CORPORATE DATA
Investor Relations
Gregory K. Cleveland, CPA
President/CEO
602-852-3526
Timothy J. Franz, CPA
Chief Financial Offi cer
612-305-2213
General Inquiries:
BNCCORP, INC.
322 East Main Avenue
Bismarck, North Dakota 58501
Telephone (701) 250-3040
Facsimile (701) 222-3653
E-mail Inquiries:
corp@bncbank.com
Annual Meeting
The 2011 annual meeting of stockholders will be
held on Wednesday, June 15, 2011 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 OTC
Markets under the symbol: “BNCC.” There were 72
record holders of the Company’s common stock at
March 11, 2011.
COMMON STOCK PRICES
For the Years Ended December 31,
Low
2010(1)
2009(1)
High
High Low
$8.50 $5.30
First Quarter
$4.00 $1.80
$5.60
$8.50
Second Quarter $3.19 $1.80
$5.00
$8.00
$2.25 $1.40
Third Quarter
$1.95
$5.50
$2.00 $1.41
Fourth Quarter
(1) The quotes represent the high and low closing
sales prices as reported by OTC Markets.
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). Th e Company operates community banking and wealth management
businesses in Arizona, Minnesota and North Dakota from 18 locations. BNC
also conducts mortgage banking from 10 locations in Arizona, Minnesota,
Iowa, Kansas, Nebraska and Missouri.
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
Offi cer, Manchester Companies, Inc.
Gregory K. Cleveland, CPA
President and
Chief Executive Offi cer
Tracy Scott, CPA
Retired Co-Founder of BNCCORP, INC.
Bradley D. Bonga
Founder and President/CEO
Bonga and Associates, LLC
BNCCORP, Inc. Annual Report 2010
Gaylen Ghylin, CPA
EVP, Secretary and 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 Offi cer,
Johnsen Trailer Sales, Inc.
Michael O’Rourke
Attorney / Author
Stephen H. Roman
Partner
FirstStrategic LLC
DIRECTORS
BNC National Bank
Julie L. Andresen
Gregory K. Cleveland
Shawn Cleveland
Timothy J. Franz
David Hoekstra
Mark E. Peiler
Scott Spillman
SUBSIDIARIES
BNC National Bank
Headquarters:
20175 North 67th Ave
Glendale, AZ 85308
Bank 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
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
240 Investors Bldg (Baker Center)
733 Marquette Avenue South
Minneapolis, MN 55402
Golden Valley
650 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
Perimeter
17550 North Perimeter Drive
Scottsdale, AZ 85255
Mortgage Banking Branches:
Scottsdale
8330 East Hartford Drive
Scottsdale, AZ 85255
Wichita
7200 West 13th
Wichita, KS 67212
Wichita
1718 North Webb Road
Wichita, KS 67206
Andover
511 North Andover Road
Andover, Kansas 67002
Overland Park
7007 College Boulevard
Overland Park, KS 66211
Topeka
2110 SW Belle Avenue
Topeka, KS 66614
Davenport
3709 Harrison Street
Davenport, IA 52806
Belton
17122 BelRay Place
Belton, MO 64012
Lincoln
3600 Village Drive
Lincoln, NE 68516
Grand Island
819 North Diers Avenue
Grand Island, NE 68803
EXECUTIVE OFFICERS
BNCCORP and Subsidiaries
Gregory K. Cleveland, CPA
President and Chief Executive Offi cer
Timothy J. Franz, CPA
Chief Financial Offi cer
Shawn Cleveland, CPA
Chief Operating Offi cer, BNC National Bank
Dave Hoekstra, CPA
Chief Credit Offi cer and President – BNC National Bank,
North Dakota Market
Mark E. Peiler, CFA
Senior Vice President – Chief Investment Offi cer
79
To Our Stockholders, Customers,
Employees and Friends:
As we entered 2011 the overall economic environment showed tentative signs of
stabilization after several years of turbulence. Th at said, a robust recovery is not yet in
evidence. Unemployment continues to be stubbornly high. Many corporations remain
reluctant to invest and are choosing to hold record levels of cash. Consumer spending is
cautious and the housing market remains problematic.
