10-Q 1 q0302.txt 10-Q FOR QUARTER ENDED MARCH 31, 2002 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 March 31, 2002 [ ] 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 of (I.R.S. Employer Identification incorporation or organization) No.) 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 ___ The number of shares of the registrant's outstanding common stock on April 15, 2002 was 2,399,170. PART I - FINANCIAL INFORMATION Item 1. Financial Statements BNCCORP, INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands, except share and per share data)
ASSETS March 31, December 31, 2002 2001 ---------- ---------- (unaudited) CASH AND DUE FROM BANKS................................ $ 13,121 $ 16,346 INTEREST-BEARING DEPOSITS WITH BANKS................... 122 126 FEDERAL FUNDS SOLD..................................... 3,000 7,500 Cash and cash equivalents 16,243 23,972 INVESTMENT SECURITIES AVAILABLE FOR SALE............... 203,861 219,181 LOANS AND LEASES, net of unearned income............... 317,369 320,791 ALLOWANCE FOR CREDIT LOSSES............................ (4,486) (4,325) Net loans and leases................................ 312,883 316,466 PREMISES, LEASEHOLD IMPROVEMENTS AND 16,670 15,403 EQUIPMENT, net...................................... INTEREST RECEIVABLE.................................... 3,255 3,008 OTHER ASSETS........................................... 4,877 4,856 GOODWILL............................................... 437 437 OTHER INTANGIBLE ASSETS, net........................... 1,633 1,734 ---------- ---------- $ 559,859 $ 585,057 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY DEPOSITS: Noninterest-bearing................................. $ 31,872 $ 43,055 Interest-bearing - Savings, NOW and money market.................... 179,399 170,653 Time deposits $100,000 and over.................. 80,358 83,809 Other time deposits.............................. 109,751 110,452 Total deposits...................................... 401,380 407,969 SHORT-TERM BORROWINGS.................................. 3,944 760 FHLB BORROWINGS........................................ 97,200 117,200 LONG-TERM BORROWINGS................................... -- 13 OTHER LIABILITIES...................................... 4,948 6,192 Total liabilities............................. 507,472 532,134 GUARANTEED PREFERRED BENEFICIAL INTERESTS IN 22,025 22,244 COMPANY'S SUBORDINATED DEBENTURES................... STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value -2,000,000 shares -- -- authorized; no shares issued or outstanding.................. Common stock, $.01 par value -10,000,000 shares 24 24 authorized; 2,399,170 shares issued and outstanding (excluding 42,880 shares held in treasury)....... Capital surplus..................................... 14,087 14,084 Retained earnings................................... 15,625 15,435 Treasury stock (42,880 shares)...................... (513) (513) Accumulated other comprehensive income, 1,139 1,649 net of income taxes.............................. Total stockholders' equity.................... 30,362 30,679 ---------- ---------- $ 559,859 $ 585,057 =========== =========== The accompanying notes are an integral part of these consolidated balance sheets.
BNCCORP, INC. AND SUBSIDIARIES Consolidated Statements of Income For the Three Months Ended March 31 (In thousands, except per share data) 2002 2001 --------- --------- INTEREST INCOME: (unaudited) Interest and fees on loans................................ $ 5,342 $ 6,118 Interest and dividends on investment securities- Taxable................................................. 2,458 3,993 Tax-exempt.............................................. 217 227 Dividends............................................... 55 135 Other.................................................... 14 20 --------- --------- Total interest income............................. 8,086 10,493 --------- --------- INTEREST EXPENSE: Interest on deposits..................................... 2,763 4,219 Interest on short-term borrowings......................... 42 95 Interest on FHLB borrowings.............................. 1,441 2,108 Interest on long-term borrowings......................... 2 293 --------- --------- Total interest expense............................ 4,248 6,715 --------- --------- Net interest income............................... 3,838 3,778 PROVISION FOR CREDIT LOSSES................................ 217 350 --------- --------- NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES...... 3,621 3,428 --------- --------- NONINTEREST INCOME: Fees on loans............................................ 515 164 Insurance commissions.................................... 467 508 Net gain on sales of securities.......................... 430 718 Brokerage income......................................... 400 349 Trust and financial services............................. 219 283 Service charges.......................................... 175 167 Rental income............................................ 47 19 Other.................................................... 142 119 --------- --------- Total noninterest income.......................... 2,395 2,327 --------- --------- NONINTEREST EXPENSE: Salaries and employee benefits........................... 2,860 2,349 Occupancy................................................ 534 449 Depreciation and amortization............................ 356 328 Minority interest in income of subsidiaries.............. 457 233 Professional services.................................... 389 299 Office supplies, telephone and postage................... 263 230 Marketing and promotion.................................. 166 156 Amortization of intangible assets........................ 101 122 FDIC and other assessments............................... 54 48 Other.................................................... 533 417 --------- --------- Total noninterest expense......................... 5,713 4,631 --------- --------- Income before income taxes................................. 303 1,124 Income taxes............................................... 113 335 --------- --------- Income before extraordinary item and cumulative effect of change in accounting principle................. 190 789
BNCCORP, INC. AND SUBSIDIARIES Consolidated Statements of Income, continued For The Three Months Ended March 31 (In thousands, except per share data) 2001 2000 --------- --------- (unaudited) Extraordinary item-gain on early extinguishment of debt, net of income taxes........................... -- 4 Cumulative effect of change in accounting principle, net of income taxes..................... -- (113) --------- --------- NET INCOME............................................ $ 190 $ 680 ========= ========= BASIC AND DILUTED EARNINGS PER COMMON SHARE: Income before extraordinary item and cumulative effect of change in accounting principle........... $ 0.08 $ 0.33 Extraordinary item-gain on early extinguishment of debt, net of income taxes.......................... -- 0.00 Cumulative effect of change in accounting principle, net of income taxes..................... -- (0.05) --------- --------- Earnings per share................................... $ 0.08 $ 0.28 ========= ========= The accompanying notes are an integral part of these consolidated financial statements.
