans between December 31,
2003 and June 30, 2004. See "-Nonperforming Assets" below.
Loans charged off during the first and second quarters of 2004 totaled $1.6
million, representing a $286,000 increase over loans charged off during the
first and second quarters of 2003. The increase was primarily attributable to
charge-offs related to one commercial loan. The loan was to a contractor on
which we charged off, in the first quarter of 2004, approximately $1.2 million.
$975,000 of the $1.2 million was reserved for as of December 31, 2003. $162,000
related to this loan was collected in June 2004. During the second quarter of
2004, we also charged off $264,000 related to a business loan.
Net charge-offs as a percentage of average total loans for the three- and
six-month periods ended June 30, 2004 and 2003 were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ --------------------------
2004 2003 2004 2003
----------- ----------- ------------ ------------
Ratio of net charge-offs
to average total loans..... (0.04)% (0.20)% (0.49)% (0.37)%
Ratio of net charge-offs
to average total loans,
annualized................. (0.15)% (0.82)% (0.99)% (0.75)%
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.
The accounting standard 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. Specific reserves totaled $992,000 at June 30,
2004.
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. Reserves for
homogeneous loan pools totaled approximately $2.3 million at June 30, 2004.
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 and peer-group loss history.
Our qualitative reserve totaled $169,000 at June 30, 2004.
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. Further information on
the allowance for credit losses is included under "-Critical Accounting
Policies."
Nonperforming Assets. The following table sets forth information concerning our
nonperforming assets as of the dates indicated (amounts are in thousands):
June 30, December 31,
2004 2003
------------ ------------
Nonperforming loans:
Loans 90 days or more delinquent and still
accruing interest................................. $ 12 $ 38
Nonaccrual loans................................... 650 7,913
Restructured loans................................. -- --
------------ ------------
Total nonperforming loans............................. 662 7,951
Other real estate owned and repossessed assets..... -- --
------------ ------------
Total nonperforming assets............................ $ 662 $ 7,951
============ ============
Allowance for credit losses........................... $ 3,443 $ 4,763
============ ============
Ratio of total nonperforming assets to total assets... 0.10% 1.28%
Ratio of total nonperforming loans to total loans..... 0.23% 2.80%
Ratio of allowance for credit losses to total
nonperforming loans................................ 520% 60%
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.
During the quarter ended March 31, 2004, two loans totaling approximately $6.7
million and reflected as nonaccrual loans at December 31, 2003 were resolved.
The first was a $4.5 million loan secured by commercial real estate on which we
received full payoff, including collection of cash basis interest income of
approximately $408,000. The second loan of approximately $2.2 million was
resolved resulting in a charge-off of approximately $1.2 million. $975,000 of
the $1.2 million was reserved for at December 31, 2003. $162,000 related to this
loan was collected in June 2004.
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
June 30, 2004 or December 31, 2003.
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
June 30, 2004 or at December 31, 2003.
Liabilities. Our total liabilities increased approximately $11.6 million, from
$581.3 million at December 31, 2003 to $592.9 million at June 30, 2004. The
following table presents our liabilities by category as of June 30, 2004 and
December 31, 2003 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
--------------------------
June 30, December 31,
Liabilities 2004 2003 $ %
- ----------------------------------- ------------ ------------- ------------ ------------
DEPOSITS:
Noninterest-bearing................ $ 49,225 $ 44,725 $ 4,500 10.1% (a)
Interest-bearing -
Savings, interest checking
and money market................ 193,882 215,525 (21,643) (10.0)% (b)
Time deposits $100,000 and over.. 65,482 46,569 18,913 40.6% (c)
Other time deposits.............. 96,904 89,123 7,781 8.7% (c)
Short-term borrowings.............. 43,977 31,383 12,594 40.1% (d)
Federal Home Loan Bank advances.... 102,200 112,200 (10,000) (8.9)% (e)
Long-term borrowings............... 10,110 8,640 1,470 17.0% (f)
Guaranteed preferred beneficial
interests in company's
subordinated debentures.......... 22,440 22,397 43 1.9%
Other liabilities.................. 8,723 10,729 (2,006) (18.7)% (g)
------------ ------------- ------------
Total liabilities......... $ 592,943 $ 581,291 $ 11,652 2.0%
============ ============= ============
- -------------------
(a) Noninterest-bearing deposits can 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) The decrease in savings, interest checking and money market deposits is
attributable to the fact that, at December 31, 2003, several accounts had
funds in our Wealthbuilder accounts awaiting placement into the CDARSsm
certificates of deposit program. These balances were transferred during the
first part of 2004. Decreases in this category early in the year can also
be attributable to the fact that, at year-end, commercial customers often
draw down on their lines of credit and place the money in their deposit
accounts. Subsequently, during the first part of the following year, the
deposits are used to pay down the lines of credit.
