BNCCORP, Inc.
BNCCORP, Inc.
Corporate Profile
BNCCORP, Inc. (Pink Sheets: BNCC) operates community banking
and wealth management businesses from 20 locations in Arizona,
Minnesota and North Dakota. In 2008, we expanded mortgage
banking operations to originate residential mortgage loans from five
locations in Arizona, Iowa, Kansas and Missouri.
To Our Stockholders, Customers,
Employees and Friends:
The economic environment during the past year was one of the most challenging in decades,
especially for the financial institution sector. I am pleased to report that despite nearly
unprecedented market disruption, BNCCORP delivered solid results for 2008. We recorded
growth in net income, in sharp contrast to the severe losses experienced by much of the nation’s
banking industry. More important, we strengthened our capital base as an added measure of
security against the fiscal pressures that are expected to persist well into 2009, if not beyond.
While no institution is immune to the global economic downturn, we believe BNC is well-
positioned to navigate turbulent times and concurrently serve our customers, community and
stockholders.
FINANCIAL PERFORMANCE
In 2008, BNC delivered one of its strongest performances, benefitting from our efforts in
prior years to refocus on the Company’s core businesses. Net income rose to $2.22 million,
or $0.67 per diluted share, from $1.98 million, or $0.57 per diluted share, for 2007. The key
factors contributing to our earnings from continuing operations were an increase in net interest
income due to the growth in our balance sheet, higher non-interest income from mortgage
banking revenues, and reduced non-interest expenses. These improvements were partly offset
by a $4 million increase in the provision for loan losses resulting from the difficult credit
environment.
Our total assets amounted to $861.5 million at the end of 2008, growing $161.9 million from
the prior year. Loans held for investment contributed $45.2 million of this increase, as we
continued to serve the needs of businesses and individuals in our marketplace through prudent
and responsible lending. At the same time, the investment portfolio increased by $86.9
million year-over-year, as a result of leverage strategies designed to increase our net interest
income. Total deposits reached $675.3 million at December 31, 2008, growing by $133.5
million, a $63.7 million increase in core deposits contributed significantly to deposit growth.
THE BENEFITS OF STRATEGIC TRANSFORMATION
To a major extent, our performance in 2008 was the direct outcome of our earlier efforts to
restructure and reposition BNC’s business. In the 2007 Annual Report, we described our
strategic initiatives to sell our former insurance agency subsidiary and to use the sale proceeds
to significantly increase our capital base, reduce or refinance higher-cost debt, and reinvest
in higher-yielding assets. Due to this transformation, BNC now has a far stronger balance
sheet, greater capacity to deliver revenue and earnings from recurring sources, and virtually no
exposure to the cyclicality and seasonality of the insurance segment.
Candidly, we did not fully anticipate the global economic turmoil at the time we planned this
strategic transformation. None-the-less, we were confident the transformation would make
the Company’s core businesses more sustainable – and our capital base stronger. These actions
have positioned BNC well for the severe conditions the global economy faces today and
opportunities we believe will emerge tomorrow.
CAPITAL – AND CONFIDENCE
BNC’s solid capital foundation provides an important measure of assurance to customers and
investors in a difficult economy, while supporting our capacity to make loans, serve our market
and grow our business. The Company and its BNC National Bank subsidiary maintained
strong capital ratios throughout the year and continued to exceed regulatory standards for
“well-capitalized” institutions at December 31, 2008.
GREGORY K. CLEVELAND
President and Chief Executive Officer
“…we believe
BNC is well-
positioned to
navigate turbulent
times and
concurrently serve
our customers,
community and
stockholders.”
BNCCORP, Inc. Annual Report 2008
1
In January 2009, we further strengthened our capital base by becoming one of the select institutions permitted to participate in the U.S.
Treasury’s Capital Purchase Program. Under the program, which is available only to strong, sound community banks, the U.S. Treasury
purchased shares of non-voting senior preferred stock in BNCCORP, Inc. and exercised warrants for an additional class of preferred
shares. The proceeds from our participation in the program added approximately $20.1 million to our capital.
We recognize that there is uncertainty as to future conditions or restrictions that may be imposed by governmental agencies on banks
that have participated in this program. However, in view of our responsibility to guard against the even greater uncertainties of the
current economic climate, and the opportunity to build a more robust capital foundation, we believed it was in the best interests of our
Company, our depositors and our shareholders to take part in the Treasury program.
ASSET QUALITY
In view of the weakness in economic conditions, credit risk has increased industry-wide during 2008 and is expected to remain an
issue in periods beyond. Accordingly, our classified loans, non-accrual loans and other real estate owned – as well as related provisions
for credit and other real estate losses – were higher in 2008 than in recent years. All of these metrics are likely to be elevated for the
foreseeable future.
Due to the extremely illiquid markets for virtually every asset class, and the possibility of further declines in asset valuations, it is very
likely that asset quality will continue to come under pressure. We believe this is one of the primary risks inherent in the financial system
for the foreseeable future. Given these conditions, we continue to carefully monitor our asset quality while at the same time remaining
committed to serving the needs of credit-worthy borrowers in our marketplace.
CHALLENGE – AND OPPORTUNITY
While it is easy to see challenges in the present economic environment, we also believe there will be opportunities for BNC. Our
mortgage banking operations, for example, may benefit from lower interest rates. We are also seeing a return to more realistic pricing
of lending products, as the marketplace now has a clearer understanding of the impact of risk on asset pricing. In the deposit area, we
would expect a “flight to quality” as customers shift to better-capitalized institutions. Overall, we see the potential to gain market share
from competitors that may be unable or unwilling to meet customers’ needs under current business conditions.
Our view of these potential opportunities does not change the fact that the global business climate is expected to remain unforgiving
in the coming year. It is not possible to predict the length or depth of the economic downturn. As a result, expectations for financial
performance should remain modest for the near term. What we do know is that BNC is approaching this period from a position of
strength. We have abundant capital to support our business and to enhance our ability to serve customers. We are maintaining a close
watch over our asset quality and have a disciplined focus on managing expenses. Fortunately, our business is geographically diverse, with
banking operations in Arizona, Minnesota and North Dakota. Weak economies is some of our markets can be offset by stability in other
regions. And, we have a talented, dedicated and experienced team that is driven to deliver solid results under adverse circumstances.
In summary, we are confident that the Company is positioned to withstand the harsh economic headwinds and to benefit from
opportunities that may arise.
On behalf of the Board of Directors of BNC and our entire team, we want to thank our customers, shareholders and community for
their support, and assure you that we remain committed to the continued strong, sound operation of BNC for the long term.
Sincerely,
GREGORY K. CLEVELAND
President and Chief Executive Officer
2
BNCCORP, Inc. Annual Report 2008
BNCCORP, INC.
INDEX TO YEAR END FINANCIAL REPORT
December 31, 2008
TABLE OF CONTENTS
Selected Financial Data ..................................................................................................................
Business ..........................................................................................................................................
4
7
Management’s Discussion and Analysis of Financial Condition and Results
of Operations .................................................................................................................................... 8
Quantitative and Qualitative Disclosures about Market Risk ....................................................... 27
BNCCORP, Inc. Annual Report 2008
3
Selected Financial Data
The selected consolidated financial data presented below under the captions “Income Statement Data” and
“Balance Sheet Data” as of and for the years ended December 31, 2008, 2007, 2006, 2005 and 2004 is derived
from the historical audited consolidated financial statements of the Company. The financial data below should be
read in conjunction with and is qualified by the Consolidated Financial Statements and the notes thereto.
$
$
$
Income Statement Data from Continuing Operations:
Total interest income
Total interest expense
Net interest income
Provision for credit losses
Non-interest income
Non-interest expense
Income tax expense (benefit)
Income (loss) from continuing operations
Balance Sheet Data: (at end of period)
Total assets
Investments securities available for sale
Federal Funds Sold
Federal Reserve Bank and Federal Home Loan Bank stock
Loans held for sale
Participating interests in mortgage loans
Loans and leases held for investment, net of unearned income
Allowance for credit losses
Total deposits
Short-term borrowings
Federal Home Loan Bank advances
Long-term borrowings
Guaranteed preferred beneficial interests in Company’s subordinated
debentures
Common stockholders’ equity
Book value per common share outstanding
Tangible book value
Earnings Performance / Share Data from Continuing Operations:
Return (loss) on average total assets
Return (loss) on average common stockholders’ equity
Efficiency ratio
Net interest margin
Net interest spread
Basic earnings (loss) per common share
Diluted earnings (loss) per common share
Average common shares outstanding
Average common and common equivalent shares
Shares outstanding at year end
Balance Sheet and Other Key Ratios from Continuing
$
$
$
$
Operations:
2008
For the Years Ended December 31,
2005
2006
2007
(dollars in thousands, except share and per share data)
2004
46,026 $
19,215
26,811
7,750
10,395
26,501
737
2,218 $
44,241 $
21,994
22,247
3,750
3,853
28,147
(2,728)
(3,069) $
42,408 $
23,606
18,802
210
5,138
23,075
(363)
1,018 $
37,264 $
19,718
17,546
250
5,823
21,859
238
1,022 $
30,141
14,146
15,995
175
5,235
19,924
(177)
1,308
861,498 $
209,857
-
5,989
13,403
28,584
542,753
(8,751)
675,321
16,844
84,500
-
699,591 $
122,899
-
4,918
-
24,357
497,556
(6,599)
541,874
5,365
61,400
-
692,276 $
182,974
24,000
5,003
1,669
56,125
333,934
(3,370)
529,252
9,709
62,200
1,167
740,016 $
227,185
-
5,791
266
101,336
310,368
(3,188)
548,790
21,416
82,200
3,850
673,710
235,916
-
7,541
25,682
34,515
293,814
(3,335)
455,343
33,697
97,200
10,079
23,025
53,947
16.35 $
16.23 $
23,075
59,730
17.11 $
16.99 $
22,711
55,602
15.44 $
7.15 $
22,648
51,612
14.97 $
6.63 $
22,509
42,596
14.77
4.42
0.28%
3.85%
71.22%
3.64%
3.46%
0.67 $
0.67 $
3,291,697
3,319,225
3,299,163
(0.47)%
(5.25)%
107.85%
3.81%
3.31%
(0.89) $
(0.89) $
3,456,993
3,515,852
3,491,337
0.14%
1.92%
96.39%
3.04%
2.73%
0.29 $
0.29 $
3,473,670
3,514,709
3,600,467
0.14%
2.14%
93.54%
2.79%
2.58%
0.33 $
0.33 $
2,988,440
3,048,139
3,447,945
0.21%
2.86%
93.85%
2.85%
2.71%
0.39
0.38
2,813,531
2,896,241
2,884,876
0.09%
0.17%
(0.579)%
1.02%
607%
6.79%
Nonperforming assets to total assets
Nonperforming loans to loans and leases held for investment
Net loan charge-offs to average loans and leases held for investment
Allowance for credit losses to total loans
Allowance for credit losses to total nonperforming loans
Average common stockholders’ equity to average total assets
3.84%
4.22%
(0.534)%
1.50%
38%
7.25%
0.77%
1.09%
(0.129)%
1.26%
122%
9.16%
0.02%
0.03%
(0.008)%
0.86%
3,304%
7.87%
0.02%
0.03%
(0.130)%
0.77%
2,229%
6.75%
4
BNCCORP, Inc. Annual Report 2008
1
Quarterly Financial Data
2008
Interest income
Interest expense
Net interest income
Provision for credit losses
Net interest income after provision for credit
losses
Non-interest income
Non-interest expense
Income (loss) from continuing operations
before income taxes
Income tax expense (benefit)
Income (loss) from continuing operations
Discontinued operations:
Income from discontinued insurance
segment
Income tax expense
Income from discontinued operations
Net income (loss)
Basic earnings per common share:
Income (loss) from continuing operations
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$ 11,385
5,113
6,272
800
$ 11,496
4,731
6,765
2,000
$ 11,694
4,884
6,810
1,800
$ 11,451
4,487
6,964
3,150
YTD
$ 46,026
19,215
26,811
7,750
5,472
2,300
5,739
4,765
3,358
7,078
5,010
2,409
6,875
3,814
2,328
6,809
19,061
10,395
26,501
2,033
671
1,362
1,045
345
700
544
39
505
(667)
(318)
(349)
2,955
737
2,218
-
-
$ 1,362
-
-
-
$ 700
-
-
-
-
-
-
$ 505
$ (349)
$ 2,218
$
0.40
$
0.22
$
0.16
$
(0.11)
$
0.67
Income from discontinued insurance segment,
net of income taxes
Basic earnings (loss) per common share
$
0.00
0.40
$
0.00
0.22
$
0.00
0.16
$
0.00
(0.11)
$
0.00
0.67
Diluted earnings per common share:
Income (loss) from continuing operations
$
0.39
$
0.21
$
0.15
$
(0.11)
$
0.67
Income from discontinued insurance segment,
net of income taxes
Diluted earnings (loss) per common share
$
0.00
0.39
$
0.00
0.21
$
0.00
0.15
$
0.00
(0.11)
$
0.00
0.67
Average common shares:
Basic
Diluted
3,407,821
3,449,481
3,248,101
3,294,559
3,243,388
3,233,740
3,261,945
3,237,177
3,291,697
3,319,225
BNCCORP, Inc. Annual Report 2008
5
2
Interest income
Interest expense
Net interest income
Provision for credit losses
2007
First
Quarter
$ 10,875
6,076
4,799
250
Second
Quarter
$ 11,133
5,773
5,360
700
Third
Quarter
Fourth
Quarter
$ 10,988
5,047
5,941
2,800
$ 11,245
5,098
6,147
-
YTD
$ 44,241
21,994
22,247
3,750
Net interest income after provision for credit
losses
4,549
4,660
3,141
6,147
18,497
Non-interest income (loss)
Non-interest expense
1,697
5,986
(284)
7,739
310
6,859
2,130
7,563
3,853
28,147
Income (loss) from continuing operations
before income taxes
Income tax expense (benefit)
Income (loss) from continuing operations
Discontinued operations:
Income from discontinued insurance
segment, (including a gain on sale of
$6,083 for the second, third and fourth
quarters)
Income tax expense (benefit)
Income (loss) from discontinued operations
Net income (loss)
Basic earnings per common share:
Income (loss) from continuing operations
Income (loss) from discontinued insurance
segment, net of income taxes
Basic earnings (loss) per common share
$
Diluted earnings per common share:
Income (loss) from continuing operations
Income (loss) from discontinued insurance
segment, net of income taxes
Diluted earnings (loss) per common share
$
260
(1)
261
(3,363)
(1,386)
(1,977)
(3,408)
(1,345)
(2,063)
714
4
710
(5,797)
(2,728)
(3,069)
2,070
774
1,296
$ 1,557
6,084
2,280
(12)
62
(26)
(49)
8,116
3,067
3,804
$ 1,827
(74)
$ (2,137)
23
$ 733
5,049
$ 1,980
$
0.06
$
(0.56)
$
(0.60)
$
0.21
$
(0.89)
0.40
0.46
$
1.08
0.52
$
(0.02)
(0.62)
$
-
0.21
$
1.46
0.57
$
0.07
$
(0.56)
$
(0.60)
$
0.20
$
(0.89)
0.39
0.46
$
1.08
0.52
$
(0.02)
(0.62)
$
0.01
0.21
$
1.46
0.57
Average common shares:
Basic
Diluted
3,500,810
3,555,984
3,501,544
3,573,181
3,414,670
3,475,599
3,439,571
3,487,268
3,456,993
3,515,852
6
BNCCORP, Inc. Annual Report 2008
3
Business
General
BNCCORP, Inc. (BNCCORP or the Company) is a bank holding company registered under the Bank Holding
Company Act of 1956 headquartered in Bismarck, North Dakota. It is the parent company of BNC National Bank
(the Bank). The Company operates community banking and wealth management businesses from 20 locations in
Arizona, Minnesota and North Dakota. In 2008, we expanded mortgage banking operations to originate
residential mortgage loans from five locations in Arizona, Iowa, Kansas and Missouri.
During 2007 we sold substantially all of the assets of BNC Insurance, Inc, our insurance agency. The proceeds
from the sale were primarily used to fortify the balance sheet and capital of the Bank.
Operating Strategy
In our banking and wealth management operations we provide relationship-based services to small and mid-sized
businesses, business owners, professionals and consumers in our primary market areas of Arizona, Minnesota and
North Dakota. Key elements of our operating strategy are:
•
•
•
•
•
Provide individualized, high-level customer service;
Offer diversified products and services;
Emphasize deposit growth;
Expand opportunistically; and
Manage credit risk.
In 2008 we continued to execute this strategy by expanding our mortgage banking operations. We believe this
expansion was opportunistic because the cost of entry in this industry was low and these operations enhanced our
line of products. We are optimistic it can be expanded into markets where we have banking and wealth
management operations to further synergize our business.
Current Operating Environment
The global economy is experiencing a recessionary decline in asset values. Governments throughout the world are
attempting to support economies because private capital is either unable or unwilling to counteract the decline in
asset values. It is not unreasonable to presume we are in a depression.
Recessionary devaluation can impact many asset classes. Cash positions can be devalued by inflation and
devaluation of the dollar. Investments can be devalued by illiquidity and declines in the assets supporting the
investments. Real estate loans can be devalued by declines in their collateral. Commercial business loans can be
devalued when businesses suffer in a recessionary environment. Maturities of debt can be accelerated when the
assets collateralizing debt devalue. Devaluation of our assets, or assets collateralizing our loans, could adversely
impact earnings and regulatory capital.
Our business is significantly influenced by asset values. Maintaining sufficient capital and liquidity is essential to
survival of all businesses, including BNCCORP.
BNCCORP, Inc. Annual Report 2008
7
4
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Overview
The following table summarizes net income (loss) and basic and diluted earnings (loss) per share for the year
ended December 31 (dollars are in thousands):
Net income (loss) attributable to continuing operations
Net income attributable to discontinued operations
Net income attributable to common shareholders
Net income per share
Basic earnings (loss) per share from continuing operations
Basic earnings per share from discontinued operations
Basic earnings per share
Diluted earnings (loss) per share from continuing operations
Diluted earnings per share from discontinued operations
Diluted earnings per share
2008
2007
$
$
$
$
$
$
$
$
2,218
-
2,218
0.67
-
0.67
0.67
-
0.67
$
$
(3,069)
5,049
1,980
$
$
$
$
$
$
(0.89)
1.46
0.57
(0.89)
1.46
0.57
Highlights. The following information highlights key developments in 2008:
• Assets increased by $161.9 million, or 23.1%, from $699.6 million to $861.5 million;
•
Investment securities increased by $86.9 million as a result of leverage strategies implemented to increase
net interest income;
• Loans held for investment increased $45.2 million primarily due to organic growth;
• Nonperforming assets increased significantly, including other real estate owned which increased by $10.2
million due to foreclosures;
• Total deposits increased by $133.5 million to $675.3 million;
• Core deposits increased $63.7 million to $575.6 million;
• Wholesale deposits increased by $69.7 million as proceeds were used to fund purchases of investment
securities;
• Net interest income increased approximately 21% to $26.811 million;
• Provisions for credit losses increased by $4 million to $7.750 million;
• Non-interest income increased significantly to $10.4 million; and
• Non-interest expenses decreased by 5.85 % to $26.501 million.
Results from Continuing Operations
Net income from continuing operations in 2008 was $2.218 million, or $0.67 per diluted share, compared to a net
loss of $(3.069) million, or $(0.89) per diluted share in 2007.
