10-Q 1 form10q9302005.htm FORM10Q 9-30-05

 

U.S. Securities and Exchange Commission

Washington, D.C. 20549

______

FORM 10-Q

_____

 

x         QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended September 30, 2005

 

o          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

(State or other jurisdiction of incorporation or organization)

 

 

 

45-0402816

(I.R.S. Employer Identification No.)

 

 

 

 

 

 

 

322 East Main

Bismarck, North Dakota 58501

(Address of principal executive office)

(701) 250-3040

(Registrant’s telephone number)

 

 

Check whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes X

No ___

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ___ No _X_

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ___ No _X_

 

The number of shares of the registrant’s outstanding common stock on November 2, 2005, was 3,493,972.

 

 

 


 

 

 

BNCCORP, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

September 30, 2005

 

TABLE OF CONTENTS

 

 

 

 

 

 

PART I. -- FINANCIAL INFORMATION

 

 

 

 

 

 

 

ITEM 1.

Financial Statements

3

 

 

 

ITEM 2.

Management’s Discussion and Analysis of Financial Condition and

 

 

Results of Operations

12

 

 

 

ITEM 3.

Quantitative and Qualitative Disclosures about Market Risk

25

 

 

 

ITEM 4.

Controls and Procedures

26

 

 

 

 

 

 

 

 

 

 

 

 

 

PART II. – OTHER INFORMATION

 

 

 

 

 

 

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

27

 

 

 

ITEM 6.

Exhibits

27

 

 

 

 

 

 

 


 

 

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

BNCCORP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except share and per share data)

 

 

 

September 30,

 

 

December 31,

ASSETS

 

 

2005

 

 

2004

 

 

 

(unaudited)

 

 

 

CASH AND CASH EQUIVALENTS

 

$

17,389

 

$

11,881

INVESTMENT SECURITIES AVAILABLE FOR SALE

 

 

223,845

 

 

235,916

FEDERAL FUNDS SOLD

 

 

7,500

 

 

-

FEDERAL RESERVE BANK AND FEDERAL HOME LOAN BANK STOCK

 

 

6,013

 

 

7,541

LOANS HELD FOR SALE

 

 

115,923

 

 

60,197

LOANS AND LEASES, net

 

 

312,944

 

 

293,814

ALLOWANCE FOR CREDIT LOSSES

 

 

(3,212)

 

 

(3,335)

Net loans and leases

 

 

309,732

 

 

290,479

PREMISES AND EQUIPMENT, net

 

 

21,978

 

 

21,799

INTEREST RECEIVABLE

 

 

3,432

 

 

2,686

OTHER ASSETS

 

 

13,844

 

 

13,357

GOODWILL

 

 

21,839

 

 

21,779

OTHER INTANGIBLE ASSETS, net

 

 

7,140

 

 

8,075

 

 

$

748,635

 

$

673,710

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

DEPOSITS:

 

 

 

 

 

 

Noninterest-bearing

 

$

74,480

 

$

63,386

Interest-bearing –

 

 

 

 

 

 

Savings, interest checking and money market

 

 

282,130

 

 

210,887

Time deposits $100,000 and over

 

 

74,808

 

 

83,952

Other time deposits

 

 

129,217

 

 

97,118

Total deposits

 

 

560,635

 

 

455,343

SHORT-TERM BORROWINGS

 

 

7,029

 

 

33,697

FEDERAL HOME LOAN BANK ADVANCES

 

 

87,200

 

 

97,200

LONG-TERM BORROWINGS

 

 

9,366

 

 

10,079

GUARANTEED PREFERRED BENEFICIAL INTERESTS IN   COMPANY’S SUBORDINATED DEBENTURES

 

 

22,387

 

 

22,509

 

 

 

 

 

 

OTHER LIABILITIES

 

 

10,984

 

 

11,036

Total Liabilities

 

 

697,601

 

 

629,864

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

 

Preferred stock, $.01 par value – 2,000,000 shares authorized; 0 and 125 shares issued and outstanding on September 30, 2005 and December 31, 2004, respectively

 

 

-

 

 

-

Capital surplus – preferred stock

 

 

-

 

 

1,250

Common stock, $.01 par value – 10,000,000 shares   authorized; 3,493,972 and 2,787,304 shares issued and   outstanding (excluding 44,096 and 42,880 shares held in   treasury) on September 30, 2005 and December 31, 2004,   respectively

 

 

35

 

 

29

Capital surplus – common stock

 

 

24,774

 

 

18,601

Retained earnings

 

 

27,851

 

 

24,430

Treasury stock (44,096 and 42,880 shares)

 

 

(533)

 

 

(530)

Accumulated other comprehensive income, net of income taxes

 

 

(1,093)

 

 

66

Total stockholders’ equity

 

 

51,034

 

 

43,846

 

 

$

748,635

 

$

673,710

 

See accompanying notes to consolidated financial statements.

 

 

 


 

 

 

BNCCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Income

(In thousands, except per share data)

 

 

 

For the Three Months

 

 

For the Nine Months

Ended September 30,

 

 

Ended September 30,

 

 

2005

 

 

2004

 

 

2005

 

 

2004

INTEREST INCOME:

 

(unaudited)

 

 

(unaudited)

Interest and fees on loans

$

7,202

 

$

4,593

 

$

19,424

 

$

13,456

Interest and dividends on investments -

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

2,002

 

 

2,324

 

 

6,033

 

 

7,382

Tax-exempt

 

518

 

 

403

 

 

1,424

 

 

1,206

Dividends

 

26

 

 

56

 

 

188

 

 

145

Total interest income

 

9,748

 

 

7,376

 

 

27,069

 

 

22,189

INTEREST EXPENSE:

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

3,342

 

 

1,590

 

 

8,063

 

 

4,746

Short-term borrowings

 

136

 

 

140

 

 

621

 

 

357

Federal Home Loan Bank advances

 

1,132

 

 

1,246

 

 

3,532

 

 

3,707

Long-term borrowings

 

142

 

 

99

 

 

395

 

 

280

Subordinated debentures

 

520

 

 

443

 

 

1,496

 

 

1,296

Total interest expense

 

5,272

 

 

3,518

 

 

14,107

 

 

10,386

Net interest income

 

4,476

 

 

3,858

 

 

12,962

 

 

11,803

PROVISION FOR CREDIT LOSSES

 

-

 

 

-

 

 

250

 

 

-

NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES

 

4,476

 

 

3,858

 

 

12,712

 

 

11,803

NONINTEREST INCOME:

 

 

 

 

 

 

 

 

 

 

 

Insurance income

 

4,262

 

 

4,312

 

 

14,699

 

 

13,296

Fees on loans

 

748

 

 

455

 

 

2,529

 

 

1,370

Service charges

 

212

 

 

214

 

 

607

 

 

635

Trust and financial services

 

162

 

 

120

 

 

455

 

 

378

Brokerage income

 

112

 

 

95

 

 

286

 

 

448

Rental income

 

6

 

 

25

 

 

17

 

 

86

Net gain (loss) on sales of securities

 

-

 

 

116

 

 

(67)

 

 

167

Other

 

210

 

 

261

 

 

894

 

 

1,280

Total noninterest income

 

5,712

 

 

5,598

 

 

19,420

 

 

17,660

NONINTEREST EXPENSE:

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

5,525

 

 

6,021

 

 

16,664

 

 

16,194

Occupancy

 

759

 

 

718

 

 

2,234

 

 

1,973

Professional services

 

582

 

 

417

 

 

1,609

 

 

1,151

Depreciation and amortization

 

388

 

 

416

 

 

1,193

 

 

1,226

Office supplies, telephone and postage

 

344

 

 

381

 

 

1,062

 

 

1,052

Amortization of intangible assets

 

279

 

 

326

 

 

935

 

 

946

Marketing and promotion

 

245

 

 

244

 

 

725

 

 

783

FDIC and other assessments

 

57

 

 

51

 

 

167

 

 

153

Other

 

953

 

 

793

 

 

2,850

 

 

2,439

Total noninterest expense

 

9,132

 

 

9,367

 

 

27,439

 

 

25,917

Income before income taxes

 

1,056

 

 

89

 

 

4,693

 

 

3,546

Income tax provision

 

305

 

 

(34)

 

 

1,243

 

 

904

Net income

$

751

 

$

123

 

$

3,450

 

$

2,642

 

See accompanying notes to consolidated financial statements.