(c) Certificates of deposit increased due to a $14.7 million increase in
brokered deposits and a $14.5 million increase in deposits made under the
CDARSsm program, including some of the deposits noted in (b) above. The
CDARSsm program was implemented during the second half of 2003. These
increases were offset by a $5.7 million decrease in national market
certificates of deposit.
(d) Short-term borrowings increased primarily because there was $28.3 million
of Federal funds purchased outstanding at June 30, 2004 (an increase of
$11.2 million over the December 31, 2003 level), including $20.1 million of
Federal funds purchased from the FHLB and a $1.4 million increase in
customer repurchase agreements between December 31, 2003 and June 30, 2004.
(e) $10.0 million of FHLB advances held at December 31, 2003 matured in January
2004.
(f) The increase in long-term borrowings is attributable to a $1.5 million
advance made in June 2004 for the purpose of repurchasing our preferred
stock of $1.5 million.
(g) The reduction in other liabilities resulted from decreases in multiple
items in this category including accrued interest payable, accrued expenses
and accounts payable.
Stockholders' Equity. Our stockholders' equity decreased $34,000 between
December 31, 2003 and June 30, 2004. This decrease was attributable to earnings
of approximately $2.5 million coupled with approximately $1.1 million of other
transactions such as stock option exercises, vesting of restricted stock and
stock issued in the acquisition of two insurance agencies. These increases were
offset by a $2.1 million decrease in accumulated other comprehensive income, the
repurchase of $1.5 million of preferred stock and the payment of $60,000 of
preferred stock dividends.
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 June 30, 2004:
Tier 1 Total
Risk- Risk- Tier 1
Based Based Leverage
Ratio Ratio Ratio
-------------- -------------- --------------
BNCCORP, consolidated.......... 6.78% 9.72% 4.67%
BNC National Bank.............. 10.65% 11.48% 7.37%
As of June 30, 2004, the Company and the Bank exceeded capital adequacy
requirements and the Bank was considered "well capitalized" under prompt
corrective action provisions.
Capital expenditures expected in 2004 could consist of the purchase or leasing
of additional facilities in our various market areas should such facilities or
properties be deemed to add additional franchise value. Such capital
expenditures will be paid through cash generated from operations. Additionally,
potential acquisitions could increase capital expenditures as such transactions
are consummated. Such capital expenditures would likely be paid through cash
generated from operations or the issuance of BNCCORP stock.
Comparison of Operating Results for the Three and Six Months
Ended June 30, 2004 and 2003
General. We reported net income of $706,000, or $0.23 per share on a diluted
basis, for the second quarter ended June 30, 2004. For the same quarter of 2003,
we reported net income of $1.17 million, or $0.41 per diluted share.
Net interest income for the second quarter of 2004 was $3.58 million, up 6.1
percent from $3.37 million in the same period of 2003. This increase reflected a
widening of the net interest margin to 2.61 percent for the quarter ended June
30, 2004, from 2.54 percent for the same period in 2003. Adjusted for the impact
of derivative contract-related transactions during the period (an increase in
net interest income of $9,000 for 2004 and a decrease in net interest income of
($70,000) for 2003), the net interest margin would have been 2.60 percent for
the quarter ended June 30, 2004, versus 2.59 percent for the quarter ended June
30, 2003.