Net Interest Income in Continuing Operations
The following table sets forth information relating to our average balance sheet data and reflects the yield on
average assets and cost of average liabilities. Such yields and costs are derived by dividing income and expense
by the average balance of assets and liabilities. All average balances have been derived from monthly averages,
which are indicative of daily averages (dollars are in thousands):
8
BNCCORP, Inc. Annual Report 2008
5
Analysis of Changes in Net Interest Income
For the Year ended December 31,
For the Year ended December 31,
For the Year ended December 31,
2008
Average
balance
Interest
earned
Average
yield or
or owed
cost
Average
balance
2007
Interest
earned
or owed
Average
yield or
Average
2006
Interest
earned
cost
balance
or owed
Average
yield or
cost
(dollars in thousands)
(dollars in thousands)
(dollars in thousands)
Assets
Federal funds sold/interest-bearing due from $
Taxable investments
Tax-exempt investments
95 $ 1
172,383 9,864
16,994 839
1.05% $
5.72%
4.94%
14,616 $ 754
6,001
124,242
926
18,815
5.16% $
4.83%
4.92%
42,121 $ 2,069
8,044
174,995
1,644
36,249
Loans held for sale
Participating interests in mortgage loans
Loans and leases held for investment
3,586 220
24,688 1,408
525,311 33,694
6.13%
5.70%
6.41%
417
27,469
402,616
-
2,137
34,423
0.00%
7.78%
8.55%
1,088
33,180
334,058
-
2,344
28,307
4.91%
4.60%
4.54%
0.00%
7.06%
8.47%
Allowance for credit losses
(7,105)
-
(4,335)
-
(3,326)
-
Total interest-earning assets
Non-interest-earning assets:
Assets from discontinued operations
Cash and due from banks
Other
735,952 46,026
6.25%
583,840
44,241
7.58%
618,365
42,408
6.86%
-
10,481
47,835
13,344
12,468
41,653
31,129
15,360
40,004
Total assets
$
794,268
$
651,305
$
704,858
Liabilities and Stockholders’ Equity
Deposits:
Interest checking and money market
accounts
Savings
Certificates of deposit:
Under $100,000
$100,000 and over
Total interest-bearing deposits
Borrowings:
Short-term borrowings
FHLB advances
Long-term borrowings
Subordinated debentures
$
244,279
4,074
9,859 33
1.67% $
0.33%
249,246
8,399
8,007
66
3.21% $
0.79%
246,476
8,398
7,440
66
3.02%
0.79%
232,367
8,981
3.87%
149,010
7,141
4.79%
150,194
6,440
58,378 2,011
3.44%
44,824
2,319
5.17%
54,155
2,499
544,883 15,099
2.77%
451,479
17,533
3.88%
459,223
16,445
7,049 144
87,159 2,291
519 25
2.04%
2.63%
4.82%
8,706
32,991
131
398
1,915
11
4.57%
5.80%
8.40%
14,480
73,060
2,659
685
4,020
201
4.29%
4.61%
3.58%
4.73%
5.50%
7.56%
22,734 1,656
7.29%
22,641
2,137
9.44%
22,458
2,255
10.04%
Total interest-bearing liabilities
662,344 19,215
2.90%
515,948
21,994
4.26%
571,880
23,606
4.13%
Non-interest-bearing demand accounts
Total deposits and interest-bearing
liabilities
Liabilities from discontinued operations
Other non-interest-bearing liabilities
Total liabilities
Stockholders’ equity
Total liabilities and stockholders’
66,388
728,732
-
7,928
736,660
57,608
68,277
584,225
2,584
6,089
592,898
58,407
68,743
640,623
6,062
5,161
651,846
53,012
equity
$
794,268
$
651,305
$
704,858
Net interest income
$ 26,811
$ 22,247
$ 18,802
Net interest spread
Net interest margin
Ratio of average interest-earning assets
to average interest-bearing liabilities
3.35%
3.64%
3.32%
3.81%
2.73%
3.04%
111.11%
113.16%
108.13%
BNCCORP, Inc. Annual Report 2008
9
6
The following table illustrates the dollar amount of changes in our interest income and interest expense for the
major components of interest-earning assets and interest-bearing liabilities and distinguishes between the changes
related to volume and rates (changes attributable to the combined impact of volume and rate have been allocated
proportionately):
For the Years Ended December 31,
For the Years Ended December 31,
2008 Compared to 2007
2007 Compared to 2006
Change Due to
Change Due to
Volume
Rate
Total
Volume
(in thousands)
Rate
(in thousands)
Total
$ (418)
2,616
(91)
97
$ (335)
1,247
4
123
$ (753)
3,863
(87)
220
$ (1,425)
(2,477)
(873)
-
$ 110
434
155
-
$ (1,315)
(2,043)
(718)
-
(200)
9,051
(529)
(9,780)
(728)
(729)
(503)
5,859
296
257
(207)
6,116
Interest Earned on Interest-
Earning Assets
Federal funds sold/interest-
bearing due from
Taxable investments
Tax-exempt investments
Loans held for sale
Participating interests in
mortgage loans
Loans held for investment
Total increase (decrease) in
interest income
11,055
(9,270)
1,785
581
1,252
1,833
Interest Expense on Interest-
Bearing Liabilities
Interest checking and money
market accounts
Savings
Certificates of Deposit:
Under $100,000
$100,000 and over
Short-term borrowings
FHLB advances
Long-term borrowings
Subordinated debentures
Total increase (decrease) in
(157)
14
(3,776)
(47)
(3,933)
(33)
84
-
483
-
567
-
2,814
2,948
(65)
565
16
9
(974)
(3,256)
(189)
(189)
(2)
(490)
1,840
(308)
(254)
376
14
(481)
(50)
(606)
(265)
(2,339)
(215)
19
751
426
(22)
234
25
(137)
701
(180)
(287)
(2,105)
(190)
(118)
interest expense
6,144
(8,923)
(2,779)
(3,372)
1,760
(1,612)
Increase (decrease) in net interest
income
$ 4,911
$ (347)
$ 4,564
$ 3,953
$ (508)
$ 3,445
Net interest income was $26.811 million in 2008 compared to $22.247 million in 2007, an increase of $4.564
million or 21%. The net interest margin decreased to 3.64% for the year ended December 31, 2008, from 3.81%
in 2007. The margin decreased in 2008 due to the impact of non-accrual loans and other nonperforming assets.
Interest income increased in 2008 primarily due to higher balances of investment securities and higher rates
earned thereon. These increases are the result of a leverage strategy implemented to increase net interest income.
Loan balances increased primarily due to organic growth. This increase partially offset the decline in interest
income due to decreasing interest rates and nonaccrual loans.
10
BNCCORP, Inc. Annual Report 2008
7
Interest expense decreased in 2008 primarily because interest rates decreased significantly in 2008. Increases in
the balances of deposits and borrowings partially offset the decline in rates.
Net interest income was $22.247 million in 2007 compared to $18.802 million in 2006, an increase of $3.445
million or 18.3%. The net interest margin increased to 3.81% for the year ended December 31, 2007, from 3.04%
in 2006. The margin increased in 2007 as a result of transactions that restructured our balance sheet.
Interest income increased in 2007 primarily due to higher balances of loans and leases held for investment. These
balances were higher due to purchases of loans aggregating $70.0 million and organic loan growth. A significant
portion of loan purchases related to loan participations we had previously sold, which we were able to repurchase
when our lending limit increased after the sale of BNC Insurance. The increase in interest income resulting from
the increase in loans and leases held for investment was partially offset by a decrease in investment securities and
Federal Funds sold. Interest rates on all of our interest earning assets were higher in 2007 than in 2006.
Interest expense decreased in 2007 primarily because of lower balances of FHLB advances which we prepaid in
the middle of the year. Interest rates paid on deposits increased in 2007 compared to 2006.
Non-interest Income in Continuing Operations
The following table presents the major categories of our non-interest income (dollars are in thousands):
Non-interest Income
For the Years Ended December 31,
Increase ( Decrease)
2008 – 2007
2008
2007
$
%
Bank charges and service fees
Wealth management revenues
Mortgage banking revenues
Gain on sales of commercial real estate loans
Net gain on sale of premises and equipment
Net gain (loss) on sales of securities
Other
Total non-interest income
$
$
2,337
2,826
2,101
1,116
775
247
993
10,395
$
2,010
2,041
158
1,731
-
(3,277)
1,190
$ 3,853
$ 327
785
1,943
(615)
775
3,524
(197)
$ 6,542
16 % (a)
38 % (b)
1,230 % (c)
(36) % (d)
100 % (e)
(108) % (f)
(17) %
170 %
(a) Reducing waived service charges was an area of focus in 2008. We also received a significant fee charged to a client for not
utilizing its line of credit.
(b) We earn custodial fees for accumulating and maintaining documents related to insurance products sold by others. These
transaction based services were significant in early 2008 and tapered dramatically by the end of the year.
(c) We expanded our mortgage banking operations in mid 2008.
(d) Gains on sales of commercial real estate loans can fluctuate significantly from period to period. Early in the year we had a
significant amount of sales, by the end of the year these transactions had virtually ceased.
In the second quarter of 2008, we sold a building previously occupied by our insurance segment.
(e)
(f) Gains and losses on sales of securities vary depending on the nature and volume of transactions. In 2007, we sold a relatively
large volume of securities at a loss in order to improve net interest income in future periods.
BNCCORP, Inc. Annual Report 2008
11
8
Non-interest Expense in Continuing Operations
The following table presents the major categories of our non-interest expense (dollars are in thousands):
Non-interest Expense
For the Years Ended December 31,
2008
2007
Increase (Decrease)
2008 – 2007
$
%
Salaries and employee benefits
Data processing fees
Occupancy
Depreciation and amortization
Marketing and promotion
Professional services
FDIC and other assessments
Office supplies, telephone and postage
ORE expenses
Debt extinguishment costs
Other
Total non-interest expense
Efficiency ratio
$ 14,673
2,202
2,140
1,375
1,127
1,177
400
533
515
-
2,359
$ 26,501
71.22%
$ 14,868
2,524
2,074
1,697
703
840
228
499
-
2,724
1,990
$ 28,147
107.85%
$
$
(195)
(322)
66
(322)
424
337
172
34
515
(2,724)
369
(1,646)
(36.63)%
(1) % (a)
(13) %
3 %
(19) % (b)
60 % (c)
40 % (d)
75 % (e)
7 %
100 % (f)
(100) % (g)
19 %
(6) %
(a)
In 2008, compensation increased due to expanded mortgage banking operations and merit increases. Despite these increases,
compensation was lower in 2008 than 2007 because we incurred a compensation charge of $1.160 million when one of the
founders of the Company retired in 2007 and he was awarded retirement compensation.
(b) Depreciation and amortization declined because of properties that have been divested after the sale of our insurance segment.
(c) Marketing costs increased due to new locations, mortgage banking and promotions for depository products.
(d) Professional services increased because of legal fees associated with problem credits and services required by mortgage banking
operations.
(e) FDIC assessments increased when the benefits of reduced assessments expired in the third quarter of 2008. We expect FDIC
assessments to increase in future periods.
(f) ORE expenses increased concurrently with foreclosure activities.
(g) Debt extinguishment costs were incurred in 2007 when FHLB advances were prepaid and subordinated debentures were
refinanced. These costs were incurred in order to improve net interest margin in future periods.
Income Tax Expense in Continuing Operations
We recorded an income tax expense of $737 thousand and an income tax benefit of $(2.728) million for the years
ended December 2008 and 2007, respectively. In 2008 the effective tax rate was 24.9%. In 2007, the benefit
primarily related to losses on sales of securities, debt extinguishment costs incurred, the provision for credit losses
and interest earned on tax exempt securities.
Results from Discontinued Operations
Net income from discontinued operations in 2007 was $5.049 million, or $1.46 per diluted share. The 2007
discontinued operations included a pre-tax gain on sale of our former insurance segment aggregating $6.083
million. See Note 2 of the Consolidated Financial Statements for a discussion of our rationale for the sale of this
segment.
Net Income in 2008 compared to 2007
Net income, which combines the results of continuing operations and discontinued operations, was $2.218
million, or $0.67 per diluted share, in 2008 compared to net income of $1.980 million, or $0.57 per diluted share,
in 2007.
12
BNCCORP, Inc. Annual Report 2008
9
Financial Condition
Assets
The following table presents our assets by category as of December 31, 2008 and 2007 (dollars are in thousands):
As of December 31,
Increase (Decrease)
2008 – 2007
2008
2007
$
%
Cash and cash equivalents
$
10,569
$
14,856
$
(4,287)
Investment securities available for sale
209,857
122,899
86,958
Federal Reserve Bank and Federal Home
Loan Bank of Des Moines stock
Loans held for sale
Participating interests in mortgage loans
Loans and leases held for investment, net
Other real estate owned
Premises and equipment, net
Interest receivable
Other assets
Premises and equipment held for sale, net
5,989
13,403
28,584
534,002
10,189
20,810
3,263
24,832
-
4,918
-
24,357
490,957
-
19,448
3,290
15,294
3,572
1,071
13,403
4,227
43,045
10,189
1,362
(27)
9,538
(3,572)
Total assets
$
861,498
$
699,591
$
161,907
(29) % (a)
71 % (b)
(c)
22 %
100 % (d)
17 % (e)
9 % (f)
100 % (g)
7 %
(1) %
62 % (h)
(100) % (i)
23 %
(a) Cash balances can vary significantly on a daily basis.
(b) Investments increased as a result of our strategy to leverage the balance sheet in order to increase net interest income.
(c) Increases in these stocks are required when we increase utilization of FHLB advances.
(d) Loans held for sale increased after we expanded mortgage banking operations in the second quarter of 2008.
(e) Participating interests in mortgage loans are collateralized by loans held for sale by mortgage banking counterparties. These
balances will vary depending on the volume of loans originated by the counterparties.
(f) Loans and leases held for investment increased due to organic growth.
(g) OREO increased due to several foreclosures in 2008.
(h) Other assets increased due to deferred tax assets, derivatives and cash surrender value of insurance products.
(i) Assets held for sale at the end of 2007 were sold in 2008.
Investment Securities Available for Sale
The following table presents the composition of the available-for-sale investment portfolio by major category (in
thousands):
BNCCORP, Inc. Annual Report 2008
13
10
Investment Portfolio Composition
2008
December 31,
2007
2006
Amortized
cost
Estimated
fair market
value
Amortized
cost
Estimated
fair market
value
Amortized
cost
Estimated
fair market
Value
$
1,505
$
1,543
$
1,799
$
1,784
$
2,165
$
2,122
2,891
2,917
3,329
3,333
8,149
8,139
23,037
23,170
2,394
2,413
9,533
9,370
37,896
39,024
62,384
63,306
148,119
144,477
138,851
13,482
129,185
14,018
32,830
17,885
33,079
18,984
-
-
17,727
18,866
U.S. government agency
mortgage-backed securities
guaranteed by GNMA
U.S. government agency
mortgage-backed securities
issued by FNMA
Collateralized mortgage
obligations guaranteed by
GNMA
Collateralized mortgage
obligations issued by FNMA
or FHLMC
Other collateralized mortgage
obligations
State and municipal bonds
Total investments
$
217,662
$
209,857
$
120,621
$
122,899
$
185,693
$
182,974
See Note 1 of our Consolidated Financial Statements for management’s conclusion on other than temporary
impairment.
The following table presents maturities for all securities available for sale (other than equity securities) and yields
for all securities in our investment portfolio at December 31, 2008 (dollars are in thousands):
Investment Portfolio - Maturity and Yields
After 5 but
within 10 years
within 5 years
Amount Yield (1) Amount Yield (1) Amount Yield (1)
Within 1 year
After 1 but
After 10 years
Amount
Yield (1)
Total
Amount Yield (1)
U.S. government agency
mortgage-backed securities
guaranteed by GNMA (2) (3)
U.S. government agency
mortgage-backed securities
issued by FNMA (2) (3)
Collateralized mortgage
obligations guaranteed by
GNMA (2) (3)
Collateralized mortgage
obligations issued by FNMA
or FHLMC (2) (3)
Other collateralized mortgage
obligations (2) (3)
State and municipal bonds (2)
Total book value of investment
$ -
0.00% $ 21
4.34% $ 1,484
5.25% $ -
0.00% $ 1,505
5.24%
-
0.00%
-
0.00%
-
-
0.00%
0.00%
-
-
0.00%
2,892
6.52%
2,891
6.52%
0.00%
23,037
4.99%
23,037
4.99%
-
0.00%
3,212
4.74%
7,305
4.89%
27,378
5.08%
37,896
5.01%
-
0.00%
-
0.00% 26,365
2,480
8.40%
3,052
7.56%
3,647
5.95%
7.63%
112,486
4,303
5.79%
7.16%
138,851
13,482
5.82%
7.61%
securities
$ 2,480
8.40% $ 6,285
6.11% $ 38,801
5.88% $ 170,096
5.61% $ 217,662
5.71%
Unrealized holding loss on
securities available for sale
Total investment in securities
available for sale
(7,805)
$ 209,857
5.92%
(1) Yields include adjustments for tax-exempt income.
(2) Based on amortized cost rather than fair value.
(3) Maturities of mortgage-backed securities and collateralized obligations are based on contractual maturities. Actual maturities
may vary because obligors may have the right to call or prepay obligations with or without call or prepayment penalties.
14
BNCCORP, Inc. Annual Report 2008
11
As of December 31, 2008, we had $209.9 million of available-for-sale securities in the investment portfolio
compared to $122.9 and $183.0 million at December 31, 2007 and 2006, respectively.
In 2008, investment securities increased because we leveraged our balance sheet in order to increase net interest
income. We have unrealized losses because credit spreads have widened for many types of investments. See
Notes 1 and 4 of our Consolidated Financial Statements for a discussion of impairment assessments.
During 2007, investment securities declined because we sold approximately $59.5 million of securities to finance
repayment of $62.0 million of FHLB advances. Unrealized gains in the investment portfolio have increased
primarily because interest rates have declined. During 2007, $3.277 million of net losses on sales of securities
were realized. We elected to incur these losses in order to improve net interest income in future periods.
At December 31, 2008, we held ten securities, other than U.S. Government Agency CMOs that exceeded 10% of
stockholders’ equity. The total carrying value of these ten securities was $73.2 million. A significant portion of
our investment securities portfolio was pledged as collateral. (See Note 4 of our Consolidated Financial
Statements for the amount of investments that serve as collateral.)
Federal Reserve Bank and Federal Home Loan Bank of Des Moines Stock
Our equity securities consisted of $1.3 million of Federal Reserve Bank (“FRB”) stock as of December 31, 2008
and 2007, and $4.7 and $3.6 million of FHLB of Des Moines stock as of December 31, 2008 and 2007,
respectively.
Loan Portfolio
The following table presents the composition of our loan portfolio (dollars are in thousands):
2008
2007
December 31,
2006
2005
2004
Amount
%
Amount
%
Amount
%
Amount
%
Amount
%
Commercial and industrial $
138,671
24.6 $
125,555
24.4
$
100,127
25.9 $ 88,467
21.6
$ 75,460
23.2
Real estate mortgage
265,360
47.2
181,000
35.1
Real estate construction
108,713
19.3
167,345
32.5
124,551
89,619
32.2
23.2
122,785
30.1
129,321
39.8
80,296
19.7
68,967
21.2
Agricultural
22,023
3.9
17,074
3.3
14,286
3.7
12,706
3.1
13,919
4.3
Consumer/other
Participating interests in
mortgage loans
Lease financing
Total principal amount of
loans
Unearned income and net
unamortized deferred fees
and costs
Loans, net of unearned
income and unamortized
fees and costs
Less allowance for credit
losses
Net loans
7,506
1.3
5,878
1.1
4,237
1.1
4,718
1.2
5,480
1.7
28,584
5.1
24,357
4.7
56,125
14.5
101,336
24.8
34,515
10.6
1,287
0.2
1,815
0.4
1,800
0.5
2,131
0.5
1,540
0.5
572,144
101.6
523,024
101.5
390,745
101.0
412,439
101.0
329,202
101.3
(807)
(0.1)
(1,111)
(0.2)
(686)
(0.2)
(735)
(0.2)
(873)
(0.3)
571,337
101.5
521,913
101.3
390,059
100.9
411,704
100.8
328,329
101.0
(8,751)
(1.5)
(6,599)
(1.3)
(3,370)
(0.9)
(3,188)
(0.8)
(3,335)
(1.0)
$
562,586
100.0 $
515,314
100.0 $
386,689
100.0 $
408,516
100.0
$ 324,994
100.0
BNCCORP, Inc. Annual Report 2008
15
12
Change in Loan Portfolio Composition
As of December 31,
2008
2007
Increase (Decrease)
2008 – 2007
$
%
Commercial and industrial
Real estate mortgage
Real estate construction
Agricultural
Consumer/other
Participating interests in mortgage loans
Lease financing
Total principal amount of loans
Unearned income and net unamortized deferred
$
138,671
265,360
108,713
22,023
7,506
28,584
1,287
572,144
$ 125,555
181,000
167,345
17,074
5,878
24,357
1,815
523,024
$ 13,116
84,360
(58,632)
4,949
1,628
4,227
(528)
49,120
fees and costs
(807)
(1,111)
304
Loans, net of unearned income and unamortized
deferred fees and costs
Less allowance for credit losses
Net loans
571,337
(8,751)
$
562,586
521,913
(6,599)
$ 515,314
49,424
(2,152)
$ 47,272
10 % (a)
47 % (b)
(35) % (b)
29 % (c)
28 %
17 % (d)
(29) %
9 %
(27) %
9 %
33 %
9 %
(a) The increase is partially due to higher outstanding balances with existing customers. We are also obtaining better opportunities
for new loans because some of our competitors have been weakened due to the challenging economy.
(b) Real estate loans have increased and construction loans have decreased because projects under construction have been completed
and reclassified between categories.