BNCCORP, INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income (Loss) For the Three Months Ended March 31 (In thousands) 2002 2001 ---------- ---------- (unaudited) NET INCOME......................................... $ 190 $ 680 OTHER COMPREHENSIVE INCOME (LOSS)- Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during the period, net of income taxes..... (240) 1,112 Less: reclassification adjustment for gains included in net income, net of income taxes (270) (485) Net gain on derivative instruments designated and qualifying as cash flow hedging instruments, net of income taxes............. -- 63 ---------- ---------- OTHER COMPREHENSIVE INCOME (LOSS).................. (510) 690 ---------- ---------- COMPREHENSIVE INCOME (LOSS)........................ $ (320) $ 1,370 ========== ========== The accompanying notes are an integral part of these consolidated financial statements.
BNCCORP, INC. AND SUBSIDIARIES Consolidated Statement of Stockholders' Equity For the Three Months Ended March 31, 2002 (In thousands, except share data) Accumulated Common Stock Other ------------------ Capital Retained Treasury Comprehensive Shares Amount Surplus Earnings Stock Income Total --------- -------- -------- -------- -------- ------------- ------- 2,442,050 $ 24 $ 14,084 $15,435 $ (513) $ 1,649 $30,679 Balance, December 31, 2001...... Net income (unaudited)....... -- -- -- 190 -- -- 190 Other comprehensive income - Change in unrealized holding gains on securities available for sale, net of income taxes and reclassification (unaudited).............. -- -- -- -- -- (510) (510) Other (unaudited)............ -- -- 3 -- -- -- 3 --------- -------- -------- -------- -------- ------------- ------- Balance, March 31, 2002 (unaudited).................. 2,442,050 $ 24 $ 14,087 $15,625 $ (513) $ 1,139 $30,362 ========= ======== ======== ======== ======== ============= ======= The accompanying notes are an integral part of these consolidated financial statements.
BNCCORP, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows For the Three Months Ended March 31 (In thousands) 2002 2001 -------- --------- (unaudited) OPERATING ACTIVITIES: Net income............................................. $ 190 $ 680 Adjustments to reconcile net income to net cash provided by (used in) operating activities - Provision for credit losses......................... 217 350 Depreciation and amortization....................... 356 328 Amortization of intangible assets................... 101 122 Net premium amortization on investment securities... 824 318 Proceeds from loans recovered....................... 28 46 Change in interest receivable and other assets, net............................................... 44 (746) Change in dividend payable - trust preferred securities........................................ (219) (198) Net realized gains on sales of investment securities........................................ (430) (718) Change in other liabilities, net.................... (1,246) 6,680 Originations of loans to be sold.................... (17,526) (21,006) Proceeds from sale of loans......................... 17,526 21,006 -------- --------- Net cash provided by (used in) operating activities........................... (135) 6,862 -------- --------- INVESTING ACTIVITIES: Purchases of investment securities..................... (19,388) (54,103) Proceeds from sales of investment securities........... 15,776 50,802 Proceeds from maturities of investment securities...... 17,718 13,082 Net (increase) decrease in loans....................... 3,338 (7,552) Additions to premises, leasehold improvements and equipment........................................ (1,623) (571) Proceeds from sale of premises and equipment........... -- 20 -------- --------- Net cash provided by investing activities........ 15,821 1,678 -------- --------- FINANCING ACTIVITIES: Net decrease in demand, savings, NOW and money market accounts................................ (2,436) (2,113) Net increase (decrease) in time deposits............... (4,153) 11,794 Net decrease in short-term and FHLB borrowings......... (16,816) (15,613) Repayments of long-term borrowings..................... (13) (51) Other.................................................. 3 18 -------- --------- Net cash used in financing activities............ (23,415) (5,965) -------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...... (7,729) 2,575 CASH AND CASH EQUIVALENTS, beginning of period............ 23,972 15,583 -------- --------- CASH AND CASH EQUIVALENTS, end of period.................. $ 16,243 $ 18,158 ======== ========= SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid.......................................... $ 4,342 $ 6,404 ======== ========= Income taxes paid...................................... $ -- $ -- ======== ========= The accompanying notes are an integral part of these consolidated financial statements.
BNCCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) March 31, 2002 NOTE 1 -- Basis of Presentation The accompanying interim consolidated financial statements have been prepared by BNCCORP, Inc. ("BNCCORP" or the "Company"), without audit, in accordance with accounting principles generally accepted in the United States for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading. The unaudited consolidated financial statements as of March 31, 2002 and for the three month periods ended March 31, 2002 and 2001 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, 2002. 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, 2001. Accordingly, footnote disclosures which would substantially duplicate the disclosures contained in the December 31, 2001 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, 2001 and the notes thereto. NOTE 2 - Reclassifications Certain of the 2001 amounts have been reclassified to conform with the 2002 presentations. These reclassifications had no effect on net income or stockholders' equity. NOTE 3 - 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 March 31:
Net Per-Share Income Shares Amount ------------ ------------ ----------- 2002 Basic earnings per share: Income from continuing operations.... $ 190,000 2,399,170 $ 0.08 ============ =========== Effect of dilutive shares - Options............................ 25,569 ------------ Diluted earnings per share: Income from continuing operations.... $ 190,000 2,424,739 $ 0.08 ============ =========== 2001 Basic earnings per share: Income before extraordinary item and cumulative effect of change in accounting principle............ $ 789,000 2,394,610 $ 0.33 Extraordinary item - gain on early extinguishment of debt, net of income taxes...................... 4,000 2,394,610 0.00 Cumulative effect of change in accounting principle, net of income taxes....................... (113,000) 2,394,610 (0.05) ------------ ----------- Income available to common stockholders....................... $ 680,000 2,394,610 $ 0.28 ============ =========== Effect of dilutive shares - Options............................ 16,872 ------------ Diluted earnings per share: Income before extraordinary item and cumulative effect of change in accounting principle............ $ 789,000 2,411,482 $ 0.33 Extraordinary item - gain on early extinguishment of debt, net of income taxes....................... 4,000 2,411,482 0.00 Cumulative effect of change in accounting principle, net of income taxes....................... (113,000) 2,411,482 (0.05) ------------ ----------- Income available to common stockholders....................... $ 680,000 2,411,482 $ 0.28 ============ ===========
The following number of options, with exercise prices ranging from $8.20 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 the Company's common stock for the period:
2002 2001 ---------- ---------- Quarter ended March 31................... 97,508 101,570