Noninterest income was $6.06 million for the 2004 second quarter, an increase of
11.9 percent from $5.41 million for the year-ago period. Commissions generated
by our insurance agency subsidiary, Milne Scali, were the largest contributor to
noninterest income, and rose nearly $1.0 million from the year-ago quarter. We
also recorded a nonrecurring gain of $527,000 from the final resolution of a
reinsurance program previously associated with Milne Scali, which was reflected
in other income during the recent quarter. Brokerage income increased in the
2004 second quarter versus the year-ago period, while loan fees, service charges
and net gain on the sale of securities decreased. Trust and financial services
income also decreased mostly due to a $488,000 fee collected by the Bank's
financial services division during the second quarter of 2003. Noninterest
income represented 62.88 percent of gross revenues for the recent quarter, up
from 61.64 percent a year ago.
Noninterest expense for the second quarter of 2004 was $8.66 million, compared
with $6.70 million in the same quarter of 2003. The increase of 29.3 percent
primarily reflected higher employee and occupancy expenses associated with the
Company's growth initiatives, including the creation of some senior management
positions, the addition of branch offices in Arizona and Minnesota and the
expansion of our insurance agency operations.
For the first six months of 2004, we reported net income of $2.52 million, or
$0.86 per diluted share, an increase from net income of $2.19 million, or $0.78
per diluted share, reported in the same period of 2003.
Net interest income was $7.95 million for the first six months of 2004, rising
16.7 percent from $6.81 million in the year-ago period. The net interest margin
widened to 2.91 percent for the first six months of 2004, from 2.56 percent for
the same period in 2003. Some nonrecurring items impacted net interest income
and margin for the six months ended June 30, 2004 and those are discussed in the
section that follows.
Noninterest income increased to $12.06 million for the first six months of 2004,
up 13.5 percent from $10.63 million in the same period of 2003. The increase
largely reflected insurance commissions generated by Milne Scali and the
nonrecurring gain noted previously. Noninterest income represented 60.29 percent
of gross revenues for the recent period, compared with 60.95 percent for the
same 2003 period.
Noninterest expense for the first six months of 2004 was $16.55 million, an
increase of 25.8 percent compared with $13.16 million in the year-ago period,
largely due to expenses associated with investments in staffing and locations,
as described previously.
Our return on average common stockholders equity for the three- and six-month
periods ended June 30, 2004 was 6.68 and 12.12 percent, respectively. This
compared with 11.99 and 11.44 percent for the three- and six-month periods ended
June 30, 2003, respectively. Our return on average assets for the three- and
six-month periods ended June 30, 2004 was 0.46 and 0.82 percent, respectively.
This compared with 0.80 and 0.75 percent for the three- and six-month periods
ended June 30, 2003, respectively.
No provision for credit losses was required for the first half of 2004, compared
with provisions of $400,000 for the second quarter and $1.18 million for the six
months ended June 30, 2003, respectively. The ratio of total nonperforming
assets to total assets improved significantly to 0.10 percent at June 30, 2004
compared with 1.28 percent at December 31, 2003. The ratio of the allowance for
credit losses to total nonperforming loans was 520 percent at June 30, 2004,
strengthening from 60 percent at December 31, 2003. These asset quality ratios
improved during 2004 primarily because of a sharp decrease in nonperforming
loans during the period. Nonperforming loans decreased from $7.95 million to
$662,000 during the six-month period ending June 30, 2004. The decrease in
nonperforming loans was caused primarily by the full payment of a $4.5 million
loan and the resolution of a $2.2 million loan that resulted in a charge-off of
$1.2 million (of which $975,000 was reserved for at December 31, 2003). The
allowance for credit losses as a percentage of total loans was 1.19 percent at
June 30, 2004 compared with 1.68 percent at December 31, 2003. The ratio at June
30, 2004 is reflective of $1.57 million of charge-offs over the course of the
six-month period ended June 30, 2004 as well as the reduced reserve requirement
related to the sharp decrease in nonperforming loans during the period.