(c) The increase in agricultural loans is due to additional lending activities in North Dakota.
(d) Participating interests in mortgage loans are collateralized mortgage loans held for sale by mortgage banking counterparties.
These loans will vary significantly depending on the volume of originations by the counterparties.
Loan Participations
Pursuant to our lending policy, loans may not exceed 85% 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.
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. Loan participations sold on a nonrecourse basis to outside financial institutions were as
follows as of the dates indicated:
Loan Participations Sold
December 31,
(in thousands)
2008
2007
2006
2005
2004
$
315,469
201,776
188,994
183,795
131,317
16
BNCCORP, Inc. Annual Report 2008
13
Concentrations of Credit
See Note 6 of our Consolidated Financial Statements for concentration of credit information.
Loan Maturities
The following table sets forth the remaining maturities of loans in each major category of our portfolio as of
December 31, 2008 (in thousands):
Maturities of Loans (1)
Commercial and industrial
Real estate mortgage
Real estate construction
Agricultural
Consumer/other
Participating interests in mortgage
loans
Lease financing
Total principal amount of loans
Over 1 year
through 5 years
One year
or less
Fixed
rate
$
81,218
71,320
60,598
12,395
3,170
$ 19,878
63,381
2,341
6,664
2,796
Floating
rate
$ 10,104
64,534
37,296
390
670
Over 5 years
Fixed
rate
Floating
rate
$
12,121 $ 15,350
30,157
35,968
105
8,373
1,546
1,028
203
667
Total
$ 138,671
265,360
108,713
22,023
7,506
28,584
381
257,666
$
906
-
$ 95,966
-
-
$ 112,994
-
-
-
44,132 $ 61,386
$
28,584
1,287
$ 572,144
(1) Maturities are based on contractual maturities. Floating rate loans include loans that would reprice prior to maturity if base rates
change.
Actual maturities may differ from the contractual maturities shown above as a result of renewals and
prepayments. Loan renewals are evaluated in the same manner as new credit applications.
Provision for Credit Losses
We provide for credit losses to maintain our allowance for credit losses at a level considered adequate for
estimated probable losses in the loan and lease portfolio as of each balance sheet date. The provision for credit
losses for the year ended December 31, 2008 was $7.750 million as compared to $3.750 million in 2007. The
provision for loan losses increased in 2008 due to loan growth, an increase in nonperforming loans and
deteriorating economic conditions.
Allowance for Credit Losses
Credit risk is the risk of loss from a customer default. We have in place a process to identify and manage our
credit risk. The process includes initial credit review and approval, periodic monitoring to measure compliance
with credit agreements and internal credit policies, internal credit review, monitoring changes in the risk ratings of
loans and leases, identification of problem loans and leases and special procedures for collection of problem loans
and leases. The risk of loss is difficult to estimate and is subject to fluctuations in values, general economic
conditions and other factors. The determination of the allowance for credit losses is a critical accounting policy,
which involves estimates and our judgment on a number of factors such as net charge-offs, delinquencies in the
loan and lease portfolio and general and economic conditions.
BNCCORP, Inc. Annual Report 2008
17
14
The following table summarizes activity in the allowance for credit losses and certain ratios:
Analysis of Allowance for Credit Losses
(dollars are in thousands)
For the Years ended December 31,
Balance of allowance for credit losses,
beginning of period
Charge-offs:
Commercial and industrial
Real estate mortgage
Real estate construction
Agricultural
Consumer/other
Lease financing
Total charge-offs
Recoveries:
Commercial and industrial
Real estate mortgage
Real estate construction
Agricultural
Consumer/other
Lease financing
Total recoveries
Net charge-offs
Provision for credit losses charged to
operations
2008
2007
2006
2005
2004
$
6,599
$
3,370
$
3,188
$
3,335
$
4,763
738
426
4,529
-
253
-
5,946
84
-
196
-
68
-
348
(5,598)
1,504
500
-
-
123
-
2,127
1,500
-
-
-
106
-
1,606
(521)
19
-
-
-
32
-
51
3
-
-
-
20
-
23
(28)
534
24
-
-
31
-
589
95
10
16
-
69
2
192
(397)
1,578
-
-
97
208
--
1,883
141
33
-
-
97
9
280
(1,603)
7,750
3,750
210
250
175
Balance of allowance for credit losses, end of
period
$
8,751
$
6,599
$
3,370
$
3,188
$
3,335
Ratio of net charge-offs to average total loans
Ratio of net charge-offs to average loans and
(0.507)%
(0.121)%
(0.008)%
(0.102)%
(0.548)%
leases held for investment
(0.534)%
(0.129)%
(0.008)%
(0.130)%
(0.579)%
Average gross loans and leases held for
investment
Ratio of allowance for credit losses to loans
and leases held for investment
Ratio of allowance for credit losses to total
nonperforming loans
$
525,311
$
402,615
$
334,058
$
305,073
$
276,652
1.61%
1.33%
1.01%
1.03%
38%
122%
3,304%
2,229%
1.14%
607%
The allowance for credit losses increased significantly in recent periods because of growth in the loan and lease
portfolio, an increase in nonperforming assets and deteriorating economic conditions. The carrying value of non
performing assets is supported by recent appraisals.
We consider the allowance for credit losses adequate to cover losses inherent in the loan and lease portfolio.
However, no assurance can be given that we will not sustain loan and lease losses that are sizable in relation to the
amount reserved, or that subsequent evaluations of the loan and lease portfolio will not require significant
increases in the allowance for credit losses. A protracted economic slowdown and/or a decline in commercial,
industrial or real estate segments may have an adverse impact on the adequacy of the allowance for credit losses
by increasing credit risk and the risk of potential loss.
See Notes 1 and 7 of our Consolidated Financial Statements and “Critical Accounting Policies” for further
information concerning accounting policies associated with the allowance for credit losses.
18
BNCCORP, Inc. Annual Report 2008
15
The table below presents, for the periods indicated an allocation of the allowance for credit losses among the
various loan categories and sets forth the percentage of loans in each category to gross loans. The allocation of the
allowance for credit losses as shown in the table should neither be interpreted as an indication of future charge-
offs, nor as an indication that charge-offs in future periods will necessarily occur in these amounts or in the
indicated proportions.
Allocation of the Allowance for Loan Losses
(dollars are in thousands)
2008
2007
Loans in
category as a
percentage
of total
gross loans
Amount
of
allowance
Amount
of
allowance
Loans in
category as a
percentage
of total
gross loans
December 31,
2006
Loans in
category as a
percentage
of total
gross loans
Amount
of
allowance
2005
2004
Loans in
category as a
percentage
Amount
of total
of
gross loans
allowance
Loans in
category as a
percentage
of total
gross loans
Amount
of
allowance
Commercial and
industrial
Real estate
mortgage (a)
Real estate
construction (a)
Agricultural
Consumer/other
Participating
interests in
mortgage loans
Lease financing
$
1,268
24%
$
1,410
24% $ 1,602
26% $ 1,632
21%
$ 1,583
2,829
47%
1,956
35%
838
32%
846
30%
1,116
4,293
180
85
86
10
19%
2,740
32%
534
23%
467
19%
379
4%
1%
5%
-
276
112
85
20
3%
1%
171
70
4%
1%
158
73
3%
1%
186
62
5%
140
14%
-
25%
-
-
15
-
12
1%
9
Total
$
8,751
100%
$
6,599
100% $ 3,370
100% $ 3,188
100%
$ 3,335
23%
39%
21%
4%
2%
11%
0%
100%
(a) In recent periods the portion of our allowance allocated to real estate loans increased because real estate is devaluing.
Allowance for Credit Losses; Impact on Earnings.
The allowance for credit losses is an estimate that reflects uncertain matters. Additionally, a different estimate that
could have been used in the current period could have had a material impact on reported financial condition or
results of operations. We are not aware of known trends, commitments, events or other uncertainties reasonably
likely to occur that would materially affect our methodology or the assumptions used, although changes in
qualitative and quantitative factors could occur at any time and such changes could be of a material nature. We
have calculated the allowance for credit losses to provide for estimated probable losses in the loan and lease
portfolio as of December 31, 2008.
From period to period, economic situations change, financial conditions of borrowers may deteriorate or improve
and other factors we consider in arriving at our estimates may change. However, our basic methodology for
determining an appropriate allowance for credit losses has remained relatively stable. The amount of the provision
for credit losses charged to operations is directly related to our estimates of the appropriate level of the allowance
for credit losses. Charge-offs and recoveries during the applicable periods also impact the level of the allowance
for credit losses resulting in a provision for credit losses that could be higher or lower in order to bring the
allowance for credit losses in line with our estimates.
BNCCORP, Inc. Annual Report 2008
19
16
Nonperforming Loans and Assets
The following table sets forth, as of the dates indicated, the amounts of nonperforming loans and other assets, the
allowance for credit losses and certain related ratios (dollars are in thousands):
Nonperforming Assets
2008
2007
December 31,
2006
(dollars in thousands)
2005
2004
Nonperforming loans:
Loans 90 days or more delinquent and still
accruing interest
Nonaccrual loans
Total nonperforming loans
Other real estate
Total nonperforming assets
Allowance for credit losses
Ratio of total nonperforming loans to total loans
Ratio of total nonperforming loans to loans and
leases held for investment
Ratio of total nonperforming assets to total assets
Ratio of allowance for credit losses to
nonperforming loans
$ 6
22,909
22,915
10,189
33,104
8,751
3.92%
$
$
$
$
$
4.22%
3.84%
-
5,399
5,399
-
5,399
6,599
1.03%
1.09%
0.77%
$ 2
100
102
-
102
3,370
0.03%
$
$
$ -
143
143
-
143
3,188
0.03%
$
$
$ 25
524
549
-
549
3,335
0.16%
$
$
0.03%
0.02%
0.05%
0.02%
0.19%
0.09%
38%
122%
3,304%
2,229%
607%
Past Due, Non-accrual and Restructured Loans
The following table indicates the effect on income if interest on non-accrual and restructured loans outstanding at
year end had been recognized at original contractual rates during the year ended December 31 (in thousands):
Interest income that would have been recorded $ 1,661
1,247
Interest income recorded
Effect on interest income
$
414
2008
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.
Non-accrual loans include loans on which the accrual of interest has been discontinued. Accrual of interest is
discontinued when we believe that the borrower’s financial condition is such that the collection of interest is
doubtful. A delinquent loan is generally placed on non-accrual 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 non-accrual 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.
20
BNCCORP, Inc. Annual Report 2008
17
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. If collection of principal and interest on restructured loans is in doubt, interest income is recognized on a
cash basis. A loan that has performed in accordance with its restructured terms for one year is no longer reported
as a restructured loan.
The table below summarizes the amounts of restructured loans. All of the restructured loans were also non-
accrual loans.
Restructured Loans
As of December 31,
(in thousands)
2008
2007
2006
2005
2004
$ 2,379
2,585
54
91
-
Other real estate owned and repossessed assets represent properties and other assets acquired through, or in
lieu of, loan foreclosure. 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 is recorded fair value less cost to sell.
Reductions to other real estate owned and repossessed assets are considered valuation allowances. Expenses
incurred to record valuation allowances subsequent to foreclosure are charged to non-interest expense.
Impaired loans
See Note 6 of our Consolidated Financial Statements for impaired loans information.
Potential Problem Loans
Asset values are declining throughout most of the country. So long as this devaluation continues, virtually all real
estate loans are potential problem assets.
Notwithstanding the prior paragraph, we attempt to quantify potential problem loans with more immediate credit
risk. We estimate such loans totaled $13.2 million and $4.5 million at December 31, 2008 and 2007, respectively.
A significant portion of these potential problem loans are not in default but may have characteristics such as
recent adverse operating cash flows or general risk characteristics that the loan officer feels might jeopardize the
future timely collection of principal and interest payments. The ultimate resolution of these credits is subject to
changes in economic conditions and other factors. These loans are closely monitored to ensure that our position as
creditor is protected to the fullest extent possible.
BNCCORP, Inc. Annual Report 2008
21
18
Liabilities and Stockholders’ Equity
The following table presents our liabilities and stockholders’ equity of December 31, 2008 and 2007 (dollars are
in thousands):
Liabilities and Stockholders’ Equity
Deposits:
Non-interest-bearing
Interest-bearing-
Savings, interest checking and money
market
Time deposits $100,000 and over
Other time deposits
Short-term borrowings
FHLB advances
Long-term borrowings
Guaranteed preferred beneficial
interests in Company's subordinated
debentures
Accrued interest payable
Accrued expenses
Other liabilities
Total liabilities
Stockholders' equity
Total liabilities and
As of December 31,
2008
2007
Increase (Decrease)
2008 – 2007
$
%
$
68,996
$
72,234
$
(3,238)
(4) % (a)
266,851
42,342
297,132
16,844
84,500
-
23,025
1,679
3,325
2,857
807,551
53,947
245,722
44,038
179,880
5,365
61,400
-
23,075
2,843
3,387
1,917
639,861
59,730
21,129
(1,696)
117,252
11,479
23,100
-
(50)
(1,164)
(62)
940
167,690
(5,783)
(b)
9 %
(4) %
65 % (c)
214 % (d)
38 % (e)
- %
- %
(41) %
(2) %
49 %
26 %
(10) %
stockholders’ equity
$
861,498
$
699,591
$
161,907
23 %
(a) These accounts fluctuate daily due to the cash management activities of our customers.
(b) Our customers have migrated to insured deposits as other investment vehicles have incurred losses.
(c) We used certificate of deposits to fund our investment securities as part of our leverage strategy.
(d) Short-term borrowings increased because a client has provided funds via customer repurchase agreements.
(e) FHLB advances were used to fund purchases of investments.
22
BNCCORP, Inc. Annual Report 2008
19
Deposits
The following table sets forth, for the periods indicated, the distribution of our average deposit account balances
and average cost of funds rates on each category of deposits (dollars are in thousands):
Average Deposits and Deposits Costs
For the Years Ended December 31,
2008
Percent
of
deposits
Wgtd.
avg.
rate
Average
balance
2007
Percent
of
deposits
Average
balance
2006
Wgtd.
avg.
rate
Average
balance
Percent Wgtd.
avg.
rate
of
deposits
$ 244,279
9,859
39.96%
1.61%
1.67% $
0.33%
249,246
8,399
47.95%
1.62%
3.21%
0.79%
$ 246,476
8,398
46.68% 3.02%
1.59% 0.79%
232,367
58,378
38.01%
9.55%
3.87%
3.44%
149,010
44,824
290,745
47.56%
3.78%
193,834
28.67%
8.62%
37.29%
4.79%
5.17%
150,194
54,155
28.45% 4.29%
10.26% 4.61%
4.88%
204,349
38.70% 4.37%
544,883
89.14%
2.77%
451,479
86.86%
3.88%
459,223
86.98% 3.58%
66,388
10.86%
-
68,277
13.14% -
68,743
13.02% -
Interest checking and
MMDAs
Savings deposits
Time deposits (CDs):
CDs under $100,000
CDs $100,000 and over
Total time deposits
Total interest-bearing
deposits
Non-interest-bearing
demand deposits
Total deposits
$ 611,271 100.00%
2.47% $
519,756
100.00%
3.37%
$ 527,966
100.00% 3.11%
Time deposits, in denominations of $100,000 and more, totaled $42.3 million at December 31, 2008 as compared
to $44.0 million at December 31, 2007. The following table sets forth the amount and maturities of time deposits
of $100,000 and more as of December 31, 2008 (in thousands):
Time Deposits of $100,000 and Over
Maturing in:
3 months or less
Over 3 months through 6 months
Over 6 months through 12 months
Over 12 months
Total
$
$
11,662
7,458
16,884
6,338
42,342
Borrowed Funds
The following table provides a summary of our short-term borrowings and related cost information as of, or for
the years ended, December 31 (dollars are in thousands):
Short-Term Borrowings
Short-term borrowings outstanding at period end
Weighted average interest rate at period end
Maximum month-end balance during the period
Average borrowings outstanding for the period
Weighted average interest rate for the period
2008
2007
2006
$
$
$
16,844
0.88%
16,844
7,049
2.04%
$
$
$
$
$
$
5,365
3.64%
15,518
8,706
4.57%
9,709
4.81%
21,059
14,480
4.73%
Note 12 of our Consolidated Financial Statements summarizes the general terms of our short-term borrowings
outstanding at December 31, 2008 and 2007.
BNCCORP, Inc. Annual Report 2008
23
20
FHLB advances totaled $84.5 million and $61.4 million at December 31, 2008 and 2007, respectively, while
long-term borrowings totaled $0 million, for the same periods.
Notes 13 and 14 of our Consolidated Financial Statements summarize the general terms of our FHLB advances
and long-term borrowings at December 31, 2008 and 2007.
Guaranteed Preferred Beneficial Interests in Company’s Subordinated Debentures
See Note 15 of our Consolidated Financial Statements for a description of the subordinated debentures.
Capital Resources 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 and the level of capital. Note 18 of our Consolidated Financial Statements includes a summary of the
risk-based and leverage capital ratios of BNCCORP and the Bank as of December 31, 2008 and 2007.
Although there is currently no regulation requiring a minimum ratio of tangible common equity to tangible assets,
the banking industry has historically used this ratio. Our ratios of tangible capital to tangible assets at December
31, 2008 are as follows:
Actual
Amount
Ratio
For Capital Adequacy
Amount
Ratio
To be Well Capitalized
Ratio
Amount
2008
Tangible Common Equity (to
total assets):
Consolidated
BNC National Bank
$
53,538
75,573
6.21 %
8.77
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
On January 16, 2009, BNC announced that it has received net proceeds of approximately $20.1 million through
the sale of shares of non-voting senior preferred stock to the U.S. Department of the Treasury under the Capital
Purchase Program. The Treasury Department also received a warrant exercisable for shares of an additional class
of BNCCORP, Inc. preferred stock which has an aggregate liquidation preference of approximately $1.0 million.
The Treasury Department exercised this warrant at the closing of the transaction. The proceeds of the sale will
further increase the Company’s capital ratios and strengthen its capital position. If the Capital Purchase Program
transaction had been consummated as of December 31, 2008, the pro forma capital of the Company would have
been as follows:
Actual
Amount
Ratio
For Capital Adequacy
Ratio
Amount
To be Well Capitalized
Amount
Ratio
2008
Pro forma Capital (to total assets):
Total Capital (to risk-weighted
assets) Consolidated
$ 109,041
15.88 %
Tier 1 Capital (to risk-weighted
assets) Consolidated
Tier 1 Capital (to average assets)
103,375
15.05
Consolidated
103,375
12.16
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
24
BNCCORP, Inc. Annual Report 2008
21
Off-Balance-Sheet Arrangements
In the normal course of business, we are a party to various financial instruments with off-balance-sheet risk.
These instruments include commitments to extend credit, commercial letters of credit, performance and financial
standby letters of credit and interest rate swaps, caps and floors. Such instruments help us to meet the needs of our
customers, manage our interest rate risk and effectuate various transactions. These instruments and commitments,
which we enter into for purposes other than trading, carry varying degrees of credit, interest rate or liquidity risk
in excess of the amount reflected in the consolidated balance sheets. See Notes 21 and 22 to the Consolidated
Financial Statements for a detailed description of each of these instruments.
Contractual Obligations, Contingent Liabilities and Commitments
As disclosed in the Notes to the Consolidated Financial Statements, we have certain contractual obligations,
contingent liabilities and commitments. At December 31, 2008, the aggregate contractual obligations (excluding
bank deposits), contingent liabilities and commitments were as follows (in thousands):
Contractual Obligations:
year
1 to 3 years
3 to 5 years
After 5 years
Total
Payments due by period
Less than 1
Total borrowings
Commitments to sell loans
Annual rental commitments under
non-cancelable operating leases
Total
$ 79,344
13,832
$ -
-
$ 15,000
-
$ 30,025 $ 124,369
13,832
-
1,256
$ 94,432
2,004
$ 2,004
742
$ 15,742
1,560
$ 31,585 $
5,562
143,763
Other Commitments:
Less than 1
year
1 to 3 years
3 to 5 years
After 5 years
Total
Amount of Commitment - Expiration by Period
Commitments to lend
Standby and commercial letters of
credit
Total
$ 105,258
$ 35,362
$ 2,770
$ 397 $ 143,787
3,968
$ 109,226
2,514
$ 37,876
27
$ 2,797
6,509
-
$ 397 $ 150,296
We are a party to transactions involving financial instruments that create risks that may or may not be reflected on
a traditional balance sheet. These financial instruments can be subdivided into two categories:
Cash financial instruments, generally characterized as on-balance-sheet items; include investments, loans,
mortgage-backed securities, deposits and debt obligations.