 

 

 


 

 

BNCCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Income, continued

(In thousands, except per share data)

 

 

 

For the Three Months

 

 

For the Nine Months

 

 

Ended September 30,

 

 

Ended September 30,

 

 

 

2005

 

 

2004

 

 

2005

 

 

2004

 

 

 

(unaudited)

 

 

(unaudited)

Dividends on preferred stock

 

-

 

 

(5)

 

 

(29)

 

 

(65)

 

Income available to common stockholders

$

751

 

$

118

 

$

3,421

 

$

2,577

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

$

0.26

 

$

0.04

 

$

1.12

 

$

0.92

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share

$

0.25

 

$

0.04

 

$

1.10

 

$

0.89

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

 

 


 

 

BNCCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(In thousands)

 

 

 

 

For the Three Months

 

 

For the Nine Months

 

 

 

Ended September 30,

 

 

Ended September 30,

 

 

 

 

2005

 

2004

 

 

2005

 

 

2004

 

 

 

 

(unaudited)

 

 

(unaudited)

 

NET INCOME

 

$

751

 

$

123

 

$

3,450

 

$

2,642

 

OTHER COMPREHENSIVE INCOME (LOSS)-

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gains (losses) arising during   the period, net of tax

 

 

(962)

 

 

1,924

 

 

(1,208)

 

 

(128)

 

Less: reclassification adjustment for (gains) losses   included in net income, net of tax

 

 

-

 

 

(72)

 

 

49

 

 

(104)

 

OTHER COMPREHENSIVE INCOME (LOSS)

 

 

(962)

 

 

1,852

 

 

(1,159)

 

 

(232)

 

COMPREHENSIVE INCOME (LOSS)

 

$

(211)

 

$

1,975

 

$

2,291

 

$

2,410

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

 

 


 

 

BNCCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

(In thousands, except share data)

 

For the Nine Months Ended September 30, 2004

 

 

 

 

 

 

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, 2003

150

 

$

-

 

$

1,500

 

2,792,076

 

$

28

 

$

17,074

 

$

21,119

 

$

(513)

 

$

978

 

$

40,186

Net income (unaudited)

-

 

 

-

 

 

-

 

-

 

 

-

 

 

-

 

 

2,642

 

 

-

 

 

-

 

 

2,642

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(232)

 

 

(232)

Preferred stock dividends (unaudited)

-

 

 

-

 

 

-

 

-

 

 

-

 

 

-

 

 

(65)

 

 

-

 

 

-

 

 

(65)

Repurchase of preferred stock (unaudited)

(150)

 

 

-

 

 

(1,500)

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

(1,500)

Issuance of preferred stock (unaudited)

150

 

 

 

 

 

1,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,500

Other (unaudited)

-

 

 

-

 

 

-

 

100,409

 

 

1

 

 

1,207

 

 

-

 

 

-

 

 

-

 

 

1,208

Balance, September 30, 2004 (unaudited)

150

 

$

-

 

$

1,500

 

2,892,485

 

$

29

 

$

18,281

 

$

23,696

 

$

(513)

 

$

746

 

$

43,739

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended September 30, 2005

 

 

 

 

 

 

 

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, 2004

125

 

$

-

 

$

1,250

 

2,928,777

 

$

29

 

$

18,601

 

$

24,430

 

$

(530)

 

$

66

 

$

43,846

Net income (unaudited)

-

 

 

-

 

 

-

 

-

 

 

-

 

 

-

 

 

3,450

 

 

-

 

 

-

 

 

3,450

Other comprehensive income-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,159)

 

 

(1,159)

Preferred stock dividends (unaudited)

-

 

 

-

 

 

-

 

-

 

 

-

 

 

-

 

 

(29)

 

 

 

 

 

-

 

 

(29)

Repurchase of preferred stock (unaudited)

(125)

 

 

-

 

 

(1,250)

 

 

 

 

-

 

-

-

 

 

-

 

 

-

 

 

-

 

 

(1,250)

Other (unaudited)

-

 

 

-

 

 

-

 

609,291

 

 

6

 

 

6,173

 

 

-

 

 

(3)

 

 

-

 

 

6,176

Balance, September 30, 2005 (unaudited)

-

 

$

-

 

$

-

 

3,538,068

 

$

35

 

$

24,774

 

$

27,851

 

$

(533)

 

$

(1,093)

 

$

51,034

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

 

BNCCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

For the Nine Months Ended September 30

(In thousands)

 

 

2005

 

 

2004

OPERATING ACTIVITIES:

 

(unaudited)

 

 

(unaudited)

Net income

$

3,450

 

$

2,642

Adjustments to reconcile net income to net cash provided by operating activities -

 

 

 

 

 

Provision for credit losses

 

250

 

 

-

Depreciation and amortization

 

1,193

 

 

1,226

Amortization of intangible assets

 

935

 

 

946

Net premium amortization on investment securities

 

1,753

 

 

2,293

Proceeds from loans recovered

 

12

 

 

257

Write down of other real estate owned and repossessed     assets

 

4

 

 

33

Change in interest receivable and other assets, net

 

(1,037)

 

 

1,097

Loss on sale of bank premises and equipment

 

35

 

 

14

Net realized (gain) loss on sales of investment securities

 

67

 

 

(167)

Deferred income taxes

 

494

 

 

817

Change in dividend distribution payable

 

(187)

 

 

(212)

Change in other liabilities, net

 

165

 

 

(1,021)

Funding of originations of loans held for sale

 

(590,469)

 

 

-

Proceeds received from sale of loans held for sale

 

534,743

 

 

-

Originations paid of loans to be participated

 

(116,701)

 

 

(42,128)

Proceeds received from participations of loans

 

116,701

 

 

42,128

Net cash provided by (used in) operating activities

 

(48,592)

 

 

7,925

INVESTING ACTIVITIES:

 

 

 

 

 

Purchase of Fed Funds Sold

 

(7,500)

 

 

-

Purchases of investment securities

 

(15,222)

 

 

(58,723)

Proceeds from sales of investment securities

 

2,572

 

 

51,498

Proceeds from maturities of investment securities

 

20,831

 

 

31,024

Purchases of Federal Reserve and Federal Home Loan Bank Stock

 

(5,341)

 

 

(5,438)

Redemptions of Federal Reserve and Federal Home Loan Bank Stock

 

6,869

 

 

5,252

Net increase in loans

 

(19,515)

 

 

(41,115)

Purchases of bank premises and equipment

 

(1,418)

 

 

(3,778)

Proceeds from sale of premises and equipment

 

11

 

 

115

Cash paid for Milne Scali earnouts

 

 

 

 

(6,012)

Cash paid for acquisition of insurance subsidiaries

 

-

 

 

(695)

Cash paid for acquisition of mortgage company

 

-

 

 

(150)

Cash paid for insurance subsidiaries earnout

 

(60)

 

 

-

Net cash used in investing activities

 

(18,773)

 

 

(28,022)

FINANCING ACTIVITIES:

 

 

 

 

 

Net increase in demand, savings, interest checking and money market accounts

 

82,337

 

 

5,500

Net increase in time deposits

 

22,955

 

 

24,992

Net decrease in short-term borrowings

 

(26,668)

 

 

(1,514)

Repayments of Federal Home Loan Bank advances

 

(270,000)

 

 

(342,000)

Proceeds from Federal Home Loan Bank advances

 

260,000

 

 

332,000

Repayments of long-term borrowings

 

(713)

 

 

(45)

Proceeds from long-term borrowings

 

-

 

 

1,500

Payment of preferred stock dividends

 

(29)

 

 

(65)

Issuance of preferred stock

 

-

 

 

1,500

Redemption of preferred stock

 

(1,250)

 

 

(1,500)

Proceeds from issuance of stock

 

5,839

 

 

-

Amortization of discount on subordinated debentures

 

65

 

 

64

Other, net

 

337

 

 

354

Net cash provided by financing activities

 

72,873

 

 

20,786

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

5,508

 

 

689

CASH AND CASH EQUIVALENTS, beginning of period

 

11,881

 

 

12,520

CASH AND CASH EQUIVALENTS, end of period

$

17,389

 

$

13,209

SUPPLEMENTAL CASH FLOW INFORMATION:

 

 

 

 

 

Interest paid

$

13,685

 

$

13,446

Income taxes paid

$

426

 

$

586

See accompanying notes to consolidated financial statements.