Our profitability for the second quarter of 2004 reflected our building of a
foundation for the future by investing in people, facilities and operations that
we believe are necessary for our continued growth. Over the course of the past
18 months, we have expanded our banking segment by opening a branch office at
the Esplanade in Phoenix, a branch office in Scottsdale and an additional branch
office in Golden Valley, Minnesota. We expect to continue our branching strategy
at a pace of about one or two branches per year. This branching strategy is part
of our initiative to continue to grow core deposits, thereby enhancing the
future franchise value of our organization. Industry statistics have shown that
new branch offices often take two to three years before they begin to contribute
to the overall profitability of growing financial organizations. In addition to
banking branches, we have also continued to expand our insurance segment with
the asset acquisition of Finkbeiner Insurance, Inc. of Prescott Valley, Arizona,
further expanding our insurance presence in the greater Phoenix market. Such
investments are expected to have an impact on our overall profitability in the
near term due to expenses associated with internal growth, however, we believe
that these are the right growth initiatives for the long term.
Net Interest Income. Net interest income for the three-month period ended June
30, 2004 increased approximately $206,000, or 6.11 percent, from approximately
$3.37 million to approximately $3.58 million. Net interest margin increased to
2.61 percent for the quarter ended June 30, 2004 from 2.54 percent for the same
period one year earlier. Net interest income and margin for the three-month
periods ended June 30, 2004 and 2003 were positively (negatively) impacted by
derivative contract-related transactions during the periods totaling
approximately $9,000 and ($70,000), respectively. Without these derivative
transactions, net interest income for the periods would have been approximately
$3.57 and $3.44 million, respectively, and net interest margin would have been
2.60 and 2.59 percent, respectively.
Net interest income for the six-month period ended June 30, 2004 increased
approximately $1.1 million, or 16.7 percent, from approximately $6.81 million to
approximately $7.94 million. Net interest margin increased to 2.91 percent for
the six months ended June 30, 2004 from 2.56 percent for the same period one
year earlier. Net interest income and margin for the six-month period ended June
30, 2004 were favorably impacted by the recovery of cash basis interest income
of approximately $408,000 on a $4.5 million loan that had been classified as
nonaccrual at December 31, 2003. Net interest income and margin for the
six-month period ended June 30, 2003 were negatively impacted by the charge-off
of interest income of approximately $287,000 on the same loan. Additionally, net
interest income and margin for the six-month periods ended June 30, 2004 and
2003 were negatively impacted by derivative contract-related transactions during
the periods totaling approximately ($28,000) and ($97,000), respectively.
Without these interest income variances and derivative transactions, net
interest income for the periods would have been approximately $7.56 and $7.19
million, respectively, and net interest margin would have been 2.77 and 2.70
percent, respectively.
