10-Q 1 q063003.txt QUARTER ENDED 6-30-03 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, 2003 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 0-26290 BNCCORP, INC. (Exact name of registrant as specified in its charter) Delaware 45-0402816 (State or other jurisdiction (I.R.S. Employer 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 1, 2003 was 2,703,995. 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 2003 2002 ------------ ------------ (unaudited) CASH AND DUE FROM BANKS.........................$ 11,996 $ 16,978 INTEREST-BEARING DEPOSITS WITH BANKS............ 201 159 ------------ ------------ Cash and cash equivalents.................. 12,197 17,137 INVESTMENT SECURITIES AVAILABLE FOR SALE........ 209,900 208,072 FEDERAL RESERVE BANK AND FEDERAL HOME LOAN BANK STOCK.............................. 7,071 7,071 LOANS AND LEASES, net........................... 322,413 335,794 ALLOWANCE FOR CREDIT LOSSES..................... (4,953) (5,006) ------------ ------------ Net loans and leases....................... 317,460 330,788 PREMISES AND EQUIPMENT, net..................... 16,066 11,100 INTEREST RECEIVABLE............................. 2,785 2,856 OTHER ASSETS.................................... 4,334 4,119 GOODWILL........................................ 14,526 12,210 OTHER INTANGIBLE ASSETS, net.................... 8,343 8,875 ------------ ------------ $ 592,682 $ 602,228 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY DEPOSITS: Noninterest-bearing........................$ 40,716 $ 44,362 Interest-bearing - Savings, interest checking and money market......................... 182,565 187,531 Time deposits $100,000 and over........ 54,439 64,905 Other time deposits.................... 93,583 101,447 ------------ ------------ Total deposits............................. 371,303 398,245 SHORT-TERM BORROWINGS........................... 32,570 28,120 FEDERAL HOME LOAN BANK ADVANCES................. 107,200 97,200 LONG-TERM BORROWINGS............................ 8,672 8,561 OTHER LIABILITIES............................... 10,803 10,053 ------------ ------------ Total liabilities................. 530,548 542,179 GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S SUBORDINATED DEBENTURES......... 22,357 22,326 STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value - 2,000,000 shares authorized; 150 shares issued and outstanding................................ -- -- Capital surplus - preferred stock............ 1,500 1,500 Common stock, $.01 par value - 10,000,000 shares authorized; 2,703,295 and 2,700,929 shares issued and outstanding (excluding 42,880 shares held in treasury) 27 27 Capital surplus - common stock............... 16,634 16,614 Retained earnings............................ 19,526 17,395 Treasury stock (42,880 shares)............... (513) (513) Accumulated other comprehensive income, net of income taxes...................... 2,603 2,700 ------------ ------------ Total stockholders' equity.......... 39,777 37,723 ------------ ------------ $ 592,682 $ 602,228 ============ ============ See accompanying notes to consolidated financial statements.
BNCCORP, INC. AND SUBSIDIARIES Consolidated Statements of Operations (In thousands, except per share data) For the Three Months For the Six Months Ended June 30, Ended June 30, ---------------------- -------------------- 2003 2002 2003 2002 ---------- --------- -------- ---------- (unaudited) (unaudited) INTEREST INCOME: Interest and fees on loans.................... $ 5,238 $ 4,936 $ 10,422 $ 9,773 Interest and dividends on investment securities - Taxable.................................... 1,584 2,581 3,451 5,039 Tax-exempt................................. 380 222 735 439 Dividends.................................. 62 55 124 110 Other......................................... 1 31 1 45 ---------- --------- --------- -------- Total interest income............. 7,265 7,825 14,733 15,406 ---------- --------- --------- -------- INTEREST EXPENSE: Deposits...................................... 1,923 2,702 4,029 5,328 Short-term borrowings......................... 113 10 221 52 Federal Home Loan Bank advances............... 1,332 1,736 2,608 3,177 Long-term borrowings.......................... 96 90 195 92 ---------- --------- --------- -------- Total interest expense............ 3,464 4,538 7,053 8,649 ---------- --------- --------- -------- Net interest income............... 3,801 3,287 7,680 6,757 PROVISION FOR CREDIT LOSSES..................... 400 185 1,175 402 ---------- --------- --------- -------- NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES............................. 3,401 3,102 6,505 6,355 ---------- --------- --------- -------- NONINTEREST INCOME: Insurance commissions......................... 3,423 2,417 7,485 2,884 Trust and financial services.................. 631 212 817 431 Fees on loans................................. 482 507 943 1,011 Net gain on sales of securities............... 301 366 421 796 Service charges............................... 218 178 428 340 Brokerage income.............................. 99 324 150 724 Rental income................................. 55 22 77 44 Other......................................... 202 93 309 234 ---------- --------- --------- -------- Total noninterest income............ 5,411 4,119 10,630 6,464 ---------- --------- --------- -------- NONINTEREST EXPENSE: Salaries and employee benefits................ 3,997 3,928 7,962 6,656 Occupancy..................................... 564 579 1,186 1,043 Interest on subordinated debentures........... 433 455 870 912 Depreciation and amortization................. 368 334 716 634 Office supplies, telephone and postage........ 355 299 609 545 Professional services......................... 309 391 569 776 Amortization of intangible assets............. 266 249 532 350 Marketing and promotion....................... 176 236 295 371 FDIC and other assessments.................... 51 55 102 109 Other......................................... 615 661 1,184 1,165 ---------- --------- --------- -------- Total noninterest expense........... 7,134 7,187 14,025 12,561 ---------- --------- --------- -------- Income before income taxes...................... 1,678 34 3,110 258 Income tax provision (benefit).................. 504 (30) 919 64 ---------- --------- --------- -------- Income from continuing operations............... 1,174 64 2,191 194
BNCCORP, INC. AND SUBSIDIARIES Consolidated Statements of Operations, continued (In thousands, except per share data) For the Three Months For the Six Months Ended June 30, Ended June 30, ------------------------- ---------------------- 2003 2002 2003 2002 ------------ ---------- ---------- ---------- (unaudited) (unaudited) Discontinued Operations: Income from operations of discontinued Fargo branch, net of income taxes....................... -- 38 -- 98 ------------ ---------- ---------- ---------- NET INCOME ................................. $ 1,174 $ 102 $ 2,191 $ 292 ============ ========== ========== ========== Dividends on preferred stock................ $ 30 $ 19 $ 60 $ 19 ------------ ---------- ---------- ---------- Income available to common stockholders..... $ 1,144 $ 83 $ 2,131 $ 273 ============ ========== ========== ========== BASIC EARNINGS PER COMMON SHARE: Income from continuing operations........... $ 0.42 $ 0.02 $ 0.79 $ 0.07 Income from discontinued Fargo branch, net of income taxes....................... -- 0.01 -- 0.04 ------------ ---------- ---------- ---------- Basic earnings per common share............. $ 0.42 $ 0.03 $ 0.79 $ 0.11 ============ ========== ========== ========== DILUTED EARNINGS PER COMMON SHARE: Income from continuing operations........... $ 0.41 $ 0.02 $ 0.78 $ 0.07 Income from discontinued Fargo branch, net of income taxes....................... -- 0.01 -- 0.04 ------------ ---------- ------------ --------- Diluted earnings per common share........... $ 0.41 $ 0.03 $ 0.78 $ 0.11 ============ ========== ============ ========= 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, ---------------------- -------------------------- 2003 2002 2003 2002 ---------- ---------- ------------ ----------- (unaudited) (unaudited) NET INCOME........................................... $ 1,174 $ 102 $ 2,191 $ 292 OTHER COMPREHENSIVE INCOME (LOSS) - Unrealized gains on securities: Unrealized holding gains arising during the period, net of income taxes................. 493 1,429 202 1,209 Less: reclassification adjustment for securities gains included in net income, net of income taxes......................... (211) (247) (299) (537) ---------- ---------- ---------- ------------- OTHER COMPREHENSIVE INCOME (LOSS).................... 282 1,182 (97) 672 ---------- ---------- ---------- ------------- COMPREHENSIVE INCOME................................. $ 1,456 $ 1,284 $ 2,094 $ 964 ========== ========== ========== ============= 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, 2003 Capital Capital Accumulated Surplus Surplus Other Preferred Stock Preferred Common Stock Common Retained Treasury Comprehensive Shares Amount Stock Shares Amount Stock Earnings Stock Income Total ------ ------- --------- --------- -------- -------- -------- -------- ------------- -------- Balance, December 31, 150 $ -- $ 1,500 2,743,809 $ 27 $ 16,614 $ 17,395 $ (513) $ 2,700 $ 37,723 2002...................... Net income (unaudited).... -- -- -- -- -- -- 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 ====== ======= ========= ========= ======== ======== ======== ======== ============= ========
For the Six Months Ended June 30, 2002 Capital Capital Accumulated Surplus Surplus Other Preferred Stock Preferred Common Stock Common Retained Treasury Comprehensive Shares Amount Stock Shares Amount Stock Earnings Stock Income Total ------ ------- --------- --------- -------- -------- -------- -------- ------------- -------- Balance, December 31, 2001... -- $ -- $ -- 2,442,050 $ 24 $ 14,084 $ 15,435 $ (513) $ 1,649 $ 30,679 Net income (unaudited) -- -- -- -- -- -- 292 -- -- 292 Other comprehensive income - Change in unrealized holding gains on securities available for sale, net of income taxes and reclassification adjustment (unaudited).. -- -- -- -- -- -- -- -- 672 672 Issuance of preferred stock (unaudited)....... 150 -- 1,500 -- -- -- -- -- -- 1,500 Preferred stock dividends (unaudited)... -- -- -- -- -- -- (19) -- -- (19) Issuance of common stock (unaudited)....... -- -- -- 297,759 3 2,497 -- -- -- 2,500 Other (unaudited).......... -- -- -- 1,000 -- 11 -- -- -- 11 ------ ------- --------- --------- -------- -------- -------- -------- ------------- -------- Balance, June 30, 2002 150 $ -- $ 1,500 2,740,809 $ 27 $ 16,592 $ 15,708 $ (513) $ 2,321 $ 35,635 (unaudited)...............====== ======= ========= ========= ======== ======== ======== ======== ============= ======== 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) 2003 2002 ----------- ------------ OPERATING ACTIVITIES: (unaudited) (unaudited) Net income........................................... $ 2,191 $ 292 Adjustments to reconcile net income to net cash provided by operating activities - Provision for credit losses...................... 1,175 402 Depreciation and amortization.................... 716 747 Amortization of intangible assets................ 532 350 Net premium amortization on investment securities...................................... 2,224 1,445 Proceeds from loans recovered.................... 59 31 Write down of other real estate owned and repossessed assets......................... 4 56 Change in interest receivable and other assets, net.................................... (2,472) (695) Gain on sale of bank premises and equipment...... (6) -- Net realized gains on sales of investment securities..................................... (421) (796) Deferred income taxes............................ 272 (192) Change in dividend distribution payable.......... (12) (9) Change in other liabilities, net................. 532 907 Originations of loans to be sold................. (31,094) (36,717) Proceeds from sale of loans...................... 31,094 36,717 ---------- ------------ Net cash provided by operating activities...... 4,794 2,538 ---------- ------------ INVESTING ACTIVITIES: Purchases of investment securities................. (62,963) (52,190) Proceeds from sales of investment securities....... 32,817 30,104 Proceeds from maturities of investment securities........................................ 26,372 28,335 Net (increase) decrease in loans................... 12,094 (7,680) Additions to premises and equipment................ (5,775) (2,144) Proceeds from sale of premises and equipment....... 99 -- Cash paid for acquisition, net..................... -- (13,964) ----------- ----------- Net cash provided by (used in) investing activities.................................... 2,644 (17,539) ----------- ----------- FINANCING ACTIVITIES: Net increase (decrease) in demand, savings, interest checking and money market accounts....... (8,612) 14,985 Net increase (decrease) in time deposits........... (18,330) 3,647 Net increase in short-term borrowings.............. 4,450 2,617 Repayments of Federal Home Loan Bank advances...... (97,300) (20,000) Proceeds from Federal Home Loan Bank advances...... 107,300 -- Repayments of long-term borrowings................. (29) -- Proceeds from long-term borrowings................. 140 8,530 Proceeds from issuance of stock.................... -- 1,500 Payment of preferred stock dividends............... (60) (19) Amortization of discount on subordinated debentures........................................ 43 43 Other, net......................................... 20 11 ---------- ----------- Net cash provided by (used in) financing activities........................... (12,378) 11,314 ---------- ----------- NET DECREASE IN CASH AND CASH EQUIVALENTS............. (4,940) (3,687) CASH AND CASH EQUIVALENTS, beginning of period........ 17,137 23,972 ---------- ----------- CASH AND CASH EQUIVALENTS, end of period.............. $ 12,197 $ 20,285 ========== =========== SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid...................................... $ 8,210 $ 9,041 ========== =========== Income taxes paid.................................. $ 678 $ 90 ========== =========== See accompanying notes to consolidated financial statements.
BNCCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) June 30, 2003 NOTE 1 - BNCCORP, Inc. BNCCORP, Inc. ("BNCCORP") is a registered bank holding company incorporated under the laws of Delaware. It is the parent company of BNC National Bank (together with its wholly owned subsidiaries, Milne Scali & Company, BNC Insurance, Inc. and BNC Asset Management, Inc., the "Bank"). BNCCORP, through these wholly owned subsidiaries, which operate from 22 locations in Arizona, Minnesota and North Dakota, provides a broad range of banking, insurance, brokerage, trust and other financial services to small and mid-sized businesses and individuals. The accounting and reporting policies of BNCCORP and its subsidiaries (collectively, the "Company") conform to accounting principles generally accepted in the United States and general practices within the financial services industry. The consolidated financial statements included herein are for BNCCORP, Inc. and its subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. NOTE 2 - Basis of Presentation The accompanying interim consolidated financial statements have been prepared by the Company, without audit, in accordance with accounting principles generally accepted in the United States 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 June 30, 2003 and for the three-month and six-month periods ended June 30, 2003 and 2002 include, in the opinion of management, all adjustments, consisting solely of normal recurring adjustments, necessary for a fair presentation of the financial results for the respective interim periods and are not necessarily indicative of results of operations to be expected for the entire fiscal year ending December 31, 2003. The accompanying interim consolidated financial statements have been prepared under the presumption that users of the interim consolidated financial information have either read or have access to the audited consolidated financial statements for the year ended December 31, 2002. Accordingly, footnote disclosures which would substantially duplicate the disclosures contained in the December 31, 2002 audited consolidated financial statements have been omitted from these interim consolidated financial statements. It is suggested that these interim consolidated financial statements be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2002 and the notes thereto. NOTE 3 - Reclassifications Certain of the 2002 amounts have been reclassified to conform to the 2003 presentations. These reclassifications had no effect on net income or stockholders' equity. NOTE 4 - Earnings Per Share The following table shows the amounts used in computing earnings per share ("EPS") and the effect on weighted average number of shares of potential dilutive common stock issuances for the three-month periods ended June 30:
Net Per-Share Income Shares Amount ---------------- ---------------- --------------- 2003 Basic earnings per common share: Income from continuing operations......... $ 1,174,000 Less: Preferred stock dividends........... (30,000) ---------------- Income from continuing operations available to common stockholders......... $ 1,144,000 2,703,071 $ 0.42 ================ =============== Effect of dilutive shares - Options................................ 55,100 ---------------- Diluted earnings per common share: Income from continuing operations......... $ 1,174,000 Less: Preferred stock dividends........... (30,000) ---------------- Income from continuing operations available to common stockholders......... $ 1,144,000 2,758,171 $ 0.41 ================ =============== 2002 Basic earnings per common share: Income from continuing operations......... $ 64,000 Less: Preferred stock dividends........... (19,000) ---------------- Income from continuing operations available to common stockholders......... 45,000 2,645,213 0.02 Income from discontinued Fargo branch, net of income taxes.............. 38,000 2,645,213 0.01 ---------------- --------------- Income available to common stockholders... $ 83,000 2,645,213 $ 0.03 ================ =============== Effect of dilutive shares - Options................................ 24,982 ---------------- Diluted earnings per common share: Income from continuing operations......... $ 64,000 Less: Preferred stock dividends........... (19,000) ---------------- Income from continuing operations available to common stockholders......... 45,000 2,670,195 0.02 Income from discontinued Fargo branch, net of income taxes..................... 38,000 2,670,195 0.01 ---------------- --------------- Income available to common stockholders... $ 83,000 2,670,195 $ 0.03 ================ ===============
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 ---------------- ---------------- --------------- 2003 Basic earnings per common share: Income from continuing operations......... $ 2,191,000 Less: Preferred stock dividends........... (60,000) ---------------- Income from continuing operations available to common stockholders......... $ 2,131,000 2,702,183 $ 0.79 ================ =============== Effect of dilutive shares - Options................................ 42,515 ---------------- Diluted earnings per common share: Income from continuing operations......... $ 2,191,000 Less: Preferred stock dividends........... (60,000) ---------------- Income from continuing operations available to common stockholders......... $ 2,131,000 2,744,698 $ 0.78 ================ =============== 2002 Basic earnings per common share: Income from continuing operations......... $ 194,000 Less: Preferred stock dividends........... (19,000) ---------------- Income from continuing operations available to common stockholders......... 175,000 2,522,871 0.07 Income from discontinued Fargo branch, net of income taxes.................... 98,000 2,522,871 0.04 ---------------- --------------- Income available to common stockholders... $ 273,000 2,522,871 $ 0.11 ================ =============== Effect of dilutive shares - Options................................ 25,271 ---------------- Diluted earnings per common share: Income from continuing operations......... $ 194,000 Less: Preferred stock dividends........... (19,000) ---------------- Income from continuing operations available to common stockholders........ 175,000 2,548,142 0.07 Income from discontinued Fargo branch, net of income taxes..................... 98,000 2,548,142 0.04 ---------------- --------------- Income available to common stockholders... $ 273,000 2,548,142 $ 0.11 ================ ===============
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 BNCCORP's common stock for the period:
2003 2002 ---------------- --------------- Quarter ended March 31............ 77,185 97,508 Quarter ended June 30............. 63,500 96,145
NOTE 5 - Segment Disclosures The Company segments its operations into three separate business activities, based on the nature of the products and services for each segment: banking operations, insurance operations and brokerage, trust and financial services operations. Banking operations provide traditional banking services to individuals and small and mid-sized businesses, such as accepting deposits, consumer and mortgage banking activities and making commercial loans. The mortgage and commercial banking activities include the origination and purchase of loans as well as the sale to and servicing of commercial loans for other institutions. Insurance operations broker a full range of insurance products and services including commercial insurance, surety bonds, employee benefits-related insurance, personal insurance and claims management. Brokerage, trust and financial services operations provide securities brokerage, trust and other financial services to individuals and businesses. Brokerage investment options include individual equities, fixed income investments and mutual funds. Trust and financial services operations provide a wide array of trust and other financial services including employee benefit and personal trust administration services, financial, tax, business and estate planning, estate administration, agency accounts, employee benefit plan design and administration, individual retirement accounts ("IRAs"), including custodial self-directed IRAs, asset management, tax preparation, accounting and payroll services. The accounting policies of the three segments are the same as those described in the summary of significant accounting policies included in Note 1 to the consolidated financial statements for the year ended December 31, 2002. The Company's financial information for each segment is derived from the internal profitability reporting system used by management to monitor and manage the financial performance of the Company. The operating segments have been determined by how executive management has organized the Company's business for making operating decisions and assessing performance. During the second and third quarters of 2002, the Company presented the following segments: banking operations, insurance operations and brokerage operations with brokerage operations not meeting the thresholds for separate presentation in the interim financial statement disclosures. Due to the changing nature of the brokerage operations segment and its closer alignment with the trust and financial services operations of the Bank, the Company has elected to redefine its reporting segments as noted above. Therefore, it has included two sets of segment disclosures below representing segments as defined in 2002 and as defined in 2003. The following tables present, for segments as currently defined, segment profit or loss, assets and a reconciliation of segment information as of, and for the three months ended June 30 (in thousands):
2003 2003 ----------------------------------------------------- ----------------------------------------------- Brokerage/ Trust/ Reportable Intersegment Consolidated Banking Insurance Financial Other(a) Totals Segments Other(a) Elimination Total --------- --------- ----------- -------- -------- ---------- -------- ------------ ------------ Net interest income..........$ 3,865 $ 22 $ -- $ (531) $ 3,356 $ 3,887 $ (531) $ 446 $ 3,802 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 (422) 1,501 Other significant noncash items: Provision for credit losses.................... 400 -- -- -- 400 400 -- -- 400 Segment profit (loss) from continuing operations..... 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 2002 2002 ----------------------------------------------------- ----------------------------------------------- Brokerage/ Trust/ Reportable Intersegment Consolidated Banking Insurance Financial Other(a) Totals Segments Other(a) Elimination Total --------- --------- ----------- -------- -------- ---------- -------- ------------ ------------ Net interest income..........$ 3,348 $ 7 $ -- $ (537) $ 2,818 $ 3,355 $ (537) $ 470 $ 3,288 Other revenue-external customers................... 1,443 2,439 537 19 4,438 4,419 19 (319) 4,119 Other revenue-from other segments.................... 29 -- 1 162 192 30 162 (192) -- Depreciation and amortization................ 380 183 15 5 583 578 5 -- 583 Equity in the net income of investees................... 26 -- -- 430 456 26 430 (456) -- Other significant noncash items: Provision for credit losses.................... 185 -- -- -- 185 185 -- -- 185 Segment profit (loss) from continuing operations...... 631 204 (161) (640) 34 674 (640) -- 34 Income tax provision (benefit)................... 276 79 (73) (312) (30) 282 (312) -- (30) Income from discontinued Fargo branch, net of income taxes................ 38 -- -- -- 38 38 -- -- 38 Segment profit (loss)........ 393 125 (88) (328) 102 430 (328) -- 102 Segment assets, from continuing operations....... 606,222 27,120 2,087 65,421 700,850 635,429 65,421 (123,658) 577,192 Segment assets............... 635,131 27,120 2,087 65,421 729,759 664,338 65,421 (123,658) 606,101 ------------- (a) The financial information in the "Other" column is for the bank holding company.
The following tables present, for segments as currently defined, segment profit or loss, assets and a reconciliation of segment information as of, and for the six months ended June 30 (in thousands):
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) $ 896 $ 7,681 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 (1,475) 2,962 Other significant noncash items: Provision for credit losses.................. 1,175 -- -- -- 1,175 1,175 -- -- 1,175 Segment profit (loss) from continuing operations................ 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 2002 2002 ----------------------------------------------------- ----------------------------------------------- Brokerage/ Trust/ Reportable Intersegment Consolidated Banking Insurance Financial Other(a) Totals Segments Other(a) Elimination Total --------- --------- ----------- -------- -------- ---------- -------- ------------ ------------ Net interest income........ $ 6,788 $ 10 $ -- $ (982) $ 5,816 $ 6,798 $ (982) $ 940 $ 6,756 Other revenue-external customers................. 2,940 2,928 1,155 70 7,093 7,023 70 (629) 6,464 Other revenue-from other segments.................. 56 -- 16 312 384 72 312 (384) -- Depreciation and amortization.............. 749 204 22 9 984 975 9 -- 984 Equity in the net income of investees.............. 78 -- -- 976 1,054 78 976 (1,054) -- Other significant noncash items: Provision for credit losses.................. 402 -- -- -- 402 402 -- -- 402 Segment profit (loss) from continuing operations.... 1,477 187 (266) (1,140) 258 1,398 (1,140) -- 258 Income tax provision (benefit)................. 564 78 (121) (457) 64 521 (457) -- 64 Income from discontinued Fargo branch, net of income taxes.............. 98 -- -- -- 98 98 -- -- 98 Segment profit (loss)...... 1,011 109 (145) (683) 292 975 (683) -- 292 Segment assets, from continuing operations..... 606,222 27,120 2,087 65,421 700,850 635,429 65,421 (123,658) 577,192 Segment assets............. 635,131 27,120 2,087 65,421 729,759 664,338 65,421 (123,658) 606,101 ------------- (a) The financial information in the "Other" column is for the bank holding company.