Credit-related financial instruments, generally characterized as off-balance-sheet items, include such
instruments as commitments to extend credit, commercial letters of credit and performance and financial
standby letters of credit.
Liquidity Risk Management
Liquidity risk is the possibility of being unable 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.
BNCCORP, Inc. Annual Report 2008
25
22
The Consolidated Statements of Cash Flows in the Consolidated Financial Statements 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 of Des Moines, which affords it the opportunity to borrow funds in terms ranging from
overnight to 10 years and beyond. Advances from the FHLB are 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.
Our liquidity is measured by our ability to raise cash when we need it at a reasonable cost and with a minimum of
losses. 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
accessed as needed.
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. In addition, we subject these assumptions to stress tests to
measure the degree of volatility our liquidity position could manage over the 30-day 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 of liquidity metrics 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 December 31, 2008, the Bank had established Federal funds purchase programs with other lending
institutions, totaling $9 million. At December 31, 2008, the Bank had purchased Federal funds of $7 million under
these programs leaving $2 million available. The Federal funds purchase programs, if advanced upon, mature
daily with interest rates that float at the Federal funds rate.
Forward-Looking Statements
Statements included in “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 and Section 21E of 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, income
and expenses, 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.
26
BNCCORP, Inc. Annual Report 2008
23
Recently Issued and Adopted Accounting Pronouncements
Note 1 of our Consolidated Financial Statements includes a summary of recently issued and adopted accounting
pronouncements and their related or anticipated impact on the Company.
Critical Accounting Policies
Note 1 of our Consolidated Financial Statements includes a summary of our critical accounting policies and their
related impact on the Company.
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, caps, and interest rate swaps, the interest rate sensitivity of specific
transactions, as well as pools of assets or liabilities, can be adjusted to maintain the desired interest rate risk
profile. See “-Loan Portfolio-Interest Rate Caps and Floors” “-Borrowings-Interest Rate Caps and Floors” and
Notes 1 and 17 to the Consolidated Financial Statements for a summary of our accounting policies pertaining to
such instruments.
Our primary tool for measuring and managing interest rate risk is net interest income simulation. This exercise
includes our assumptions regarding the changes in interest rates and the 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.
Additionally, changes in prepayment behavior of the residential mortgage, CMOs, 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 accounts are held constant at their December 31, 2008 levels. Cash flows from a given
account are reinvested back into the same account so as to keep the month-end balance constant at its December
31, 2008 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.
BNCCORP, Inc. Annual Report 2008
27
24
We monitor the results of net interest income simulation on a quarterly basis at regularly scheduled 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. Given the low absolute level of interest rates as of December 31, 2008, the
downward scenarios for interest rate movements is limited to -100bp. 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 on a pro-rata basis. For
example, in the +100bp scenario, the projected prime rate is projected to increase from 3.25% to 4.25% 12
months later. The prime rate in this example will increase 1/12th of the overall decrease of 100 basis points each
month.
The net interest income simulation result for the 12-month horizon that covers the calendar year of 2008 is shown
below:
Net Interest Income Simulation
Movement in interest rates
$
Projected 12-month net interest income
Dollar change from unchanged scenario $
Percentage change from unchanged
scenario
Policy guidelines (decline limited to)
-100bp
27,984
371
$
Unchanged
27,613
-
+100bp
27,129
(484)
$
$
+200bp
$ 26,809 $
$
$ (804)
1.34%
(5.00)%
-
-
(1.75)%
(5.00)%
(2.91)%
(10.00)%
+300bp
26,483
(1,130)
(4.09)%
(15.00)%
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 percentage 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.
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.
When a given scenario falls outside of these limits, the ALCO reviews the circumstances surrounding the
exception and, considering the level of net interest income generated in the scenario and other related factors, may
approve the exception to the general policy or recommend actions aimed at bringing the respective scenario
within the general limits noted above.
Since there are limitations inherent in any methodology used to estimate the exposure to changes in market
interest rates, these analyses are not intended to be a forecast of the actual effect of changes in market interest
rates such as those indicated above on the Company. Further, these analyses are based on our assets and liabilities
as of December 31, 2008 (without forward adjustments for planned growth and anticipated business activities)
and do not contemplate any actions we might undertake in response to changes in market interest rates.
Static gap analysis is another tool that may be used for interest rate risk measurement. The net differences
between the amount of assets, liabilities, equity and off-balance-sheet instruments repricing within a cumulative
calendar period is typically referred to as the “rate sensitivity position” or “gap position.” The following table sets
forth our rate sensitivity position as of December 31, 2008. Assets and liabilities are classified by the earliest
possible repricing date or maturity, whichever occurs first.
28
BNCCORP, Inc. Annual Report 2008
25
Interest Sensitivity Gap Analysis
0–3
months
Estimated maturity or repricing at December 31, 2008
1–5
years
(dollars are in thousands)
4–12
months
Over
5 years
Total
Interest-earning assets:
Interest-bearing deposits with banks
Investment securities
FRB and FHLB stock
Fed Funds Sold
Loans held for sale, fixed rate
Loans held for sale, floating rate
Loans held for investment, fixed rate
Loans held for investment, floating rate
$ -
19,637
5,989
-
-
-
26,571
314,086
$ -
47,025
-
-
-
41,987
56,674
3,027
$ - $ -
52,530
-
-
-
-
20,439
2,141
90,665
-
-
-
-
93,271
26,544
$ -
209,857
5,989
-
-
41,987
196,955
345,798
Total interest-earning assets
$
366,283
$
148,713 $
210,480 $ 75,110
$ 800,586
Interest-bearing liabilities:
Interest checking and money market accounts
Savings
Time deposits under $100,000
Time deposits $100,000 and over
Short-term borrowings
FHLB advances
Long-term borrowings
Subordinated debentures
Total interest-bearing liabilities
Interest rate gap
$
256,091
10,760
95,417
11,662
16,844
62,500
-
-
$ -
-
103,273
24,343
-
-
-
-
$ - $ -
-
5,456
-
-
7,000
-
23,025
-
92,985
6,338
-
15,000
-
-
$ 256,091
10,760
297,131
42,343
16,844
84,500
-
23,025
$
453,274
$ (86,991)
$
$
127,616 $
114,323 $ 35,481
$ 730,694
21,097
96,157 $ 39,629
$ 69,892
Cumulative interest rate gap at December 31, 2008
$ (86,991)
$ (65,894)
$
30,263
69,892
Cumulative interest rate gap to total assets
(10.10)%
(7.65)%
3.51%
8.11%
The table assumes that all savings and interest-bearing demand deposits reprice in the earliest period presented,
however, we believe a significant portion of these accounts constitute a core component and are generally not rate
sensitive. Our position is supported by the fact that aggressive reductions in interest rates paid on these deposits
historically have not caused notable reductions in balances in net interest income because the repricing of certain
assets and liabilities is discretionary and is subject to competitive and other pressures. As a result, assets and
liabilities indicated as repricing within the same period may in fact reprice at different times and at different rate
levels.
Static gap analysis does not fully capture the impact of embedded options, lagged interest rate changes,
administered interest rate products, or certain off-balance-sheet sensitivities to interest rate movements. Therefore,
this tool generally cannot be used in isolation to determine the level of interest rate risk exposure in banking
institutions.
Since there are limitations inherent in any methodology used to estimate the exposure to changes in market
interest rates, these analyses are not intended to be a forecast of the actual effect of changes in market interest
rates such as those indicated above on the Company. Further, these analyses are based on our assets and liabilities
as of December 31, 2008 and do not contemplate any actions we might undertake in response to changes in
market interest rates.
BNCCORP, Inc. Annual Report 2008
29
26
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors’ Report
Consolidated Balance Sheets as of December 31, 2008 and 2007
Consolidated Statements of Income for the years ended December 31, 2008 and 2007
Consolidated Statements of Comprehensive Income for the years ended December 31, 2008
and 2007
Consolidated Statements of Cash Flows for the years ended December 31, 2008 and 2007
Page
31
32
33
35
36
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2008 and 2007
38
Notes to Consolidated Financial Statements
39
30
BNCCORP, Inc. Annual Report 2008
27
Independent Auditors’ Report
The Board of Directors and Stockholders
BNCCORP, Inc.:
We have audited the accompanying consolidated balance sheets of BNCCORP, Inc. and subsidiaries
(the Company) as of December 31, 2008 and 2007, and the related consolidated statements of income,
comprehensive income, stockholders’ equity, and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company’s management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes consideration of
internal control over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of BNCCORP, Inc. and subsidiaries as of December 31, 2008 and 2007, and
the results of their operations and their cash flows for the years then ended in conformity with
U.S. generally accepted accounting principles.
Omaha, Nebraska
March 23, 2009
BNCCORP, Inc. Annual Report 2008
31
KPMG LLP Suite 1501 Two Central Park Plaza Omaha, NE 68102 Suite 1600 233 South 13th Street Lincoln, NE 68508-2041 KPMG LLP, a U.S. limited liability partnership, is the U.S.member firm of KPMG International, a Swiss cooperative. Financial Statements
FINANCIAL INFORMATION
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31
(In thousands, except share data)
ASSETS
2008
2007
CASH AND CASH EQUIVALENTS
INVESTMENT SECURITIES AVAILABLE FOR SALE
FEDERAL RESERVE BANK AND FEDERAL HOME LOAN BANK STOCK
LOANS HELD FOR SALE
PARTICIPATING INTERESTS IN MORTGAGE LOANS
LOANS AND LEASES HELD FOR INVESTMENT
ALLOWANCE FOR CREDIT LOSSES
Net loans and leases
OTHER REAL ESTATE OWNED
PREMISES AND EQUIPMENT, net
INTEREST RECEIVABLE
OTHER ASSETS
PREMISES AND EQUIPMENT HELD FOR SALE, net
Total assets
$ 10,569
209,857
5,989
13,403
28,584
542,753
(8,751)
562,586
10,189
20,810
3,263
24,832
-
861,498
$
$
14,856
122,899
4,918
-
24,357
497,556
(6,599)
515,314
-
19,448
3,290
15,294
3,572
699,591
$
LIABILITIES AND STOCKHOLDERS’ EQUITY
DEPOSITS:
Noninterest-bearing
Interest-bearing –
Savings, interest checking and money market
Time deposits $100,000 and over
Other time deposits
Total deposits
SHORT-TERM BORROWINGS
FEDERAL HOME LOAN BANK ADVANCES
LONG-TERM BORROWINGS
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY’S
SUBORDINATED DEBENTURES
ACCRUED INTEREST PAYABLE
ACCRUED EXPENSES
OTHER LIABILITIES
Total liabilities
STOCKHOLDERS’ EQUITY:
$ 68,996
$
72,234
266,851
42,342
297,132
675,321
16,844
84,500
-
23,025
1,679
3,325
2,857
807,551
245,722
44,038
179,880
541,874
5,365
61,400
-
23,075
2,843
3,387
1,917
639,861
Preferred stock, $.01 par value – 2,000,000 shares authorized; no shares
issued or outstanding
-
-
Common stock, $.01 par value – 10,000,000 shares authorized; 3,299,163
and 3,491,337 shares issued and outstanding
Capital surplus – common stock
Retained earnings
Treasury stock, at cost (357,738 and 150,116 shares)
Accumulated other comprehensive income (loss), net
Total stockholders’ equity
Total liabilities and stockholders’ equity
33
26,628
36,104
(5,020)
(3,798)
53,947
861,498
$
35
26,355
34,105
(2,424)
1,659
59,730
699,591
$
See accompanying notes to consolidated financial statements.
29
32
BNCCORP, Inc. Annual Report 2008
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the Years Ended December 31
(In thousands, except per share data)
INTEREST INCOME:
Interest and fees on loans
Interest and dividends on investments
Taxable
Tax-exempt
Dividends
Total interest income
INTEREST EXPENSE:
Deposits
Short-term borrowings
Federal Home Loan Bank advances
Long-term borrowings
Subordinated debentures
Total interest expense
Net interest income
PROVISION FOR CREDIT LOSSES
2008
2007
$
35,322
$
36,560
9,599
839
266
46,026
15,099
144
2,291
25
1,656
19,215
26,811
7,750
6,541
926
214
44,241
17,533
398
1,915
11
2,137
21,994
22,247
3,750
NET INTEREST INCOME AFTER PROVISION FOR CREDIT
LOSSES
19,061
18,497
NON-INTEREST INCOME:
Bank charges and service fees
Wealth management revenues
Mortgage banking revenues
Gains on sales of commercial real estate loans
Gain on sales of premises and equipment
Net gain (loss) on sales of securities
Other
Total non-interest income
NON-INTEREST EXPENSE:
Salaries and employee benefits
Data processing fees
Occupancy
Depreciation and amortization
Marketing and promotion
Professional services
FDIC and other assessments
Office supplies, telephone and postage
ORE expenses
Debt extinguishment costs
Other
Total non-interest expense
Income (loss) from continuing operations before income taxes
Income tax expense (benefit)
Income (loss) from continuing operations
2,337
2,826
2,101
1,116
775
247
993
10,395
14,673
2,202
2,140
1,375
1,127
1,177
400
533
515
-
2,359
26,501
2,955
737
2,218
$
See accompanying notes to consolidated financial statements.
$
2,010
2,041
158
1,731
-
(3,277)
1,190
3,853
14,868
2,524
2,074
1,697
703
840
228
499
-
2,724
1,990
28,147
(5,797)
(2,728)
(3,069)
BNCCORP, Inc. Annual Report 2008
33
30
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income, continued
For the Years Ended December 31
(In thousands, except per share data)
Discontinued Operations:
Income from discontinued insurance segment
Income tax expense
Income from discontinued operations
NET INCOME
BASIC EARNINGS PER COMMON SHARE:
Income (loss) from continuing operations
Income from discontinued insurance segment, net of income taxes
Basic earnings per common share
DILUTED EARNINGS PER COMMON SHARE
Income (loss) from continuing operations
Income from discontinued insurance segment, net of income taxes
Diluted earnings per common share
2008
2007
-
-
-
2,218
$
$
8,116
3,067
5,049
1,980
0.67
$
(0.89)
-
0.67
$
1.46
0.57
0.67
$
(0.89)
-
0.67
$
1.46
0.57
$
$
$
$
$
$
See accompanying notes to consolidated financial statements.
34
BNCCORP, Inc. Annual Report 2008
31
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the Years Ended December 31
(In thousands)
NET INCOME
2008
2007
$
2,218
$
1,980
Unrealized gain on cash flow hedge, net
$
1,332
$
690
Unrealized gain (loss) on securities available for
sale
Reclassification adjustment for (gains) losses
included in net income
Other comprehensive income (loss), before
tax
Income tax (expense) benefit related to items of
other comprehensive income
Other comprehensive income (loss)
(9,836)
(247)
(8,751)
3,294
(5,457)
1,720
3,277
5,687
(2,117)
3,570
3,570
(5,457)
TOTAL COMPREHENSIVE INCOME (LOSS)
$
(3,239)
$
5,550
See accompanying notes to consolidated financial statements.
BNCCORP, Inc. Annual Report 2008
35
32
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31 (In thousands)
OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by (used in)
operating activities -
Provision for credit losses
Depreciation and amortization
Net amortization of premiums (discounts) on investment securities and
subordinated debentures
Fair value adjustment for loans held for sale
Share-based compensation
Change in other assets, net
Loss on sale of ORE
(Gain) loss on sales of bank premises and equipment, net
Net realized (gain) loss on sales of investment securities
Deferred income taxes
Unamortized premium related to early extinguishment of subordinated debt
Change in other liabilities, net
Originations of loans to be participated
Proceeds from participations of loans
Funding of originations of loans held for sale
Proceeds from sale of loans held for sale
Change in operating accounts of discontinued operations
Gain on sale of discontinued operations
Net cash (used in) provided by operating activities
INVESTING ACTIVITIES:
Changes in federal funds sold, net
Purchases of investment securities
Proceeds from sales of investment securities
Proceeds from maturities of investment securities
Purchases of Federal Reserve and Federal Home Loan Bank Stock
Sales of Federal Reserve and Federal Home Loan Bank Stock
Net (increase) decrease in participating interests in mortgage loans
Net increase in loans, excluding participating interests in mortgage loans
Proceeds from sales of ORE
Additions to bank premises and equipment
Proceeds from sales of bank premises and equipment
Proceeds from sale of insurance operations, net
Net cash used in investing activities
2008
2007
$
2,218
$
1,980
7,750
1,375
(1,164)
(268)
273
(3,877)
38
(775)
(247)
(1,158)
-
(138)
(201,489)
201,489
(102,040)
88,905
-
-
(9,108)
-
(141,821)
14,209
31,981
(8,618)
7,547
(4,227)
(61,511)
222
(2,990)
4,600
-
(160,608)
3,750
1,752
163
-
298
(419)
-
11
3,277
(1,325)
289
1,733
(205,929)
205,929
(11,364)
13,033
(2,540)
(6,083)
4,555
24,000
(71,196)
106,450
26,379
(2,817)
2,902
31,768
(164,143)
-
(1,889)
836
35,204
(12,506)
See accompanying notes to consolidated financial statements.
36
BNCCORP, Inc. Annual Report 2008
33
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, continued
For the Years Ended December 31 (In thousands)
FINANCING ACTIVITIES:
Net increase in deposits
Net increase (decrease) in short-term borrowings
Repayments of Federal Home Loan Bank advances
Proceeds from Federal Home Loan Bank advances
Repayments of long-term borrowings
Proceeds from long-term borrowings
Purchases of treasury stock
Net cash provided by financing activities
NET DECREASE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, beginning of year
CASH AND CASH EQUIVALENTS, end of year
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid
Income taxes paid
2008
2007
133,448
11,479
(3,413,530)
3,436,630
-
-
(2,598)
165,429
(4,287)
14,856
10,569
$
12,622
(4,344)
(320,200)
319,400
(16,167)
15,000
(1,720)
4,591
(3,360)
18,216
14,856
15,892
2,231
$
$
21,981
3,367
$
$
$
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Additions to other real estate in settlement of loans
$
10,717
$
-
See accompanying notes to consolidated financial statements.
BNCCORP, Inc. Annual Report 2008
37
34
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
For the Years Ended December 31, 2008 and 2007
(In thousands, except share data)
Preferred Stock
Common Stock
Shares
Amount
Shares
Amount
Capital
Surplus
Common
Stock
Retained
Earnings
Treasury
Stock
Accumulated
Other
Comprehensive
Income (Loss)
Total
BALANCE, December 31, 2006
- $ -
3,600,467 $ 36 $
25,950 $
32,125 $ (598) $
(1,911) $ 55,602
Net income
-
-
-
-
-
1,980
-
-
1,980
Other comprehensive income
-
-
-
-
-
-
-
3,570
3,570
Impact of share-based
compensation
Purchase of common shares
-
-
-
-
(14,348)
-
405
-
(107)
-
298
(94,782)
(1)
-
-
(1,719)
-
(1,720)
BALANCE, December 31, 2007
- $ -
3,491,337 $ 35 $
26,355 $
34,105 $ (2,424) $
1,659 $ 59,730
Net income
-
-
-
-
Other comprehensive (loss)
-
-
-
-
-
-
2,218
-
-
2,218
-
-
(5,457)
(5,457)
Cumulative effect of change in
accounting principle related
to split dollar life insurance
policies
Impact of share-based
compensation
Purchase of common shares
-
-
-
-
-
(219)
-
-
(219)
-
-
-
-
8,152
-
273
-
-
-
273
(200,326)
(2)
-
-
(2,596)
-
(2,598)
BALANCE, December 31, 2008
- $ -
3,299,163 $ 33 $
26,628 $
36,104 $ (5,020) $
(3,798) $ 53,947
See accompanying notes to consolidated financial statements.
38
BNCCORP, Inc. Annual Report 2008
35
BNCCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 1. Description of Business and Significant Accounting Policies
Description of Business
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., collectively the “Bank”). The Company operates community
banking, and wealth management businesses in Arizona, Minnesota and North Dakota from 20 locations. BNC
also conducts mortgage banking from five locations in Iowa, Kansas, Missouri and Arizona.
The consolidated financial statements included herein are for BNCCORP and its subsidiaries. The accounting and
reporting policies of BNCCORP and its subsidiaries (collectively, the “Company”) conform to U.S. generally
accepted accounting principles and general practices within the financial services industry. The more significant
accounting policies are summarized below.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of BNCCORP and its wholly-owned
subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Ultimate results could differ from those estimates.
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, income taxes, other than temporary impairment and
fair value. The following have been identified as “critical accounting policies”.