At the same time, global conditions have dramatically altered the landscape for
businesses and governments. In response to world-wide economic uncertainties,
legislative and regulatory authorities have unleashed a fl ood of new regulations that will
have a signifi cant impact on fi nancial institutions. While it is certain these new
regulations will be burdensome, our industry and consumers of fi nancial products are not
likely to fully comprehend the full impact of the new regulatory environment for quite
some time.
Th roughout this challenging period, our approach at BNC has been to focus sharply on
addressing credit issues, maintaining liquidity and managing capital. For example, we
reduced nonperforming assets by almost one-third in the past year and our yearend cash
balances exceed $100 million. Clearly, this focus has served us well and continues to
provide relative stability at a time when economic outlook remains uncertain.
Improving Credit Quality
BNC has taken prudent and appropriate actions to deal with the elevated levels of
nonperforming assets that we, and many fi nancial institutions, faced as a result of the
recession. We have benefi ted from our ongoing and rigorous scrutiny of asset quality, as
well as our decision in 2009 to increase the provision for loan losses.
Our credit quality trends improved in 2010, as refl ected in the signifi cant decreases in
nonperforming assets (which decreased by $12.6 million, or 29%) and nonperforming
loans (which decreased by $18.0 million, or 50%). Our provisions for credit losses and
other real estate costs also declined signifi cantly in 2010 while the allowance for credit
losses as a percentage of loans and leases held for investment improved.
Strengthening Our Capital Foundation
In November 2010, we entered into an agreement to sell certain loans and deposits in our
Arizona and Minnesota markets to another banking institution. Th is transaction positions
BNC for the future by enhancing the Bank’s capital ratios; we project our leverage ratio
will be approximately 9% and our total risk based ratio will be approximately 15%.
It is important to note that we will continue to off er a full range of banking and mortgage
banking services in our Arizona and Minnesota communities following the sale. Equally
important, if not more importantly, the transaction also does not impact our operations in
North Dakota. We look forward to participating in growth opportunities in all our
markets, particularly North Dakota – where we are committed to expanding our resources
and growing our presence.
GREGORY K. CLEVELAND
President and Chief Executive Offi cer
“As we entered 2011
the overall economic
environment showed
tentative signs of
stabilization after
several years
of turbulence.”
BNCCORP, INC. Annual Report 2010
Responding to a Challenge
In May 2010, we reported that the Company had discovered fraudulent activity by an external company that was servicing residential
mortgage loans for BNC. Since that time we have been diligently addressing this matter. We commenced investigations, which have
confi rmed that the fraudulent activity was limited to the external servicing company and that no bank employees were involved in this
wrongful conduct by the servicing company. In the second quarter, we determined the scope of the fraud losses and recorded a loss.
Since then, we have fi led a legal claim against our insurance carriers and we fi rmly believe our claim is strong. Th is matter is discussed in
further detail in Note 4 of our Consolidated Financial Statements.
Our people responded to this challenge with incredible resolve. As a result, there has been limited impact on our day-to-day business or
on our capacity to deliver superior service to our customers.
2011 Outlook
We continue to believe that the operating and regulatory environment will remain unsettled for the foreseeable future. While some
regions are showing economic vitality – including our own North Dakota market – this is more the exception than the rule.
Th erefore, we are convinced that our strategy which hones in on credit quality, liquidity and capital remains right for the times. We
will continue to focus on reducing nonperforming assets where possible and maintaining reserves when necessary. We will manage our
investment portfolio to ensure that the Company has suffi cient liquidity. And we will manage our capital to support our business. At the
same time, we will continue to deliver the attentive customer service that is a tradition at BNC – and a signifi cant competitive advantage
in a changing fi nancial marketplace.
Our ability to address the challenges of recent years is a refl ection of the dedication of our employees, the loyalty of our customers and
shareholders, and the sound guidance of our Board of Directors. I thank all of you for your support and look forward to building BNC
in the future.
Sincerely,
GREGORY K. CLEVELAND
President and Chief Executive Offi cer
BNCCORP, INC. Annual Report 2010
BNCCORP, INC.