 

 

 


 

 

BNCCORP, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

September 30, 2005

 

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, BNC Insurance Services, Inc. and BNC Asset Management, Inc., the “Bank”). BNCCORP, through these wholly owned subsidiaries, which operate from 27 locations in Arizona, Minnesota, North Dakota, Utah and Colorado, provides a broad range of banking, insurance and asset management services to small- and mid-sized businesses and individuals.

 

The accounting and reporting policies of BNCCORP and its subsidiaries (collectively, the “Company”) conform to accounting principles generally accepted in the United States of America and general practices within the financial services industry. The consolidated financial statements included herein are for BNCCORP and its subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.

 

NOTE 2 – Basis of Presentation

 

The accompanying interim consolidated financial statements have been prepared by the Company, without audit, in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading.

 

The unaudited consolidated financial statements as of September 30, 2005 and for the three-month and nine-month periods ended September 30, 2005 and 2004 include, in the opinion of management, all 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, 2005.

 

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, 2004. Accordingly, footnote disclosures which would substantially duplicate the disclosures contained in the December 31, 2004 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, 2004 and the notes thereto.

 

NOTE 3 – Reclassifications

 

Certain of the 2004 amounts have been reclassified to conform to the 2005 presentations. These reclassifications had no effect on net income or stockholders’ equity.

 

 


 

 

NOTE 4 – Earnings per Share

 

 

Net income per share was calculated as follows:

 

 

 

 

 

 

 

Three months ended

 

 

Nine months ended

 

September 30, 2005

 

September 30, 2005

Denominator for basic earnings per share:

 

 

 

 

 

   Average common shares outstanding

 

2,932,588

 

 

3,054,125

   Dilutive common stock options

 

59,696

 

 

50,829

   Denominator for diluted earnings per share

 

2,992,284

 

 

3,104,954

Numerator: Net income attributable to common shareholders

$

751

 

$

3,421

  Net income per share

 

 

 

 

 

Basic

$

0.26

 

$

1.12

Diluted

$

0.25

 

$

1.10

 

 

 

 

 

 

 

 

Three months ended

 

 

Nine months ended

 

September 30, 2004

 

September 30, 2004

Denominator for basic earnings per share:

 

 

 

 

 

   Average common shares outstanding

 

2,839,309

 

 

2,796,901

   Dilutive common stock options

 

88,167

 

 

90,706

   Denominator for diluted earnings per share

 

2,927,476

 

 

2,887,607

Numerator: Net income attributable to common shareholders

$

118

 

$

2,577

  Net income per share

 

 

 

 

 

       Basic

$

0.04

 

$

0.92

       Diluted

$

0.04

 

$

0.89

 

As of September 30, 2005 and 2004, options to purchase 57,450 and 61,850 shares, respectively, were outstanding but were not included in the computation of diluted EPS because their exercise prices were higher than the market price.

 

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 asset management operations.

 

Banking operations provide traditional banking services to individuals and small- and mid-sized businesses, such as accepting deposits, consumer and mortgage banking activities and making commercial loans. The mortgage and commercial banking activities include the origination and purchase of loans as well as the sale to and servicing of commercial loans for other institutions.

 

Insurance operations provide a full range of insurance agency services, including commercial insurance, surety bonds, employee benefits-related insurance, personal insurance and claims management.

 

Asset management operations provide securities brokerage, trust and other financial services to individuals and businesses. Brokerage investment choices include individual equities, fixed income investments and mutual funds. Trust and financial services operations provide a wide array of trust and other financial services including personal trust administration services, financial, tax, business and estate planning, estate administration, agency

 

 


 

accounts, employee benefit plan design and administration, individual retirement accounts (“IRAs”), including custodial self-directed IRAs, asset management, tax preparation, accounting and payroll services.

 

The accounting policies of the three segments are the same as those described in the summary of significant accounting policies included in Note 1 to the consolidated financial statements for the year ended December 31, 2004.

 

The Company’s financial information for each segment is derived from the internal profitability reporting system used by management to monitor and manage the financial performance of the Company. The operating segments have been determined by how executive management has organized the Company’s business for making operating decisions and assessing performance.

 

The following tables present segment income, profit or loss, and assets as of, and for the three months ended September 30 and the nine months ended September 30 (in thousands):

 

 

3 months ended September 30, 2005

 

 

 

 

 

 

 

 

 

Asset

 

Bank

 

 

 

Intersegment

 

Consolidated

 

Banking

 

Insurance

 

Management

 

Holding Co.

 

Totals

 

Elimination

 

Total

Net interest income

$

4,929

 

$

28

 

$

167

 

$

(662)

 

$

4,462

 

$

14

 

$

4,476

Other revenue-external customers

 

1,178

 

 

4,273

 

 

305

 

 

20

 

 

5,776

 

 

(64)

 

 

5,712

Segment profit (loss)

 

1,219

 

 

207

 

 

(37)

 

 

(638)

 

 

751

 

 

-

 

 

751

Segment assets

 

726,692

 

 

36,321

 

 

21,336

 

 

86,350

 

 

870,699

 

 

(122,064)

 

 

748,635

 

 

 

9 months ended September 30, 2005

 

 

 

 

 

 

 

 

 

Asset

 

Bank.

 

 

 

Intersegment

 

Consolidated

 

Banking

 

Insurance

 

Management

 

Holding Co

 

Totals

 

Elimination

 

Total

Net interest income

$

14,387

 

$

53

 

$

383

 

$

(1,904)

 

$

12,919

 

$

43

 

$

12,962

Other revenue-external customers

 

3,769

 

 

14,867

 

 

822

 

 

132

 

 

19,590

 

 

(170)

 

 

19,420

Segment profit (loss)

 

3,100

 

 

1,753

 

 

(82)

 

 

(1,321)

 

 

3,450

 

 

-

 

 

3,450

Segment assets

 

726,692

 

 

36,321

 

 

21,336

 

 

86,350

 

 

870,699

 

 

(122,064)

 

 

748,635

 

NOTE 6 – Stock-Based Compensation

 

At September 30, 2005, the Company had two stock-based employee compensation plans. The Company applies the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations in accounting for those plans. No stock-based employee compensation expense is reflected in net income for stock options granted under the plans as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Compensation expense is reflected in net income for the periods presented below for restricted stock issued under the stock plans and its net effect on net income is reflected in the table below.