NOTE 4 - Segment Disclosures Banking is the primary operational activity of the Company and there are no other operational segments which are material and are required to be separately disclosed for financial statement purposes. NOTE 5 - Retirement of Subordinated Notes During the quarter ended March 31, 2001, the Company retired $40,000 of its 8 5/8 percent subordinated notes due 2004. The Company purchased the notes at a discount, and the transactions resulted in extraordinary gains of $4,000 net of income taxes of $2,000. The notes were retired using cash generated from the issuance of trust preferred securities in July 2000. NOTE 6 - Goodwill and Other Intangible Assets - Adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," ("SFAS 142") Goodwill, representing the excess of the purchase price over the fair value of net assets acquired, results from purchase acquisitions made by the Company. On January 1, 2002, the Company adopted SFAS 142. Under SFAS 142, goodwill associated with business combinations completed after June 30, 2001 was not to be amortized. During the transition period from July 1, 2001 through December 31, 2001, all of the Company's goodwill associated with business combinations completed prior to July 1, 2001 continued to be amortized over 15 to 25 year periods. Effective January 1, 2002, all goodwill amortization was discontinued. Effective January 1, 2002, goodwill will be assessed at least annually for impairment at the reporting unit and qualifying subsidiary levels by applying a fair-value-based test. The Company has $437,000 of unamortized goodwill related to five separate transactions completed prior to July 1, 2001 and, pursuant to SFAS 142, will complete its initial goodwill impairment assessment during the second quarter of 2002. Core deposit intangibles are amortized based on a useful life of 10 years. Certain identifiable intangible assets that are also included in the caption "other intangible assets" in the consolidated balance sheets are generally amortized over an original life of 10 to 15 years. The Company reviews intangible assets annually for other-then-temporary impairment, or whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. If impairment is indicated through such analysis, the asset is written down to the extent that the carrying value exceeds its fair value. Adjusted Earnings - SFAS 142 Transitional Disclosure: Effective January 1, 2002, the amortization of goodwill was discontinued. The following tables reconcile for the periods presented, income before extraordinary items and cumulative effect of change in accounting principle, net income and earnings per share, adjusted to exclude amortization expense recognized in those periods related to goodwill (amounts are in thousands):
For the three months ended March 31, ---------------------- 2002 2001 ---------- ---------- Reported income before extraordinary item and cumulative effect of change in accounting principle....................... $ 190 $ 789 Add back: goodwill amortization, net of income taxes............................... -- 7 ---------- ---------- Adjusted income before extraordinary item and cumulative effect of change in accounting principle.................... $ 190 $ 796 ========== ========== Reported net income.......................... $ 190 $ 680 Add back: goodwill amortization, net of income taxes............................... -- 7 ---------- ---------- Adjusted net income.......................... $ 190 $ 687 ========== ========== Basic and diluted earnings per share: Reported net income..................... $ 0.08 $ 0.28 Goodwill amortization, net of income taxes................................. -- 0.00 ---------- ---------- Adjusted net income........................... $ 0.08 $ 0.28 ========== ==========
Intangible Assets: The gross carrying amount of intangible assets and the associated accumulated amortization at March 31, 2002 is presented in the table below (amounts are in thousands). Amortization expense for intangible assets was $101,000 for the quarter ended March 31, 2002.
As of March 31, 2002 ------------------------- Gross Carrying Accumulated Amount Amortization ---------- ------------- Amortized intangible assets: Core deposit intangibles................ $ 3,497 $ 2,323 Other................................... 874 415 ---------- ------------- Total............................ $4,371 $ 2,738 ========== =============
There were no other intangible assets which are not being amortized. Projections of amortization expense are based on existing asset balances as of March 31, 2002 and do not reflect any amortization expense associated with the acquisition disclosed in Note 8, "Subsequent Events." What the Company actually experiences may be significantly different depending upon changes in market conditions. The following table shows the estimated future amortization expense for amortized intangible assets existing on the Company's books at March 31, 2002 (amounts are in thousands):
Core Deposit Intangibles Other Total ----------- -------- -------- Nine months ended December 31, 2002...... $ 262 $ 62 $ 324 Year ended December 31, 2003.................................. 350 74 424 2004.................................. 350 74 424 2005.................................. 213 74 287 2006.................................. -- 26 26 2007.................................. -- 26 26
Goodwill: At January 1, 2002, the Company had a total of $437,000 of unamortized goodwill relating to five separate purchase transactions completed prior to July 1, 2001. As indicated above, pursuant to SFAS 142, the goodwill will be assessed for impairment during the second quarter of 2002. NOTE 7 - Recently Adopted Accounting Standards In August 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business (as previously defined in that opinion). SFAS 144 requires that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and broadens the presentation of discontinued operations to include more disposal transactions than were included under the previous standards. BNCCORP adopted SFAS 144 on January 1, 2002 and the adoption of the statement did not have a material impact. NOTE 8 - Subsequent Events On April 8, 2002, the Company merged BNC National Bank with and into BNC National Bank of Arizona and changed the name of the combined bank to BNC National Bank. On April 16, 2002, pursuant to a stock purchase agreement (the "Agreement"), the Company acquired Milne & Company Insurance, Inc. ("Milne Scali") from Richard W. Milne, Jr., Terrence M. Scali, and other sellers named in the Agreement (collectively, the "Sellers"). Milne Scali is a general insurance agency. Milne Scali was purchased for 297,759 shares of newly issued Company common stock and $15,500,000 in cash. Additional consideration of up to $8,500,000 is payable to the Sellers, subject to Milne Scali achieving certain financial performance targets. The cash portion of the purchase price was financed from internal resources. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Comparison of Financial Condition at March 31, 2002 and December 31, 2001 Assets. Total assets decreased $25.2 million, from $585.1 million at December 31, 2001 to $559.9 million at March 31, 2002. The following table presents the Company's assets by category as of March 31, 2002 and December 31, 2001, 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 March 31, December 31, ------------------- Assets 2002 2002 $ % ----------------------------- ------------ ------------ --------- --------- Cash and due from banks...... $ 13,121 $16,346 $ (3,225) (19.7)% Interest-bearing deposits with banks................. 122 126 (4) (3.2)% Federal funds sold........... 3,000 7,500 (4,500) (60.0)% (a) Investment securities available for sale......... 203,861 219,181 (15,320) (7.0)% (b) Loans and leases, net........ 312,883 316,466 (3,583) (1.1)% Premises, leasehold improve- ments and equipment, net... 16,670 15,403 1,267 8.2% Interest receivable.......... 3,255 3,008 247 8.2% Other assets................. 4,877 4,856 21 0.4% Goodwill..................... 437 437 -- -- Other intangible assets, net........................ 1,633 1,734 (101) (5.8)% ------------ ------------ ---------- Total assets........... $ 559,859 $ 585,057 $(25,198) (4.3)% ============ ============ ========== -------------------- (a) Federal funds sold fluctuate on a daily basis depending upon the various funding activities and transactions of the Company and its customer base. (b) The Company followed a balance sheet leveraging strategy in 1999 and 2000 during which time it increased its earning asset portfolio by purchasing investment securities funded by FHLB borrowings. This strategy, combined with market interest rate developments, resulted in a low loan-to-assets ratio relative to the Company's peers and unrealized gains in the investment portfolio. During the quarter ended March 31, 2002, the Company sold $15.8 million of investment securities. The sales generated realized gains of $430,000. These gains are included in noninterest income in the Consolidated Statement of Income for the quarter.