Allowance for Credit Losses
The Bank maintains an estimate of its allowance for credit losses at a level considered adequate to provide for
probable losses related to specifically identified loans as well as 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. The Bank evaluates the allowance necessary
for specific nonperforming loans and also estimates losses in other credit exposures. The resultant three allowance
components are as follows:
Specific Reserves. The amount of specific reserves is determined through a loan-by-loan analysis of problem
loans over a minimum size. Included in problem loans are those non-accrual or renegotiated loans that meet
the criteria as being “impaired” under the definition in Statement of Financial Accounting Standards
(“SFAS”) No. 114, “Accounting by Creditors for Impairment of a Loan”. 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. Any allowance on impaired loans is generally based
on one of three methods, as SFAS No. 114 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. 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.
BNCCORP, Inc. Annual Report 2008
39
36
Reserves for Homogeneous Loan Pools. The Bank makes 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 as previously discussed. The Bank segments the homogeneous pools by
type of loan or lease and, using historical loss information, estimates a loss reserve for each pool.
Qualitative Reserve. The Bank’s senior lending management also allocates reserves for special
circumstances which are unique to the measurement period. These include, among other things, prevailing
trends and economic conditions in certain geographic, industry or lending segments of the portfolio;
management’s assessment of credit risk inherent in the loan portfolio, delinquency data; historical loss
experience and peer-group loss history.
Continuous credit monitoring and analysis of loss components are the principal processes relied upon by
management to determine changes in estimated credit losses are reflected in the Bank’s allowance for credit losses
on a timely basis. Management also considers experience of peer institutions and regulatory guidance in addition
to the Bank’s 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. Management’s estimate of the allowance for credit losses is
highly dependent upon variables affecting valuation, including, appraisals of collateral, evaluations of
performance and status, and the amounts and timing of future cash flows expected to be received on impaired
loans. These variables are reviewed periodically. Actual losses may vary from the current estimated allowance for
credit losses. The provision for credit losses is the amount necessary to adjust the allowance to the level
determined appropriate through application of the above processes.
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 nonperforming 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 that
occur in a particular period.
Qualitative factors include the general economic environment in our markets and the state of certain industries in
our market areas. Size and complexity of individual credits, loan structure, the extent and nature of waivers of
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, we will enhance our methodology as
circumstances dictate to keep pace with the complexity of the loan and lease portfolio. We believe that our
systematic methodology is appropriate given our size and level of complexity.
Income Taxes
The Company files consolidated federal and unitary state income tax returns. Deferred 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, unrealized gains and losses on investment securities, deferred
compensation and leases. 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.
40
BNCCORP, Inc. Annual Report 2008
37
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 taxes.
The Company adopted Financial Accounting Standards Board (FASB) Financial Interpretation No. 48 (FIN 48),
“Accounting for Uncertainty in Income Taxes”, on January 1, 2007. FIN 48 is an interpretation of SFAS No. 109,
“Accounting for Income Taxes”, and it seeks to reduce the diversity in practice associated with certain aspects of
measurement and recognition in accounting for income taxes. FIN 48 requires that the Company recognize in its
financial statements, the impact of a tax position if that position is more likely than not of being sustained on audit
based on the technical merits of the position. The adoption of FIN 48 did not have a material impact on the
Company’s results of operations or financial position. See Footnote 24 to these consolidated financial statements,
for additional information.
Other Than Temporary Impairment
Declines in the fair value of individual available-for-sale or held-to-maturity securities below their cost, which are
deemed other than temporary, could result in a charge to earnings and the corresponding establishment of a new
cost basis for the security. Such write-downs would be included in non-interest income as realized losses. The
Company assesses available information regarding the collectability of securities such as past events, current
conditions and reasonable and supportable forecasts. Consideration is also given to a variety of factors including,
but not limited to, the following:
• Recent and expected performance of the securities;
• Financial condition of issuers or guarantors;
• Recent cash flows;
• Seniority of invested tranches and subordinated credit support;
• Vintage of origination;
• Location of collateral;
• Ratings of securities;
• Value of underlying collateral;
• Delinquency and foreclosure data;
• Historical losses and estimated severity of future losses;
• Credit surveillance data which summarize retrospective performance; and
• Anticipated future cash flows and prospective performance assessments.
Determining whether an other than temporary impairment has occurred requires management’s judgment of
factors that may indicate an impairment loss has incurred. There were no securities that management concluded
were other than temporarily impaired in either 2008 or 2007.
Note 4 to these consolidated financial statements includes a summary of investment securities in a loss position at
December 31, 2008 and a discussion concerning such securities.
Fair Value
Several accounting standards require recording assets and liabilities based on their fair values. Determining the
fair value of assets and liabilities can be highly subjective.
BNCCORP, Inc. Annual Report 2008
41
38
SFAS No. 157 “Fair Value Measurements” defines fair value and establishes a framework for measuring fair
value of assets and liabilities using a hierarchy system consisting of three levels based on the markets in which the
assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels
are:
Level 1: Valuation is based upon quoted prices for identical instruments traded in active markets that the
Company has the ability to access.
Level 2: Valuation is based upon quoted prices for similar instruments in active markets, quoted prices
for identical or similar instruments in markets that are not active, and model-based valuation techniques
for which significant assumptions are observable in the market.
Level 3: Valuation is generated from model-based techniques that use significant assumptions not
observable in the market and are used only to the extent that observable inputs are not available. These
unobservable assumptions reflect our own estimates of assumptions that market participants would use in
pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash
flow models and similar techniques.
Management assigns a level to assets and liabilities accounted for at fair value and uses the methodologies
prescribed by SFAS 157 to determine fair value.
OTHER SIGNIFICANT ACCOUNTING POLICIES
Investment Securities
Investment securities that the Bank intends to hold for indefinite periods of time as part of its asset/liability
strategy, or that may be sold in response to changes in interest rates, changes in prepayment risk, the need to
increase regulatory capital or similar factors are classified as available for sale. Available for sale securities are
carried at market value. Net unrealized gains and losses, net of deferred income taxes, on investment and
mortgage-backed securities available for sale are reported as a separate component of stockholders’ equity until
realized (see “Comprehensive Income”). All securities, other than the securities of the Federal Reserve Bank
(“FRB”) and the Federal Home Loan Bank (“FHLB”), were classified as available for sale as of December 31,
2008 and 2007.
Investment securities that the Bank intends to hold until maturity are carried at cost, adjusted for amortization of
premiums and accretion of discounts using a level yield method over the period to maturity. There were no such
securities as of December 31, 2008 or 2007.
Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to yield
using the effective interest method. Dividend and interest income is recognized when earned. Realized gains and
losses on the sale of investment securities are determined using the specific-identification method and recognized
in non-interest income on the trade date.
Federal Reserve Bank and Federal Home Loan Bank of Des Moines Stock
Investments in FRB and FHLB stock are carried at cost, which approximates fair value.
Loans Held For Sale
At December 31, 2007 loans held for sale were accounted for at the lower of cost or market.
In 2008, loans held for sale were accounted for at fair value pursuant to the fair value option permitted by SFAS
No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities”. We elected the fair value option
for loans held for sale because they are economically hedged with forward sales commitments. We expect that
changes in the fair value of loans held for sale and forward sales commitments will be offsetting. Adopting SFAS
No. 159 had no impact on retained earnings.
For mortgage loans held for sale carried at fair value under SFAS 159, gains and losses from the initial
measurement and subsequent changes in fair value are included in mortgage banking revenue.
39
42
BNCCORP, Inc. Annual Report 2008
Participating Interests in Mortgage Loans
The Bank purchases participating interests in mortgage loans owned by mortgage banking counter-parties. The
participating interests are generally outstanding for a short duration as funds are advanced to finance loans closed
by the counterparties and are repaid when the counterparties sell the loans. The participating interests are stated at
the aggregate amount of the loans financed by the counterparties. An allowance for losses is estimated on the
participating interests and is included in the allowance for credit losses.
Loans and Leases
Loans and leases held for investment are stated at their outstanding principal amount net of unearned income, net
of unamortized deferred fees and costs and an allowance for credit losses. Interest income is recognized on an
accrual basis using the interest method prescribed in the loan agreement except when collectability is in doubt.
Loans and leases, including loans that are considered to be impaired, are reviewed regularly by management and
are placed on non-accrual status when the collection of interest or principal is 90 days or more past due, unless the
loan or lease is adequately secured and in the process of collection. When a loan or lease is placed on non-accrual
status, unless collection of all principal and interest is considered to be assured, uncollected interest accrued in
prior years is charged off against the allowance for credit losses. Interest accrued in the current year is reversed
against interest income in the current period. Interest payments received on non-accrual loans and leases are
generally applied to principal unless the remaining principal balance has been determined to be fully collectible.
Accrual of interest is resumed when it can be determined that all amounts due under the contract are expected to
be collected and the loan has exhibited a sustained level of performance, generally at least six months.
All impaired loans are measured at the present value of expected future cash flows discounted at the loan’s initial
effective interest rate. The fair value of collateral of an impaired collateral-dependent loan or an observable
market price may be used as an alternative to discounting. If the measure of the impaired loan is less than the
recorded investment in the loan, impairment will be recognized as a charge-off through the allowance for credit
losses. A loan is considered impaired when it is probable that a creditor will be unable to collect all amounts due
according to the contractual terms of the loan agreement. All loans are reviewed for impairment on an individual
basis.
Cash receipts on impaired loans, excluding impaired loans that are on non-accrual status, are applied to principal
except when the loan is well collateralized or there are other circumstances that support recognition of interest.
Cash receipts on impaired loans that are on non-accrual status are applied to principal.
Loan Origination Fees and Costs; Other Lending Fees
For Loans and Leases Held for Investment, origination fees and costs incurred to extend credit are deferred and
amortized over the term of the loan as an adjustment to yield using the interest method, except where the net
amount is immaterial.
The Company occasionally originates lines of credit where the customer is charged a non-usage fee if the line of
credit is not used. In such instances, we periodically review use of lines on a retrospective basis and recognize
non-usage fees in non-interest income.
Mortgage Servicing and Transfers of Financial Assets
The Bank sells loans to others on a non-recourse basis. Sold loans are not included in the accompanying
consolidated balance sheets. 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. At December 31, 2008 and 2007, the Bank was servicing loans for
the benefit of others with aggregate unpaid principal balances of $315.5 and $201.8 million, respectively. In 2008
and 2007, $285.6 million and $187.5 million, respectively of loans sold by the Bank are commercial lines of
credit, or construction loans, for which balances and related payment streams cannot be reasonably estimated in
order to determine the fair value of the servicing assets or liabilities and/or future interest income retained by the
Bank. Upon sale, unearned net loan fees and/or costs are recognized in non-interest income and included in gains
on sale of loans.
BNCCORP, Inc. Annual Report 2008
43
40
The sales of loans are accounted for pursuant to SFAS No. 140, “Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities”.
Premises and Equipment
Land is carried at cost. Premises and equipment are reported at cost less accumulated depreciation and
amortization. Depreciation and amortization for financial reporting purposes is charged to operating expense
using the straight-line method over the estimated useful lives of the assets. Estimated useful lives are up to 40
years for buildings and three to 10 years for furniture and equipment. Leasehold improvements are amortized over
the shorter of the lease term or the estimated useful life of the improvement. The costs of improvements are
capitalized. Maintenance and repairs, as well as gains and losses on dispositions of premises and equipment, are
included in non-interest income or expense as incurred.
Other Real Estate Owned and Repossessed Property
Real estate properties and other assets acquired through loan foreclosures are stated at the lower of carrying
amount or fair value less estimated costs to sell. When an asset is acquired, the excess of the recorded investment
in the asset over fair value less estimated costs to sell, if any, is charged to the allowance for credit losses.
Management performs valuations periodically. Fair value is generally determined based upon appraisals of the
assets involved. Subsequent declines in the estimated fair value, net operating results and gains and losses on
disposition of the asset are included in other non-interest income. Operating expenses of properties are charged to
ORE expense.
Impairment of Long-Lived Assets
The Company reviews long-lived assets, including property and equipment for impairment periodically or
whenever events or changes in circumstances indicate that the carrying amount of any such asset may not be
recoverable. If impairment is identified, the assets are written down to their fair value through a charge to non-
interest expense. No such impairment losses were recorded during 2008 or 2007.
Long-Lived Assets Held for Sale
Long-lived assets held for sale are carried at the lower of the carrying amount or fair value less costs to sell.
Assets classified as long-lived assets held for sale are available for immediate sale in their present condition and
are actively marketed for sale. The Company does not record depreciation expense on long-lived assets held for
sale.
Securities Sold Under Agreements to Repurchase
From time to time, the Bank enters into sales of securities under agreements to repurchase, generally for periods
of less than 90 days. These agreements are treated as financings, and the obligations to repurchase securities sold
are reflected as a liability in the consolidated balance sheets as short-term borrowings. The costs of securities
underlying the agreements remain in the asset accounts.
Fair Values of Financial Instruments
The Company is required to disclose the estimated fair value of financial instruments for which it is practicable to
estimate fair value. Fair value estimates are subjective in nature, involving uncertainties and matters of significant
judgment, and therefore cannot be determined with precision. Changes in assumptions could significantly affect
the estimates. Non-financial instruments are excluded from fair value of financial instrument disclosure
requirements. The following methods and assumptions are used by the Company in estimating fair value
disclosures for its financial instruments, all of which are issued or held for purposes other than trading.
Cash and Cash Equivalents, Non-interest-Bearing Deposits and Demand Deposits. The carrying amounts
approximate fair value due to the short maturity of the instruments. The fair value of deposits with no stated
maturity, such as interest checking, savings and money market accounts, is equal to the amount payable on
demand at the reporting date.
Investment Securities Available for Sale. The fair value of the Company’s securities are based upon quoted
prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets
that are not active, and model-based valuation techniques for which significant assumptions are observable in
the market.
41
44
BNCCORP, Inc. Annual Report 2008
Federal Reserve Bank and Federal Home Loan Bank Stock. The carrying amount of FRB and FHLB
stock is their cost, which approximates fair value.
Loans Held for Sale. The fair value of the Company’s loans held for sale was stated at the lower of cost or
market value of the loans at December 31, 2007. In 2008 loans held for sale were accounted for at fair value
pursuant to the fair value option permitted by SFAS No. 159 “The Fair Value Option for Financial Assets and
Financial Liabilities”. See recently issued or adopted accounting pronouncement disclosure.
Participating Interests in Mortgage Loans, Loans and Leases Held for Investment. Fair values of these
assets are estimated by discounting future cash flow payment streams using rates at which current loans to
borrowers with similar credit ratings and similar loan maturities are being made.
Accrued Interest Receivable. The fair value of accrued interest receivable equals the amount receivable due
to the current nature of the amounts receivable.
Derivative Financial Instruments. The fair value of the Company’s derivatives are based upon quoted
prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets
that are not active, and model-based valuation techniques for which significant assumptions are observable in
the market.
Interest-Bearing Deposits. Fair values of interest-bearing deposit liabilities are estimated by discounting
future cash flow payment streams using rates at which comparable current deposits with comparable
maturities are being issued. The intangible value of long-term customer relationships with depositors is not
taken into account in the fair values disclosed.
Borrowings and Advances. The carrying amount of short-term borrowings approximates fair value due to
the short maturity and the instruments’ floating interest rates, which are tied to market conditions. The fair
values of long-term borrowings are estimated by discounting future cash flow payment streams using rates at
which comparable borrowings are currently being offered.
Accrued Interest Payable. The fair value of accrued interest payable equals the amount payable due to the
current nature of the amounts payable.
Guaranteed Preferred Beneficial Interests In Company’s Subordinated Debentures. The fair values of
the Company’s subordinated debentures are estimated by discounting future cash flow payment streams using
discount rates estimated to reflect those at which comparable instruments could currently be offered.
Financial Instruments with Off-Balance-Sheet Risk. The fair values of the Company’s commitments to
extend credit and commercial and standby letters of credit are estimated using fees currently charged to enter
into similar agreements.
Derivative Financial Instruments
SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, as amended and interpreted,
establishes accounting and reporting standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. As required by SFAS No. 133, the Company records all
derivatives at fair value.
The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the
resulting designation. Derivatives used to hedge the exposure to variability in expected future cash flows, or other
types of forecasted transactions, are considered cash flow hedges.
BNCCORP, Inc. Annual Report 2008
45
42
All derivative instruments that qualify for specific hedge accounting are recorded at fair value and classified either
as a hedge of the fair value of a recognized asset or liability (“fair value” hedge) or as a hedge of the variability of
cash flows to be received or paid related to a recognized asset or liability or a forecasted transaction (“cash flow”
hedge). All relationships between hedging instruments and hedged items are formally documented, including the
risk management objective and strategy for undertaking various hedge transactions. This process includes linking
all derivatives that are designated as hedges to specific assets or liabilities on the balance sheet.
Changes in the fair value of a derivative that is highly effective and designated as a fair value hedge and the
offsetting changes in the fair value of the hedged item are recorded in income. Changes in the fair value of a
derivative that is highly effective and designated as a cash flow hedge are recognized in other comprehensive
income until income from the cash flows of the hedged item are recognized. The Company performs an
assessment, both at the inception of the hedge and on a quarterly basis thereafter, to determine whether these
derivatives are highly effective in offsetting changes in the value of the hedged items. Any change in fair value
resulting from hedge ineffectiveness is immediately recorded in income.
Revenue Recognition
The Company recognizes revenue on an accrual basis for interest and dividend income on loans, investment
securities, Federal funds sold and interest bearing cash and cash equivalent accounts. Non-interest income is
recognized when it has been realized and has been earned. In accordance with existing accounting and industry
standards, the Company considers revenue to be realized or realizable and earned when the following criteria have
been met: persuasive evidence of an arrangement exists (generally, there is contractual documentation); delivery
has occurred or services have been rendered; the seller’s price to the buyer is fixed or determinable; and
collectability is reasonably assured. Additionally, there can be no outstanding contingencies that could ultimately
cause the revenue to be passed back to the payor. In instances where these criteria have not been met, receipts are
deferred until such time as they can be recognized as revenue.
Earnings Per Common Share
Basic earnings per share (“EPS”) excludes dilution and is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding during the applicable period.
Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of common stock that then shared in
the earnings of the entity. Such potential dilutive instruments include stock options and contingently issuable
stock. Note 25 to these consolidated financial statements includes disclosure of the Company’s EPS calculations.
Comprehensive Income
Comprehensive income is the total of net income and other comprehensive income, which for the Company, is
generally comprised of unrealized gains and losses on securities available for sale and unrealized gains and losses
on hedging instruments qualifying for cash flow hedge accounting treatment pursuant to SFAS No. 133, as
amended. The Company presents consolidated statements of comprehensive income.
Cash and Cash Equivalents
For purposes of the Consolidated Statements of Cash Flows, cash and cash equivalents include cash on hand, cash
due from banks and federal funds sold.
Share-Based Compensation
As of January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), Share-Based Payment (“FAS
123R”), which requires the Company to measure the cost of employee services received in exchange for an award
of equity instruments based on the fair value of the award on the grant date.
At December 31, 2008, the Company had three stock-based employee compensation plans, which are described
more fully in Note 28 to these consolidated financial statements.
46
BNCCORP, Inc. Annual Report 2008
43
RECENTLY ISSUED OR ADOPTED ACCOUNTING PRONOUNCEMENTS
The Company adopted FIN 48, “Accounting for Uncertainty in Income Taxes” on January 1, 2007. FIN 48 is an
interpretation of SFAS No. 109, “Accounting for Income Taxes”, and it seeks to reduce the diversity in practice
associated with certain aspects of measurement and recognition in accounting for income taxes. FIN 48 requires
that the Company recognize in its financial statements, the impact of a tax position if that position is more likely
than not of being sustained on audit based on the technical merits of the position. The adoption of FIN 48 did not
have a material impact on the Company’s results of operations or financial position. See Note 24 to these
consolidated financial statements for additional information.
Emerging Issues Task Force (“EITF”) 06-04, “Accounting for Deferred Compensation and Postretirement Benefit
Aspects of Endorsement Split-Dollar Life Insurance Arrangements” (EITF 06-04) requires recognition of a
liability for future benefits in accordance with SFAS No. 106, “Employers Accounting for Post Retirement
Benefits Other Than Pension” (if, in substance, a postretirement benefit plan exists) or Accounting Principles
Board (“APB”) Opinion 12 (if the arrangement is, in substance, an individual deferred compensation contract)
based on the substantive agreement with the employee. The EITF is effective for fiscal years beginning after
December 15, 2007, with earlier application permitted. The Company adopted EITF 06-04 on January 1, 2008
and recognized a cumulative-effect adjustment to decrease retained earnings by $219,000.
SFAS No. 156, “Accounting for Servicing of Financial Assets” – an amendment of SFAS No. 140, requires an
entity to recognize a servicing asset or liability each time it undertakes an obligation to service a financial asset.