 

The following table illustrates the effect on net income and EPS if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” to stock-based employee compensation (dollars in thousands):

 

 

 


 

 

 

For the three months ended September 30,

 

For the nine months ended September 30,

 

2005

 

2004

 

2005

 

2004

Net income, as reported

$

751

 

$

123

 

$

3,450

 

$

2,642

Add: stock-based employee compensation expense    included in reported net income, net of tax

 

45

 

 

30

 

 

121

 

 

76

Deduct: stock based employee compensation under fair    value method for all awards, net of tax

 

(55)

 

 

(40)

 

 

(151)

 

 

(106)

Pro forma net income

$

741

 

$

113

 

$

3,420

 

$

2,612

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

Basic – as reported

$

0.26

 

$

0.04

 

$

1.12

 

$

0.92

Basic – pro forma

$

0.24

 

$

0.04

 

$

1.07

 

$

0.88

Diluted – as reported

$

0.25

 

$

0.04

 

$

1.10

 

$

0.89

Diluted – pro forma

$

0.24

 

$

0.04

 

$

1.05

 

$

0.85

 

 

 

 

 

 

 

 

 

 

 

 

 

NOTE 7 – Derivative Activities

 

The Company has interest rate cap contracts with notional amounts that totaled $20.0 million at September 30, 2005. These contracts were purchased in May and June of 2001 to mitigate interest rate risk in rising-rate scenarios. The referenced interest rate is three-month LIBOR with five-year original maturities (maturing during May and June of 2006). The total amount paid for the contracts was $720,500. The remaining contracts are reflected in the Company’s consolidated balance sheet at their current combined fair value of approximately $237 at September 30, 2005 and $3,000 at September 30, 2004. The contracts are not being accounted for as hedges under Statement of Financial Accounting Standards No. 133, “Accounting for Derivatives and Hedging Activities.” As a result, the impact of marking the contracts to fair value has been, and will continue to be, included in net interest income. During the three months ended September 30, 2005 and 2004, the impact of marking the contracts to market, reflected as additional (or reduced) interest expense on Federal Home Loan Bank (“FHLB”) advances, was an increase (reduction) to net interest income of approximately $200 and ($26,000), respectively. During the nine months ended September 30, 2005 and 2004, the impact of marking the contracts to market was a reduction to net interest income of approximately ($900) and ($53,000), respectively.

 

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; “BNC Insurance” when referring only to BNC Insurance Services, Inc.; and “BNC AMI” when referring only to BNC Asset Management, Inc.

 

Comparison of Operating Results for the Three and Nine Months Ended September 30, 2005 and 2004

 

General. The Company reported net income of $751,000 or $0.25 per share on a diluted basis, for the third quarter ended September 30, 2005. For the same quarter of 2004, we reported net income of $123,000, or $0.04 per diluted share.

 

Results for the 2004 period included a severance payment of $688,000 related to the termination of a former executive officer of the Company’s insurance subsidiary. Excluding this expense, net income for the third quarter 2004 would have been $567,000, or $0.19 per diluted share.

 

 

 

 


 

 

Net interest income for the third quarter of 2005 was $4.47 million, up 16.0 percent from $3.86 million in the same period of 2004. This increase reflected a 193 percent increase in loans held for sale and a widening of the net interest margin to 2.75 percent for the quarter ended September 30, 2005, from 2.72 percent for the same period in 2004. The increase in short-term interest rates led to an increased yield on variable rate loans while core deposit costs have not been as sensitive to movement in market interest rates.

 

Noninterest income was $5.71 million for the 2005 third quarter compared to $5.60 million for the year-ago period. Income generated by our insurance agency subsidiary, BNC Insurance Services, was the largest contributor to noninterest income in both periods, accounting for 74.8 percent and 76.6 percent of non interest income for the 3 months ended September 30, 2005 and 2004, respectively. Loan fees in the 2005 third quarter increased to $748,000, up 64.4 percent over the same period in 2004 as a result of commercial real estate transactions generated by the Minneapolis and Phoenix offices and the increased volume of loans through the Company’s special residential mortgage loan financing program. An increase in assets under management and a non-recurring ESOP transaction fee were key factors in the 35.0 percent increase in Trust and Financial Services income. Brokerage income also increased while other noninterest income and net gain on sale of securities decreased. Service charge income remained steady. Noninterest income represented 56.1 percent of revenues for the recent quarter, down from 59.2 percent a year ago.

 

Noninterest expense for the third quarter of 2005 was $9.13 million, compared with $9.37 million in the same quarter of 2004. Noninterest expense for the third quarter of 2004 would have been $8.67 million after excluding a $688,000 severance payment mentioned earlier.

 

For the first nine months of 2005, we reported net income of $3.45 million or $1.10 per diluted share, an increase from net income of $2.64 million, or $0.89 per diluted share, reported in the same period of 2004. Net income for the nine months ended September 30, 2004, would have been $3.0 million or, $1.05 per diluted share after excluding the $688,000 severance payment previously mentioned.

 

Net interest income was $12.96 million for the first nine months of 2005, compared to $11.80 million in the year-ago period. Most of this increase is attributable to the 10.3 percent rise in loan volume, as the net interest margin decreased from 2.85 percent for the same period in 2004, to 2.79 percent for the first nine months of 2005.

Net interest margin for the 2004 period would have been 2.76 percent without the recovery of cash basis interest income of approximately $408,000 and derivative contract-related transaction during the period totaling ($53,000).

 

Noninterest income increased to $19.42 million for the first nine months of 2005, 10.0 percent, from $17.66 million in the same period of 2004. The increase was due largely to an 84.6 percent increase in loan fees and a 10.6 percent increase in insurance income, generated by BNC Insurance Services from $13.30 million to $14.70 million. Noninterest income represented 60.0 percent of revenues for the recent period, compared with 59.9 percent for the same 2004 period.

 

Noninterest expense for the first nine months of 2005 was $27.43 million, compared with $25.92 million in the year-ago period. Noninterest expense for the same period of 2004 would have been $25.2 million after excluding the $688,000 termination expense previously mentioned. The increase was attributed to higher staffing and occupancy expenses due to the banking and insurance expansion, increased legal costs, and increased insurance premiums.

 

Total common stockholders equity increased 19.8 percent to $51.03 million at September 30, 2005, from $42.60 million at December 31, 2004. A significant portion of this increase resulted from the issuance of 575,000 shares of common stock through a private placement offering completed on September 21, 2005. Our return on average common stockholders equity for the three- and nine-month periods ended September 30, 2005 was 6.49 and 10.28 percent, respectively. This compared with 1.14 and 8.42 percent for the three- and nine-month periods ended September 30, 2004, respectively. Our return on average assets for the three- and nine-month periods ended September 30, 2005 was 0.41 and 0.65 percent, respectively. This compared with 0.08 and 0.56 percent for the three- and nine-month periods ended September 30, 2004, respectively.

 

 

 


 

 

The tangible book value per common share increased to $6.31, at September 30, 2005, from $4.42, at December 31, 2004. This was a result of the stock offering as well as the net income for the period. Book value per common share decreased slightly to $14.61, at September 30, 2005, from $14.77 at December 31, 2004.

 

A principal payment of $5.50 million, on a note outstanding with the Bank of North Dakota, was made on October 11, 2005, from the net proceeds of the stock offering. This reduced the balance of this note from $9.4 million to $3.9 million.

 

There was no provision for credit losses for the third quarter and $250,000 for the nine months ended September 30, 2005, compared to no provision for both the three- and nine-months periods ended September 30, 2004. The ratio of total nonperforming assets to total assets improved to 0.02 percent at September 30, 2005 compared with 0.08 percent at December 31, 2004. The ratio of the allowance for credit losses to total nonperforming loans was 1857 percent at September 30, 2005, strengthening from 607 percent at December 31, 2004. These asset quality ratios improved during 2005 primarily due to a decrease in nonperforming loans during the period.

 

Nonperforming loans decreased from $549,000 to $173,000 during the nine-month period ending September 30, 2005. The allowance for credit losses as a percentage of total loans was 1.03 percent at September 30, 2005 compared with 1.14 percent at December 31, 2004.