Allowance for Credit Losses. The following table sets forth information regarding changes in the Company's allowance for credit losses for the three month period ending March 31, 2002 (amounts are in thousands):
Three Months Ended March 31, 2002 ----------------- Balance, beginning of period................ $ 4,325 Provision for credit losses................. 217 Loans charged off........................... (84) Loans recovered............................. 28 Balance, end of period...................... $ 4,486 ================= Ending loan portfolio ...................... $ 317,369 ================= Allowance for credit losses as a percentage of ending loan portfolio.................. 1.41%
As of March 31, 2002, the Company's allowance for credit losses was 1.41 percent of total loans as compared to 1.35 percent at December 31, 2001. Net charge-offs as a percentage of average loans for the three month period ended March 31, 2002 were 0.02 percent. Net recoveries as a percentage of average loans for the three month period ended March 31, 2001 were 0.01 percent. The Company maintains its allowance for credit losses at a level considered adequate to provide for an estimate of probable losses related to specifically identified loans as well as probable losses in the remaining loan and lease portfolio that have been incurred as of each balance sheet date. The loan and lease portfolio and other credit exposures are reviewed regularly to evaluate the adequacy of the allowance for credit losses. In determining the level of the allowance, the Company evaluates the allowance necessary for specific nonperforming loans and also estimates losses in other credit exposures. The resultant three allowance components are as follows: Specific Reserve. 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 which meet the criteria as being "impaired" under the definition in 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. Ranges of loss are determined based on best- and worst-case scenarios for each loan. Reserves for Homogeneous Loan Pools. The Company makes a significant number of loans and leases which, due to their underlying similar characteristics, are assessed for loss as "homogeneous" pools. Included in the homogeneous pools are loans and leases from the retail sector and commercial loans under a certain size, which have been excluded from the specific reserve allocation previously discussed. The Company segments the pools by type of loan or lease and using historical loss information estimates a loss reserve for each pool. Qualitative Reserve. The Company's senior lending management also allocates reserves for special situations, which are unique to the measurement period. These include environmental factors, such as economic conditions in certain geographical or industry segments of the portfolio, economic trends in the retail lending sector and peer-group loss history. 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 the Company's allowance for credit losses on a timely basis. Management also considers experience of peer institutions and regulatory guidance in addition to the Company's own experience. Loans, leases and other extensions of credit deemed uncollectible are charged to the allowance. Subsequent recoveries, if any, are credited to the allowance. Estimating the risk and amount of loss on any loan is subjective and actual losses may vary from current estimates. Additionally, 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 process. Although management believes that the allowance for credit losses is adequate to cover losses in the loan portfolio as well as other credit exposures, there can be no assurance that the allowance will prove sufficient to cover actual losses in the future. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the adequacy of the Company's allowance for credit losses. Such agencies may require the Company to make additional provisions to the allowance based upon their judgments about information available to them at the time of the examination. Nonperforming Assets. The following table sets forth information concerning the Company's nonperforming assets as of the dates indicated (amounts are in thousands):
March 31, December 31, 2002 2001 ------------ ---------------- Nonperforming loans: Loans 90 days or more delinquent and still $ 504 $ 983 accruing interest.......................... Nonaccrual loans............................ 3,406 3,391 Restructured loans.......................... -- 5 ------------ ---------------- Total nonperforming loans...................... 3,910 4,379 Other real estate owned and repossessed assets.................................... 70 70 ------------ ---------------- Total nonperforming assets..................... $ 3,980 $ 4,449 ============ ================ Allowance for credit losses.................... $ 4,486 $ 4,325 ============ ================ Ratio of total nonperforming assets to total assets....................................... 0.71% .76% Ratio of total nonperforming loans to total loans........................................ 1.23% 1.36% Ratio of allowance for credit losses to total 114.75% 98.77% nonperforming loans.........................