The following tables present, for segments as defined in 2002, segment profit or loss, assets and a reconciliation of segment information as of, and for the three months ended June 30 (in thousands):
2003 2003 ------------------------------------------- --------------------------------------------------- Reportable Intersegment Consolidated Banking Insurance Other(a) Totals Segments Other(a) Elimination Total --------- ---------- ---------- -------- ---------- --------- ------------ ------------- Net interest income................ $ 3,865 $ 22 $ (531) $ 3,356 $ 3,887 $ (531) $ 446 $ 3,802 Other revenue-external customers......................... 2,223 3,461 162 5,846 5,684 162 (435) 5,411 Other revenue-from other segments.. 45 -- 164 209 45 164 (209) -- Depreciation and amortization...... 415 214 5 634 629 5 -- 634 Equity in the net income of investees......................... 422 -- 1,501 1,923 422 1,501 (422) 1,501 Other significant noncash items: Provision for credit losses...... 400 -- -- 400 400 -- -- 400 Segment profit (loss) from continuing operations............. 1,504 803 (629) 1,678 2,307 (629) -- 1,678 Income tax provision (benefit)..... 425 361 (282) 504 786 (282) -- 504 Segment profit (loss).............. 1,079 442 (347) 1,174 1,521 (347) -- 1,174 Segment assets..................... 589,388 28,643 69,807 687,838 618,031 69,807 (95,156) 592,682 2002 2002 ------------------------------------------- --------------------------------------------------- Reportable Intersegment Consolidated Banking Insurance Other(a) Totals Segments Other(a) Elimination Total --------- ---------- ---------- -------- ---------- --------- ------------ ------------- Net interest income................ $ 3,348 $ 7 $ (537) $ 2,818 $ 3,355 $ (537) $ 470 $ 3,288 Other revenue-external customers......................... 1,606 2,439 393 4,438 4,045 393 (319) 4,119 Other revenue-from other segments.......................... 30 -- 162 192 30 162 (192) -- Depreciation and amortization...... 391 183 9 583 574 9 -- 583 Equity in the net income of investees......................... 26 -- 430 456 26 430 (456) -- Other significant noncash items: Provision for credit losses...... 185 -- -- 185 185 -- -- 185 Segment profit (loss) from continuing operations............. 607 204 (777) 34 811 (777) -- 34 Income tax provision (benefit)..... 283 79 (392) (30) 362 (392) -- (30) Income from discontinued Fargo branch, net of income taxes....... 38 -- -- 38 38 -- -- 38 Segment profit (loss).............. 362 125 (385) 102 487 (385) -- 102 Segment assets, from continuing operations...................... 606,923 27,120 66,807 700,850 634,043 66,807 (123,658) 577,192 Segment assets..................... 635,832 27,120 66,807 729,759 662,952 66,807 (123,658) 606,101 ------------- (a) The financial information in the "Other" column is for the bank holding company and the brokerage segment.
The following tables present, for segments as defined in 2002, segment profit or loss, assets and a reconciliation of segment information as of, and for the six months ended June 30 (in thousands):
2003 2003 ---------------------------------------------- ------------------------------------------------ Reportable Intersegment Consolidated Banking Insurance Other(a) Totals Segments Other(a) Elimination Total ----------- ---------- ---------- --------- ---------- -------- ------------ ------------- Net interest income............... $ 7,830 $ 22 $ (1,067) $ 6,785 $ 7,852 $ (1,067) $ 896 $ 7,681 Other revenue-external customers........................ 7,669 3,461 278 11,408 11,130 278 (778) 10,630 Other revenue-from other segments......................... 89 -- 319 408 89 319 (408) -- Depreciation and amortization..... 1,023 214 11 1,248 1,237 11 -- 1,248 Equity in the net income of investees........................ 1,475 -- 2,962 4,437 1,475 2,962 (1,475) 2,962 Other significant noncash items: Provision for credit losses..... 1,175 -- -- 1,175 1,175 -- -- 1,175 Segment profit (loss) from continuing operations............ 3,570 803 (1,263) 3,110 4,373 (1,263) -- 3,110 Income tax provision (benefit).... 1,016 361 (458) 919 1,377 (458) -- 919 Segment profit (loss)............. 2,554 442 (805) 2,191 2,996 (805) -- 2,191 Segment assets.................... 589,388 28,643 69,807 687,838 618,031 69,807 (95,156) 592,682 2002 2002 ---------------------------------------------- ------------------------------------------------- Reportable Intersegment Consolidated Banking Insurance Other(a) Totals Segments Other(a) Elimination Total ----------- ---------- ---------- --------- ---------- -------- ------------ -------------- Net interest income............... $ 6,788 $ 10 $ (982) $ 5,816 $ 6,798 $ (982) $ 940 $ 6,756 Other revenue-external customers........................ 3,268 2,928 897 7,093 6,196 897 (629) 6,464 Other revenue-from other segments......................... 72 -- 312 384 72 312 (384) -- Depreciation and amortization..... 763 204 17 984 967 17 -- 984 Equity in the net income of investees........................ 78 -- 976 1,054 78 976 (1,054) -- Other significant noncash items: Provision for credit losses..... 402 -- -- 402 402 -- -- 402 Segment profit (loss) from continuing operations............ 1,453 187 (1,382) 258 1,640 (1,382) -- 258 Income tax provision (benefit).... 586 78 (600) 64 664 (600) -- 64 Income from discontinued Fargo branch, net of income taxes...... 98 -- -- 98 98 -- -- 98 Segment profit (loss)............. 965 109 (782) 292 1,074 (782) -- 292 Segment assets, from continuing operations............ 606,923 27,120 66,807 700,850 634,043 66,807 (123,658) 577,192 Segment assets.................... 635,832 27,120 66,807 729,759 662,952 66,807 (123,658) 606,101 ------------- (a) The financial information in the "Other" column is for the bank holding company and the brokerage segment.
NOTE 6 - Stock-Based Compensation At June 30, 2003, the Company had two stock-based employee compensation plans. The Company applies the recognition and measurement principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB 25") and related interpretations in accounting for those plans. No stock-based employee compensation expense is reflected in net income for stock options granted under the plans as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Compensation expense is reflected in net income for the periods presented below for restricted stock issued under the stock plans and its net effect on net income is reflected in the table below. The following table illustrates the effect on net income and EPS if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") to stock-based employee compensation (dollars in thousands):
For the three months ended For the six months ended June 30, June 30, ----------------------------- -------------------------- 2003 2002 2003 2002 ------------- -------------- ----------- ------------- Net income, as reported..................... $ 1,174 $ 102 $ 2,191 $ 292 Add: total stock-based employee compensation expense included in reported net income, net of related tax effects................ 3 3 5 5 Deduct: total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects................ (11) (11) (21) (21) ------------- ------------ ------------ ------------- Pro forma net income........................ $ 1,166 $ 94 $ 2,175 $ 276 ============= ============ ============ ============= Earnings per share: Basic - as reported.................... $ 0.42 $ .03 $ 0.79 $ 0.11 Basic - pro forma...................... $ 0.42 $ .03 $ 0.78 $ 0.11 Diluted - as reported.................. $ 0.41 $ .03 $ 0.78 $ 0.11 Diluted - pro forma.................... $ 0.41 $ .03 $ 0.77 $ 0.11
NOTE 7 - Derivative Activities During May and June 2001, the Company purchased interest rate cap contracts with notional amounts totaling $40.0 million to mitigate interest rate risk in rising-rate scenarios. The referenced interest rate is three-month LIBOR with $20.0 million of 4.50 percent contracts having three-year original maturities and $20.0 million of 5.50 percent contracts having five-year original maturities. The total amount paid for the contracts was $1.2 million. The contracts are reflected in the Company's consolidated balance sheet at their current combined fair value of approximately $40,000. 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, 2003 and 2002, the impact of marking the contracts to market, reflected as additional interest expense on Federal Home Loan Bank ("FHLB") advances, was a reduction to net interest income of approximately $70,000 and $389,000, respectively. During the six months ended June 30, 2003 and 2002, the impact of marking the contracts to market was a reduction to net interest income of approximately $97,000 and $468,000, respectively. NOTE 8 - Annual Goodwill / Intangible Asset Impairment Assessment In accordance with its accounting policy, during the second quarter of 2003 the Company completed the annual assessment of its goodwill asset and other intangible assets with indeterminate lives and such assessment did not indicate any impairment. NOTE 9 - Change in Goodwill During the second quarter of 2003, the Company paid the first earnout payment related to the acquisition of Milne Scali & Company ("Milne Scali") in April 2002. The earnout payment was approximately $2.3 million and increased goodwill by that amount. NOTE 10 - Recently Adopted Accounting Standards In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143 amends FASB Statement No. 19, "Financial Accounting and Reporting by Oil and Gas Producing Companies," and applies to all entities. The statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and / or the normal operation of a long-lived asset, except for certain obligations of lessees. The Company adopted this standard on January 1, 2003; however, adoption of this statement did not have a material impact. In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS 145"). SFAS 145 rescinds FASB Statement No. 4, "Reporting Gains and Losses from Extinguishment of Debt," and an amendment of that Statement, FASB Statement No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." SFAS 145 also rescinds FASB Statement No. 44, "Accounting for Intangible Assets of Motor Carriers." Finally, SFAS 145 amends FASB Statement No. 13, "Accounting for Leases," to eliminate inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions and amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions of SFAS 145 related to the rescission of FASB Statement No. 4 are to be applied in fiscal years beginning after May 15, 2002 (January 1, 2003 for the Company) with any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet the criteria in APB Opinion 30 for classification as an extraordinary item being reclassified. The provisions of SFAS 145 related to FASB Statement No. 13 that relate to modifications of a capital lease that make it an operating lease became effective for transactions occurring after May 15, 2002. The Company adopted this standard as indicated above; however, adoption did not have a material impact. In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)" ("EITF Issue 94-3"). One of the principal differences between SFAS 146 and EITF Issue 94-3 pertains to the criteria for recognizing a liability for exit or disposal costs. Under EITF Issue 94-3, a liability for such costs was recognized as of the date of an entity's commitment to an exit plan. Pursuant to SFAS 146, a liability is recorded as of the date an obligation is incurred. SFAS 146 requires that an exit or disposal liability be initially measured at fair value. Provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The Company adopted SFAS 146 on January 1, 2003 with no material impact. In October 2002, the FASB issued Statement of Financial Accounting Standards No. 147, "Acquisition of Certain Financial Institutions, an Amendment to FASB Statements No. 72 ("SFAS 72") and 144 and FASB Interpretation No. 9 ("FIN 9")" ("SFAS 147"). SFAS 147 removes acquisitions of financial institutions from the scope of both SFAS 72 and FIN 9 and requires that those transactions be accounted for in accordance with Statement of Financial Accounting Standards No. 141, "Business Combinations" and Statement of Financial Accounting Standards No. 142, "Goodwill and Intangible Assets" ("SFAS 142"). Thus, the requirement to recognize (and subsequently amortize) any excess of the fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired as an unidentifiable intangible asset no longer applies to acquisitions within the scope of SFAS 147. Entities with previously recognized unidentifiable intangible assets that are still amortizing them in accordance with SFAS 72 must, effective the latter of the date of the acquisition or the full adoption of SFAS 142, reclassify those intangible assets to goodwill and terminate amortization on them. The Company adopted SFAS 147 on October 1, 2002 and the adoption resulted in no reclassification or revisions to prior period financial statements. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees Including Indirect Guarantees of Indebtedness of Others" ("Fin 45"), which addresses the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. Fin 45 also requires the recognition of a liability by a guarantor at the inception of certain guarantees. Fin 45 requires the guarantor to recognize a liability for the non-contingent component of the guarantee, which is the obligation to stand ready to perform in the event that specified triggering events or conditions occur. The initial measurement of this liability is the fair value of the guarantee at inception. The recognition of the liability is required even if it is not probable that payments will be required under the guarantee or if the guarantee was issued with a premium payment or as part of a transaction with multiple elements. The Company has adopted the disclosure requirements of Fin 45 and has applied the recognition and measurement provisions for guarantees entered into or modified after December 31, 2002. Between January 1, 2003 and June 30, 2003, the Company entered into performance and financial standby letters of credit totaling $69.2 million. These guarantees are recognized as liabilities on the Company's balance sheet at their current estimated combined fair value of approximately $150,000. In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation; Transition and Disclosure" ("SFAS 148"). SFAS 148 amends SFAS 123 to provide new guidance concerning transition when an entity changes from the intrinsic value method to the fair value method of accounting for employee stock-based compensation cost. As amended by SFAS 148, SFAS 123 now also requires additional information to be disclosed regarding such cost in annual financial statements and in condensed interim statements of public companies. In general, the new transition requirements are effective for financial statements for fiscal years ending after December 15, 2002. Earlier application was permitted if statements for a fiscal year ending prior to December 15, 2002 had not yet been issued as of December 2002. Interim disclosures are required for reports containing condensed financial statements for periods beginning after December 15, 2002. The Company accounts for stock-based compensation using the intrinsic method under ABP 25 and plans to continue to do so while providing the disclosures provided for in SFAS 123. The Company adopted the annual disclosure requirements for SFAS 148 for purposes of its December 31, 2002 consolidated financial statements and has adopted the interim disclosure requirements of SFAS 148 for purposes of these consolidated financial statements. Interim disclosures related to stock-based compensation are presented in Note 6 to these consolidated financial statements. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). FIN 46 addresses consolidation by business enterprises of variable interest entities which have certain characteristics by requiring that if a business enterprise has a controlling interest in a variable interest entity (as defined by FIN 46), the assets, liabilities and results of activities of the variable interest entity be included in the consolidated financial statements with those of the business enterprise. FIN 46 applies to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date. For variable interests acquired before February 1, 2003, FIN 46 applies in the first fiscal year or interim period beginning after June 15, 2003. The Company has, and will continue to, adopt the various provisions of FIN 46 as indicated above but presently does not have any variable interest entities that would be required to be included in its consolidated financial statements. Note 11 - Recently Issued Accounting Standards In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS 149 amends Statement 133 for decisions made (1) as part of the Derivatives Implementation Group process that effectively required amendments to Statement 133, (2) in connection with other FASB projects dealing with financial instruments, and (3) in connection with implementation issues raised in relation to the application of the definition of a derivative, in particular, the meaning of "an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors," the meaning of "underlying," and the characteristics of a derivative that contains financing components. SFAS 149 is generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The Company will adopt SFAS 149 as indicated above and such adoption is not expected to have a material effect on its financial position or results of operations. In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity," ("SFAS 150"). SFAS 150 established standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or asset in some circumstances). Many of those instruments were previously classified as equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities. The Company will adopt SFAS 150 on July 1, 2003 and such adoption is not expected to have a material effect on its financial position or results of operations. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations For purposes of Items 2, 3 and 4 of Part I of this Form 10-Q, we refer to "we," "our" or the "Company" when such reference includes BNCCORP, Inc. and its consolidated subsidiaries, collectively; "BNCCORP" when referring only to BNCCORP, Inc.; the "Bank" when referring only to BNC National Bank; "Milne Scali" when referring only to Milne Scali & Company, Inc.; "BNC Insurance" when referring only to BNC Insurance, Inc.; and "BNC AMI" when referring only to BNC Asset Management, Inc. Comparison of Financial Condition at June 30, 2003 and December 31, 2002 Assets. Our total assets decreased $9.5 million, from $602.2 million at December 31, 2002 to $592.7 million at June 30, 2003. The following table presents our assets by category as of June 30, 2003 and December 31, 2002, as well as the amount and percent of change between the two dates. Significant changes are discussed in lettered explanations below the table (amounts are in thousands):
Change ---------------------------- June 30, December 31, Assets 2003 2002 $ % ------------------------------------------- ---------------- ------------------ ------------- ----------- Cash and due from banks.................... $ 11,996 $ 16,978 $ (4,982) (29.3)% (a) Interest-bearing deposits with banks....... 201 159 42 26.4% Investment securities available for sale... 209,900 208,072 1,828 0.9% Federal Reserve Bank and Federal Home Loan Bank Stock...................... 7,071 7,071 -- -- Loans and leases, net...................... 317,460 330,788 (13,328) (4.0)% (b) Premises and equipment, net................ 16,066 11,100 4,966 44.7% (c) Interest receivable........................ 2,785 2,856 (71) (2.5)% Other assets............................... 4,334 4,119 215 5.2% Goodwill................................... 14,526 12,210 2,316 19.0% (d) Other intangible assets, net............... 8,343 8,875 (532) (6.0)% ---------------- ------------------ ------------- ----------- Total assets...................... $ 592,682 $ 602,228 $ (9,546) (1.6)% ================ ================== ============= =========== ------------------- (a) Cash and due from banks - The decrease in cash and due from banks is primarily attributable to an account reclassification program that was implemented during 2003 and results in the Bank holding less cash at the Federal Reserve. (b) Loans and leases, net - Loans decreased between December 31, 2002 and June 30, 2003 partly because loans typically increase at yearend as commercial customers draw down on their lines of credit and then make payments on the lines during the early part of the subsequent year. Additionally, during the first half of 2003, loan growth was negatively impacted by pay-downs on some large commercial credits. Commercial loan demand to date during 2003 has decreased compared to loan demand experienced for the same period in 2002. Due to current economic conditions, it is difficult to predict, with any degree of certainty, loan growth in future periods. (c) Premises and equipment, net - Premises and equipment increased due to our purchase of the Milne Scali building in Phoenix, Arizona in March 2003 for its appraised value of $3.9 million and the construction of a facility in Scottsdale, Arizona. (d) Goodwill - Goodwill increased due to the earnout payment related to the April 2002 acquisition of Milne Scali.
Allowance for Credit Losses. The following table sets forth information regarding changes in our allowance for credit losses for the three- and six-month periods ended June 30, 2003 and 2002 (amounts are in thousands):
Three Months Six Months Ended June 30, Ended June 30, ----------------------------- ------------------------------ 2003 2002 2003 2002 ------------- -------------- -------------- -------------- Balance, beginning of period........ $ 5,219 $ 4,486 $ 5,006 $ 4,325 Provision for credit losses......... 400 185 1,175 402 Loans charged off................... (690) (47) (1,287) (131) Loans recovered..................... 24 3 59 31 ------------- -------------- -------------- -------------- Balance, end of period.............. $ 4,953 $ 4,627 $ 4,953 $ 4,627 ============= ============== ============== ============== Ending loan portfolio .............. $ 322,413 $ 305,540 ============= ============== Allowance for credit losses as a percentage of ending loan portfolio..................... 1.54% 1.51%
As of June 30, 2003, our allowance for credit losses was 1.54 percent of total loans as compared to 1.49 percent at December 31, 2002 and 1.51 percent at June 30, 2002. Net charge-offs as a percentage of average total loans for the three- and six-month periods ended June 30, 2003 and 2002 were as follows:
Three Months Ended Six Months Ended June 30, June 30, ------------------------------ ------------------------------- 2003 2002 2003 2002 ------------- ------------- ------------ --------------- Ratio of net charge-offs to average total loans................. (0.20)% (0.01)% (0.37)% (0.03)% Ratio of net charge-offs to average total loans, annualized..... (0.82)% (0.06)% (0.75)% (0.07)%
Our provision for loan losses for the three-month period ended June 30, 2003 was $400,000 compared to $185,000 for the same period in 2002. This increase is a direct response to continued charge-off activity related to loans to a commercial contractor that the Bank has been in the process of liquidating / collecting over the past three quarters and the continued presence of a large nonperforming commercial real estate loan managed out of our Arizona market. Our provision for loan losses for the six-month period ended June 30, 2003 was approximately $1.2 million compared to $402,000 for the same period in 2002. This increase is also a direct response to the charge-off activity related to the previously mentioned commercial customer in addition to the fact that a few large credits moved to a higher risk rating category during the six-month period ended June 30, 2003. Loans charged off during the second quarter of 2003 totaled $690,000, representing a $643,000 increase over loans charged off during the second quarter of 2002. The increase was primarily attributable to charge-offs related to one commercial credit. The credit is the above-mentioned contractor on which we charged off $600,000 of principal during the quarter. See comments regarding this credit relationship in the next paragraph. Loans charged off during the six-month period ended June 30, 2003 totaled approximately $1.3 million, representing a $1.2 million increase over loans charged off during the same period in 2002. The increase was primarily attributable to the above-mentioned contractor. During the six-month period, $1.0 million was charged off on this credit relationship. The Bank is currently in the process of liquidating this credit, which has a remaining balance of $320,000. It is expected that the liquidation process will be concluded prior to September 30, 2003. The Bank currently holds a specific reserve of $235,000 against this credit. We maintain our allowance for credit losses at a level considered adequate to provide for an estimate of probable losses related to specifically identified loans as well as probable losses in the remaining loan and lease portfolio that have been incurred as of each balance sheet date. The loan and lease portfolio and other credit exposures are reviewed regularly to evaluate the adequacy of the allowance for credit losses. In determining the level of the allowance, we evaluate the allowance necessary for specific nonperforming loans and also estimate losses in other credit exposures. The resultant three allowance components are as follows: Specific Reserves. The amount of specific reserves is determined through a loan-by-loan analysis of problem loans over a minimum size that considers expected future cash flows, the value of collateral and other factors that may impact the borrower's ability to make payments when due. Included in this group are those nonaccrual or renegotiated loans that meet the criteria as being "impaired" under the definition in Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS 114"). A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Problem loans also include those credits that have been internally classified as credits requiring management's attention due to underlying problems in the borrower's business or collateral concerns. Under SFAS 114, any allowance on impaired loans is generally based on one of three methods. It requires that impaired loans be measured at either the present value of expected cash flows at the loan's effective interest rate, the loan's observable market price or the fair value of the collateral of the loan. Reserves for Homogeneous Loan Pools. We make a significant number of loans and leases that, due to their underlying similar characteristics, are assessed for loss as "homogeneous" pools. Included in the homogeneous pools are consumer loans and commercial loans under a certain size, which have been excluded from the specific reserve allocation previously discussed. We segment the pools by type of loan or lease and, using historical loss information, estimate a loss reserve for each pool. Qualitative Reserve. Our senior lending management also allocates reserves for special situations, which are unique to the measurement period. These include, among other things, prevailing and anticipated economic trends, such as economic conditions in certain geographical or industry segments of the portfolio and economic trends in the retail lending sector, management's assessment of credit risk inherent in the loan portfolio, delinquency trends, historical loss experience, peer-group loss history and other factors. Continuous credit monitoring processes and the analysis of loss components is the principal method relied upon by management to ensure that changes in estimated credit loss levels are reflected in our allowance for credit losses on a timely basis. Management also considers experience of peer institutions and regulatory guidance in addition to our own experience. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for credit losses. Such agencies may require additions to the allowance based on their judgment about information available to them at the time of their examination. Loans, leases and other extensions of credit deemed uncollectible are charged to the allowance. Subsequent recoveries, if any, are credited to the allowance. The amount of the allowance for credit losses is highly dependent upon management's estimates of variables affecting valuation, appraisals of collateral, evaluations of performance and status, and the amounts and timing of future cash flows expected to be received on impaired loans. Such estimates, appraisals, evaluations and cash flows may be subject to frequent adjustments due to changing economic prospects of borrowers, lessees or properties. These estimates are reviewed periodically. Actual losses may vary from current estimates and the amount of the provision may be either greater than or less than actual net charge-offs. The related provision for credit losses, which is charged to income, is the amount necessary to adjust the allowance to the level determined appropriate through application of the above processes. Nonperforming Assets. The following table sets forth information concerning our nonperforming assets as of the dates indicated (amounts are in thousands):
June 30, December 31, 2003 2002 -------------- --------------- Nonperforming loans: Loans 90 days or more delinquent and still accruing interest......... $ 28 $ 5,081 Nonaccrual loans..................... 6,304 2,549 Restructured loans................... -- -- -------------- --------------- Total nonperforming loans............... 6,332 7,630 Other real estate owned and repossessed assets................. -- 8 -------------- --------------- Total nonperforming assets.............. $ 6,332 $ 7,638 ============== =============== Allowance for credit losses............. $ 4,953 $ 5,006 ============== =============== Ratio of total nonperforming assets to total assets................ 1.07% 1.27% Ratio of total nonperforming loans to total loans.................. 1.96% 2.27% Ratio of allowance for credit losses to total nonperforming loans... 78% 66%
Loans 90 days or more delinquent and still accruing interest include loans over 90 days past due which we believe, based on our specific analysis of the loans, do not present doubt about the collection of interest and principal in accordance with the loan contract. Loans in this category must be well secured and in the process of collection. Our lending and management personnel monitor these loans closely. Nonaccrual loans include loans on which the accrual of interest has been discontinued. Accrual of interest is discontinued when we believe, after considering economic and business conditions and collection efforts, that the borrower's financial condition is such that the collection of interest is doubtful. A delinquent loan is generally placed on nonaccrual status when it becomes 90 days or more past due unless the loan is well-secured and in the process of collection. When a loan is placed on nonaccrual status, accrued but uncollected interest income applicable to the current reporting period is reversed against interest income of the current period. Accrued but uncollected interest income applicable to previous reporting periods is charged against the allowance for credit losses. No additional interest is accrued on the loan balance until the collection of both principal and interest becomes reasonably certain. When a problem loan is finally resolved, there may ultimately be an actual write down or charge-off of the principal balance of the loan which may necessitate additional charges to earnings. Of the $6.3 million in the nonaccrual category at June 30, 2003, $5.0 million relates to one commercial real estate loan (which was included in the loans 90 days or more delinquent and still accruing interest category at December 31, 2002), and the balance is made up of smaller credits. Regarding the $5.0 million credit, the Bank was scheduled to take title of the property on April 24, 2003. The Bank and the borrower have contractually agreed to extend the maturity of the loan to November 1, 2003 with the guarantor (an estate) paying all past due interest and putting up a cash reserve to carry the loan to November 1, 2003. The probate court has approved the estate payments and the Bank has received the payments. The borrower is currently negotiating with a potential buyer for the property and the additional time due to the loan extension may allow adequate time to consummate the sale transaction that would potentially result in payment of the loan in full by the November 1, 2003 extension date. If a sale of the property does not occur by November 1, 2003, the Bank expects to commence proceedings to take title of the property and the guarantors will all remain jointly and severally liable for any deficiency. Restructured loans are those for which concessions, including a reduction of the interest rate or the deferral of interest or principal, have been granted due to the borrower's weakened financial condition. Interest on restructured loans is accrued at the restructured rates when it is anticipated that no loss of original principal will occur. We had no restructured loans in our portfolio at June 30, 2003 or December 31, 2002. Other real estate owned and repossessed assets represents properties and other assets acquired through, or in lieu of, loan foreclosure. Such properties and assets are included in other assets in the consolidated balance sheets. They are initially recorded at fair value at the date of acquisition establishing a new cost basis. Write-downs to fair value at the time of acquisition are charged to the allowance for credit losses. After foreclosure, we perform valuations periodically and the real estate or assets are carried at the lower of carrying amount or fair value less cost to sell. Write-downs, revenues and expenses incurred subsequent to foreclosure are charged to operations as recognized/incurred. We had no other real estate owned and repossessed assets at June 30, 2003 and $8,000 at December 31, 2002. Liabilities. Our total liabilities decreased approximately $11.6 million, from $542.2 million at December 31, 2002 to $530.5 million at June 30, 2003. The following table presents our liabilities by category as of June 30, 2003 and December 31, 2002 as well as the amount and percent of change between the two dates. Significant changes are discussed in lettered explanations below the table (amounts are in thousands):
Change June 30, December 31, ------------------------------- Liabilities 2003 2002 $ % -------------------------------------- ----------------- ------------------ -------------- ------------ DEPOSITS: Noninterest-bearing.................... $ 40,716 $ 44,362 $ (3,646) (8.2)% (a) Interest-bearing - Savings, interest checking and money market.................... 182,565 187,531 (4,966) (2.6)% (b) Time deposits $100,000 and over...... 54,439 64,905 (10,466) (16.1)% (c) Other time deposits.................. 93,583 101,447 (7,864) (7.8)% (d) Short-term borrowings.................. 32,570 28,120 4,450 15.8% (e) Federal Home Loan Bank advances........ 107,200 97,200 10,000 10.3% (f) Long-term borrowings................... 8,672 8,561 111 1.3% Other liabilities...................... 10,803 10,053 750 7.5% ----------------- ------------------ -------------- Total liabilities............. $ 530,548 $ 542,179 $ (11,631) (2.1)% ================= ================== ============== ------------------- (a) Noninterest-bearing deposits - Our noninterest-bearing deposits typically increase at yearend as commercial customers draw down on lines of credit and place funds in the bank's noninterest-bearing deposit accounts. Noninterest-bearing deposits can also fluctuate widely on a day-to-day basis due to the number of commercial customers we serve and the nature of their transaction account activity. (b) Savings, interest checking and money market deposits - The decrease in savings, interest checking and money market accounts is partly attributable to a customer moving $1.0 million from a money market account to a collateralized customer repurchase agreement while the additional decrease is attributable to daily fluctuations in interest checking and money market accounts. (c) Time deposits $100,000 and over - Time deposits $100,000 and over decreased primarily because brokered and national market certificates of deposit ("CDs") decreased approximately $18.4 million between December 31, 2002 and June 30, 2003. Some of this decrease in volume was offset by CD growth in the North Dakota and Arizona markets. (d) Other time deposits - Other time deposits declined primarily because a number of CDs, held by credit unions and other financial institutions (with balances averaging approximately $99,000), matured and the funds were not reinvested. (e) Short-term borrowings - Short-term borrowings increased primarily because of a $4.2 million increase in customer repurchase agreements between December 31, 2002 and June 30, 2003 including the $1.0 million repurchase agreement discussed in (b) above. (f) Federal Home Loan Bank advances - $10.0 million of FHLB advances held at December 31, 2002 matured in January 2003 and, at June 30, 2003, we had $20.0 million of short-term FHLB advances. We use such short-term advances to manage liquidity similar to how we use Federal funds purchased on a day-to-day basis. The short-term FHLB advances provide us with a slightly more cost-effective way of managing our short-term liquidity needs since the FHLB gives a discount for advances of $10.0 million or more.
Stockholders' Equity. Our stockholders' equity increased $2.1 million between December 31, 2002 and June 30, 2003. This increase was primarily attributable to earnings of approximately $2.2 million offset by a $97,000 decrease in accumulated other comprehensive income and $40,000 of other transactions such as payment of preferred stock dividends, stock option exercises and vesting of restricted stock. Capital Adequacy and Expenditures. We actively monitor compliance with regulatory capital requirements, including risk-based and leverage capital measures. Under the risk-based capital method of capital measurement, the ratio computed is dependent on the amount and composition of assets recorded on the balance sheet, and the amount and composition of off-balance-sheet items, in addition to the level of capital. The following table includes the risk-based and leverage capital ratios of the Company and the Bank as of June 30, 2003:
Tier 1 Total Risk- Risk- Tier 1 Based Based Leverage Ratio Ratio Ratio -------------- --------------- -------------- BNCCORP, consolidated...... 6.45% 10.06% 4.73% BNC National Bank.......... 10.01% 11.21% 7.33%