 

Net Interest Income. 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 nine-month periods ended September 30, 2005 and 2004, as well as the changes between the periods presented. (Amounts are in thousands):

 

 

 


 

 

 

Three Months Ended September 30,

 

 

 

 

 

 

 

2005

 

2004

 

Change

 

 

 

Interest

 

Average

 

 

 

Interest

 

Average

 

 

 

Interest

 

Average

Average

earned

yield or

Average

earned

yield or

Average

earned

yield or

balance

or paid

cost

balance

or paid

cost

balance

or paid

cost

Interest-earning assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds sold/interest bearing due from

$

17,165

 

$

148

 

3.42%

 

$

781

 

$

3

 

1.53%

 

$

16,384

 

$

145

 

1.89%

Investments - Taxable

 

188,692

 

 

1,880

 

3.95%

 

 

235,389

 

 

2,377

 

4.02%

 

 

(46,697)

 

 

(497)

 

-0.07%

Investments - Tax Exempt

 

46,972

 

 

518

 

4.38%

 

 

34,140

 

 

403

 

4.70%

 

 

12,832

 

 

115

 

-0.32%

Loans held for sale

 

84,046

 

 

1,192

 

5.63%

 

 

19,032

 

 

211

 

4.41%

 

 

65,014

 

 

981

 

1.22%

Loans and leases held for investment

 

311,461

 

 

6,010

 

7.66%

 

 

278,434

 

 

4,382

 

6.26%

 

 

33,027

 

 

1,628

 

1.40%

Allowance for loan losses

 

(3,367)

 

 

-

 

 

 

 

(3,436)

 

 

-

 

 

 

 

69

 

 

-

 

 

Total interest-earning assets

$

644,969

 

 

9,748

 

6.00%

 

$

564,340

 

 

7,376

 

5.20%

 

$

80,629

 

 

2,372

 

0.80%

Interest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest checking & money market accounts

$

242,986

 

 

1,411

 

2.30%

 

$

194,267

 

 

511

 

1.05%

 

$

48,719

 

 

900

 

1.25%

Savings

 

8,465

 

 

17

 

0.80%

 

 

6,563

 

 

11

 

0.67%

 

 

1,902

 

 

6

 

0.13%

Certificates of deposit under $100,000

 

119,803

 

 

900

 

2.98%

 

 

96,749

 

 

597

 

2.45%

 

 

23,054

 

 

303

 

0.53%

Certificates of deposit $100,000 and over

 

94,285

 

 

1,014

 

4.27%

 

 

64,485

 

 

471

 

2.91%

 

 

29,800

 

 

543

 

1.36%

Interest-bearing deposits

 

465,539

 

 

3,342

 

2.85%

 

 

362,064

 

 

1,590

 

1.75%

 

 

103,475

 

 

1,752

 

1.10%

Short-term borrowings

 

15,774

 

 

137

 

3.45%

 

 

30,920

 

 

140

 

1.80%

 

 

(15,146)

 

 

(3)

 

1.65%

Federal Home Loan Bank advances

 

90,426

 

 

1,131

 

4.96%

 

 

109,064

 

 

1,246

 

4.54%

 

 

(18,638)

 

 

(115)

 

0.42%

Long-term borrowings

 

9,371

 

 

142

 

6.01%

 

 

10,100

 

 

99

 

3.90%

 

 

(729)

 

 

43

 

2.11%

Subordinated debentures

 

22,306

 

 

520

 

9.25%

 

 

22,180

 

 

443

 

7.95%

 

 

126

 

 

77

 

1.30%

Total borrowings

 

137,877

 

 

1,930

 

5.55%

 

 

172,264

 

 

1,928

 

4.45%

 

 

(34,387)

 

 

2

 

1.10%

Total interest-bearing liabilities

$

603,416

 

 

5,272

 

3.47%

 

$

534,328

 

 

3,518

 

2.62%

 

$

69,088

 

 

1,754

 

0.85%

Net interest income/spread

 

 

 

$

4,476

 

2.53%

 

 

 

 

$

3,858

 

2.58%

 

 

 

 

$

618

 

-0.05%

Net interest margin

 

 

 

 

 

 

2.75%

 

 

 

 

 

 

 

2.72%

 

 

 

 

 

 

 

0.03%

Notation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

$

68,497

 

 

-

 

 

 

$

55,908

 

 

-

 

 

 

$

12,589

 

 

-

 

 

Total deposits

$

534,036

 

$

3,342

 

2.48%

 

$

417,972

 

$

1,590

 

1.51%

 

$

116,064

 

$

1,752

 

0.97%

Taxable equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-earning assets

$

644,969

 

$

9,860

 

6.07%

 

$

564,340

 

$

7,413

 

5.23%

 

$

80,629

 

$

2,447

 

0.84%

Net interest income/spread

 

-

 

$

4,588

 

2.60%

 

 

-

 

$

3,895

 

2.61%

 

 

-

 

$

693

 

-0.01%

Net interest margin

 

-

 

 

-

 

2.82%

 

 

-

 

 

-

 

2.74%

 

 

-

 

 

-

 

0.08%

 

 

 

 


 

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

2005

 

2004

 

Change

 

 

 

Interest

 

Average

 

 

 

Interest

 

Average

 

 

 

Interest

 

Average

Average

earned

yield or

Average

earned

yield or

Average

earned

yield or

balance

or paid

cost

balance

or paid

cost

balance

or paid

cost

Interest-earning assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds sold/interest bearing due from

$

5,776

 

$

148

 

3.43%

 

$

375

 

$

3

 

1.07%

 

$

5,401

 

$

145

 

2.36%

Investments -Taxable

 

197,059

 

 

6,073

 

4.12%

 

 

245,082

 

 

7,524

 

4.10%

 

 

(48,023)

 

 

(1,451)

 

0.02%

Investments - Tax Exempt

 

42,337

 

 

1,424

 

4.50%

 

 

34,486

 

 

1,206

 

4.67%

 

 

7,851

 

 

218

 

-0.17%

Loans held for sale

 

78,497

 

 

3,051

 

5.20%

 

 

7,442

 

 

248

 

4.45%

 

 

71,055

 

 

2,803

 

0.75%

Loans and leases held for investment

 

301,614

 

 

16,373

 

7.26%

 

 

270,412

 

 

13,208

 

6.52%

 

 

31,202

 

 

3,165

 

0.74%

Allowance for loan losses

 

(3,433)

 

 

-

 

 

 

 

(3,919)

 

 

-

 

 

 

 

486

 

 

-

 

 

Total interest-earning assets

$

621,850

 

 

27,069

 

5.82%

 

$

553,878

 

 

22,189

 

5.35%

 

$

67,972

 

 

4,880

 

0.47%

Interest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest checking & money market accounts

$

224,216

 

 

3,165

 

1.89%

 

$

197,051

 

 

1,521

 

1.03%

 

$

27,165

 

 

1,644

 

0.86%

Savings

 

7,832

 

 

47

 

0.80%

 

 

6,624

 

 

34

 

0.69%

 

 

1,208

 

 

13

 

0.11%

Certificates of deposit under $100,000

 

108,124

 

 

2,394

 

2.96%

 

 

95,571

 

 

1,837

 

2.57%

 

 

12,553

 

 

557

 

0.39%

Certificates of deposit $100,000 and over

 

84,072

 

 

2,457

 

3.91%

 

 

54,783

 

 

1,354

 

3.30%

 

 

29,289

 

 

1,103

 

0.61%

Interest-bearing deposits

 

424,244

 

 

8,063

 

2.54%

 

 

354,029

 

 

4,746

 

1.79%

 

 

70,215

 

 

3,317

 

0.75%

Short-term borrowings

 

27,320

 

 

621

 

3.04%

 

 

30,094

 

 

357

 

1.58%

 

 

(2,774)

 

 

264

 

1.46%

Federal Home Loan Bank advances

 

101,262

 

 

3,532

 

4.66%

 

 

111,254

 

 

3,707

 

4.45%

 

 

(9,992)

 

 

(175)

 

0.21%

Long-term borrowings

 

9,607

 

 

395

 

5.50%

 

 

9,132

 

 

280

 

4.10%

 

 

475

 

 

115

 

1.40%

Subordinated debentures

 

22,319

 

 

1,496

 

8.96%

 

 

22,203

 

 

1,296

 

7.80%

 

 

116

 

 

200

 

1.16%

Total borrowings

 

160,508

 

 

6,044

 

5.03%

 

 

172,683

 

 

5,640

 

4.36%

 

 

(12,175)

 

 

404

 

0.67%

Total interest-bearing liabilities

$

584,752

 

 

14,107

 

3.23%

 

$

526,712

 

 

10,386

 