Nonperforming loans consist of loans 90 or more days past due for which the Company continues to accrue interest, nonaccrual loans and loans on which the original terms have been restructured. Loans 90 days or more delinquent and still accruing interest include loans over 90 days past due which management believes, based on its specific analysis of the loans, do not present doubt about the collection of interest and principal in accordance with the loan contract. Loans in this category must be well-secured and in the process of collection. Company 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 management believes, after considering economic and business conditions and collection efforts, that the borrower's financial condition is such that the collection of interest is doubtful. A delinquent loan is generally placed on nonaccrual status when it becomes 90 days or more past due unless the loan is well-secured and in the process of collection. When a loan is placed on nonaccrual status, accrued but uncollected interest income applicable to the current reporting period is reversed against interest income of the current period. Accrued but uncollected interest income applicable to previous reporting periods is charged against the allowance for credit losses. No additional interest is accrued on the loan balance until the collection of both principal and interest becomes reasonably certain. When a problem loan is finally resolved, there may ultimately be an actual write down or charge-off of the principal balance of the loan which may necessitate additional charges to earnings. Of the $3.4 million of loans in this category at March 31, 2002, $3.0 million relates to two commercial customers and loans for one of these customers are partially SBA-guaranteed. Restructured loans are those for which concessions, including a reduction of the interest rate or the deferral of interest or principal, have been granted due to the borrower's weakened financial condition. Interest on restructured loans is accrued at the restructured rates when it is anticipated that no loss of its original principal will occur. Other real estate owned and repossessed assets represents properties and other assets acquired through, or in lieu of, loan foreclosure. Such properties and assets are included in other assets in the balance sheets. They are initially recorded at fair value at the date of acquisition establishing a new cost basis. Write-downs to fair value at the time of acquisition are charged to the allowance for credit losses. After foreclosure, management periodically performs valuations 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. Liabilities. Total liabilities decreased $24.6 million, from $532.1 million at December 31, 2001 to $507.5 million at March 31, 2002. The following table presents the Company's liabilities by category as of March 31, 2002 and December 31, 2001 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 --------------------- March 31, December 31, Liabilities 2002 2001 $ % -------------------------- ----------- ------------ ---------- --------- DEPOSITS: Noninterest - bearing...... $ 31,872 $ 43,055 $(11,183) (26.0)% (a) Interest - bearing - Savings, NOW and money market.................. 179,399 170,653 8,746 5.1% (b) Time deposits $100,000 and over................ 80,357 83,809 (3,452) (4.1)% Other time deposits...... 109,751 110,452 (701) (0.6)% Short-term borrowings...... 3,944 760 3,184 418.9% FHLB borrowings............ 97,200 117,200 (20,000) (17.1)% (c) Long-term borrowings....... -- 13 (13) (100.0)% Other liabilities.......... 4,948 6,192 (1,244) (20.1)% ----------- ------------ ---------- Total liabilities... $ 507,472 $ 532,134 $(24,662) (4.6)% =========== ============ ========== ------------------- (a) The Company's noninterest-bearing deposits can fluctuate widely on a day-to-day basis due to the number of commercial customers served by the Company and the nature of their transaction account activity. (b) The increase in savings, NOW and money market accounts is due to continued growth in the Company's Wealthbuilder product line including growth of these products in the Arizona and Minnesota markets. (c) The Company's FHLB borrowings decreased $20.0 million because two $10.0 million advances matured in January 2002.
Stockholders' Equity. The Company's equity capital decreased $317,000 between December 31, 2001 and March 31, 2002. This decrease was primarily attributable to a $510,000 decrease in the net unrealized holding gain on securities available for sale offset by $190,000 of earnings recorded for the three months ended March 31, 2002. Capital Adequacy and Expenditures. BNCCORP's management actively monitors compliance with bank regulatory capital requirements, including risk-based and leverage capital measures. Under the risk-based capital method of capital measurement, the ratio computed is dependent on the amount and composition of assets recorded on the balance sheet, and the amount and composition of off-balance- sheet items, in addition to the level of capital. The following table includes the risk-based and leverage capital ratios of the Company and its banking subsidiaries as of March 31, 2002:
Tier 1 Total Risk- Risk- Tier 1 Based Based Leverage Ratio Ratio Ratio ----------- ------------ ----------- BNCCORP, consolidated... 8.98% 13.02% 6.56% BNC National Bank....... 10.27% 11.36% 7.39% BNC National Bank of Arizona............... 16.69% 17.76% 14.45%
As of March 31, 2002, BNCCORP and its subsidiary banks exceeded capital adequacy requirements and the banks were considered "well capitalized" under prompt corrective action provisions. Comparison of Operating Results for the Three Months Ended March 31, 2002 and 2001 General. Net income and earnings per share from continuing operations decreased to $190,000 and $0.08, respectively, for the quarter ended March 31, 2002 as compared with $789,000 and $0.33, respectively, for the same period one year earlier. Net income for the three months ended March 31, 2002 was also $190,000, or basic and diluted earnings per share of $0.08. For the same period in 2001, the Company recorded earnings of $680,000, or basic and diluted earnings per share of $0.28. The year-ago quarter reflected the cumulative effect of a change in accounting principle of $0.05 per basic and diluted share. The returns on average assets and average stockholders' equity, from continuing operations, were 0.14 and 2.48 percent, respectively, for the three months ended March 31, 2002 as compared with 0.57 and 10.69 percent for the same period one year earlier. Net Interest Income. Net interest income for the three month period ended March 31, 2002 increased $60,000, or 1.6 percent. Net interest margin increased to 2.96 percent for the quarter ended March 31, 2002 from 2.91 percent for the same period one year earlier. The following table presents average balances, interest earned or paid, associated yields on interest-earning assets and costs on interest-bearing liabilities for the three month periods ended March 31, 2002 and 2001, 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 table (amounts are in thousands):