As of June 30, 2003, the Company and the Bank exceeded capital adequacy requirements and the Bank was considered "well capitalized" under prompt corrective action provisions. During 2002, we initiated construction of an office building at 17045 North Scottsdale Road, Scottsdale, Arizona. Total cost for the building, including furniture and equipment (through June 30, 2003) was approximately $1.7 million. Construction was completed during the second quarter of 2003, the office opened on May 5, 2003, and the project was funded through cash generated from operations. In March 2003, we purchased the Milne Scali building at 1750 East Glendale Avenue, Phoenix, Arizona for its appraised price of $3.9 million. The purchase was funded through cash generated from operations. We expect current facilities, along with the pending relocation of our branch office at 2725 East Camelback Road, Suite 200, Phoenix, Arizona to 2425 East Camelback Road, Suite 100, Phoenix, Arizona to be sufficient for operating purposes for the foreseeable future. Estimated leasehold improvement costs for the property at 2425 East Camelback Road are approximately $500,000, which includes furniture, fixtures and equipment and which will be paid through cash generated from operations. Comparison of Operating Results for the Three and Six Months Ended June 30, 2003 and 2002 General. Record net income from continuing operations of $1.17 million, or $0.41 per diluted share, for the quarter ended June 30, 2003 represented a more than ten-fold increase over net income of $102,000, or $0.03 per diluted share, reported for the second quarter of 2002. Net income for the year-ago quarter included income of $38,000, or $0.01 per share, from the operations of our Fargo, North Dakota branch office, which was sold on September 30, 2002, and subsequently reclassified as a discontinued operation. Net interest income for the second quarter of 2003 rose 15.6 percent, to $3.80 million compared with $3.29 million for the same quarter one year earlier. The increase reflected a widening of the net interest margin which improved to 2.86 percent for the quarter ended June 30, 2003 compared with 2.58 percent for the same period one year earlier. Noninterest income was $5.41 million for the 2003 second quarter, rising 31.4 percent from $4.12 million for the year-ago period. As a percentage of gross revenues, noninterest income was 58.74 percent for the recent quarter, up from 55.62 percent a year ago. The largest contributors to noninterest income in the second quarter of 2003 were insurance commissions of $3.42 million, largely produced by Milne Scali, acquired in April of 2002, and trust/financial services income of $631,000, which was largely driven by a fee for managing the sale of two companies on behalf of a customer. Noninterest expense for the second quarter of 2003 was $7.13 million. This represents a slight decrease from $7.19 million in the second quarter of 2002. Our return on average common stockholders' equity, from continuing operations, for the most recent quarter was 11.99 percent compared with 0.55 percent for the same period one year earlier. Our return on average assets, from continuing operations, for the most recent quarter was 0.80 percent compared with 0.05 percent for the same period one year earlier. For the six months ended June 30, 2003, we reported net income of $2.19 million, or $0.78 per common share on a diluted basis. This represented a more than six-fold increase over net income of $292,000, or $0.11 per diluted share, recorded in the first half of 2002. The year-ago results included income of $98,000, or $0.04 per diluted share, from the discontinued Fargo branch operations. Net interest income for the 2003 six-month period was $7.68 million, an increase of 13.7 percent compared with $6.76 million in the year-ago period and was driven by a widening of the net interest margin from 2.69 percent for the six months ended June 30, 2002, to 2.88 percent for the same period in 2003. Noninterest income was $10.63 million for the first six months of 2003, compared with $6.46 million reported for the similar 2002 period. The 64.4 percent increase in noninterest income largely reflected the acquisition of Milne Scali, which was included in our results for the full first half of 2003, versus approximately 10 weeks of the comparable 2002 period. Noninterest income as a percent of gross revenues for the 2003 first half was 58.06 percent, up from 48.89 percent for the same period in 2002. Noninterest expense for the first six months of 2003 was $14.03 million compared with $12.56 million for the first half of 2002. The increase in noninterest expense largely reflected a full six months of operations of Milne Scali in the recent period. Net Interest Income. Net interest income for the three-month period ended June 30, 2003 increased approximately $514,000, or 15.6 percent, from approximately $3.29 million to approximately $3.80 million. Net interest margin increased to 2.86 percent for the quarter ended June 30, 2003 from 2.58 percent for the same period one year earlier. Net interest income and margin for the three-month periods ended June 30, 2003 and 2002 were negatively impacted by derivative contract-related transactions during the periods totaling approximately $70,000 and $389,000, respectively. Without these derivative transactions, net interest income for the periods would have been approximately $3.87 and $3.68 million, respectively, and net interest margin would have been 2.92 and 2.89 percent, respectively. Net interest income for the six-month period ended June 30, 2003 increased approximately $923,000, or 13.7 percent, from approximately $6.76 million to approximately $7.68 million. Net interest margin increased to 2.88 percent for the quarter ended June 30, 2003 from 2.69 percent for the same period one year earlier. Net interest income and margin for the six-month periods ended June 30, 2003 and 2002 were negatively impacted by derivative contract-related transactions during the periods totaling approximately $97,000 and $468,000, respectively. Without these derivative transactions, net interest income for the periods would have been approximately $7.78 and $7.22 million, respectively, and net interest margin would have been 2.92 and 2.88 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, 2003 and 2002, 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, --------------------------------------------------------------- 2003* 2002* 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........ $ 427 $ 1 0.94% $ 6,395 $ 31 1.94% $ (5,968) $ (30) -1.00%(a) Investments.............. 210,380 2,026 3.86% 211,657 2,858 5.42% (1,277) (832) -1.56%(b) Loans.................... 326,936 5,238 6.43% 296,794 4,936 6.67% 30,142 302 -0.24%(c) Allowance for loan losses................. (5,130) -- (4,474) -- (656) -- --------- -------- --------- --------- --------- -------- Total interest-earning assets................. $532,613 7,265 5.47% $510,372 7,825 6.15% $ 22,241 (560) -0.68% ========= -------- ========= --------- ========= -------- Interest-bearing liabilities Interest checking & money market accounts... $179,908 563 1.26% $173,790 745 1.72% $ 6,118 (182) -0.46%(d) Savings.................. 6,037 13 0.86% 4,182 9 0.86% 1,855 4 0.00% Certificates of deposit under $100,000.......... 96,384 779 3.24% 107,320 1,067 3.99% (10,936) (288) -0.75%(e) Certificates of deposit $100,000 and over....... 57,149 568 3.99% 77,702 881 4.55% (20,553) (313) -0.56%(f) --------- -------- --------- --------- --------- -------- Interest-bearing deposits............... 339,478 1,923 2.27% 362,994 2,702 2.99% (23,516) (779) -0.72% Short-term borrowings.... 25,972 113 1.75% 1,894 10 2.12% 24,078 103 -0.37%(g) Federal Home Loan Bank advances........... 102,222 1,332 5.23% 97,200 1,736 7.16% 5,022 (404) -1.93%(h) Long-term borrowings..... 8,634 96 4.46% 7,115 90 5.07% 1,519 6 -0.61%(i) --------- -------- --------- --------- --------- -------- Total borrowings........ 136,828 1,541 4.52% 106,209 1,836 6.93% 30,619 (295) -2.41% --------- -------- --------- --------- --------- -------- Total interest-bearing liabilities............ $476,306 3,464 2.92% $469,203 4,538 3.88% $ 7,103 (1,074) -0.96% ========= -------- ========= ========= Net interest income/spread.......... $ 3,801 2.55% $ 3,287 2.27% $ 514 0.28% ======== ========= ======== Net interest margin..... 2.86% 2.58% 0.28% Notation: Noninterest-bearing deposits................ $ 38,858 -- $ 30,964 -- $ 7,894 -- (j) --------- --------- --------- Total deposits.......... $378,336 $ 1,923 2.04% $393,958 $ 2,702 2.75% $(15,622) $ (779) -0.71% ========= ======== ========= ========= ========= ======== Taxable equivalents: Total interest- earning assets......... $532,613 $ 7,462 5.62% $510,327 $ 8,450 6.64% $ 22,241 $ (988) -1.02% Net interest income/spread.......... -- $ 3,998 2.70% -- $ 3,912 2.76% -- $ 86 -0.06% Net interest margin..... -- -- 3.01% -- -- 3.07% -- -- -0.06% --------------------------------- * From continuing operations
Six Months Ended June 30, --------------------------------------------------------------- 2003* 2002* 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........ $ 383 $ 1 0.53% $ 4,109 $ 45 2.21% $ (3,726) $ (44) -1.68%(a) Investments.............. 213,098 4,310 4.08% 210,952 5,588 5.34% 2,146 (1,278) -1.26%(b) Loans.................... 328,972 10,422 6.39% 295,466 9,773 6.67% 33,506 649 -0.28%(c) Allowance for loan losses............ (5,035) -- (4,387) -- (648) -- --------- -------- --------- --------- --------- -------- Total interest-earning assets................. $537,418 14,733 5.53% $506,140 15,406 6.14% $ 31,278 (673) -0.61% ========= -------- ========= --------- ========= -------- Interest-bearing liabilities Interest checking & money market accounts.. $182,347 1,158 1.28% $166,806 1,327 1.66% $ 15,541 (214) -0.38%(d) Savings.................. 5,675 25 0.89% 4,147 17 0.83% 1,528 8 0.06% Certificates of deposit under $100,000.......... 98,881 1,637 3.34% 105,430 2,173 4.16% (6,549) (536) -0.82%(e) Certificates of deposit $100,000 and over....... 60,124 1,209 4.06% 78,144 1,766 4.56% (18,020) (557) -0.50%(f) --------- -------- --------- --------- --------- -------- Interest-bearing deposits............... 347,027 4,029 2.34% 354,527 5,328 3.03% (7,500) (1,299) -0.69% Short-term borrowings.... 22,771 221 1.96% 4,693 52 2.23% 18,078 169 -0.27%(g) Federal Home Loan Bank advances........... 103,072 2,608 5.10% 98,222 3,177 6.52% 4,850 (569) -1.42%(h) Long-term borrowings..... 8,591 195 4.58% 3,560 92 5.21% 5,031 103 -0.63%(i) --------- -------- --------- --------- --------- -------- Total borrowings....... 134,434 3,024 4.54% 106,475 3,321 6.29% 27,959 (297) -1.75% --------- -------- --------- --------- --------- -------- Total interest-bearing liabilities........... $481,461 7,053 2.95% $461,002 8,649 3.78% $ 20,459 (1,596) -0.83% ========= -------- ========= --------- ========= -------- Net interest income/spread......... $ 7,680 2.58% $ 6,757 2.36% $ 923 0.22% ======== ========= ======== Net interest margin.... 2.88% 2.69% 0.19% Notation: Noninterest-bearing deposits................ $ 38,348 -- $ 29,868 -- $ 8,480 -- (j) --------- --------- --------- Total deposits......... $385,375 $ 4,029 2.11% $384,395 $ 5,328 2.80% $ 980 $(1,299) -0.69% ========= ======== ========= ========= ========= ======== Taxable equivalents: Total interest-earning assets................ $537,418 $14,929 5.60% $506,140 $ 16,649 6.63% $ 31,278 $(1,720) -1.03% Net interest income/spread......... -- $ 7,876 2.65% -- $ 8,000 2.85% -- $ (124) -0.20% Net interest margin.... -- -- 2.96% -- -- 3.19% -- -- -0.23% --------------------------------- * From continuing operations (a) Federal funds sold / interest bearing due from - Average balances of Federal funds sold and interest bearing due from decreased for the 2003 periods due to less Federal funds sold outstanding during those periods. The decreased yield is reflective of the lower interest rate environment caused by additional Federal Reserve rate reductions during 2002 and late in June 2003. (b) Investments - The decreased yield in the investment portfolio reflects the current lower rate environment caused by the Federal Reserve rate reductions during 2002 and late June 2003. (c) Loans - Average loans increased primarily as a result of loan growth in the Arizona market. The decreased yield reflects the Federal Reserve rate reductions during 2002 and 2003. (d) Interest checking and money market accounts - Increased average balances of interest checking and money market accounts represents additional growth in our floating-rate Wealthbuilder deposit products, particularly in the Arizona market. While period end balances of these accounts has declined between December 31, 2002 and June 30, 2003, averages for the above three- and six-month periods in 2003 exceeded those for the same periods in 2002. The decreased costs are reflective of the lower rate environment in 2003 compared to the same periods in 2002. (e) Certificates of deposit under $100,000 - The decrease in average CDs under $100,000 is primarily attributable to run off of some CDs during the first half of 2003. The lower costs are representative of the lower interest rate environment in 2003 compared to the same periods in 2002. (f) Certificates of deposit $100,000 and over - During the quarter ended June 30, 2003, average balances of brokered and national market CDs were $45.9 million as compared to $64.6 million for the same period one year earlier. During the six months ended June 30, 2003, average balances of brokered and national market CDs were $51.2 million as compared to $65.8 million for the same period one year earlier. The reduced costs reflect the lower interest rate environment in 2003 compared to the same periods in 2002. (g) Short-term borrowings - Average short-term borrowings increased during the three- and six-month periods ended June 30, 2003 compared to the same periods in 2002 due to the use of customer repurchase agreements during late 2002 and early 2003 and an increase in average Federal funds purchased outstanding during 2003. The reduced costs reflect the lower interest rate environment in 2003 compared to the same periods in 2002. (h) FHLB advances - The increased volume of FHLB advances resulted from the use of short-term FHLB advances in 2003 offset by the maturity of $10.0 million of long-term advances in January 2003. 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. At June 30, 2003, $20.0 million of such advances were outstanding. The reduced costs reflect the lower interest rate environment in 2003 compared to the same periods in 2002. (i) Long-term borrowings - In conjunction with the acquisition of Milne Scali in April 2002, we incurred $8.5 million of long-term debt. The debt is priced at 30-day LIBOR plus 3.20 percent. (j) Noninterest-bearing deposits - Noninterest-bearing deposit balances have increased largely due to commercial deposit growth in our Arizona and Minnesota markets.