2.63%

 

$

58,040

 

 

3,721

 

0.60%

Net interest income/spread

 

 

 

$

12,962

 

2.59%

 

 

 

 

$

11,803

 

2.72%

 

 

 

 

$

1,159

 

-0.13%

Net interest margin

 

 

 

 

 

 

2.79%

 

 

 

 

 

 

 

2.85%

 

 

 

 

 

 

 

-0.06%

Notation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

$

64,052

 

 

-

 

 

 

$

48,607

 

 

-

 

 

 

$

15,445

 

 

-

 

 

Total deposits

$

488,296

 

$

8,063

 

2.21%

 

$

402,636

 

$

4,746

 

1.57%

 

$

85,660

 

$

3,317

 

0.64%

Taxable equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-earning assets

$

621,850

 

$

27,803

 

5.98%

 

$

553,878

 

$

22,811

 

5.50%

 

$

67,972

 

$

4,992

 

0.48%

Net interest income/spread

 

-

 

$

13,696

 

2.75%

 

 

-

 

$

12,425

 

2.87%

 

 

-

 

$

1,271

 

-0.12%

Net interest margin

 

-

 

 

-

 

2.94%

 

 

-

 

 

-

 

3.00%

 

 

-

 

 

-

 

-0.06%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

 

Provision for Credit Losses. The provision for credit losses was $0 and $250,000, respectively, for the three- and nine-month periods ended September 30, 2005 compared to $0 for the three- and nine-month periods ended September 30, 2004. See “Comparison of Financial Condition at September 30, 2005 and December 31, 2004 – Allowance for Credit Losses.”

 

Noninterest Income. The following table presents the major categories of our noninterest income for the three- and nine-month periods ended September 30, 2005 and 2004 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 September 30,

 

 

 

Nine Months Ended September 30,

 

 

 

Change

Change

 

2005

 

2004

 

$

 

%

 

2005

 

2004

 

 

$

 

%

 

Insurance income

$

4,262

 

$

4,312

 

$

(50)

 

(1.2)

 

$

14,699

 

$

13,296

 

$

1,403

 

10.6

(a)

Fees on loans

 

748

 

 

455

 

 

293

 

64.4

 

 

2,529

 

 

1,370

 

 

1,159

 

84.6

(b)

Service charges

 

212

 

 

214

 

 

(2)

 

(0.9)

 

 

607

 

 

635

 

 

(28)

 

(4.4)

 

Trust and financial services

 

162

 

 

120

 

 

42

 

35.0

 

 

455

 

 

378

 

 

77

 

20.4

 

Brokerage income

 

112

 

 

95

 

 

17

 

17.9

 

 

286

 

 

448

 

 

(162)

 

(36.2)

(c)

Rental income

 

6

 

 

25

 

 

(19)

 

(76.0)

 

 

17

 

 

86

 

 

(69)

 

(80.2)

 

Net gain on sales of securities

 

-

 

 

116

 

 

(116)

 

(100.0)

 

 

(67)

 

 

167

 

 

(234)

 

(140.1)

 

Other

 

210

 

 

261

 

 

(51)

 

(19.5)

 

 

894

 

 

1,280

 

 

(386)

 

(30.2)

 

Total noninterest income

$

5,712

 

$

5,598

 

$

114

 

2.0

 

$

19,420

 

$

17,660

 

$

1,760

 

10.0

 

Noninterest income as a percent of revenues

 

56.1%

 

 

59.2%

 

 

 

 

(3.1)

 

 

60.0%

 

 

59.9%

 

 

 

 

0.1

 

(a) Increase due to continuing expansion of the insurance segment.

(b) Increase primarily due to commercial real estate transactions generated by the Minneapolis and Phoenix offices and increased loan volume through our special residential mortgage financing loan program.

(c) Decrease due to lower volume of business.

 

 

 


 

 

Noninterest Expense. The following table presents the major categories of our noninterest expense for the three- and nine-month periods ended September 30, 2005 and 2004 as well as the amount and percent of change between the periods. (amounts are in thousands):

 

 

Noninterest Expense

Three Months Ended September 30,

 

 

 

Nine Months Ended September 30,

 

 

 

Change

 

 

Change

 

2005

 

2004

 

 

$

 

%

 

2005

 

 

2004

 

$

 

%

 

Salaries and employee benefits

$

5,525

 

$

6,021

 

$

(496)

 

(8.2)

 

$

16,664

 

$

16,194

 

$

470

 

2.9

(a)

Occupancy

 

759

 

 

718

 

 

41

 

5.7

 

 

2,234

 

 

1,973

 

 

261

 

13.2

 

Professional services

 

582

 

 

417

 

 

165

 

39.6

 

 

1,609

 

 

1,151

 

 

458

 

39.8

(b)

Depreciation and amortization

 

388

 

 

416

 

 

(28)

 

(6.7)

 

 

1,193

 

 

1,226

 

 

(33)

 

(2.7)

 

Office supplies, telephone and postage

 

344

 

 

381

 

 

(37)

 

(9.7)

 

 

1,062

 

 

1,052

 

 

10

 

1.0

 

Amortization of intangible assets

 

279

 

 

326

 

 

(47)

 

(14.4)

 

 

935

 

 

946

 

 

(11)

 

(1.2)

 

Marketing and promotion

 

245

 

 

244

 

 

1

 

0.4

 

 

725

 

 

783

 

 

(58)

 

(7.4)

 

FDIC and other assessments

 

57

 

 

51

 

 

6

 

11.8

 

 

167

 

 

153

 

 

14

 

9.2

 

Other

 

953

 

 

793

 

 

160

 

20.2

 

 

2,850

 

 

2,439

 

 

411

 

16.9

 

Total noninterest expense

$

9,132

 

$

9,367

 

$

(235)

 

(2.5)

 

$

27,439

 

$

25,917

 

$

1,522

 

5.9

 

Efficiency ratio

 

89.6%

 

 

99.1%

 

 

 

 

(9.5)

 

 

84.7%

 

 

88.0%

 

 

 

 

(3.3)

 

Total operating expenses as a percentage of average assets, annualized

 

5.0%

 

 

5.8%

 

 

 

 

(0.8)

 

 

5.2%

 

 

5.5%

 

 

 

 

0.3

 

 

 

 

(a)

Decrease in three months ended September 30 2005 due to severance amounts paid to a former executive officer in the third quarter of 2004. Increase in the nine months ended September 30, 2005 due to higher staffing and occupancy expenses related to continuing expansion in the banking, insurance and asset management segments.

 

 

(b)

Due primarily to legal fees related to ongoing litigation. See prior quarter 10-Q for more information.

 

Income Tax Provision. Our provision for income taxes for the quarter ended September 30, 2005 increased $339,000 as compared to the same period in 2004 due to the increase in pre-tax income. The estimated effective tax rate for the three-month period ended September 30, 2005 was 28.8 percent.

 

Earnings per Common Share. See Note 3 to the interim consolidated financial statements included under Item 1 for a summary of the EPS calculations for the three- and nine-month periods ended September 30, 2005 and 2004.

 

 

 


 

 

Comparison of Financial Condition at September 30, 2005 and December 31, 2004

 

Assets. The following table presents our assets by category as of September 30, 2005 and December 31, 2004, 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):

 

 

 

September 30,

 

December 31,

 

Change

 

Assets

 

2005

 

2004

 

$

 

%

 

Cash and due from banks

 

$

17,389

 

$

11,867

 

$

5,522

 

46.5

(a)

Interest-bearing deposits with banks

 

 

-

 

 

14

 

 

(14)

 

(100.0)

 

Investment securities available for sale

 

 

224,045

 

 

235,916

 

 

(11,871)

 

(5.0)

 

Federal Funds Sold

 

 

7,500

 

 

-

 

 

7,500

 

100.0

 

Federal Reserve Bank and   Federal Home Loan Bank   Stock

 

 

6,013

 

 

7,541

 

 

(1,528)

 

(20.3)

 

Loans held for sale

 

 

115,923

 

 

60,197

 

 

55,726

 

92.6

(b)

Loans and leases, net

 

 

309,732

 

 

290,479

 

 

19,253

 

6.6

 

Premises and equipment, net

 

 

21,978

 

 

21,799

 

 

179

 

0.8

 

Interest receivable

 

 

3,432

 

 

2,686

 

 

746

 

27.8

 

Other assets

 

 

13,644

 

 

13,357

 

 

287

 

2.1

 

Goodwill

 

 

21,839

 

 

21,779

 

 

60

 

0.3

 

Other intangible assets, net

 

 

7,140

 

 

8,075

 

 

(935)

 

(11.6)

 

Total assets

 

$

748,635

 

$

673,710

 

$

74,925

 

11.1

 

 

 

 

(a)

Balance at September 30, 2005 includes approximately $4.0 million of cash letter credits that we did not receive credit for until Monday, 10/03/05.