The following tables present average balances, interest earned or paid,
associated yields on interest-earning assets and costs on interest-bearing
liabilities for the three- and six-month periods ended June 30, 2004 and 2003,
as well as the changes between the periods presented. Significant factors
contributing to the increase in net interest income and net interest margin are
discussed in lettered notes below the tables (amounts are in thousands):
Three Months Ended June 30,
----------------------------------------------------------------------
2004 2003 Change
---------------------------------- ---------------------------------- ---------------------------------
Interest Average Interest Average Interest Average
Average earned yield or Average earned yield or Average earned yield
balance or paid cost balance or paid cost balance or paid or cost
---------- ---------- ---------- ---------- ----------- ---------- ----------- ----------- ---------
Interest-earning assets
Federal funds
sold/interest
bearing due from..........$ 116 $ -- -- $ 427 $ 1 0.94% $ (311) $ (1) -0.94%
Investments................ 287,709 2,815 3.94% 210,380 2,026 3.86% 77,329 789 0.08%(a)
Loans...................... 266,668 4,139 6.24% 326,936 5,238 6.43% (60,268) (1,099) -0.19%(b)
Allowance for
loan losses............. (3,568) -- (5,130) -- 1,562 --
---------- ---------- ---------- ----------- ----------- -----------
Total interest-
earning assets........$ 550,925 6,954 5.08% $ 532,613 7,265 5.47% $ 18,312 (311) -0.39%
========== ---------- ========== ----------- =========== -----------
Interest-bearing
liabilities
Interest checking
& money market
accounts.................$188, 409 470 1.00% $ 179,908 563 1.26% $ 8,501 (93) -0.26%(c)
Savings.................... 6,743 12 0.72% 6,037 13 0.86% 706 (1) -0.14%
Certificates of
deposit under
$100,000.................. 96,264 605 2.53% 96,384 779 3.24% (120) (174) -0.71%
Certificates of
deposit $100,000
and over.................. 52,753 451 3.44% 57,149 568 3.99% (4,396) (117) -0.55%(d)
---------- ---------- ---------- ----------- ----------- -----------
Interest-bearing
deposits................ 344,169 1,538 1.80% 339,478 1,923 2.27% 4,691 (385) -0.47%
Short-term borrowings...... 32,969 118 1.44% 25,972 113 1.75% 6,997 5 -0.31%(e)
Federal Home Loan Bank
advances.................. 115,241 1,208 4.22% 102,222 1,332 5.23% 13,019 (124) -1.01%(f)
Long-term borrowings....... 8,665 88 4.08% 8,634 96 4.46% 31 (8) -0.38%
Subordinated debentures.... 22,290 427 7.70% 22,199 432 7.81% 91 (5) -0.12%
---------- ---------- ---------- ----------- ----------- -----------
Total borrowings......... 179,165 1,841 4.13% 159,027 1,973 4.98% 20,138 (132) -0.85%
---------- ---------- ---------- ----------- ----------- -----------
Total interest-bearing
liabilities.............$ 523,334 3,379 2.60% $ 498,505 3,896 3.13% $ 24,829 (517) -0.54%
========== ---------- ========== ----------- =========== -----------
Net interest
income/spread........... $ 3,575 2.48% $ 3,369 2.34% $ 206 0.15%
========== =========== ===========
Net interest margin...... 2.61% 2.54% 0.07%(g)
Notation:
Noninterest-bearing
deposits..................$ 48,064 -- $ 38,858 -- $ 9,206 --
---------- ---------- -----------
Total deposits...........$ 392,233 $ 1,538 1.58% $ 378,336 $ 1,923 2.04% $ 13,897 $ (385) -0.46%
========== ========== ========== =========== =========== ===========
Taxable equivalents:
Total interest-
earning assets..........$ 550,925 $ 7,162 5.23% $ 532,613 $ 7,462 5.62% $ 18,312 $ (300) -0.39%
Net interest
income/spread........... -- $ 3,783 2.63% -- $ 3,565 2.48% -- $ 218 0.15%
Net interest margin...... -- -- 2.76% -- -- 2.69% -- -- -0.07%
- ---------------------------
Six Months Ended June 30,
----------------------------------------------------------------------
2004 2003 Change
---------------------------------- ---------------------------------- ---------------------------------
Interest Average Interest Average Interest Average
Average earned yield or Average earned yield or Average earned yield
balance or paid cost balance or paid cost balance or paid or cost
---------- ---------- ---------- ---------- ----------- ---------- ----------- ----------- ---------
Interest-earning assets