INDEX TO YEAR END FINANCIAL REPORT
December 31, 2010
TABLE OF CONTENTS
Selected Financial Data ......................................................................................................
Business .............................................................................................................................
Management’s Discussion and Analysis of Financial Condition and Results
of Operations ......................................................................................................................
Quantitative and Qualitative Disclosures about Market Risk ............................................
Consolidated Financial Statements ....................................................................................
3
6
7
28
32
Selected Financial Data
The selected consolidated financial data presented below should be read in conjunction with our audited financial
statements and the notes thereto (dollars in thousands, except share and per share data):
Income Statement Data from Continuing Operations:
Total interest income
Total interest expense
Net interest income
Provision for credit losses
Non-interest income
Fraud loss on assets serviced by others
Non-interest expense, excluding fraud loss on assets serviced by others
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-mortgage banking
Participating interests in mortgage loans
Loans and leases held for investment, net of unearned income
Other loans held for sale, net
Allowance for credit losses(2)
Allowance for credit losses(3)
Total deposits(2)
Core deposits(2)
Short-term borrowings
Federal Home Loan Bank advances
Other 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
Other Key Ratios
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(2)
Allowance for credit losses to total loans(3)
Allowance for credit losses to total nonperforming loans(2)
Allowance for credit losses to total nonperforming loans(3)
(1) Loss from continuing operations was $(3.069) million for 2007. Net
income for 2007 was $1.980 million.
(2) Excluding impact of pending sale
(3) Including impact of pending sale
For the Years Ended December 31,
2010
2009
2008
2007(1)
2006
$
$
$
33,510 $
10,238
23,272
5,750
23,973
26,231
37,257
72
(22,065)
$
44,588
14,899
29,689
27,000
16,013
-
39,103
(1,625)
(18,776)
$
$
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)(1)
$
747,069 $
137,032
-
2,862
29,116
4,888
350,501
70,501
(16,476)
(14,765)
661,111
594,152
16,329
-
-
868,083 $
212,661
-
3,048
24,130
38,534
517,108
-
(18,047)
-
755,963
640,169
10,190
15,000
-
861,498 $
209,857
-
5,989
13,403
28,584
542,753
-
(8,751)
-
675,321
575,637
16,844
84,500
-
699,591 $
122,899
-
4,918
-
24,357
497,556
-
(6,599)
-
541,874
541,874
5,365
61,400
-
24,134
16,835
5.09 $
5.09 $
22,890
36,980
11.24 $
11.24 $
$
$
23,025
53,947
16.35 $
16.23 $
23,075
59,730
17.11 $
16.99 $
42,408
23,606
18,802
210
5,138
-
23,075
(363)
1,018
692,276
182,974
24,000
5,003
1,669
56,125
333,934
-
(3,370)
-
529,252
529,054
9,709
62,200
1,167
22,711
55,602
15.44
7.15
(2.79)%
(90.47)%
134.38%
3.20%
3.14%
$ (7.13)
$ (7.13)
3,281,719
3,281,719
3,304,339
(2.09)%
(38.88)%
85.56%
3.58%
3.37%
$ (6.14)
$ (6.14)
3,261,831
3,273,722
3,290,219
0.28%
3.85%
71.22%
3.64%
3.46%
(0.47)%
(5.25)%
107.85%