 

(b)

Increase attributable to higher loan volume generated by our special residential mortgage financing loan program.

 

Loan Portfolio.

 

The banking segment’s primary source of income is interest earned on loans held for investment. Total loans held for investment, net of unearned income and unamortized fees and costs, increased $18.9 million, or 6.4 percent to, $313.7 million at September 30, 2005, from $294.7 million at December 30, 2004.

 

The following table presents the composition of our loan portfolio as of dates indicated:

 

 

September 30,

 

December 31,

2005

 

2004

 

Amount

 

%

 

Amount

 

%

Commercial and Industrial

$

79,753

 

25.7

 

$

75,460

 

26.0

Real estate mortgage

 

127,050

 

41.0

 

 

129,321

 

44.5

Real estate construction

 

76,073

 

24.6

 

 

68,967

 

23.7

Agricultural

 

13,601

 

4.4

 

 

13,919

 

4.8

Consumer/other

 

15,843

 

5.1

 

 

5,480

 

1.9

Lease financing

 

1,350

 

0.4

 

 

1,540

 

0.5

Total principal amount of loans

 

313,670

 

101.3

 

 

294,687

 

101.4

Unearned income and net unamortized deferred fees and costs

 

(726)

 

(0.2)

 

 

(873)

 

(0.3)

Loans, net of unearned income and unamortized fees and costs

 

312,944

 

101.0

 

 

293,814

 

101.1

Less allowance for credit losses

 

(3,212)

 

(1.0)

 

 

(3,335)

 

(1.1)

Net loans

$

309,732

 

100.0

 

$

290,479

 

100.0

 

 

 

 


 

 

Loan Participations.

 

Pursuant to our lending policy, loans may not exceed 85 percent of the Bank’s legal lending limit (except to the extent collateralized by U.S. Treasury securities or Bank deposits and, accordingly, excluded from the Bank’s legal lending limit) unless the Chief Credit Officer and the Executive Credit Committee grant prior approval. To accommodate customers whose financing needs exceed lending limits and internal loan restrictions relating primarily to industry concentration, the Bank sells loan participations to outside participants without recourse.

 

Loan participations sold on a nonrecourse basis to outside financial institutions were $181.61 million as of September 30, 2005 compared to $131.32 as of December 31, 2004.

 

The Bank generally retains the right to service the loans as well as the right to receive a portion of the interest income on the loans. Many of the loans sold by the Bank are commercial lines of credit for which balances and related payment streams cannot be reasonably estimated in order to determine the fair value of the servicing rights and/or future interest income retained by the Bank. We cannot reliably predict our ability to continue to generate or sell loan participations in future periods or the terms of any such sales.

 

Allowance for Credit Losses. The following table sets forth information regarding changes in our allowance for credit losses for the three- and nine-month periods ended September 30, 2005 and 2004 (amounts are in thousands):

 

 

Three Months

 

Nine Months

Ended September 30,

Ended September 30,

 

2005

 

2004

 

2005

 

2004

Balance, beginning of period

$

3,538

 

$

3,443

 

$

3,335

 

$

4,763

Provision for credit losses

 

-

 

 

-

 

 

250

 

 

-

Loans charged off

 

(358)

 

 

(23)

 

 

(555)

 

 

(1,596)

Loans recovered

 

32

 

 

4

 

 

182

 

 

257

Balance, end of period

$

3,212

 

$

3,424

 

$

3,212

 

$

3,424

Ending loan portfolio

$

312,944

 

$

323,074

 

 

 

 

 

 

Allowance for credit losses   as a percentage of ending   portfolio

 

1.03%

 

 

1.06%

 

 

 

 

 

 

 

Loans charged off during the first nine months of 2005 totaled $555,000, representing a $1.0 million decrease over loans charged off during the first nine months of 2004. The decrease was primarily attributable to charge-offs related to one commercial loan. The loan was to a contractor on which we charged off, in the first quarter of 2004, approximately $1.2 million. In June of 2004, we collected $162,000 related to this loan.

 

Net charge-offs as a percentage of average total loans held for investment for the three- and nine-month periods ended September 30, 2005 and 2004 were as follows:

 

Three Months Ended

 

Nine Months Ended

September 30,

September 30,

 

2005

 

2004

 

2005

 

2004

Ratio of net charge-offs to average total loans held for    investment

(0.10)%

 

(0.01)%

 

(0.12)%

 

(0.48)%

Ratio of net charge-offs to average total loans held for    investment, annualized

(0.39)%

 

(0.03)%

 

(0.16)%

 

(0.64)%

 

We maintain our allowance for credit losses at a level considered adequate to provide for an estimate of probable losses related to specifically identified loans as well as probable losses in the remaining loan and lease portfolio

 

 


 

that have been incurred as of each balance sheet date. The loan and lease portfolio and other credit exposures are reviewed regularly to evaluate the adequacy of the allowance for credit losses. In determining the level of the allowance, we evaluate the allowance necessary for specific nonperforming loans and also estimate losses in other credit exposures. The resultant three allowance components are as follows:

 

Specific Reserves. The amount of specific reserves is determined through a loan-by-loan analysis of problem loans over a minimum size that considers expected future cash flows, the value of collateral and other factors that may impact the borrower’s ability to make payments when due. Included in this group are those nonaccrual or renegotiated loans that meet the criteria as being “impaired” under the definition in Statement of Financial Accounting Standards No. 114, “Accounting by Creditors for Impairment of a Loan” (“SFAS 114”). A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Problem loans also include those credits that have been internally classified as credits requiring management’s attention due to underlying problems in the borrower’s business or collateral concerns. Under SFAS 114, any allowance on impaired loans is generally based on one of three methods. The accounting standard requires that impaired loans be measured at either the present value of expected cash flows at the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral of the loan.

 

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 and peer-group loss history.

 

Continuous credit monitoring processes and the analysis of loss components is the principal method relied upon by management to ensure that changes in estimated credit loss levels are reflected in 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.

 

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. Our nonperforming assets have decreased from $549,000 to $173,000 during the nine-month period ended September 30, 2005 due to a decrease in nonperforming loans.