Federal funds
sold/interest bearing
due from..................$ 172 $ -- -- $ 383 $ 1 0.53% $ (211) $ (1) -0.53%
Investments................ 284,587 5,950 4.20% 213,098 4,310 4.08% 71,489 1,640 0.12%(a)
Loans...................... 268,048 8,863 6.65% 328,972 10,422 6.39% (60,924) (1,559) 0.26%(b)
Allowance for
loan losses............. (4,160) -- (5,035) -- 875 --
---------- ---------- ---------- ----------- ----------- -----------
Total interest-earning
assets..................$ 548,647 14,813 5.43% $ 537,418 14,733 5.53% $ 11,229 80 -0.10%
========== ---------- ========== ----------- =========== -----------
Interest-bearing
liabilities
Interest checking
& money market
accounts.................$ 198,443 1,010 1.02% $ 182,347 1,158 1.28% $ 16,096 (148) -0.26%(c)
Savings.................... 6,655 23 0.70% 5,675 25 0.89% 980 (2) -0.19%
Certificates of
deposit under
$100,000.................. 94,981 1,239 2.63% 98,881 1,637 3.34% (3,900) (398) -0.71%
Certificates of
deposit $100,000
and over.................. 49,932 884 3.56% 60,124 1,209 4.06% (10,192) (325) -0.50%(d)
---------- ---------- ---------- ----------- ----------- -----------
Interest-bearing
deposits................ 350,011 3,156 1.81% 347,027 4,029 2.34% 2,984 (873) -0.53%
Short-term borrowings...... 29,681 217 1.47% 22,771 221 1.96% 6,910 (4) -0.49%(e)
Federal Home Loan
Bank advances............ 112,350 2,461 4.41% 103,072 2,608 5.10% 9,278 (147) -0.69%(f)
Long-term borrowings....... 8,648 181 4.21% 8,591 195 4.58% 57 (14) -0.37%
Subordinated debentures.... 22,213 853 7.72% 22,110 870 7.93% 103 (17) -0.21%
---------- ---------- ---------- ----------- ----------- -----------
Total borrowings......... 172,892 3,712 4.32% 156,544 3,894 5.02% 16,348 (182) -0.70%
---------- ---------- ---------- ----------- ----------- -----------
Total interest-bearing
liabilities.............$ 522,903 6,868 2.64% $ 503,571 7,923 3.17% $ 19,332 (1,055) -0.53%
========== ---------- ========== ----------- =========== ----------
Net interest
income/spread........... $ 7,945 2.79% $ 6,810 2.36% $ 1,135 0.43%
========== =========== ===========
Net interest margin...... 2.91% 2.56% 0.35%(g)
Notation:
Noninterest-bearing
deposits................. $ 44,957 -- $ 38,348 -- $ 6,609 --
---------- ---------- -----------
Total deposits.......... $ 394,968 $ 3,157 1.61% $ 385,375 $ 4,029 2.11% $ 9,593 $ (872) -0.50%
========== ========== ========== =========== =========== ===========
Taxable equivalents:
Total interest-earning
assets..................$ 548,647 $ 15,227 5.58% $ 537,418 $ 15,112 5.67% $ 11,229 $ 115 -0.09%
Net interest
income/spread........... -- $ 8,358 2.94% -- 7,189 2.50% -- $ 1,169 0.44%
Net interest margin...... -- -- 3.06% -- -- 2.69% -- -- -0.37%
- ---------------------------------
(a) Average investments during the three- and six-month periods ended June 30,
2004 exceeded those for the same periods in 2003 due to our portfolio and
liquidity management strategies, including the purchase of investment
securities to offset a decrease in the earning asset portfolio that
resulted from a net decrease in loan volume. Total investments at June 30,
2004 were $263.4 million compared with $209.9 million at June 30, 2003.
(b) Average loans decreased primarily as a result of general planned loan
payoffs and paydowns of commercial revolving lines of credit. Actual loan
balances at June 30, 2004 and June 30, 2003 were $288.9 and $322.4 million,
respectively. Loan yield for the six-month period ended June 30, 2004 was
favorably impacted by the recovery of $408,000 of cash basis interest
income on a $4.5 million loan that was classified as nonaccrual at December
31, 2003 and was paid in full during the first quarter of 2004. Without
this recovery, interest income on loans for the six-month period ended June
30, 2004 would have been approximately $8.5 million and the yield on loans
would have been 6.34 percent. Loan yield for the six-month period ended
June 30, 2003 was negatively impacted by the charge-off of $287,000 of
interest income on the same loan. Without this charge-off, interest income
on loans for the six-month period ended June 30, 2003 would have been
approximately $10.7 million and the yield on loans would have been 6.56
percent.