SFAS No. 156 requires that all separately recognized servicing assets and liabilities be initially measured at fair
value and permits, but does not require the subsequent measurement of servicing assets and liabilities at fair
value. The provisions of SFAS No. 156 were adopted by the Company on January 1, 2007 and did not have a
material impact on the Company’s results of operations or financial position. The Company elected to measure
the subsequent measurements of the servicing assets and liabilities using the amortization method.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. This Statement defines fair
value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands
disclosures about the use of fair value to measure assets and liabilities. This Statement is effective for financial
statements issued for fiscal years beginning after November 15, 2007. The impact of adopting SFAS No. 157 on
January 1, 2008 did not have a material impact on the Company’s results of operations or financial position. In
accordance with the provisions of FASB Staff Position, or FSP, No. FAS 157-2 Effective Date of FASB Statement
No. 157, we elected to defer implementation of SFAS No. 157, as it relates to our nonfinancial assets and
nonfinancial liabilities that are recognized and disclosed at fair value in our consolidated financial statements on a
non-recurring basis, until January 1, 2009. We are evaluating the impact, if any, the adoption of SFAS No. 157 for
our nonfinancial assets and nonfinancial liabilities will have on our financial position, results of operations or
liquidity.
In February 2007, FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities”, including an amendment of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity
Securities”. This Statement permits entities to measure many financial instruments and other items at fair value
and most of the provisions of the Statement apply only to entities that elect the fair value option. This Statement
is effective for financial statements issued for fiscal years beginning after November 15, 2007. The impact of
adopting SFAS No. 159 on January 1, 2008 had no impact on retained earnings.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial
Statements-an amendment of ARB No. 51”. This Statement amends ARB No. 51 to establish accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It
clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should
be reported as equity in the consolidated financial statements. This Statement applies to all for-profit entities that
prepare consolidated financial statements, but affects only those entities that have an outstanding noncontrolling
interest in subsidiaries or that deconsolidate a subsidiary. This Statement is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and for interim periods within those fiscal years. The
BNCCORP, Inc. Annual Report 2008
47
44
impact of adopting SFAS No. 160 on January 1, 2009 had no impact on the Company’s results of operations or
financial position.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations”. This Statement
replaces SFAS No. 141, “Business Combinations” and retains the fundamental requirements of SFAS No. 141
that the purchase method of accounting be used for all business combinations and for an acquirer to be identified
for each business combination. This Statement established principles and requirements for how the acquirer
recognizes and measures the assets acquired (including goodwill), the liabilities assumed, and any controlling
interest in the acquiree. It also determines what information is to be disclosed to enable users of the financial
statements to evaluate the nature and financial effect of the business combination. This Statement is effective for
financial statements issued for fiscal years beginning after December 15, 2008, and for interim periods within
those fiscal years.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging
Activities-an amendment of FASB Statement No. 133”. This Statement applies to all entities and requires
enhanced disclosures about an entity’s derivative hedging activities including how and why an entity uses
derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS 133
and how derivative instruments and related hedged items affect an entity’s financial position, financial
performance, and cash flows. This Statement is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. We have not completed our analysis of the Statement but we
believe the impact of adopting SFAS No. 161 on January 1, 2009 will not have a material impact on the
Company’s results of operations or financial position.
REGULATORY ENVIRONMENT
BNCCORP and its subsidiaries are subject to regulations of certain state and federal agencies, including periodic
examinations by those regulatory agencies. BNCCORP and the Bank are also subject to minimum regulatory
capital requirements. At December 31, 2008, capital levels exceeded minimum capital requirements (see Note 18
to these consolidated financial statements).
RECLASSIFICATIONS
Certain amounts in the financial statements for the prior year have been reclassified to conform to the current
year’s presentation. These reclassifications had no effect on net income or stockholders’ equity.
NOTE 2. Acquisitions and Divestitures
On June 1, 2007, the Company completed the sale of substantially all of the assets of BNC Insurance Services,
Inc. (BNC Insurance). Management considered the benefits of the sale including, but not limited to the following:
• Monetizes the value of a segment the Company had nurtured;
• Strengthens the regulatory capital of Company;
• Decreases the risk of impaired revenue due to a decline in contingency income;
• Decreases exposure to the cyclicality of the insurance business; and
• Permits replacement of a significant portion of the income generated by the agency.
The Company initiated actions related to the sale late in 2006 and reached an agreement to sell substantially all of
the assets of the insurance segment in March 2007. Stockholders approved the transaction in May 2007. The gross
proceeds from sale were $37.25 million and a pre-tax gain on sale of $6.083 million was recognized in the second
quarter of 2007.
The financial statements of the Company report BNC Insurance in discontinued operations for all periods
presented. The gain on sale is also reported in discontinued operations of the Company in 2007. Pre-tax revenues
of BNC Insurance were $9.111 million in 2007.
48
BNCCORP, Inc. Annual Report 2008
45
NOTE 3. Restrictions on Cash and Cash Equivalents
The Bank is required to maintain reserve balances in cash on hand or with the FRB under the Federal Reserve Act
and FRB’s Regulation D required reserve balances were $25,000 as of December 31, 2008 and 2007.
NOTE 4. Investment Securities Available For Sale
Investment securities have been classified in the consolidated balance sheets according to management’s intent.
The Company had no securities designated as trading or held-to-maturity in its portfolio at December 31, 2008 or
2007. The carrying amount of available-for-sale securities and their approximate fair values were as follows as of
December 31 (in thousands):
2008
U.S. government agency
mortgage-backed securities
guaranteed by GNMA
U.S. government agency
mortgage-backed securities
issued by FNMA
Collateralized mortgage
obligations guaranteed by
GNMA
Collateralized mortgage
obligations issued by FNMA or
FHLMC
Other collateralized mortgage
obligations
State and municipal bonds
2007
U.S. government agency
mortgage-backed securities
guaranteed by GNMA
U.S. government agency
mortgage-backed securities
issued by FNMA
Collateralized mortgage
obligations guaranteed by
GNMA
Collateralized mortgage
obligations issued by FNMA or
FHLMC
Other collateralized mortgage
obligations
State and municipal bonds
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
$
1,505
$
39
$
(1)
$
1,543
2,891
23,037
33
177
(7)
2,917
(44)
23,170
37,896
1,128
-
39,024
138,851
13,482
233
541
(9,899)
(5)
129,185
14,018
$
217,662
$
2,151
$
(9,956)
$ 209,857
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
$
1,799
$
1
$
(16)
$
1,784
3,329
2,394
33
19
(29)
3,333
-
2,413
62,384
933
(11)
63,306
32,830
17,885
312
1,099
(63)
-
33,079
18,984
$
120,621
$
2,397
$
(119)
$ 122,899
BNCCORP, Inc. Annual Report 2008
49
46
The amortized cost and estimated fair market value of available-for-sale securities classified according to their
contractual maturities at December 31, 2008, were as follows (in thousands):
Amortized
Cost
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Total
$
$
2,480
6,285
38,801
170,096
217,662
$
$
Estimated
Fair Value
2,527
6,430
38,648
162,252
209,857
Securities carried at approximately $197.5 million and $118.3 million at December 31, 2008 and 2007,
respectively, were pledged as collateral for public and trust deposits and borrowings, including borrowings from
the FHLB and repurchase agreements with customers.
Sales proceeds and gross realized gains and losses on available-for-sale securities were as follows for the years
ended December 31 (in thousands):
Sales proceeds
Gross realized gains
Gross realized losses
$
2008
14,209
256
(9)
2007
$ 106,450
-
(3,277)
The following table shows the Company’s investments’ gross unrealized losses and fair value; aggregated by
investment category and length of time that individual securities have been in a continuous unrealized loss
position at December 31, 2008 and 2007 (in thousands):
As of December 31, 2008
Description of
Securities
U.S. government agency
mortgage-backed securities
guaranteed by GNMA
U.S. government agency
mortgage-backed securities
issued by FNMA
Collateralized mortgage
obligations guaranteed by
GNMA
Other collateralized mortgage
Less than 12 months
12 months or more
#
Fair
Value
Unrealized
Loss
#
Fair
Value
Unrealized
Loss
#
Total
Fair
Value
Unrealized
Loss
- $
- $
-
1
$ 81 $
(1)
1 $
81 $
(1)
-
-
-
3
1,555
(7)
3
1,555
(7)
2
10,402
(44)
-
-
-
2
10,402
(44)
obligations
26
109,322
(9,767)
State and municipal bonds
2
892
(5)
1
-
2,490
(132)
-
-
27
2
111,812
892
(9,899)
(5)
Total temporarily impaired
securities
30 $
120,616 $ (9,816)
5
$ 4,126 $
(140)
35 $
124,742 $
(9,956)
50
BNCCORP, Inc. Annual Report 2008
47
As of December 31, 2007
Description of
Securities
U.S. government agency
mortgage-backed securities
guaranteed by GNMA
U.S. government agency
mortgage-backed securities
issued by FNMA
Collateralized mortgage
obligations issued by
FNMA or FHLMC
Other collateralized mortgage
obligations
State and municipal bonds
Total temporarily impaired
securities
Less than 12 months
12 months or more
Total
#
Fair
Value
Unrealized
Loss
#
Fair
Value
Unrealized
Loss
#
Fair
Value
Unrealized
Loss
-
$
- $
-
3
$
1,399 $
(16)
3 $ 1,399
$
(16)
-
-
-
5
2,194
(29)
5
2,194
(29)
2
514
(2)
2
2,499
(9)
4
3,013
(11)
3
-
11,704
(63)
-
-
-
-
-
-
-
3
11,704
-
-
-
(63)
-
5 $
12,218 $
(65)
10 $
6,092 $ (54)
15 $ 18,310
$ (119)
In reaching the conclusion that the impairments disclosed in the tables above are temporary and not other-than-
temporary in nature, the Company considered the nature of the securities, the associated guarantees and
collateralization, the securities ratings and the level of impairment of the securities. As of December 31, 2008,
there were nine U.S. government agency mortgage-backed securities with unrealized losses, four issued and
guaranteed by GNMA, the other five by FNMA or FHLMC, and there were two general obligation bank-
qualified, municipal bonds with underlying ratings of "A" or above.
The 27 other collateralized mortgage obligations that were in an unrealized loss position are senior tranches,
backed by fixed-rate collateral generated in 2004 or earlier. All but one of these securities have been in an
unrealized loss positions for less than twelve months. The weighted average amortized loan-to-value (LTV) of the
collateral underlying 15 of the 27 securities in an unrealized loss position is less than 60%. The largest weighted
average amortized LTV of any of the securities in an unrealized loss position is 70.4%. All but three of these
securities were originally issued in 2003 or in the first half of 2004. The three securities in an unrealized loss
position that were issued in 2005 are off of mortgage collateral that was originated in 2001, 2002, 2003 and 2004
and have collateral ages of 61, 63, and 79 months respectively.
All of the securities are rated investment grade by Moody’s, Standard & Poor’s, and/or Fitch. Twenty-six of the
27 securities carry “AAA” ratings by two of the three ratings agencies. None of the securities are currently “on-
watch” for downgrade from their current ratings. None of the impairments were due to deterioration in credit
quality that might result in the non-collection of contractual principal and interest. The cause of the impairments
is, in general, attributable to changes in interest rates. Further, we have both the intent and ability to hold these
impaired securities for a sufficient period of time to allow for their recovery in market value. For management’s
conclusion on other than temporary impairment, please refer to the other than temporary impairment discussion in
the critical accounting policies in Note 1 to these consolidated financial statements.
NOTE 5. Federal Reserve Bank and Federal Home Loan Bank of Des Moines Stock
The carrying amounts of FRB and FHLB stock, which approximate their fair values, consisted of the following as
of December 31 (in thousands):
Federal Reserve Bank Stock, at cost
Federal Home Loan Bank of Des Moines Stock, at cost
Total
2008
1,297
4,692
5,989
$
$
2007
1,297
3,621
4,918
$
$
There is no contractual maturity on these investments; they represent required investments.
BNCCORP, Inc. Annual Report 2008
51
48
NOTE 6. Loans and Leases
Loan Portfolio Composition
The composition of loans and leases, including participating interests in mortgage loans, classified as we present
on our regulatory reports was as follows at December 31 (in thousands):
Commercial and industrial
Real estate:
Mortgage
Construction
Agricultural
Consumer
Lease financing
Other
Subtotal
Participating interests in mortgage loans
Total gross loans held for investment
Unearned income and net unamortized deferred fees and costs
Loans, net of unearned income and unamortized fees and costs
Allowance for credit losses
Net loans and leases
2008
$ 138,671
2007
$ 125,555
265,360
108,713
22,023
6,873
1,287
633
543,560
28,584
572,144
(807)
571,337
(8,751)
$ 562,586
181,000
167,345
17,074
5,445
1,815
433
498,667
24,357
523,024
(1,111)
521,913
(6,599)
$ 515,314
Commercial and industrial loan borrowers are generally small and mid-sized corporations, partnerships and sole
proprietors in a wide variety of businesses. Real estate loans are fixed or variable rate and include both amortizing
and revolving line-of-credit loans. Real estate mortgage loans include various types of loans for which the Bank
holds real property as collateral. Agricultural loans include loans to grain and/or livestock producers, agricultural
real estate loans, machinery and equipment and other types of loans. Loans to consumers are both secured and
unsecured. Lease financing represents credit to borrowers under direct finance lease obligations. The Bank also
extends financing to lease companies, securing the loan with an assignment of lease payments and a security
filing against the underlying asset of the lease. These loans are classified as lease financing but are not direct
finance lease obligations.
Concentrations of Credit
The following tables summarize the location of our borrowers as of December 31 (in thousands):
2008
2007
Minnesota
North Dakota
Arizona
Other
Totals
$ 185,947
173,509
145,643
67,045
$ 572,144
33 %
30
25
12
100 %
$ 193,149
154,972
136,371
38,532
$ 523,024
37 %
30
26
7
100 %
52
BNCCORP, Inc. Annual Report 2008
49
Our borrowers use loan proceeds for projects in various geographic areas. The following table summarizes the
locations where our borrowers are using loan proceeds as of December 31 (in thousands):
North Dakota
Arizona
Minnesota
Texas
California
Kentucky
Wisconsin
Idaho
New York
Georgia
South Dakota
Arkansas
Florida
Other
Totals
2008
2007
$ 181,073
126,327
106,786
37,032
23,894
11,000
10,301
8,146
7,496
6,559
5,864
5,260
5,228
37,178
$ 572,144
32 %
22
19
6
4
2
2
1
1
1
1
1
1
7
100 %
$ 160,506
120,931
130,085
26,966
20,715
9,916
5,573
5,621
4,155
6,566
1,723
5,171
2,862
22,234
$ 523,024
31 %
23
25
5
4
2
1
1
1
1
-
1
1
4
100 %
The bank has a concentration of loans exceeding 10% of the total loan portfolio in real estate loans. Significant
concentrations within the real estate portfolio as defined by the loan’s purpose code as of December 31 are as
follows (in thousands):
Land and land development loans
Construction loans
Totals
2008
61,814
37,746
99,560
$
$
2007
11 %
7
18 %
$
78,992
15 %
68,849
13
$
147,841
28 %
Construction loans include loans for which construction is complete and the loans will be either sold or refinanced
to permanent loans within the following year.
Impaired Loans
As of December 31, the Bank’s recorded investment in impaired loans and the related valuation allowance was as
follows (in thousands):
2008
2007
Recorded
Investment
Valuation
Allowance
Recorded
Investment
Valuation
Allowance
Impaired loans -
Valuation allowance required
$
17,355
$
1,619
$
16,397
$
1,572
No valuation allowance required
-
-
-
-
Total impaired loans
$
17,355
$
1,619
$
16,397
$
1,572
Impaired loans generally include loans which management believes it is probable that the Bank will not be able to
collect all amounts due in accordance with the terms of the loan agreement and which are analyzed for a specific
reserve allowance. The Bank generally considers all loans risk-graded substandard and doubtful, as well as non-
accrual and restructured loans, as impaired loans.
BNCCORP, Inc. Annual Report 2008
53
50
The valuation allowance on impaired loans is included in the Bank’s allowance for credit losses. The average
recorded investment in impaired loans, and approximate interest income recognized for such loans, were as
follows for the years ended December 31 (in thousands):
Average recorded investment in impaired loans
$
17,917
$
16,228
Average recorded investment in impaired loans as a
percentage of average total loans
3.41%
3.26%
2008
2007
Twelve Months Ended
December 31, 2008
Twelve Months Ended
December 31, 2007
Interest income recognized on impaired loans
$
267
$
159
Interest income recognized on a cash basis during the
time of impairment
169
18
Loans to Related Parties
Note 23 to these consolidated financial statements includes information relating to loans to executive officers,
directors, principal shareholders and associates of such persons.
Leases
The Bank extends credit to borrowers under direct finance lease obligations. The direct finance lease obligations
are stated at their outstanding principal amount net of unearned income and net unamortized deferred fees and
costs. At December 31, 2008, the future minimum annual lease payments for direct finance lease obligations were
as follows (in thousands):
2009
2010
2011
2012
2013
Thereafter
Total future minimum lease
Unguaranteed residual values
Total all payments
Unearned income
Net outstanding principal amount
$
$
486
258
225
24
-
-
993
414
1,407
(120)
1,287
Loans Pledged as Collateral
Single- and multi-family residential mortgage loans totaling $12.2 and $11.7 million at December 31, 2008 and
2007, respectively, were pledged as collateral for borrowings. Commercial real estate first mortgage loans totaling
$58.2 and $68.5 million at December 31, 2008 and 2007, respectively, were pledged as collateral for borrowings.
Home equity lines of credit, residential second mortgage loans, and warehouse mortgage loans held for sale of
$7.6 million, $7.2 million, and $10.7 million respectively as of December 31, 2008 were pledged as collateral for
borrowings. No home equity lines of credit, residential second mortgage loans, and warehouse mortgage loans
held for sale were pledged as collateral for borrowings as of December 31, 2007.
54
BNCCORP, Inc. Annual Report 2008
51
NOTE 7. Allowance for Credit Losses
Transactions in the allowance for credit losses were as follows for the years ended December 31 (in thousands):
Balance, beginning of year
Provision for credit losses
Loans charged off
Loans recovered
Balance, end of year
2008
6,599
7,750
(5,946)
348
8,751
$
$
2007
3,370
3,750
(2,127)
1,606
6,599
$
$
NOTE 8. Other Real Estate
Other real estate (ORE) includes property acquired through foreclosure, property in judgment and in-substance
foreclosures. ORE is carried at fair value less estimated selling costs. The property is evaluated regularly and any
decreases in the carrying amount are included in non-interest expense. ORE consisted of the following at
December 31 (in thousands):
Other Real Estate
Other real estate owned
Real estate in judgment
In-substance foreclosure
2008
2007
$
10,189
$
-
-
-
-
-
Total other real estate owned
Allowance for other real estate losses
$
10,189
$
-
-
-
Total other real estate owned, net $
10,189
$
-
NOTE 9. Premises and Equipment, net
Premises and equipment, net consisted of the following at December 31 (in thousands):
Land and improvements
Buildings and improvements
Leasehold improvements
Furniture, fixtures and equipment
Total cost
Less accumulated depreciation and amortization
Net premises, leasehold improvements and equipment
2008
6,692
12,914
1,795
8,643
30,044
(9,234)
20,810
$
$
2007
6,692
11,108
1,686
8,085
27,571
(8,123)
19,448
$
$
Depreciation and amortization expense charged to continuing operations totaled approximately $1.4 million and
$1.6 million for the years ended December 31, 2008 and 2007, respectively.
NOTE 10. Premises and Equipment Held for Sale
In October 2007 the Company entered into an exclusive listing agreement with a commercial real estate broker to
sell a commercial building which was no longer needed for operating purposes. The Company sold the building in
the second quarter of 2008 and recognized a gain of $832,000.
BNCCORP, Inc. Annual Report 2008
55
52
NOTE 11. Deposits
The scheduled maturities of time deposits as of December 31, 2008 are as follows (in thousands):
2009
2010
2011
2012
2013
Thereafter
$
$
234,695
54,395
12,440
22,305
10,183
5,456
339,474
At December 31, 2008 and 2007, the Bank had $99.7 million and $30.0 million, respectively, of time deposits that
had been acquired through a broker.
Deposits Received from Related Parties
Note 23 to these consolidated financial statements includes information relating to deposits received from
executive officers, directors, principal shareholders and associates of such persons.