3.81%
3.31%
$ 0.67 $ (0.89)
(0.89)
$
3,456,993
3,515,852
3,491,337
0.67 $
3,291,697
3,319,225
3,299,163
0.14%
1.92%
96.39%
3.04%
2.73%
$ 0.29
0.29
$
3,473,670
3,514,709
3,600,467
4.09%
5.10%
(1.530)%
3.62%
3.84%
92%
83%
4.97%
6.94%
(3.235)%
3.11%
-
50%
-
3.84%
4.22%
(1.066)%
1.50%
-
38%
-
0.77%
1.09%
(0.129)%
1.26%
-
122%
-
0.02%
0.03%
(0.008)%
0.86%
-
3,304%
-
3
Quarterly Financial Data
Interest income
Interest expense
Net interest income
Provision for credit losses
Net interest income after provision for
credit losses
Non-interest income
First
Quarter
Second
Quarter
2010
Third
Quarter
(Unaudited)
Fourth
Quarter
YTD
$ 9,289 $ 8,451
$ 8,133 $ 7,637 $
33,510
2,951
2,638
2,356
2,293
10,238
6,338
5,813
5,777
5,344
23,272
2,000
1,500
1,250
1,000
5,750
4,338
4,313
4,527
4,344
17,522
6,286
5,560
5,603
6,524
23,973
Fraud loss on assets serviced by others
-
26,231
-
-
26,231
Non-interest expense, excluding fraud loss
on assets serviced by others
8,482
8,743
9,692
10,340
37,257
Income (loss) before income taxes
2,142
(25,101)
438
528
(21,993)
Income tax expense (benefit)
(48)
120
-
-
72
NET INCOME (LOSS)
$ 2,190 $
(25,221)
$ 438 $ 528 $ (22,065)
Preferred stock costs
Net income (loss) available to common
shareholders
(324)
(331)
(337)
(341)
(1,333)
$ 1,866 $
(25,552)
$ 101 $ 187 $ (23,398)
Basic earnings (loss) per common share
$
0.57 $
(7.79)
Diluted earnings (loss) per common share $
0.57 $
(7.79)
$
$
0.03 $
0.06 $
0.03 $
0.06 $
(7.13)
(7.13)
Average common shares:
Basic
Diluted
3,281,719
3,281,719
3,281,719
3,281,719
3,281,719
3,281,719
3,281,719
3,281,719
3,281,719
3,281,719
4
Interest income
Interest expense
Net interest income
Provision for credit losses
Net interest income (loss) after provision
for credit losses
Non-interest income
Non-interest expense
Income (loss) before income taxes
Income tax expense (benefit)
NET INCOME (LOSS)
Preferred stock costs
Net income (loss) available to common
shareholders
First
Quarter
Second
Quarter
2009
Third
Quarter
(Unaudited)
Fourth
Quarter
YTD
$
10,679 $
11,413
$
11,611
$ 10,885
$ 44,588
3,797
6,882
1,700
5,182
3,696
8,060
818
202
3,797
7,616
2,000
5,616
4,345
9,390
571
48
3,758
3,547
14,899
7,853
7,338
29,689
22,300
1,000
27,000
(14,447)
6,338
2,689
3,488
4,484
16,013
12,745
8,908
39,103
(23,704)
1,914
(20,401)
(1,814)
(61)
(1,625)
$
616 $
523
$
(21,890)
$ 1,975
$ (18,776)
(266)
(327)
(330)
(331)
(1,254)
$
350 $
196
$
(22,220)
$ 1,644
$
(20,030)
Basic earnings (loss) per common share
$
0.11 $
Diluted earnings (loss) per common share $
0.11 $
0.06
0.06
$
$
(6.81)
(6.81)
$
$
0.50
0.50
$
$
(6.14)
(6.14)
Average common shares:
Basic
Diluted
3,261,831
3,261,831
3,261,831
3,275,279
3,261,831
3,274,595
3,290,400
3,269,355
3,275,279
3,273,722
5
Business
General
BNCCORP, INC. (BNCCORP or the Company) is a bank holding company 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 in Arizona, Minnesota and North Dakota from 18 locations. BNC also
conducts mortgage banking from 10 locations in Arizona, Minnesota, Iowa, Kansas, Nebraska and Missouri.
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:
•
•
•
•
•
Emphasize deposit growth;
Manage credit risk;
Provide individualized, high-level customer service;
Offer diversified products and services; and
Expand opportunistically.