Provision for Credit Losses. The provision for credit losses was $400,000 for the quarter ended June 30, 2003 as compared to $185,000 for the same period one year earlier. The provision for credit losses was approximately $1.2 million for the six months ended June 30, 2003 as compared to $402,000 for the same period one year earlier. See "Comparison of Financial Condition at June 30, 2003 and December 31, 2002 - 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, 2003 and 2002 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):
Noninterest Income Three Months Ended Six Months Ended June 30, Change June 30, Change ------------------------- --------------------- ------------------------ --------------------- 2003 2002 $ % 2003 2002 $ % ------------ ----------- ---------- ---------- ----------- ----------- ---------- ---------- Insurance commissions........... $ 3,423 $ 2,417 $1,006 41.6% $ 7,485 $ 2,884 $4,601 159.5% (a) Trust and financial services.... 631 212 419 197.6% 817 431 386 89.6% (b) Fees on loans................... 482 507 (25) (4.9)% 943 1,011 (68) (6.7)% Net gain on sales of securities. 301 366 (65) (17.8)% 421 796 (375) (47.1)% (c) Service charges................. 218 178 40 22.5% 428 340 88 25.9% Brokerage income................ 99 324 (225) (69.4)% 150 724 (574) (79.3)% (d) Rental income................... 55 22 33 150.0% 77 44 33 75.0% Other........................... 202 93 109 117.2% 309 234 75 32.1% (e) ------------ ----------- ---------- ----------- ----------- ---------- Total noninterest income..... $ 5,411 $ 4,119 $1,292 31.4% $10,630 $ 6,464 $4,166 64.4% ============ =========== ========== =========== =========== ========== ----------------- (a) Insurance commissions - The increases in insurance commission revenue are primarily attributable to our acquisition of Milne Scali in April of 2002. Insurance contingency fees of $115,000 and $932,000 were recognized during the three- and six-month periods ending June 30, 2003. For the same periods in 2002, contingency fees recognized were $79,000 and $81,000, respectively. Although Milne Scali was not part of the Company during the first quarter of 2002, contingency fee income recognized by Milne Scali during that quarter was approximately $703,000. If the acquisition of Milne Scali had been effective on January 1, 2002, contingency fee income recognized by the Company for the three- and six-month periods ending June 30, 2002 would have been $80,000 and $784,000, respectively. (b) Trust and financial services - The increases in trust and financial services revenue are primarily attributable to a $488,000 fee received by the Bank's financial services division for the management of the sale of two companies on behalf of a customer. (c) Net gain on sales of securities - Net gains on sales of securities vary depending on the nature of investment securities sales transacted during the respective periods. During the six-month period ended June 30, 2003, we sold $32.8 million of investment securities compared with $30.1 million for the same period in 2002. (d) Brokerage income - The decreases in brokerage revenue are attributable to the fact that we had significantly fewer brokers during 2003 than in 2002 due to the closing of the BNC AMI office in Fargo, North Dakota and fewer brokers on staff in the Minnesota market during 2003. (e) Other - The increases in other noninterest income are primarily attributable to interest we received on some tax refunds.
Noninterest Expense. The following table presents the major categories of our noninterest expense for the three- and six-month periods ended June 30, 2003 and 2002 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 Expense June 30, Change June 30, Change -------------------- --------------------- -------------------- --------------------- 2003 2002 $ % 2003 2002 $ % --------- --------- -------- ---------- --------- --------- --------- ---------- Salaries and employee benefits....................$ 3,997 $ 3,928 $ 69 1.8% $ 7,962 $ 6,656 $ 1,306 19.6% (a) Occupancy.................... 564 579 (15) (2.6)% 1,186 1,043 143 13.7% (b) Interest on subordinated debentures................. 433 455 (22) (4.8)% 870 912 (42) (4.6)% Depreciation and amortization................ 368 334 34 10.2% 716 634 82 12.9% Office supplies, telephone and postage................. 355 299 56 18.7% 609 545 64 11.7% Professional services........ 309 391 (82) (21.0)% 569 776 (207) (26.7)% (c) Amortization of intangible assets........... 266 249 17 6.8% 532 350 182 52.0% (d) Marketing and promotion...... 176 236 (60) (25.4)% 295 371 (76) (20.5)% FDIC and other assessments... 51 55 (4) (7.3)% 102 109 (7) (6.4)% Other........................ 615 661 (46) (7.0)% 1,184 1,165 19 1.6% --------- --------- -------- --------- --------- --------- Total noninterest expense...$ 7,134 $ 7,187 $ (53) (0.7)% $14,025 $ 12,561 $ 1,464 11.7% ========= ========= ======== ========= ========= ========= Efficiency ratio............ 77.4% 97.0% (19.6)% 76.6% 95.0% (18.4)% ========= ========= ========= ========= Adjusted efficiency ratio excluding impact of derivative contracts and dividends on subordinated debentures..... 72.2% 86.4% (14.2)% 71.5% 85.1% (13.6)% ========= ========= ========= ========= Noninterest income as a percent of gross revenues... 58.7% 55.6% 3.1% 58.1% 48.9% 9.2% ========= ========= ========= ========= Total operating expenses as a percent of average assets, annualized.......... 4.9% 5.1% (0.2)% 4.8% 4.6% 0.2% ========= ========= ========= ========= (a) Salaries and employee benefits - Average full time equivalent employees for the three- and six-month periods ended June 30, 2003 were 276 and 271, respectively, as compared to 279 and 245, respectively, for the same periods in 2002. The increase in full time equivalents for the first six months of 2003 versus 2002 is primarily attributable to the April 2002 acquisition of Milne Scali, which has approximately 85 employees. (b) Occupancy - Occupancy expenses increased in the year-to-date period due to expenses associated with increased Arizona locations as well as the addition of Milne Scali in April of 2002. (c) Professional services - The decrease in professional services expenses is attributable to a decrease in brokerage clearing and retainage expenses resulting from the decrease in associated brokerage revenues, a decrease in other consulting expenses and audit fees offset by an increase in legal and collection fees. (d) Amortization of intangible assets - The increase in amortization of intangible assets for the six-month period ended June 30, 2003 is attributable to the addition of Milne Scali and the associated amortization of the books of business intangible assets acquired in the acquisition.
Income Tax Provision. Our provision for income taxes for the quarter ended June 30, 2003 increased $534,000 as compared to the same period in 2002 due to the increase in pre-tax income. The estimated effective tax rate for the three-month period ended June 30, 2003 was 30.0 percent. Our provision for income taxes for the six months ended June 30, 2003 increased $855,000 as compared to the same period in 2002 due to the increase in pre-tax income. The estimated effective tax rate for the six-month period ended June 30, 2003 was 29.5 percent. Earnings per Common Share. See Note 4 to the interim consolidated financial statements included under Item 1 for a summary of the EPS calculations for the three- and six-month periods ended June 30, 2003 and 2002. Liquidity Liquidity. Liquidity risk management encompasses our 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 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 deposit growth, together with repayments and maturities of loans and investments, we utilize brokered deposits, sell securities under agreements to repurchase and borrow overnight federal funds. The Bank is a member of the FHLB, which affords it the opportunity to borrow funds on terms ranging from overnight to 10 years and beyond. Advances from the FHLB are generally collateralized by the Bank's mortgage loans and various investment securities. We have also obtained funding through the issuance of subordinated notes, subordinated debentures and long-term borrowings. The following table sets forth, for the six months ended June 30, 2003 and 2002, a summary of our 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 Six Months Ended June 30, ------------------------- Major Sources and Uses of Funds 2003 2002 ---------- ---------- Proceeds from FHLB advances..........................$ 107,300 $ -- Proceeds from sales of investment securities......... 32,817 30,104 Proceeds from maturities of investment securities.... 26,372 28,335 Net (increase) decrease in loans..................... 12,094 (7,680) Net increase in short-term borrowings................ 4,450 2,617 Proceeds from long-term borrowings................... 140 8,530 Repayments of FHLB advances.......................... (97,300) (20,000) Purchases of investment securities................... (62,963) (52,190) Net increase (decrease) in deposits.................. (26,942) 18,632 Additions to premises and equipment.................. (5,775) (2,144) Cash paid for acquisition, net....................... -- (13,964)
Our liquidity is measured by our ability to raise cash when we need it at a reasonable cost and with a minimum of loss. Given the uncertain nature of our customers' demands as well as our desire to take advantage of earnings enhancement opportunities, we 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, credit lines with correspondent banks for federal funds, wholesale and retail repurchase agreements, brokered certificates of deposit and direct non-brokered national certificates of deposit through national deposit networks. We measure our liquidity position on a monthly basis. Key factors that determine our liquidity are the reliability or stability of our deposit base, the pledged/non-pledged status of our investments and potential loan demand. Our liquidity management system divides the balance sheet into liquid assets, and short-term liabilities that are assumed to be vulnerable to non-replacement under abnormally stringent conditions. The excess of liquid assets over short-term liabilities is measured over a 30-day planning horizon. Assumptions for short-term liabilities vulnerable to non-replacement under abnormally stringent conditions are based on a historical analysis of the month-to-month percentage changes in deposits. The excess of liquid assets over short-term liabilities and other key factors such as expected loan demand as well as access to other sources of liquidity such as lines with the FHLB, Federal funds and those other supplemental sources listed above are tied together to provide a measure of our liquidity. We have a targeted range and manage our operations such that these targets can be achieved. We believe that our prudent 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 policy statement identifies actions to be taken in response to an adverse liquidity event. As of June 30, 2003, we had established three revolving lines of credit with banks totaling $16.5 million of which $2.5 million had been advanced and $14.0 million remained available for advance. The lines, if drawn upon, mature daily with interest rates that float at the Federal funds rate. At June 30, 2003, we also had the ability to draw additional FHLB advances of $35.2 million based upon the mortgage loans and securities that were then pledged, subject to a requirement to purchase additional FHLB stock. Critical Accounting Policies Critical accounting policies are dependent on estimates that are particularly susceptible to significant change and include the determination of the allowance for credit losses and income taxes. The following have been identified as "critical accounting policies." Allowance for Credit Losses. Our accounting policy for determining the allowance for credit losses is set forth under "Comparison of Financial Condition at June 30, 2003 and December 31, 2002 - Allowance for Credit Losses." As indicated in that policy statement, we employ a systematic methodology for determining our allowance for credit losses that includes an ongoing review process and quarterly adjustment of the allowance. Our process includes periodic loan-by-loan review for loans that are individually evaluated for impairment as well as detailed reviews of other loans (either individually or in pools). This includes an assessment of known problem loans, potential problem loans and other loans that exhibit indicators of deterioration. Our methodology incorporates a variety of risk considerations, both quantitative and qualitative, in establishing an allowance for credit losses that we believe is appropriate at each reporting date. Quantitative factors include our historical loss experience, delinquency and charge-off trends, collateral values, changes in non-performing loans and other factors. Quantitative factors also incorporate known information about individual loans, including borrowers' sensitivity to interest rate movements and borrowers' sensitivity to quantifiable external factors including commodity and finished goods prices as well as acts of nature (violent weather, fires, etc.) that occur in a particular period. Qualitative factors include the general economic environment in our markets and, in particular, the state of certain industries in our market areas. Size and complexity of individual credits in relation to lending officers' background and experience levels, loan structure, extent and nature of waivers of existing loan policies and pace of portfolio growth are other qualitative factors that are considered in our methodology. Our methodology is, and has been, consistently applied. However, as we add new products, increase in complexity and expand our geographical coverage, we will enhance our methodology to keep pace with the size and complexity of the loan and lease portfolio. In this regard, we may, if deemed appropriate, engage outside firms to independently assess our methodology. On an ongoing basis we perform independent credit reviews of our loan portfolio. We believe that our systematic methodology continues to be appropriate given our size and level of complexity. While our methodology utilizes historical and other objective information, the establishment of the allowance for credit losses and the classification of loans is, to some extent, based on our judgment and experience. We believe that the allowance for credit losses is adequate as of June 30, 2003 to cover known and inherent risks in the loan and lease portfolio. However, future changes in circumstances, economic conditions or other factors could cause us to increase or decrease the allowance for credit losses as necessary. Income Taxes. We file consolidated Federal and state income tax returns. Income taxes are accounted for using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Such differences can relate to differences in accounting for credit losses, depreciation timing differences, unrealized gains and losses on investment securities, deferred compensation and leases, which are treated as operating leases for tax purposes and loans for financial statement purposes. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The determination of current and deferred income taxes is based on complex analyses of many factors including interpretation of Federal and state income tax laws, the difference between tax and financial reporting basis of assets and liabilities (temporary differences), estimates of amounts due or owed such as the timing of reversals of temporary differences and current financial accounting standards. Actual results could differ significantly from the estimates and interpretations used in determining the current and deferred income tax liabilities. 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 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. We caution readers that these forward-looking statements, including without limitation, those relating to our 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 and regional economic conditions; competition for our 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 our acquisition and growth strategies; and other risks which are difficult to predict and many of which are beyond our control. Item 3. Quantitative and Qualitative Disclosures About Market Risk Market risk arises from changes in interest rates, exchange rates, and commodity prices and equity prices and represents the possibility that changes in future market rates or prices will have a negative impact on our earnings or value. Our principal market risk is interest rate risk. Interest rate risk arises from changes in interest rates. Interest rate risk can result from: (1) Repricing risk - timing differences in the maturity/repricing 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. We have risk management policies to monitor and limit exposure to interest rate risk. To date we have not conducted trading activities as a means of managing interest rate risk. Our asset/liability management process is utilized to manage our 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. Our interest rate risk exposure is actively managed with the objective of managing the level and potential volatility of net interest income in addition to the long-term growth of equity, bearing in mind that we 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 and 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 our 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. Our primary tool in measuring and managing interest rate risk is net interest income simulation. This exercise includes our assumptions regarding the level of interest rate or balance changes on indeterminate maturity deposit products (savings, interest checking, 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, collateralized mortgage obligation, and mortgage-backed securities portfolios in each rate environment are captured using industry estimates of prepayment speeds for various coupon segments of the portfolio. For purposes of this simulation, projected month-end balances of the various balance sheet planning accounts are held constant at their June 30, 2003 levels. Cash flows from a given planning account are reinvested back into the same planning account so as to keep the month-end balance constant. The static balance sheet assumption is made so as to project the interest rate risk to net interest income embedded in the existing balance sheet. With knowledge of the balance sheet's existing net interest income profile, more informed strategies and tactics may be developed as it relates to the structure/mix of growth. We monitor the results of net interest income simulation on a quarterly basis at regularly scheduled asset/liability committee ("ALCO") meetings. Each quarter net interest income is generally 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. 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 decrease from its starting point at June 30, 2003 of 4.00 percent to 3.00 percent 12 months later. The prime rate in this example will decrease 1/12th of the overall decrease of 100 basis points each month. Given the historically low absolute level of market interest rates as of June 30, 2003, the declining rate scenario analysis was limited to -100bp for the summary table presented below and a +400bp scenario was added. The net interest income simulation result for the 12-month horizon is shown below. The impact of each interest rate scenario on projected net interest income is displayed before and after the impact of the $20.0 million cumulative notional original three-year interest rate cap positions on three-month LIBOR with a 4.50 percent strike and the $20.0 million cumulative notional original five-year interest rate cap positions on three-month LIBOR with a 5.50 percent strike. The impact of the cap positions is calculated by determining the fair value of the contracts at the end of the 12-month horizon using an interest rate option valuation model. The change in fair value plus any expected cash flow in the various rate scenarios is summed to determine the total net benefit/(cost) of the portfolio of interest rate cap contracts.