Three Months Ended March 31, ------------------------------------------------------------- 2002 2001 Change ---------------------------- ------------------------------ ----------------------------- Interest Average Interest Average Interest Average Average earned yield or Average earned yield or Average earned yield or balance or paid cost balance or paid cost balance or paid cost -------- -------- -------- -------- -------- -------- -------- --------- -------- Interest-earning assets Federal funds sold/ interest bearing due from........... $ 1,822 $ 14 3.14% $ 1,434 $ 20 5.66% $ 388 $ (6) -2.52% Investments.......... 210,247 2,730 5.31% 259,280 4,355 6.81% (49,033) (1,625) -1.50(a) Loans................ 318,063 5,342 6.87% 269,766 6,118 9.20% 48,297 (777) -2.33(a) Allowance for loan losses...... (4,299) -- (3,635) -- (663) -- -------- -------- -------- -------- -------- -------- Total interest- earning assets... $525,833 8,086 6.29% $526,845 10,493 8.08% $ (1,011) (2,407) -1.79% ======== -------- ======== -------- ======== -------- Interest-bearing liabilities NOW & money market accounts.......... $169,596 660 1.59% $154,397 1,724 4.53% $ 15,199 (1,064) -2.94%(b) Savings 4,132 9 0.89% 3,449 18 2.12% 683 (9) -1.23% Certificates of deposit under $100,000.......... 111,418 1,161 4.26% 96,811 1,417 5.94% 14,607 (256) -1.68%(c) Certificates of deposit $100,000 and over.......... 80,358 933 4.75% 65,895 1,060 6.52% 14,463 (127) -1.77%(d) -------- -------- -------- -------- -------- -------- Interest-bearing deposits........ 365,504 2,763 3.09% 320,552 4,219 5.34% 44,952 (1,456) -2.25% Short-term borrowings........ 7,144 42 2.40% 6,256 95 6.16% 888 (53) -3.76% FHLB borrowings..... 99,502 1,441 5.92% 144,893 2,108 5.90% (45,391) (667) 0.02%(e) Long-term borrowings........ 5 2 12,636 293 9.40% (12,631) (291) -- (f) -------- -------- -------- -------- -------- -------- Total borrowings.. 106,651 1,485 5.69% 163,785 2,496 6.18% (57,134) (1,011) -0.49% -------- -------- -------- -------- -------- -------- Total interest- bearing liabilities....... $472,155 $ 4,248 3.68% $484,337 $ 6,715 5.62% $(12,182) $ (2,467) -1.94% ======== -------- ======== -------- ======== -------- Net interest income/spread... $ 3,838 2.61% $ 3,778 2.46% $ 60 0.15% ======== ======== ======== Net interest margin.......... 2.96% 2.91% 0.05% Notation: Noninterest-bearing deposits.......... $ 33,131 -- $ 32,007 -- $ 1,124 -- -------- -------- -------- Total deposits.... $398,635 $ 2,763 2.83% $352,559 $ 4,219 4.85% $ 46,076 $ (1,456) -2.02% ======== ======== ======== ======== ======== ======== Taxable equivalents: Total interest- earning assets... $525,833 $ 8,199 6.38% $526,844 $ 10,590 8.15% $ (1,011) $ (2,391) -1.77% Net interest income/spread.... -- $ 3,951 2.70% -- $ 3,875 2.53% -- $ 76 0.17% Net interest margin........... -- -- 3.07% -- -- 2.98% -- -- 0.09% ------------------------- (a) Investments and Loans - During 2001 and 2002, the Company sold investment securities and used the proceeds to fund loan growth resulting in lower average balances of investment securities and higher average balances for loans. The decreased yields in the investment and loan portfolios reflect the current rate environment caused by multiple Federal Reserve rate reductions during 2001. A significant amount of the average loan volume increase was generated out of the Arizona market which the Company entered in 2001. (b) Now and Money Market Accounts - Increased average balances of NOW and money market accounts represents additional growth in the Company's floating-rate Wealthbuilder deposit products. The decreased costs are reflective of the lower rate environment in 2002 compared to the first quarter of 2001. (c) Certificates of Deposit Under $100,000 - The increase in average CD's under $100,000 represents growth due to CD specials the Company runs from time to time in select markets. The lower costs are representative of the lower rate environment during 2002 compared to the first quarter of 2001 as CD's during 2002 renewed and opened at lower rates than they did during the three month period ended March 31, 2001. (d) Certificates of Deposit $100,000 and Over - During the quarter ended March 31, 2002, average balances of brokered and national market CD's were $67.0 million as compared to $44.1 million for the same period one year earlier. The reduced costs reflect the lower interest rate environment in 2002 compared to the first quarter of 2001. (e) FHLB Borrowings - The decreased volume of FHLB borrowings resulted from increases in other funding sources including NOW and money market deposits, CD's under $100,000 and CD's over $100,000 as well as the decease in investment securities as investments were sold to fund loan growth. Additionally, $20.0 million of FHLB advances matured in January 2002. (f) Long-term Borrowings - During 2001, the Company redeemed all of its 8 5/8 percent subordinated notes due 2004.
Provision for Credit Losses. The provision for credit losses was $217,000 for the quarter ended March 31, 2002 as compared to $350,000 for the same period one year earlier. See "Comparison of Financial Condition at March 31, 2002 and December 31, 2001 - Allowance for Credit Losses." Noninterest Income. The following table presents the major categories of the Company's noninterest income for the three month periods ended March 31, 2002 and 2001 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):
For the Three Increase Months Ended (Decrease) March 31, 2002 - 2001 ------------------- ------------------- Noninterest Income 2002 2001 $ % --------- -------- -------- --------- Fees on loans............. $ 515 $ 164 $ 351 214.0% (a) Insurance commissions..... 467 508 (41) (8.1)% Net gain on sales of securities ............. 430 718 (288) (40.1)% (b) Brokerage income.......... 400 349 51 14.6% (c) Trust and financial services................ 219 283 (64) (22.6)% (d) Service charges........... 175 167 8 4.8% Rental income............. 47 19 28 147.4% Other..................... 142 119 23 19.3% --------- --------- -------- Total noninterest income.......... .... $ 2,395 $ 2,327 $ 68 2.9% ========= ========= ======== ----------------- (a) Loan fees included in noninterest income may vary from quarter to quarter depending upon the structure of the loan transactions made during the quarter. (b) The Company sold investment securities totaling $15.8 million in the first quarter of 2002 generating $430,000 in gains. During the quarter ended March 31, 2001, the Company sold $50.8 million of investment securities generating $718,000 in gains. (c) Brokerage revenue showed an improvement in the first quarter of 2002 due to the volume and nature of customer transactions effected during the quarter. (d) Decrease is attributable to a decrease in management fee income from the BNC US Opportunities Fund LLC.