6
Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Overview
The following table summarizes selected income statement data and earnings (loss) per share data (in thousands,
except per share data):
SELECTED INCOME STATEMENT DATA
Interest income
Interest expense
Net interest income
Provision for credit losses
Non-interest income
Fraud loss on assets serviced by others
Non-interest expense, excluding fraud loss on assets serviced
by others
Loss before income taxes
Income tax expense (benefit)
Net loss
Preferred stock costs
2010
2009
$
$
33,510
10,238
23,272
5,750
23,973
26,231
37,257
(21,993)
72
(22,065)
(1,333)
44,588
14,899
29,689
27,000
16,013
-
39,103
(20,401)
(1,625)
(18,776)
(1,254)
Net loss available to common shareholders
$
(23,398)
$
(20,030)
EARNINGS PER SHARE DATA
Basic loss per common share
Diluted loss per common share
The following is an overview of recent periods:
$
$
(7.13)
(7.13)
$
$
(6.14)
(6.14)
• The loss in 2010 is attributed to a fraud committed by a third party servicer of loans owned by BNC. See
Note 4 of our Consolidated Financial Statements.
• The losses in 2009 are primarily attributed to provisions for credit losses and ORE write-downs and costs
related to nonperforming loans and foreclosed assets. For more information see discussion of loans, the
allowance for credit losses and OREO that follows in the MD&A as well as Notes 8, 9 and 10 of our
Consolidated Financial Statements.
• Net interest income decreased in 2010 due to lower rates and reduced asset balances. For more
information see discussion of net interest income that follows in the MD&A.
• Non-interest income has been higher in recent years primarily due to growth in mortgage banking
operations. For more information see discussion of non-interest income that follows in the MD&A.
• Non-interest expenses significantly increased by the fraud loss on assets serviced by others in 2010 and
include higher costs for foreclosed assets, mortgage banking operations and regulatory costs. See Note 4
of our Consolidated Financial Statements.
In November 2010, we announced an agreement to sell loans, other assets and deposits in our Arizona
and Minnesota markets. See Note 3 of our Consolidated Financial Statements.
•
7
General
Net loss in 2010 was $(22.065) million, or $(7.13) per diluted share, compared to a net loss of $(18.776) million,
or $(6.14) per diluted share in 2009.
Net Interest Income
The following table sets forth information relating to our average balance sheet information, yields on interest-
earning assets and costs on interest-bearing liabilities (dollars are in thousands):
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,
2010
Average
balance
Interest Average
earned
yield or
or owed
cost
Average
balance
2009
Interest
earned
or owed
Average
yield or
cost
Average
balance
2008
Interest Average
yield or
earned
cost
or owed
(dollars in thousands)
(dollars in thousands)
(dollars in thousands)
Assets
Federal funds sold/interest-bearing due from $
Taxable investments
Tax-exempt investments
Loans held for sale-mortgage banking
Participating interests in mortgage loans
Loans and leases held for investment
47,470 $ 111
8,631
167,572
93
2,111
1,263
29,039
665
20,144
22,747
478,492
0.23% $
5.15%
4.41%
4.35%
3.30%
4.75%
5,755 $ 9
14,397
226,309
409
8,165
1,182
23,570
1,312
29,683
27,279
547,336
0.16% $
6.36%
5.01%
5.01%
4.42%
4.98%
95 $ 1
9,864
172,383
839
16,994
220
3,586
1,408
24,688
33,694
525,311
1.05%
5.72%
4.94%
6.13%
5.70%
6.41%
Allowance for credit losses
(17,201)
-
(11,962)
-
(7,105)
-
Total interest-earning assets
Non-interest-earning assets:
Cash and due from banks
Other
Total assets
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
Other borrowings
Subordinated debentures
727,627
33,510
4.61%
828,856
44,588
5.38%
735,952
46,026
6.25%
9,929
53,146
$
790,702
9,749
61,611
$
900,216
10,481
47,835
$
794,268
$
282,880
11,156
1,729
11
0.61% $
0.10%
266,537
11,685
2,379
13
0.89% $
0.11%
244,279
9,859
4,074