 

 

September 30,

 

December 31,

2005

2004

Nonperforming loans:

 

 

 

 

Loans 90 days or more delinquent and still accruing interest

$

-

 

$

25

Nonaccrual loans

 

173

 

 

524

Restructured loans

 

-

 

 

-

Total nonperforming loans

 

173

 

 

549

   Other real estate owned and repossessed assets

 

-

 

 

-

Total nonperforming assets

$

173

 

$

549

Allowance for credit losses

    $

3,212

 

$

3,335

Ratio of total nonperforming assets to total assets

 

0.02%

 

 

0.08%

Ratio of total nonperforming loans to total loans

 

0.06%

 

 

0.19%

Ratio of allowance for credit losses to total nonperforming loans

 

1857%

 

 

607%

 

 

Liabilities. The following table presents our liabilities by category as of September 30, 2005 and December 31, 2004 as well as the amount and percent of change between the two dates. (Amounts are in thousands):

 

 

 

September 30,

 

December 31,

 

Change

 

Liabilities

 

2005

 

2004

 

$

 

%

 

DEPOSITS:

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing

 

$

74,480

 

$

63,386

 

$

11,094

 

17.5

(a)

Interest-bearing -

 

 

 

 

 

 

 

 

 

 

 

 

Savings, interest checking and money market

 

 

282,130

 

 

210,887

 

 

71,243

 

33.8

(a)

Time deposits $100,000 and over

 

 

74,808

 

 

83,952

 

 

(9,144)

 

(10.9)

 

Other time deposits

 

 

129,217

 

 

97,118

 

 

32,099

 

33.1

(a)

Short-term borrowings

 

 

7,029

 

 

33,697

 

 

(26,668)

 

(79.1)

(b)

Federal Home Loan Bank Advances

 

 

87,200

 

 

97,200

 

 

(10,000)

 

(10.3)

(b)

Long-term borrowings

 

 

9,366

 

 

10,079

 

 

(713)

 

(7.1)

 

Guaranteed preferred beneficial interests in company’s subordinated debentures

 

 

22,387

 

 

22,509

 

 

(122)

 

(0.5)

 

Other liabilities

 

 

10,984

 

 

11,036

 

 

(52)

 

(0.5)

 

Total liabilities

 

$

697,601

 

$

629,864

 

$

67,737

 

10.8

 

 

(a) The sources of these increased deposits included insurance clients in the Phoenix office, substantial increases from existing bank customers and active marketing efforts at all locations to attract new customers.

 

(b) Planned decrease due to increase in deposits.

 

 

 


 

 

Stockholders’ Equity. Our stockholders’ equity increased $7.19 million between December 31, 2004 and September 30, 2005. On September 30, 2005, we received approximately net proceeds of $5.84 million from a private placement offering of 575,000 shares of our common stock. These proceeds, along with earnings of approximately $3.45 million, were the major contributors to the increase in stockholders equity. The increase was somewhat offset by our repurchase of $1.25 million of preferred stock in the first two quarters of 2005.

 

Capital Adequacy. We actively monitor compliance with regulatory capital requirements, including risk-based and leverage capital measures. Under the risk-based capital method of capital measurement, the ratio computed is dependent on the amount and composition of assets recorded on the balance sheet, and the amount and composition of off-balance-sheet items, in addition to the level of capital. The following table includes the risk-based and leverage capital ratios of the Company and the Bank as of September 30, 2005:

 

Tier 1 Risk-

 

Total Risk-

 

Tier 1 Leverage

Based Ratio

 

Based Ratio

 

Ratio

BNCCORP, consolidated

8.08%

 

9.72%

 

5.79%

BNC National Bank

9.63%

 

10.27%

 

6.90%

 

As of September 30, 2005, the Company and the Bank exceeded capital adequacy requirements and the Bank was considered “well capitalized” under prompt corrective action provisions.

 

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 nine months ended September 30, 2005 and 2004, a summary of our major sources and (uses) of funds. (Amounts are in thousands):

 

 

For the Nine Months Ended September 30,

Major Sources and (Uses) of Funds

2005

 

2004

Net increase in deposits

$

105,292

 

 

$

30,492

Net increase in loans

 

(19,515)

 

 

(41,115)

Net increase in Loans Held for Sale

 

(55,726)

 

 

-

Net (decrease) in short-term borrowings

 

(26,668)

 

 

(1,514)

 

 

 

 


 

 

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 deposits 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. 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 September 30, 2005, we had established three revolving lines of credit with banks totaling $17.5 million all of which remained available for advance. The lines, if drawn upon, mature daily with interest rates that float at the Federal funds rate. At September 30, 2005, we also had the ability to draw additional FHLB advances based upon the mortgage loans and securities that were pledged, subject to a requirement to purchase additional FHLB stock.

 

Critical Accounting Policies

 

The following 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.

 

Allowance for Credit Losses.

Goodwill Impairment.

Interest Income Recognition.

Income Taxes.

 

Refer to the 2004 10-K for information regarding these policies

 

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 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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.

 

We have risk management policies to monitor and limit exposure to interest rate risk. Our asset/liability management process is utilized to manage our interest rate risk. 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. It is recognized that as exposure to interest rate risk is reduced, so too may the overall level of net interest income. 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. We monitor the results of the net interest income simulation on a quarterly basis at regularly scheduled asset/liability committee (“ALCO”) meetings. This exercise includes our assumptions regarding the level of interest rates and their impact on our current balance sheet. Interest rate caps and floors are included to the extent that they are exercised in the 12-month simulation period. 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 September 30, 2005 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 at its September 30, 2005 level. 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.

 

The scenarios 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 increase from its starting point at September 30, 2005 of 6.75 percent to 7.75 percent 12 months later. The prime rate in this example will increase 1/12th of the overall increase of 100 basis points each month. Given the relatively low absolute level of market interest rates as of September 30, 2005, the declining rate scenarios analyses are limited to -100bp and -200bp.

 

The net interest income simulation result for the 12-month horizon is shown below:

 

Net Interest Income Simulation

(Amounts in thousands)

 

 

 

 

 

 

 

 

Movement in interest rates

-200bp

 

-100bp

Unchanged

+100bp

+200bp

+300bp

Projected 12-month net interest income

16,412

 

17,892

18,822

19,483

19,853

20,115

Percentage change from rates unchanged scenario

-12.80%

(a)

-4.94%

0.00%

3.51%

5.48%

6.87%

Policy guidelines decline limited to

-10.00%

 

-5.00%

--

-5.00%

- 10.00%

-15.00%

 

 

(a) Asset/Liability Management Committee approved this variance in the October     meeting.

 

 

 


 

 

Our general policy is to limit the percentage decrease in projected net interest income to 5, 10 and 15 percent from the rates unchanged scenario for the +/- 100bp, 200bp and 300bp interest rate ramp scenarios, respectively. In the case with the 200bp scenario above, where the decline falls outside of these limits, the ALCO reviewed the circumstances surrounding the exception and considering the level of net interest income generated in the scenario and other related factors, recommended strategies aimed at bringing the respective scenario within the general guidelines noted above.

 

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 September 30, 2005 and does not contemplate any actions we might undertake in response to changes in market interest rates.

 

Item 4. Controls and Procedures

 

The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including our President and Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures and our internal control over financial reporting pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 (“Exchange Act”). Based upon that evaluation, management concluded that the Company’s disclosure controls and procedures were effective, as of September 30, 2005, for ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, Additionally, there were no changes in the Company’s disclosure controls or internal controls over financial reporting during the third quarter of 2005 that have materially affected or are reasonably likely to materially affect those internal controls subsequent to the date of the most recent evaluation by our CEO and CFO.

 

 

Any control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The design of a control system inherently has limitations, and the benefits of controls must be weighed against their costs. 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 controls. Therefore, no evaluation of a cost-effective system of controls can provide absolute assurance that all control issues and instances of fraud, if any, will be detected.

 

 

 


 

 

Part II – Other Information

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

On September 21, 2005, BNCCORP issued 575,000 shares of its common stock in a private placement offering resulting in gross proceeds of $6.61 million. Sandler O’Neill & Partners, L.P. served as the exclusive placement agent and received a fee of seven percent of the gross proceeds, plus reasonable out-of-pocket expenses. The net proceeds were approximately $5.84 million. The offering was conducted as a private placement in reliance on the exemptions from registration provided by Section 4(2) of the securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated thereunder.

 

Item 6. Exhibits

 

Exhibit 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act.

 

Exhibit 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act.

 

Exhibit 32.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Sections 302 and 906 of the Sarbanes Oxley Act of 2002.

 

 

 

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:

November

10

, 2005

 

By

/s/ Gregory K. Cleveland

 

 

 

 

 

 

Gregory K. Cleveland

 

 

 

 

 

 

President and Chief Executive Officer

 

 

 

 

 

 

 

 

 

 

 

 

By

/s/ Neil M. Brozen

 

 

 

 

 

 

Neil M. Brozen

 

 

 

 

 

 

Chief Financial Officer