Net Interest Income Simulation (amounts in thousands) Movement in interest rates -100bp Unchanged +100bp +200bp +300bp +400bp -------- --------- -------- -------- -------- -------- Projected 12-month net interest income...... $14,516 $14,891 $ 15,730 $ 16,334 $ 16,392 $ 16,155 Dollar change from rates unchanged scenario. $ (375) -- $ 839 $ 1,443 $ 1,501 $ 1,264 Percentage change from rates unchanged scenario................................. (2.52)% -- 5.63% 9.69% 10.08% 8.49% Net benefit/(cost) of cumulative $40.0 million interest rate caps (1)........... $ (40) $ (36) $ (14) $ 41 $ 140 $ 291 Total net interest income impact with caps.. $14,476 $14,855 $ 15,716 $ 16,375 $ 16,532 $ 16,446 Dollar change from unchanged w/caps......... $ (379) -- $ 861 $ 1,520 $ 1,677 $ 1,591 Percentage change from unchanged w/caps..... (2.55)% -- 5.80% 10.23% 11.29% 10.71% Policy guidelines (decline limited to)...... 5.00 % -- 5.00% 10.00% 15.00% 20.00% (1) In May and June 2001, we purchased four interest rate cap contracts on three-month LIBOR with strikes at 4.50 percent each in the amount of $5.0 million notional with original terms of three years for total notional of $20.0 million. We also purchased four interest rate cap contracts on three-month LIBOR with strikes at 5.50 percent each in the amount of $5.0 million notional with original terms of five years for total notional of $20.0 million.
Our rate sensitivity position over the projected 12-month horizon is asset sensitive. This position is evidenced by the projected increase in net interest income in the rising interest rate scenarios, and the decrease in net interest income in the falling rate scenario. Because one of the objectives of asset/liability management is to manage net interest income over a one-year planning horizon, policy guidelines are stated in terms of maximum potential reduction in net interest income resulting from changes in interest rates over the 12-month period. It is no less important, however, to give attention to the absolute dollar level of projected net interest income over the 12-month period. For example, while in the -100bp scenario, net interest income declines $379,000, or 2.6 percent, from the unchanged scenario, the level of net interest income of $14.5 million is only 2.7 percent below the $14.9 million of net interest income recorded for the year ended December 31, 2002. Our general policy is to limit the percentage decrease in projected net interest income to 5, 10, 15 and 20 percent from the rates unchanged scenario for the +/- 100bp, 200bp, 300bp and 400bp interest rate ramp scenarios, respectively. In addition, a targeted level of net interest income is established and approved by the Board and ALCO. This target is reevaluated and reset at each quarterly ALCO meeting. Since there are limitations inherent in any methodology used to estimate the exposure to changes in market interest rates, this analysis is 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 our assets and liabilities as of June 30, 2003 and does not contemplate any actions we might undertake in response to changes in market interest rates. Item 4. Controls and Procedures Quarterly evaluation of the Company's Disclosure Controls and Internal Controls. As of the end of the period covered by this quarterly report on Form 10-Q, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures ("Disclosure Controls"), and our internal control over financial reporting ("Internal Controls"). This evaluation (the "Controls Evaluation") was done under the supervision and with the participation of management, including our President and Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"). Rules adopted by the Securities and Exchange Commission ("SEC") require that in this section of the quarterly report we present the conclusions of the CEO and the CFO about the effectiveness of our Disclosure Controls and any change in our Internal Controls that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our Internal Controls based on and as of the date of the Controls Evaluation. CEO and CFO Certifications. Appearing, as Exhibit 31 to this quarterly report, there are "Certifications" of the CEO and the CFO. The Certifications are required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (the "Section 302 Certifications"). This section of the quarterly report is the information concerning the Controls Evaluation referred to in the Section 302 Certifications and this information should be read in conjunction with the Section 302 Certifications for a more complete understanding of the topics presented. Disclosure Controls and Internal Controls. Disclosure controls are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, such as this quarterly report, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure Controls are also designed with the objective of ensuring that material information relating to BNCCORP, including its consolidated subsidiaries, is made known to the CEO and CFO by others within those entities, particularly during the period in which the applicable report is being prepared. Internal Controls are procedures which are designed with the objective of providing reasonable assurance that (1) our transactions are properly authorized; (2) our assets are safeguarded against unauthorized or improper use; and (3) our transactions are properly recorded and reported, all to permit the preparation of our financial statements in conformity with accounting principles generally accepted in the United States. Limitations on the Effectiveness of Controls. Our management, including the CEO and CFO, does not expect that our Disclosure Controls or our Internal Controls will prevent all error and all fraud. A control system, no matter how well developed and operated, can provide only reasonable, but not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Scope of the Controls Evaluation. The CEO/CFO evaluation of our Disclosure Controls and our Internal Controls included a review of the controls' objectives and design, our controls' implementation and the effect of the controls on the information generated for use in this quarterly report. In the course of the Controls Evaluation, we sought to identify data errors, controls problems or acts of fraud and to confirm that appropriate corrective action, including process improvements, were being undertaken. This type of evaluation is done on a quarterly basis so that the conclusions concerning controls effectiveness can be reported in our quarterly reports on Form 10-Q and annual report on Form 10-K. Our Internal Controls are also evaluated on an ongoing basis by our internal audit and credit review departments in connection with their audit and review activities. The overall goals of these various evaluation activities are to monitor our Disclosure Controls and our Internal Controls and to make modifications as necessary. Our external auditors also review Internal Controls in connection with their audit and review activities. Our intent in this regard is that the Disclosure Controls and Internal Controls will be maintained as dynamic systems that change (including with improvements and corrections) as conditions warrant. Among other matters, we sought in our evaluation to determine whether there were any "significant deficiencies" or "material weaknesses" in our Internal Controls which are reasonably likely to adversely affect our ability to record, process, summarize and report financial information, or whether we had identified any acts of fraud, whether or not material, involving management or other employees who have a significant role in our Internal Controls. This information was important both for the Controls Evaluation generally and because item 5 in the Section 302 Certifications of the CEO and CFO require that the CEO and CFO disclose that information to our board's audit committee and to our independent auditors and to report on related matters in this section of the quarterly report. In the professional auditing literature, "significant deficiencies" are referred to as "reportable conditions." These are control issues that could have a significant adverse effect on the ability to record, process, summarize and report financial data in the financial statements. A "material weakness" is defined in the auditing literature as a particularly serious reportable condition where the internal control does not reduce to a relatively low level the risk that misstatements caused by error or fraud may occur in amounts that would be material in relation to the financial statements and not be detected within a timely period by employees in the normal course of performing their assigned functions. We also sought to deal with other controls matters in the Controls Evaluation, and in each case if a problem was identified, we considered what revision, improvement and/or correction to make in accordance with our ongoing procedures. Conclusions. Based upon the Controls Evaluation, our CEO and CFO have concluded that, subject to the limitations noted above, our Disclosure Controls are effective to ensure that material information relating to BNCCORP and its consolidated subsidiaries is made known to management, including the CEO and CFO, particularly during the period when our periodic reports are being prepared, and that our Internal Controls are effective to provide reasonable assurance that our financial statements are fairly presented in conformity with accounting principles generally accepted in the United States. Additionally, there has been no change in our Internal Controls that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our Internal Controls. Part II - Other Information Item 4. Submission of Matters to a Vote of Securities Holders The annual meeting of stockholders of the Company was held on June 18, 2003 (the "Annual Meeting"). Proxies were solicited pursuant to the Securities Exchange Act of 1934, as amended. At the Annual Meeting, Brenda L. Rebel, Gaylen A. Ghylin and Terrence M. Scali were elected to serve until the 2006 annual meeting of stockholders. The number of votes cast for or withheld from each nominee were as follows:
Name For Withheld ----------- ---------- -------- Rebel 2,213,373 8,918 Ghylin 2,213,373 8,918 Scali 2,213,809 8,482
With respect to the election of directors, there were no abstentions or non-votes. In addition to the directors elected at the Annual Meeting, the terms of the following directors continued after the Annual Meeting: Gregory K. Cleveland, Denise Forte-Pathroff, M.D., John A. Hipp, M.D., Richard M. Johnsen Jr., Tracy Scott and Jerry R. Woodcox. At the Annual Meeting, the stockholders also voted on and approved a proposal to ratify the appointment of KPMG LLP as the Company's independent public accountants for 2003. Holders of 2,217,776 shares voted for, holders of 2,315 shares voted against and holders of 2,200 shares abstained from voting on the proposal. There were no non-votes with respect to the proposal. Item 6. Exhibits and Reports on Form 8-K (a) Exhibit 31 - Certifications Under Section 302 of the Sarbanes-Oxley Act of 2002 (b) Exhibit 32 - Certification Under Section 906 of the Sarbanes-Oxley Act of 2002 (c) Reports on Form 8-K On April 23, 2003, we filed a Form 8-K, furnishing under Item 7, our earnings press release for the quarter ended March 31, 2003. 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: August 6, 2003 By /s/ Gregory K. Cleveland ------------------------------------- Gregory K. Cleveland President and Chief Executive Officer By /s/ Brenda L. Rebel ------------------------------------- Brenda L. Rebel Treasurer and Chief Financial Officer