Noninterest Expense. The following table presents the major categories of the Company's noninterest expense for the three month periods ended March 31, 2002 and 2001 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):
For the Three Increase Months (Decrease) Ended March 31 2002 - 2001 ------------------- ------------------- Noninterest Expense 2002 2001 $ % -------- -------- -------- --------- Salaries and employee benefits................... $ 2,860 $ 2,349 $ 511 21.8% (a) Occupancy.................... 534 449 85 18.9% (b) Depreciation and amortization............... 457 450 7 1.6% Minority interest in income of subsidiaries............ 457 233 224 96.1% (c) Professional services........ 389 299 90 30.1% (d) Office supplies, telephone and postage................ 263 230 33 14.3% Marketing and promotion...... 166 156 10 6.4% FDIC and other assessments... 54 48 6 12.5% Other........................ 533 417 116 27.8% (e) -------- -------- -------- Total noninterest expense................. $ 5,713 $ 4,631 $ 1,082 23.4% ======== ======== ======== Efficiency ratio ............ 91.65% 75.86% 20.8% ======== ======== Efficiency ratio, adjusted (f)........................ 83.27% 72.69% 14.6% ======== ======== --------------- (a) Average full time equivalent employees for the quarter ended March 31, 2002 were 211 as compared to 188 for the first quarter 2001. The increase is largely attributable to staff additions for the Arizona market. (b) Occupancy expenses have increased due to expenses associated with entry into the Arizona market during 2001. (c) This is the expense associated with the Company's trust preferred offerings. During the first quarter of 2002, the Company had $22.5 million of trust preferred securities outstanding versus $7.5 million during the first quarter of 2001. (d) The increase in professional services expenses is attributable to an increase in consulting fees during the first quarter of 2002. (e) The increase in other noninterest expenses is due to increases in several different items included in this category such as correspondent charges, insurance expense, dues and publications and other miscellaneous items. (f) Efficiency ratio adjusted for impact of derivative contracts and trust preferred costs.
Income Tax Expense. Income tax expense for the quarter ended March 31, 2002 decreased $222,000 as compared to the same period in 2001 due to the decrease in pre-tax income. The estimated effective tax rates for the three month periods ended March 31, 2002 and 2001 were 37.3 and 29.8 percent, respectively. Earnings per Common Share. See Note 3 to the interim Consolidated Financial Statements included under Item 1 for a summary of the EPS calculation for the three month periods ended March 31, 2002 and 2001. Liquidity Liquidity. Liquidity risk management encompasses the Company's ability to meet all present and future financial obligations in a timely manner. The objectives of liquidity management policies are to maintain adequate liquid assets, liability diversification among instruments, maturities and customers and a presence in both the wholesale purchased funds market and the retail deposit market. The Consolidated Statements of Cash Flows in the interim consolidated financial statements included under Item 1 present data on cash and cash equivalents provided by and used in operating, investing and financing activities. In addition to liquidity from core deposits, together with repayments and maturities of loans and investments, the Company utilizes brokered deposits, sells securities under agreements to repurchase and borrows overnight federal funds. The Company's banking subsidiaries are members of the FHLB, which affords them the opportunity to borrow funds on terms ranging from overnight to ten years and beyond. Borrowings from the FHLB are generally collateralized by the bank's mortgage loans and various investment securities. The Company has also obtained funding through the issuance of trust preferred securities. The following table sets forth, for the three months ended March 31, 2002 and 2001, a summary of the Company's major sources and (uses) of funds. The summary information is derived from the Consolidated Statements of Cash Flows included under Item 1 (amounts are in thousands):
For the Three Months Ended March 31, ---------------------- Major Sources and Uses of Funds 2002 2001 --------- ---------- Proceeds from sales and maturities of $ 33,494 $ 63,884 Net (increase) decrease in loans......... 3,338 (7,552) Purchases of investment securities....... (19,388) (54,103) Net decrease in short-term and FHLB borrowings........................ (16,816) (15,613) Net increase (decrease) in deposits...... (6,589) 9,681
Given the uncertain nature of customer demands as well as the Company's desire to take advantage of earnings enhancement opportunities, the Company must have adequate sources of on- and off-balance sheet funds that can be acquired in time of need. Accordingly, in addition to the liquidity provided by balance sheet cash flows, liquidity is supplemented with additional sources such as credit lines with the FHLB, federal funds lines with correspondent banks, wholesale and retail repurchase agreements, brokered certificates of deposit and direct non-brokered national certificates of deposit through national deposit networks. The Company regularly measures its liquidity position and believes that its management policies and guidelines will ensure adequate levels of liquidity to fund anticipated needs of on- and off-balance sheet items. In addition, a contingency funding plan identifies actions to be taken in response to an adverse liquidity event. Forward Looking Statements Statements included in Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," which are not historical in nature are intended to be, and are hereby identified as "forward looking statements" for purposes of the safe harbor provided by Section 21E of the Securities Exchange Act of 1934, as amended. The Company cautions readers that forward looking statements, including without limitation, those relating to the Company's future business prospects, revenues, working capital, liquidity, capital needs, interest costs, and income, are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated in the forward looking statements due to several important factors. These factors include, but are not limited to: risks of loans and investments, including dependence on local economic conditions; competition for the Company's customers from other providers of financial services; possible adverse effects of changes in interest rates including the effects of such changes on derivative contracts and associated accounting consequences; risks associated with the Company's acquisition strategy; and other risks which are difficult to predict and many of which are beyond the control of the Company. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company's business activities generate market and other risks. Market risk arises from changes in interest rates, exchange rates, commodity prices and equity prices and represents the possibility that changes in future market rates or prices will have a negative impact on the Company's earnings or value. The Company's principal market risk is interest rate risk which arises from changes in interest rates. Interest rate risk can result from: (1) Re-pricing risk - timing differences in the maturity/re-pricing of assets, liabilities and off-balance sheet contracts; (2) Options risk - the effect of embedded options, such as loan prepayments, interest rate caps/floors and deposit withdrawals; (3) Basis risk - risk resulting from unexpected changes in the spread between two or more different rates of similar maturity, and the resulting impact on the behavior of lending and funding rates; and (4) Yield curve risk - risk resulting from unexpected changes in the spread between two or more rates of different maturities from the same type of instrument. The Company has risk management policies to monitor and limit exposure to interest rate risk. To date the Company has not conducted trading activities as a means of managing interest rate