NOTE 12. Short-Term Borrowings
The following table sets forth selected information for short-term borrowings (borrowings with an original
maturity of less than one year) as of December 31 (in thousands):
Federal funds purchased and U. S. Treasury tax and loan retainer
$
9,345
$
1,876
2008
2007
Repurchase agreements with customers, renewable daily, interest payable monthly,
rates ranging from 0.25% to 1.70% in 2008, and 3.15% to 4.00%, in 2007,
secured by government agency collateralized mortgage obligations
7,499
3,489
$
16,844
$
5,365
The weighted average interest rate on short-term borrowings outstanding as of December 31, 2008 and 2007 was
0.88% and 3.64% respectively.
Customer repurchase agreements are used by the Bank to acquire funds from customers where the customers are
required, or desire, to have their funds supported by collateral consisting of government, government agency or
other types of securities. The repurchase agreement is a promise to sell these securities to a customer at a certain
price and repurchase them at a future date at that same price plus interest accrued at an agreed upon rate. The
Bank uses customer repurchase agreements in its liquidity plan as well as an accommodation to customers. At
December 31, 2008, $7.5 million of securities sold under repurchase agreements, with a weighted average interest
rate of 1.27%, maturing in 2009, were collateralized by government agency collateralized mortgage obligations
having a carrying value of $20.0 million, a market value of $20.0 million and unamortized principal balances of
$19.5 million.
As of December 31, 2008, the Bank had established Federal funds purchase programs with two banks, totaling $9
million. At December 31, 2008, the Bank had purchased Federal funds of $7 million under these programs
leaving $2 million available. The Federal funds purchase programs, if advanced upon, mature daily with interest
rates that float at the Federal funds rate.
56
BNCCORP, Inc. Annual Report 2008
53
NOTE 13. Federal Home Loan Bank Advances
FHLB advances consisted of the following at December 31 (in thousands):
2008
2007
Year of Maturity
2008
2009
2013
2015
Amount
-
$
62,500
15,000
7,000
84,500
$
Weighted
Average
Rate
- %
0.91
3.99
5.16
1.81 %
Amount
61,400
-
-
-
61,400
$
$
Weighted
Average
Rate
4.26 %
-
-
-
4.26 %
As of December 31, 2008 the Bank had $62.5 million of FHLB advances maturing in January 2009. These
advances were renewed in the normal course of business. The Bank retains the option to call the $15 million
advance maturing in 2013 without a prepayment penalty, on March 10, 2010 and quarterly thereafter. The Bank
retains the option to call the $7 million advance maturing in 2015 without a prepayment penalty, on July 17, 2009
and quarterly thereafter.
At December 31, 2008 the advances from the FHLB were collateralized by the Bank’s mortgage loans with
unamortized principal balances of approximately $96 million resulting in a FHLB collateral equivalent of $59.5
million. In addition, the advances from the FHLB were collateralized by securities with unamortized principal
balances of approximately $150.8 million. The Bank has the ability to draw additional advances of $109.3 million
based upon the mortgage loans and securities that are currently pledged, subject to a requirement to purchase
additional FHLB stock.
NOTE 14. Long-Term Borrowings
As of December 31, 2008, BNCCORP had a $20.0 million established line of credit with the Bank of North
Dakota. Interest is payable quarterly at 30-day LIBOR plus 2.00%; maturity is February 15, 2010. No funds were
drawn on the line as of December 31, 2008 or 2007.
NOTE 15. Guaranteed Preferred Beneficial Interest’s in Company’s Subordinated
Debentures
In July 2007, BNCCORP established a special purpose trust, BNC Statutory Trust III, for the purpose of issuing
$15.0 million of floating rate trust preferred securities. The interest rate paid on the securities is equal to three
month LIBOR plus 1.40%. The interest rate at December 31, 2008 was 5.2825% and the interest rate reset on
January 2, 2009 to 2.835%. The trust preferred securities mature on October 1, 2037. On or after October 1, 2012,
the trust preferred securities may be redeemed at par and the corresponding debentures may be prepaid at the
option of BNCCORP, subject to Federal Reserve Board approval.
BNC Statutory Trust III was used to refinance BNC Statutory Trust II. BNC Statutory Trust II securities had an
outstanding balance of $15.0 million and we incurred a prepayment penalty of $1.189 million in 2007 when our
obligation to BNC Statutory Trust II was settled.
In July 2000, BNCCORP established a special purpose trust, BNC Capital Trust I, for the purpose of issuing $7.5
million of trust preferred securities at 12.045%. The trust preferred securities are subject to mandatory redemption
on July 19, 2030. On or after July 19, 2010, the trust preferred securities may be redeemed and the corresponding
debentures may be prepaid at the option of BNCCORP, subject to Federal Reserve Board approval, at declining
redemption prices.
BNCCORP, Inc. Annual Report 2008
57
54
BNCCORP fully and unconditionally guarantees all obligations of the special purpose trusts related to the trust
preferred securities.
NOTE 16. Stockholders’ Equity
BNCCORP and the Bank are subject to certain minimum capital requirements (see Note 18 to these consolidated
financial statements). BNCCORP is also subject to certain restrictions on the amount of dividends it may declare
without prior regulatory approval in accordance with the Federal Reserve Act. In addition, certain regulatory
restrictions exist regarding the ability of the Bank to transfer funds to BNCCORP in the form of cash dividends.
Approval of the Office of the Comptroller of the Currency (“OCC”), the Bank’s principal regulator, is required
for the Bank to pay dividends to BNCCORP in excess of the Bank’s net profits from the current year plus retained
net profits for the preceding two years. At December 31, 2008, approximately $961,000 of retained earnings were
available for Bank dividend declaration without prior regulatory approval.
BNCCORP repurchased 200,326 shares of its common stock for $2.6 million or $13.03 per share in 2008. In
2007, the Company purchased 94,782 shares of its common stock for $1.7 million or $18.15 per share.
On May 30, 2001, BNCCORP’s Board of Directors (the “Board”) adopted a rights plan intended to protect
stockholder interests in the event BNCCORP becomes the subject of a takeover initiative that BNCCORP’s Board
believes could deny BNCCORP’s stockholders the full value of their investment. This plan does not prohibit the
Board from considering any offer that it deems advantageous to its stockholders. BNCCORP has no knowledge
that anyone is considering a takeover.
The rights were issued to each common stockholder of record on May 30, 2001, and they will be exercisable only
if a person acquires, or announces a tender offer that would result in ownership of, 15% or more of BNCCORP’s
outstanding common stock. The rights will expire on May 30, 2011, unless redeemed or exchanged at an earlier
date.
NOTE 17. Derivatives
The Company entered into an interest rate floor agreement during the first quarter of 2006. The $50.0 million
prime rate interest rate floor has an effective date of January 9, 2006 and a maturity date of January 9, 2010. The
floor is designated as a cash flow hedge. The terms of the floor result in the Company receiving payments when
the prime interest rate is below the strike rate of 7.0%. At December 31, 2008 the prime rate was 3.25% and the
Company was receiving payments under the terms of the agreement. At December 31, 2007 the prime rate was
7.25% and the Company was not entitled to receive a payment under the terms of the agreement. The floor was
used to hedge the variable cash flows associated with $50.0 million of the Company’s existing variable-rate loans.
In 2008 we received $863,000 of payments on the floor.
At December 31, 2008, the fair value of the floor was $1.9 million, which was included in other assets. The
change in unrealized gain of $1.3 million, net, during the year ended December 31, 2008, for the derivative
designated as a cash flow hedge, is separately disclosed in the statement of changes in comprehensive income.
There was $105,000 of hedge ineffectiveness on the cash flow hedge that was recognized during the year. The
entire gain on the derivative was included in the assessment of the effectiveness.
58
BNCCORP, Inc. Annual Report 2008
55
At December 31, 2007, the fair value of the floor was $761,000, which was included in other assets. The change
in unrealized gains of $690,000, net, during the year ended December 31, 2007, for the derivative designated as a
cash flow hedge, is separately disclosed in the statement of changes in comprehensive income. No hedge
ineffectiveness on the cash flow hedge was recognized during the year. The entire gain on the derivative was
included in the assessment of the effectiveness.
In our mortgage banking operations, the Company makes commitments to originate and sell loans. Commitments
to originate and commitments to sell residential loans are considered to be derivatives pursuant to SFAS No. 133.
Commitments to originate and sell residential loans are entered into concurrently in order to create economic
hedges for changes in interest rates. The commitments are not formally designated as hedges. Because the
commitments are derivatives, the value of the commitments is recorded at fair value.
At December 31, 2008 the fair value of commitments to originate residential loans was $429,000, which is
recorded in other assets. The change in fair value of the commitment to originate loans in 2008 was $429,000, this
change was recognized in the income statement.
At December 31, 2008 the fair value of the commitments to sell residential loans was $697,000, which is recorded
in other liabilities. The change in fair value of the commitments to sell residential loans in 2008 was $697,000,
this change was recognized in the income statement.
At December 31, 2007 commitments to originate and sell residential loans were $0 and the change in fair value of
the commitment to originate loans was $0.
NOTE 18. Regulatory Capital
BNCCORP and the Bank are subject to various regulatory capital requirements administered by the Federal
banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the
Company’s financial results. Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, BNCCORP and the Bank must meet specific capital guidelines that involve quantitative
measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting
practices. Capital amounts and classifications of BNCCORP and the Bank are also subject to qualitative
judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by the regulations to ensure capital adequacy require BNCCORP and the Bank
to maintain minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to
average assets.
Under current regulatory capital regulations, BNCCORP’s subordinated debentures qualify as Tier 1 capital for
purposes of the consolidated capital calculations up to 25% of Tier 1 capital prior to the deduction of intangible
assets. The remainder of the subordinated debentures qualify as Tier 2 capital provided that the total of Tier 2
capital does not exceed Tier 1 capital. As of December 31, 2008, $19.2 million of the subordinated debentures
qualified as Tier 1 capital with the remaining $3.8 million qualifying as Tier 2 capital. As of December 31, 2007,
$19.4 million of the subordinated debentures qualified as Tier 1 capital with the remaining $3.7 million qualifying
as Tier 2 capital.
BNCCORP, Inc. Annual Report 2008
59
56
As of December 31, 2008, the most recent notifications from the OCC categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must
maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table that
follows. There are no conditions or events since that notification that management believes have changed the
institution’s category. Actual capital amounts and ratios of BNCCORP and the Bank as of December 31 are also
presented in the tables (dollars in thousands):
2008
Total Capital (to risk-weighted assets):
Consolidated
BNC National Bank
Tier 1 Capital (to risk-weighted assets):
Consolidated
BNC National Bank
Tier 1 Capital (to average assets):
Consolidated
BNC National Bank
2007
Total Capital (to risk-weighted assets):
Consolidated
BNC National Bank
Tier 1 Capital (to risk-weighted assets):
Consolidated
BNC National Bank
Tier 1 Capital (to average assets):
Consolidated
BNC National Bank
Actual
Amount
Ratio
For Capital Adequacy
Amount
Ratio
To be Well Capitalized
Amount
Ratio
$
88,949
87,956
12.95 % $
12.81
54,943
54,948
$
≥8.0 %
≥8.0
N/A
68,685
N/A
≥10.0 %
76,585
79,368
11.15
11.56
27,472
27,474
≥4.0
≥4.0
76,585
79,368
9.01
9.34
33,994
33,982
≥4.0
≥4.0
N/A
41,211
N/A
42,478
N/A
≥6.0
N/A
≥5.0
$
87,338
87,240
14.26 % $
14.26
48,991
48,959
$
≥8.0 %
≥8.0
N/A
61,199
N/A
≥10.0 %
77,021
80,641
77,021
80,641
12.58
13.18
12.01
12.57
24,496
24,479
25,648
25,668
≥4.0
≥4.0
≥4.0
≥4.0
N/A
36,719
N/A
32,085
N/A
≥6.0
N/A
≥5.0
On January 16, 2009, BNC announced that it received net proceeds of approximately $20.1 million through the
sale of shares of non-voting senior preferred stock to the U.S. Department of the Treasury under the Capital
Purchase Program. The Treasury Department also received a warrant exercisable for shares of an additional class
of BNCCORP, Inc. preferred stock which has an aggregate liquidation preference of approximately $1.0 million.
The Treasury Department exercised this warrant at the closing of the transaction. The proceeds of the sale will
further increase the Company’s capital ratios and strengthen its capital position. See management’s Discussion
and Analysis for pro forma capital information.
60
BNCCORP, Inc. Annual Report 2008
57
NOTE 19. Fair Value of Financial Instruments
The estimated fair values of the Company’s financial instruments are as follows as of December 31
(in thousands):
Assets:
Cash and cash equivalents
Investment securities available for sale
Federal Reserve Bank and Federal Home
Loan Bank of Des Moines stock
Loans held for sale
Participating interests in mortgage loans
Loans and leases held for investment, net
Accrued interest receivable
Derivative financial instruments
Other assets
Liabilities and Stockholders’ Equity:
Deposits, noninterest-bearing
Deposits, interest-bearing
Borrowings and advances
Accrued interest payable
Guaranteed preferred beneficial interests in
Company’s subordinated debentures
Other liabilities
Stockholders’ equity
Financial instruments with off-balance-sheet risk:
Commitments to extend credit
Standby and commercial letters of credit
Mortgage banking commitments to fund loans
Mortgage banking commitments to sell loans
2008
2007
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
10,569
$
209,857
$
10,569
209,857
$
14,856
122,899
$
14,856
122,899
5,989
13,403
28,584
534,002
3,263
1,896
807,563
53,935
$ 861,498
$
68,996
606,325
101,344
1,679
23,025
801,369
6,182
53,947
$ 861,498
5,989
13,403
28,584
533,008
3,263
1,896
806,569
4,918
-
4,918
-
24,357
492,251
3,290
761
$ 663,332
24,357
490,957
3,290
761
662,038
37,553
$ 699,591
68,996
608,275
101,833
1,679
$
72,234
469,640
66,765
2,843
$
72,234
470,297
66,760
2,843
$
$
12,382
793,165
$
23,075
634,557
5,304
20,906
$ 633,040
59,730
$ 699,591
$
$
300
65
26,343
13,832
40,540
$
$
562
91
-
-
653
BNCCORP, Inc. Annual Report 2008
61
58
NOTE 20. Fair Value Measurements
The following table summarizes the financial assets and liabilities of the Company for which fair values are
determined on a recurring basis as of December 31, 2008 (in thousands):
ASSETS
Securities available for sale
Loans held for sale
Commitments to originate mortgage loans
Interest rate floor
Total assets at fair value
LIABILITIES
Commitments to sell mortgage loans
Total liabilities at fair value
Total
Level 1
Level 2
Level 3
$
$
209,857
13,403
429
1,896
225,585
$ -
-
-
-
$ -
$
$
209,857
13,403
429
1,896
225,585
$ -
-
-
-
$ -
$
$
697
697
$ -
$ -
$
$
697
697
$ -
$ -
Changes in the fair value of assets and liabilities determined on a recurring basis had no net impact on our
Consolidated Statement of Income for the period ending December 31, 2008. See Note 1 to these consolidated
financial statements for definitions of Level 1, Level 2 and Level 3 inputs.
The Company may also be required from time to time to measure certain other financial assets at fair value on a
nonrecurring basis in accordance with generally accepted accounting principles. These adjustments to fair value
usually result from the application of the lower of cost or market accounting or write-down of individual assets.
For assets measured at fair value on a nonrecurring basis that were still held at December 31, 2008, the following
table provides the level of valuation assumptions used to determine each adjustment and the carrying value of the
related individual assets or portfolios as of December 31, 2008 (in thousands):
Impaired Loans(1)
Total
Carrying Value at December 31, 2008
Total
29,340
29,340
$
$
Level 1
-
-
$
$
Level 2
29,340
29,340
$
$
Level 3
$
$
-
-
(1) Represents the carrying value and related write-downs of loans based on the appraised value of the collateral.
NOTE 21. Financial Instruments with Off-Balance-Sheet Risk
In the normal course of business, the Company is a party to various financial instruments with off-balance-sheet
risk, primarily to meet the needs of its customers as well as to manage its interest rate risk. These instruments,
which are issued by the Company for purposes other than trading, carry varying degrees of credit, interest rate or
liquidity risk in excess of the amounts reflected in the consolidated balance sheets.
Commitments to Extend Credit
Commitments to extend credit are agreements to lend to a customer, provided there is no violation of any
condition in the contract, and are legally binding and generally have fixed expiration dates or other termination
clauses and may require payment of a fee. The contractual amount represents the Bank’s exposure to credit loss in
the event of default by the borrower; however, at December 31, 2008, based on current information, no losses
were anticipated as a result of these commitments. The Bank manages this credit risk by using the same credit
policies it applies to loans. Collateral is obtained to secure commitments under contract based on management’s
credit assessment of the borrower. The collateral may include marketable securities, receivables, inventory,
equipment or real estate. Since the Bank expects many of the commitments to expire without being drawn, total
commitment amounts do not necessarily represent the Bank’s future liquidity requirements related to such
commitments.
59
62
BNCCORP, Inc. Annual Report 2008
In our mortgage banking operations we commit to extend credit for purposes of selling residential loans. We
underwrite these commitments to determine if each loan meets criteria established by the secondary market for
residential loans. Forward commitments represent commitments to sell loans to third party investors and are
entered into in the normal course of business.
The Company’s participating interests in mortgage loans is related to one counterparty relationship. As of
December 31, 2008, there was a $28.6 million limit to our loan commitment with this relationship.
Standby and Commercial Letters of Credit
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a
customer to a third party. Commercial letters of credit are issued on behalf of customers to ensure payment or
collection in connection with trade transactions. In the event of a customer’s nonperformance, the Bank’s credit
loss exposure is the same as in any extension of credit, up to the letter’s contractual amount. At December 31,
2008, based on current information, no losses were anticipated as a result of these commitments. Management
assesses the borrower’s credit to determine the necessary collateral, which may include marketable securities, real
estate, accounts receivable and inventory. Since the conditions requiring the Bank to fund letters of credit may not
occur, the Bank expects our liquidity requirements related to such letters of credit to be less than the total
outstanding commitments.
The contractual amounts of these financial instruments were as follows as of December 31 (in thousands):
2008
2007
Fixed
Rate
Variable
Rate
Fixed
Rate
Variable
Rate
Commitments to extend credit
$
46,527
$
96,831
$ 15,497
$
187,653
Standby and commercial letters of credit
244
6,265
273
8,859
Forward commitments
13,136
-
-
-
NOTE 22. Guarantees and Contingent Consideration
Guaranteed Preferred Beneficial Interests In Company’s Subordinated Debentures
BNCCORP, concurrent with the issuance of preferred securities by BNC Capital Trust I and by BNC Statutory
Trust III, fully and unconditionally guaranteed all obligations of the special purpose trusts related to the trust
preferred securities (See Note 15 to these consolidated financial statements for a description of the trusts). There
are no recourse provisions associated with these guarantees that would enable BNCCORP to recover from third
parties any of the amounts paid under the guarantees and there are no assets held either as collateral or by third
parties that, upon the occurrence of any triggering event or condition under the guarantees, BNCCORP could
obtain and liquidate to recover all or a portion of the amounts paid under the guarantees.
Performance and Financial Standby Letters of Credit
As of December 31, 2008 and 2007, the Bank had outstanding $4.3 million and $4.8 million of performance
standby letters of credit and $30.6 million and $38.2 million of financial standby letters of credit. Performance
standby letters of credit are irrevocable obligations to the beneficiary on the part of the Bank to make payment on
account of any default by the account party in the performance of a nonfinancial or commercial obligation.
Financial standby letters of credit are irrevocable obligations to the beneficiary on the part of the Bank to repay
money for the account of the account party or to make payment on account of any indebtedness undertaken by the
account party, in the event that the account party fails to fulfill its obligation to the beneficiary. Under these
arrangements, the Bank could, in the event of the account party’s nonperformance, be required to pay a maximum
of the amount of issued letters of credit. The Bank has recourse against the account party up to and including the
amount of the performance standby letter of credit. The Bank evaluates each account party’s creditworthiness on a
case-by-case basis and the amount of collateral obtained varies and is based on management’s credit evaluation of
the account party.
BNCCORP, Inc. Annual Report 2008
63
60
NOTE 23. Related-Party/Affiliate Transactions
The Bank has entered into transactions with related parties, such as opening deposit accounts for and extending
credit to, employees of the Company. In the opinion of management, such transactions have been fair and
reasonable to the Bank and have been entered into under terms and conditions substantially the same as those
offered by the Bank to unrelated parties.
In the normal course of business, loans are granted to, and deposits are received from, executive officers,
directors, principal stockholders and associates of such persons. The aggregate dollar amount of these loans,
which exceeded $60,000, was $2.2 million and $1.9 million at December 31, 2008 and 2007, respectively.