(c) Increased average balances of interest checking and money market accounts
represents additional growth in our floating-rate Wealthbuilder deposit
products. These transaction accounts can fluctuate significantly based on
the cash management activities of our commercial customers. This is
evidenced by the fact that, as indicated earlier, the period-end balance in
these accounts at June 30, 2004 is down from the period-end balance at
December 31, 2003. Commercial customers often draw down on their lines of
credit at year-end and place these funds in interest checking and money
market accounts. After year-end, customers pay down on their lines of
credit using these funds. While this negatively impacts the period end
numbers in the early part of the year, averages for the presented periods
were actually up in 2004 versus the same periods in 2003.
(d) For the three months ended June 30, 2004, average balances in brokered,
national market and CDARSsm certificates of deposit totaled $21.5, $7.7 and
$13.8 million, respectively. Average balances in brokered and national
market certificates of deposit totaled $25.0 and 20.9 million,
respectively, for the three months ended June 30, 2003. There were no
CDARSsm deposits during the quarter ended June 30, 2003. For the six months
ended June 30, 2004, average balances of brokered, national market and
CDARSsm certificates of deposit were $19.4, $10.0 and $10.6 million,
respectively. For the same period during 2003, average balances of brokered
and national market certificates of deposit totaled $27.3 and $23.8
million, respectively. There were no CDARSsm certificates of deposit during
the first half of 2003. The reduced cost of these certificates of deposit
reflects the maturity of higher rate certificates of deposit and renewal or
origination of new certificates of deposit at lower current rates.
(e) Average short-term borrowings increased during the three- and six-month
periods ended June 30, 2004 over the same periods in 2003 due to an
increase in average Federal funds purchased. For the three-month periods
ended June 30, 2004 and 2003, average Federal funds purchased were $16.0
and $9.2 million, respectively. For the six-month periods ended June 30,
2004 and 2003, average Federal funds purchased were $13.5 and $7.8 million,
respectively. Reduced costs of short-term borrowings reflect the current
interest rate environment in 2004 versus 2003.
(f) The increase in volume of FHLB advances resulted from the use of additional
short-term FHLB advances in early 2004. Short-term FHLB advances are used
to manage liquidity similar to how Federal funds purchased are used on a
day-to-day basis. The short-term advances provide us with a slightly more
cost-effective way of managing short-term liquidity needs since the FHLB
gives a discount for advances of $10.0 million or more. The lower costs of
FHLB advances reflect the lower rate structure in 2004 versus 2003.
(g) Net interest margin for the six months ended June 30, 2004 was favorably
impacted by the previously mentioned recovery of cash basis interest income
of $408,000 during the quarter ended March 31, 2004. Without this recovery,
and without the impact of derivative contract adjustments, net interest
margin would have been 2.77 percent for the six months ended June 30, 2004.
Additionally, net interest margin for the six months ended June 30, 2003
was negatively impacted by the charge-off of interest income on the same
loan of $287,000 during the quarter ended March 31, 2003. Without this
charge-off and without the impact of derivative contract adjustments, net
interest margin would have been 2.70 percent for the six months ended June
30, 2003.
Provision for Credit Losses. There was no provision for credit losses for the
three- or six-month periods ended June 30, 2004 as compared to $400,000 and $1.2
million, respectively, for the three- and six-month periods ended June 30, 2003.
No provisions for credit losses have been necessary during 2004 largely due to
the significant decline in nonperforming assets between December 31, 2003 and
June 30, 2004. See "Comparison of Financial Condition at June 30, 2004 and
December 31, 2003 - Allowance for Credit Losses."
Noninterest Income. The following table presents the major categories of our
noninterest income for the three- and six-month periods ended June 30, 2004 and
2003 as well as the amount and percent of change between the periods.
Significant changes are discussed in lettered explanations following the table
(amounts are in thousands):
Three Months Ended Six Months Ended
Noninterest Income June 30, Change June 30, Change
----------------------- --------------------- -----------