risk. BNCCORP's asset/liability management process is utilized to manage the Company's interest rate risk. The measurement of interest rate risk associated with financial instruments is meaningful only when all related and offsetting on- and off-balance-sheet transactions are aggregated, and the resulting net positions are identified. Interest rate risk exposure is actively managed with the goal of minimizing the impact of interest rate volatility on current earnings and on the market value of equity. In general, the assets and liabilities generated through ordinary business activities do not naturally create offsetting positions with respect to repricing or maturity characteristics. Access to the derivatives market can be an important element in maintaining the Company's interest rate risk position within policy guidelines. Using derivative instruments, principally interest rate floors and caps, the interest rate sensitivity of specific transactions, as well as pools of assets or liabilities, is adjusted to maintain the desired interest rate risk profile. The Company's primary tool in measuring and managing interest rate risk is net interest income simulation. This exercise includes management assumptions regarding the level of interest rate or balance changes on indeterminate maturity deposit products (savings, NOW, money market and demand deposits) for a given level of market rate changes. These assumptions have been developed through a combination of historical analysis and future expected pricing behavior. Interest rate caps and floors are included to the extent that they are exercised in the 12-month simulation period. Additionally, changes in prepayment behavior of the residential mortgage and mortgage-backed securities portfolios in each rate environment are captured using industry estimates of prepayment speeds for various coupon segments of the portfolio. Finally, the impact of planned growth and anticipated new business activities is factored into the simulation model. It is the Company's objective to manage its exposure to interest rate risk, bearing in mind that the Company will always be in the business of taking on rate risk and that rate risk immunization is not entirely possible. Also, it is recognized that as exposure to interest rate risk is reduced, so too may the overall level of net interest income. The Company monitors the results of net interest income simulation on a quarterly basis at regularly scheduled asset/liability management committee meetings. Each quarter net interest income is simulated for the upcoming 12-month horizon in seven interest scenarios. The scenarios generally modeled are parallel interest ramps of +/- 100bp, 200bp, and 300bp along with a rates unchanged scenario, however, due to the relative low rates at present, for purposes of this simulation, a rates -300bp scenario was not run. The parallel movement of interest rates means all projected market interest rates move up or down by the same amount. A ramp in interest rates means that the projected change in market interest rates occurs over the 12-month horizon projected. For example, in the +100bp scenario, the projected prime rate will increase from its starting point of 4.75 percent at March 31, 2002 to 5.75 percent 12 months later. The prime rate in this example will increase 1/12th of the overall increase of 100 basis points each month. The net interest income simulation results for the twelve month period ending March 31, 2002 is shown below. The growth assumption used for this simulation was based on the growth projections the Company anticipates over the next 12 months given trends since the beginning of 2002. The impact of each interest rate scenario on projected net interest income is displayed before and after factoring in the estimated impact of the $40.0 million of interest rate caps.
Net Interest Income Simulation (amounts in thousands) Movement in interest rates -200bp -100bp Unchanged +100bp +200bp +300bp ------- ------- --------- ------- ------- ------- Projected 12-month net interest income........ $14,563 $15,493 $16,899 $17,515 $17,961 $18,195 Dollar change from rates unchanged scenario..... $(2,336) $(1,406) $ -- $ 616 $ 1,062 $ 1,296 Percentage change from rates unchanged scenario............... (13.8)% (8.32)% -- 3.65% 6.28% 7.67% Benefit/(cost) from interest rate caps (1)............... $ (791) $ (695) $ (511) $ (214) $ 206 $ 754 Total net interest income impact with caps................... $13,772 $14,798 $16,388 $17,301 $18,167 $18,949 Dollar change from flat w/caps................. $(2,616) $(1,590) $ -- $ 913 $ 1,779 $ 2,561 Percentage change from unchanged w/caps....... (15.96)% (9.70)% -- 5.6% 10.9% 15.6% POLICY LIMITS +/-........ 6.00% 3.00% -- 3.00% 6.00% 9.00% __________________ (1) In May and June 2001, the Company purchased several interest rate caps. The total notional amount of the caps is $40 million. The reference rate on the caps is three month LIBOR and the strike prices are 4.50 percent (for $20 million of caps maturing in 2004) and 5.50 percent (for $20 million of caps maturing in 2006).
The Company's rate sensitivity position over the projected twelve month horizon, after factoring in the impact of the interest rate caps, is asset sensitive. This position is evidenced by the projected increase of net interest income in the rising interest rate scenarios, and the decrease in net interest income in falling rate scenarios. The Company's general policy is to limit the percentage change in projected net interest income to +/- 3, 6, and 9 percent from the rates unchanged scenario for the +/-100bp, 200bp, and 300bp interest rate ramp scenarios, respectively. Due to the abnormalities that begin to occur when modeling rates moving down from already historically low levels, the projected percentage change in net interest income is outside of the policy limits for the rates down scenarios. The projected positive percentage changes in net income are also outside of the Company's policy limits, however the variance is on the positive side so such a position is acceptable to the Company's asset/liability committee. Running parallel shifts from what are already historical lows in short-term rates exposes some of the limitations of net interest income simulation and attention to percentage changes. Attention should be given not only to the projected percentage change in net interest income but also the level and dollar change of net interest income in the various scenarios. Such a dollar decline can then be viewed within the context of the potential investment portfolio appreciation should, for example, a rates down 100bp scenario occur. Since there are limitations inherent in any methodology used to estimate the exposure to changes in market interest rates, these analyses are not intended to be a forecast of the actual effect of changes in market interest rates such as those indicated above on the Company. Further, this analysis is based on the Company's assets and liabilities as of March 31, 2002 (with forward adjustments for planned growth and anticipated business activities) and does not contemplate any actions the Company might undertake in response to changes in market interest rates. Part II - Other Information Item 2. Changes in Securities and Use of Proceeds (c) Pursuant to a Stock Purchase Agreement (the "Agreement"), in April 2002, the Company issued 297,759 shares of its Common Stock to Richard W. Milne, Jr., Terrence M. Scali, and the other Sellers named in the Agreement in connection with the Company's acquisition of Milne & Company Insurance, Inc. The shares of Common Stock were issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended, due to the private negotiated nature of the acquisition of this closely held company. Item 6. Exhibits and Reports on Form 8-K (a) None. (b) Reports on Form 8-K None. Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BNCCORP, Inc. Date: May 9, 2002 By /s/ Gregory K. Cleveland --------------------------------------- Gregory K. Cleveland President Chief Executive Officer By /s/ Brenda L. Rebel --------------------------------------- Brenda L. Rebel Treasurer Chief Financial Officer