Originations in 2008 and 2007 totaled $237,000 and $1.5 million, respectively. Loan paydowns in 2008 and 2007
were $28,000 and $902,000, respectively. The total amount of deposits received from these parties was $1.1
million and $1.8 million at December 31, 2008 and 2007, respectively. Loans to, and deposits received from,
these parties were made on substantially the same terms, including interest rates and collateral, as those prevailing
at the time for comparable transactions with unrelated persons and do not involve more than the normal risk of
collection.
The Federal Reserve Act limits amounts of, and requires collateral on, extensions of credit by the Bank to
BNCCORP, and with certain exceptions, its non-bank affiliates. There are also restrictions on the amounts of
investment by the Bank in stocks and other subsidiaries of BNCCORP and such affiliates and restrictions on the
acceptance of their securities as collateral for loans by the Bank. As of December 31, 2008, BNCCORP and its
affiliates were in compliance with these requirements.
NOTE 24. Income Taxes
The expense (benefit) for income taxes on continuing operations consists of the following for the years ended
December 31 (in thousands):
2008
2007
Continuing operations:-
Current:
Federal
State
Deferred:
Federal
State
$
$
1,499
396
1,895
(958)
(200)
(1,158)
737
$
(1,133)
(270)
(1,403)
(1,057)
(268)
(1,325)
(2,728)
Total from continuing operations
$
Income tax expense on discontinued operations was $3.067 million for the year ended December 31, 2007
64
BNCCORP, Inc. Annual Report 2008
61
The expense (benefit) for federal income taxes on continuing operations expected at the statutory rate differs from
the actual expense (benefit) for the years ended December 31 (in thousands):
Tax expense (benefit) at 34% statutory rate
State taxes (net of Federal benefit)
Tax-exempt interest
$
2008
1,005
142
(267)
$
2007
(1,971)
(262)
(283)
Increase in cash surrender values of bank-owned
life insurance
(179)
(172)
Tax benefit as a result of the lapse of an uncertain
tax positions
Other, net
(25)
61
737
$
(62)
22
(2,728)
$
Temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities
that result in significant portions of the Company’s deferred tax assets and liabilities are as follows as of
December 31 (in thousands):
Deferred tax asset:
Loans, primarily due to differences in accounting for credit losses
Difference between book and tax amortization of branch premium
acquisition costs
Difference between book and tax amortization of acquired intangibles
Unrealized loss on securities available for sale
Expenses and write downs on other real estate owned
Other
Deferred tax asset
Deferred tax liability:
Unrealized gain on cash flow hedges
Leases, primarily due to differences in accounting for leases
Premises and equipment, primarily due to differences in original cost
basis and depreciation
Other
Deferred tax liability
Valuation allowance
Net deferred tax asset
2008
2007
$
3,585
$
2,856
117
37
2,965
904
-
7,608
511
373
577
296
1,757
(227)
5,624
$
206
59
-
-
37
3,158
945
334
563
-
1,842
(249)
1,067
$
The valuation allowance primarily represents the tax benefits of a certain state net operating loss carryforward
which may expire without being utilized. During 2008, the valuation allowance decreased $22,000 due to the
expiration of a portion of these benefits. In assessing the realizability of deferred tax assets, management believes
it is more likely than not that the deferred taxes will be realized.
The Company adopted FIN 48 on January 1, 2007. Although the implementation of FIN 48 did not result in a
cumulative affect to retained earnings at the date of adoption, the Company did have an unrecognized tax benefit
of approximately $218,000 at January 1, 2007.
BNCCORP, Inc. Annual Report 2008
65
62
At December 31, 2008, the Company had an unrecognized tax benefit of $131,000. If this benefit was recognized,
it would affect the Company’s effective tax rate. The Company recognizes interest as a component of tax expense.
We had approximately $18,000 of interest accrued at December 31, 2008 and no penalties. Interest included in tax
expense for 2008 is approximately $2,000.
A reconciliation of unrecognized tax benefits at December 31 is as follows (in thousands):
Balance at January 1
Change in unrecognized tax benefits in the current year
Balance at December 31
2008
$
156
(25)
$
2007
218
(62)
$
131
$
156
The Company files consolidated federal and unitary state income tax returns where allowed. Tax years ending
December 31, 2005 through 2007 remain open to federal examination, although there are no examinations in
progress at this time. Tax years ending December 31, 2004 through 2007 remain open to state examinations.
It is reasonably possible the unrecognized tax benefit discussed above may be reduced by $39,000 within the next
twelve months. This amount includes $8,000 of interest and no penalties.
NOTE 25. Earnings Per Share
The following table shows the amounts used in computing EPS and the effect of weighted average number of
shares of potential dilutive common stock issuances:
Net income (loss) per share was calculated as follows:
Denominator for basic earnings per share:
Average common shares outstanding
Dilutive common stock options
Denominator for diluted earnings per share
Numerator: Net income (loss) attributable to continuing operations
Numerator: Net income attributable to discontinued operations
Numerator: Net income attributable to common shareholders
Net income per share
Basic earnings (loss) per share from continuing operations
Basic earnings per share from discontinued operations
Basic earnings per common share
Diluted earnings (loss) per share from continuing operations
Diluted earnings per share from discontinued operations
Diluted earnings per common share
2008
2007
3,291,697
27,528
3,319,225
3,456,993
58,859
3,515,852
2,218
-
2,218
$
$
(3,069)
5,049
1,980
0.67
-
0.67
$
$
(0.89)
1.46
0.57
0.67
-
0.67
$
$
(0.89)
1.46
0.57
$
$
$
$
$
$
Pursuant to SFAS No. 128, no contingent shares are included in the computation of the diluted per share amounts
because a loss exists in continuing operations in 2007.
At December 31, 2008 and 2007 options totaling 12,200 and 54,000, respectively were outstanding but not
included in the computation of diluted EPS because their exercise prices were higher than the average price of the
Company’s common stock. Exercise prices ranged from $7.00 to $8.75.
66
BNCCORP, Inc. Annual Report 2008
63
NOTE 26. Benefit Plans
BNCCORP has a qualified, tax-exempt 401(k) savings plan covering all employees of BNCCORP and its
subsidiaries who meet specified age and service requirements. Under the plan, eligible employees may elect to
defer up to 50% of compensation each year not to exceed the dollar limit set by law. At their discretion,
BNCCORP and its subsidiaries may provide matching contributions to the plan. In 2008 and 2007, BNCCORP
and its subsidiaries made matching contributions of up to 50% of employee deferrals up to a maximum employer
contribution of 5% of employee compensation. Generally, all participant contributions and earnings are fully and
immediately vested. The Company makes its matching contribution during the first calendar quarter following the
last day of each calendar year and an employee must be employed by the Company on the last day of the calendar
year in order to receive the current year’s employer match. The anticipated matching contribution is expensed
monthly over the course of the calendar year based on employee contributions made throughout the year. The
Company made matching contributions of $387,000 and $378,000 for 2008, and 2007, respectively. Under the
investment options available under the 401(k) savings plan, prior to January 28, 2008 employees could elect to
invest their salary deferrals in BNCCORP common stock. At December 31, 2008, the assets in the plan totaled
$11.5 million and included $938,000 (138,805 shares) invested in BNCCORP common stock. On January 28,
2008 the Company voluntarily delisted from the NASDAQ Global Market and deregistered its common stock
under the Securities Exchange Act of 1934 (as amended). As a result, the participants are prohibited from making
new investments of the Company’s common stock in the plan.
NOTE 27. Commitments and Contingencies
Employment Agreements and Noncompete Covenants
The Company has entered into an employment agreement with its President and Chief Executive Officer (the
“President”). The President will be paid a minimum annual salary throughout the term of the agreement and
annual incentive bonuses as may, from time to time, be determined by the Board. The President will also be
provided with benefits under any employee benefit plan maintained by BNCCORP for its employees generally, or
for its senior executive officers in particular, on the same terms as are applicable to other senior executives of
BNCCORP. Under the agreement, if the President’s status as an employee with the Company is terminated for
any reason other than death, disability, cause, as defined in the agreement, or if he terminates his employment for
good reason, as defined in the agreement, or following a change in control of BNCCORP, as defined in the
agreement, then the President will be paid a lump-sum amount equal to three times his current annual
compensation.
In December 2007, the Chairman of the Board announced his retirement. The former Chairman received an award
of $1.160 million upon retirement from the Company which was reflected in accrued expenses on the
consolidated balance sheet as of December 31, 2007.
Leases
The Bank has entered into operating lease agreements for certain facilities and equipment used in its operations.
Rent expense for the years ended December 31, 2008 and 2007 was $1.063 million and $830,000, respectively,
for facilities, and $39,000 and $51,000, respectively, for equipment and other items. At December 31, 2008, the
total minimum annual base lease payments for operating leases were as follows (in thousands):
2009
2010
2011
2012
2013
Thereafter
$
1,256
1,138
866
621
121
1,560
BNCCORP, Inc. Annual Report 2008
67
64
NOTE 28. Share-Based Compensation
The Company has three share-based plans for certain key employees and directors whereby shares of common
stock have been reserved for awards in the form of stock options or restricted stock awards. Under the 1995 Stock
Incentive Plan, the aggregate number of options and shares granted can not exceed 250,000 shares. Under the
2002 Stock Incentive Plan, the aggregate number of shares can not exceed 125,000 shares. Under the 2006 Stock
Incentive Plan, the aggregate number of shares can not exceed 200,000 shares. Pursuant to each plan, the
compensation committee may grant options at prices equal to the fair value of the stock at the grant date.
Total shares available and maximum restricted shares available as of December 31, 2008 are as follows:
1995
Stock
Incentive
Plan
2002
Stock
Incentive
Plan
2006
Stock
Incentive
Plan
Total
Total Shares Available
58,751
107,250
136,600
302,601
Maximum Restricted Shares Available
58,751
7,250
136,600
202,601
The Company recognized share-based compensation expense of $342,000 and $312,000 for the twelve months
ended December 31, 2008 and 2007, respectively all of which related to restricted stock.
At December 31, 2008, the Company had $352,000 of unamortized restricted stock compensation. At December
31, 2007 the Company had $552,000 of unamortized restricted stock compensation. Restricted shares of stock
granted generally have vesting and amortization periods of at least three years
Following is a summary of restricted stock transactions for the years ended December 31:
2008
2007
Number
Restricted
Stock
Shares
51,766
19,500
(26,434)
(7,500)
37,332
Weighted
Average
$
Grant Date
Fair Value
12.50
11.03
12.46
9.60
Number
Restricted
Stock
Shares
100,500
-
(34,734)
(14,000)
51,766
Weighted
Average
Grant Date
Fair Value
$
13.07
-
13.15
15.05
Nonvested, beginning of year
Granted
Vested
Forfeited
Nonvested, end of year
No stock options were granted during 2008 or 2007 and the Company had no unrecognized share-based
compensation expense related to stock options during these periods.
68
BNCCORP, Inc. Annual Report 2008
65
Following is a summary of stock option transactions for the years ended December 31:
2008
2007
Outstanding, beginning of year
Granted
Exercised
Forfeited
Outstanding, end of year
Exercisable, end of year
Weighted average fair value of
Granted
Exercised
Forfeited
Options to
Purchase
Shares
Weighted
Average
Exercise Price
Options to
Purchase
Shares
107,700
-
(8,000)
(55,500)
44,200
44,200
$
$
$
11.76
-
5.94
17.04
6.34
6.34
115,000
-
(6,000)
(1,300)
107,700
107,700
$
$
$
-
2.80
7.53
$
$
$
-
2.99
7.60
Weighted
Average
Exercise Price
11.49
-
6.15
17.00
11.76
11.76
$
$
$
Following is a summary of the status of options outstanding at December 31, 2008:
Options with exercise
prices ranging from:
$5.94 to $8.75
Outstanding Options
Weighted Average
Remaining
Number
Contractual Life
Weighted
Average
Exercise Price
Exercisable Options
Weighted
Average
Exercise Price
Number
44,200
44,200
2.3 years
$
6.34
$
44,200
44,200
6.34
BNCCORP, Inc. Annual Report 2008
69
66
NOTE 29. Condensed Financial Information-Parent Company Only
Condensed financial information of BNCCORP on a parent company only basis is as follows:
Parent Company Only
Condensed Balance Sheets
As of December 31
(In thousands, except per share data)
Assets:
Cash and cash equivalents
Investment in subsidiaries
Receivable from subsidiaries
Deferred charges and intangible assets, net
Other
Total assets
Liabilities and stockholders’ equity:
Subordinated debentures
Payable to subsidiaries
Accrued expenses and other liabilities
Total liabilities
Preferred stock, $.01 par value – 2,000,000 shares authorized; no shares issued
or outstanding
Common stock, $.01 par value – 10,000,000 shares authorized; 3,299,163 and
3,491,337 shares issued and outstanding
Capital surplus – common stock
Retained earnings
Treasury stock (357,738 and 150,116 shares)
Accumulated other comprehensive income (loss), net of income taxes
Total stockholders’ equity
Total liabilities and stockholders’ equity
2008
2007
1,766
76,526
570
154
446
79,462
23,115
487
1,913
25,515
$
$
$
954
83,254
545
154
525
85,432
23,112
100
2,490
25,702
-
-
33
26,628
36,104
(5,020)
(3,798)
53,947
79,462
$
35
26,355
34,105
(2,424)
1,659
59,730
85,432
$
$
$
$
70
BNCCORP, Inc. Annual Report 2008
67
Parent Company Only
Condensed Statements of Income
For the Years Ended December 31
(In thousands)
Income:
Management fee income
Interest
Other
Total income
Expenses:
Interest
Salaries and benefits
Legal and other professional
Depreciation and amortization
Other
Total expenses
Loss before income tax benefit and equity in income of subsidiaries
Income tax benefit
Loss before equity in income of subsidiaries
Equity in income of subsidiaries
Net income
2008
2007
$
1,599
$
1,730
17
76
1,692
1,728
829
443
3
610
3,613
(1,921)
646
(1,275)
3,493
40
65
1,835
2,212
2,392
635
4
1,924
7,167
(5,332)
2,078
(3,254)
5,234
$
2,218
$
1,980
BNCCORP, Inc. Annual Report 2008
71
68
Parent Company Only
Condensed Statements of Cash Flows
For the Years Ended December 31
(In thousands)
Operating activities:
Net income
Adjustments to reconcile net income to net cash used in operating
activities:
Equity in income of subsidiaries
Depreciation and amortization
Deferred income taxes
Change in prepaid expenses and other receivables
Change in accrued expenses and other liabilities
Net cash used in operating activities
Investing activities:
Increase in investment in subsidiaries
Net cash provided by investing activities
Financing activities:
Repayments of long term borrowings
Proceeds from issuance of share-based compensation
Purchase of treasury stock
Net cash used in financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental cash flow information:
Interest paid
Income tax payments received from the subsidiary bank, net of income
taxes paid
2008
2007
$
2,218
$
1,980
(3,493)
6
110
(61)
(408)
(1,628)
4,765
4,765
-
273
(2,598)
(2,325)
812
954
1,766
$
(5,234)
340
(395)
37
1,255
(2,017)
4,675
4,675
(1,167)
298
(1,720)
(2,589)
69
885
954
$
$
1,675
$
2,314
$
2,173
$
3,322
72
BNCCORP, Inc. Annual Report 2008
69
Corporate Data
Investor Relations
Gregory K. Cleveland, CPA
President/CEO
602-852-3526
Timothy J. Franz, CPA
Chief Financial Officer
612-305-2213
General Inquiries:
BNCCORP, Inc.
322 East Main Avenue
Bismarck, North Dakota 58501
Telephone (701) 250-3040
Facsimile (701) 222-3653
Annual Meeting
The 2009 annual meeting of stockholders will be
held on Wednesday, June 17, 2009, at 8:30 a.m.
(Central Daylight Time) at BNC National Bank,
Second Floor Conference Room, 322 East Main
Avenue, Bismarck, ND 58501.
Independent Public Accountants
KPMG LLP
233 South 13th Street
Suite 1600
Lincoln, NE 68508
Securities Listing
BNCCORP, Inc.’s common stock is traded on the
Pink Sheets under the symbol: “BNCC.” There were
73 record holders of the Company’s common stock
at March 6, 2009.
COMMON STOCK PRICES
For the Years Ended December 31,
2008(1)
2007(2)
High
Low
$13.89 $11.75
$13.00 $9.05
$11.00 $7.80
$8.90 $5.15
High
Low
$18.00 $12.98
$19.15 $15.16
$18.50 $17.25
$17.31 $12.60
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
(1) The quotes represent the high and low closing sales
prices as reported by Pink Sheets.
(2) The quotes represent the high and low closing sales
prices as reported by the NASDAQ Stock Market.
Stock Transfer Agent and Registrar
American Stock Transfer & Trust Company
59 Maiden Lane, Plaza Level
New York, NY 10038
(800) 937-5449
DIRECTORS
BNCCORP, Inc.
Mark W. Sheffert
Chairman of the Board of BNCCORP, Inc.
Chairman and Chief Executive
Officer, Manchester Companies, Inc.
Gregory K. Cleveland, CPA
President and
Chief Executive Officer
Tracy Scott, CPA
Retired Co-Founder of BNCCORP, Inc.
Bradley D. Bonga
Founder and President/CEO
Bonga and Associates, LLC
Gaylen Ghylin, CPA
EVP, Secretary & CFO
Tiller Corporation d/b/a Barton
Sand & Gravel Co., Commercial
Asphalt Co. and Barton Enterprises, Inc.
Richard M. Johnsen, Jr.
Chairman of the Board and
Chief Executive Officer,
Johnsen Trailer Sales, Inc.
Michael O’Rourke
Attorney/Author
Stephen H. Roman
Partner
First Strategic LLC
DIRECTORS
BNC National Bank
Gregory K. Cleveland
Shawn Cleveland
Timothy J. Franz
David Hoekstra
Mark E. Peiler
Scott Spillman
B. Timothy Swanson
SUBSIDIARIES
BNC National Bank
Headquarters:
2425 East Camelback Road
Suite 100
Phoenix, AZ 85016
Branches:
Bismarck Main
322 East Main Avenue
Bismarck, ND 58501
Bismarck South
219 South 3rd Street
Bismarck, ND 58504
Bismarck North
801 East Century Avenue
Bismarck, ND 58503
Primrose Assisted Living Apartments
1144 College Drive
Bismarck, ND 58501
Waterford on West Century
1000 West Century Avenue
Bismarck, ND 58503
Crosby
107 North Main Street
Crosby, ND 58730
Ellendale
83 Main Street
Ellendale, ND 58436
Garrison
92 North Main
Garrison, ND 58540
Kenmare
103 1st Avenue SE
Kenmare, ND 58746
Linton
104 North Broadway
Linton, ND 58552
Stanley
210 South Main
Stanley, ND 58784
Watford City
205 North Main
Watford City, ND 58854
Minneapolis
333 South Seventh Street
Minneapolis, MN 55402
Golden Valley
650 North Douglas Drive
Golden Valley, MN 55422
The Heathers Estate
2900 North Douglas Drive
Crystal, MN 55422
The Heathers Manor
3000 North Douglas Drive
Crystal, MN 55422
Scottsdale
17045 N. Scottsdale Road
Scottsdale, AZ 85255
Ice Den
9375 East Bell Road, Suite 102
Scottsdale, AZ 85260
Glendale
20175 North 67th Avenue
Glendale, Arizona 85308
Scottsdale Mortgage
8330 East Hartford Drive
Scottsdale, Arizona 85255
Wichita
7200 West 13th, Suite 3
Wichita, KS 67212
Overland Park
7007 College Boulevard, Suite 330
Overland Park, KS 66211
Davenport
3709 Harrison Street
Davenport, IA 52806
Belton
17122 BelRay Place
Belton, MO 64012
EXECUTIVE OFFICERS
BNCCORP and Subsidiaries
Gregory K. Cleveland, CPA
President and
Chief Executive Officer
Timothy J. Franz, CPA
Chief Financial Officer
Shawn Cleveland, CPA
Chief Operating Officer,
BNC National Bank
Dave Hoekstra, CPA
Chief Credit Officer and
President – BNC National Bank, North Dakota Market
Mark E. Peiler, CFA
Senior Vice President – Chief Investment Officer
Scott Spillman
President – BNC National Bank, Arizona Market
Timothy Swanson
President – BNC National Bank, Minnesota Market
Clint Bowling
Executive Vice President – Commercial Real Estate
BNC National Bank, Arizona Market
Brian Whitemarsh
Executive Vice President – Commercial Real Estate
BNC National Bank, Minnesota Market
BNCCORP, Inc. Annual Report 2008
73
BNCCORP, Inc.
BNCCORP, Inc.