33
1.67%
0.33%
241,036
6,070
2.52%
324,902
8,653
2.66%
232,367
8,981
45,083 998
2.21%
47,358
1,341
2.83%
58,378
2,011
580,155
8,808
1.52%
650,482
12,386
1.90%
544,883
15,099
11,163
2,899
10
73
112
1
0.65%
3.86%
10.00%
17,953
51,738
58
179
1,078
3
1.00%
2.08%
5.17%
7,049
87,159
519
144
2,291
25
23,491 1,244
5.30%
22,686
1,253
5.52%
22,734
1,656
3.87%
3.44%
2.77%
2.04%
2.63%
4.82%
7.29%
2.90%
Total interest-bearing liabilities
617,718
10,238
1.66%
742,917
14,899
2.01%
662,344
19,215
Non-interest-bearing demand accounts
Total deposits and interest-bearing
liabilities
Other non-interest-bearing liabilities
Total liabilities
Stockholders’ equity
Total liabilities and stockholders’
117,459
735,177
9,272
744,449
46,253
77,736
820,653
8,679
829,332
70,884
66,388
728,732
7,928
736,660
57,608
equity
$
790,702
$
900,216
$
794,268
Net interest income
$ 23,272
$ 29,689
$ 26,811
Net interest spread
Net interest margin
Ratio of average interest-earning assets
to average interest-bearing liabilities
2.95%
3.20%
3.37%
3.58%
3.35%
3.64%
117.79%
111.57%
111.11%
8
The following table allocates changes in our interest income and interest expense between the changes related to
volume and rates:
For the Years Ended December 31,
For the Years Ended December 31,
2010 Compared to 2009
2009 Compared to 2008
Change Due to
Change Due to
Volume
Rate
Total
Volume
(in thousands)
Rate
(in thousands)
Total
$ 95
(3,326)
(272)
$ 7
(2,440)
(44)
$ 102 $ 10
3,340
(442)
(5,766)
(316)
$
(2)
1,193
12
$ 8
4,533
(430)
Interest Earned on Interest-
Earning Assets
Federal funds sold/interest-
bearing due from
Taxable investments
Tax-exempt investments
Loans held for sale–mortgage
banking
251
(170)
81
1,114
(152)
962
Participating interests in
mortgage loans
Loans held for investment
Total increase (decrease) in
(362)
(3,315)
(285)
(1,217)
(647)
(4,532)
255
1,362
(351)
(7,777)
(96)
(6,415)
interest income
(6,929)
(4,149)
(11,078)
5,639
(7,077)
(1,438)
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
Other borrowings
Subordinated debentures
Total increase (decrease) in
interest expense
Increase (decrease) in net interest
138
(1)
(788)
(1)
(650)
(2)
343
5
(2,038)
(25)
(1,695)
(20)
(2,133)
(62)
(56)
(1,474)
(4)
45
(450)
(281)
(50)
508
2
(54)
(2,583)
(343)
(106)
(966)
(2)
(9)
2,952
(345)
137
(803)
(24)
(3)
(3,280)
(325)
(102)
(410)
2
(400)
(328)
(670)
35
(1,213)
(22)
(403)
(3,547)
(1,114)
(4,661)
2,262
(6,578)
(4,316)
income
$
(3,382)
$
(3,035)
$
(6,417)
$ 3,377
$
(499)
$ 2,878
Net interest income was $23.272 million in 2010 compared to $29.689 million in 2009, a decrease of $(6.417)
million or (21.6)%. The net interest margin decreased to 3.20% for the year ended December 31, 2010, from
3.58% in 2009.
In 2010 lower rates and lower balances of assets and liabilities combined to reduce net interest income. Net
interest income in 2010 was also lower than in 2009 as we recognized income of $1.550 million in 2009 related to
an interest rate floor which expired very early in 2010. Nonperforming assets have also negatively impacted net
interest income in recent periods. During 2010, cash balances were very significant for most of the year in order
to maintain the liquidity needed to finance the sale of deposits discussed in Note 3 of our Consolidated Financial
Statements.
Interest income decreased in 2009 primarily due to the lower interest rate environment. The impact of lower
interest rates was partially offset by an increase in investments. We emphasized investments in 2009 because we
9
believed the yield on investments was attractive compared to other assets. Increases in nonperforming assets
reduced interest income.
Interest expense decreased in 2009 primarily due to lower interest rates. Increases in the balances of deposits
partially offset the decline in rates.
Net interest income was $29.689 million in 2009 compared to $26.811 million in 2008, an increase of $2.878
million or 10.7%. The net interest margin decreased to 3.58% for the year ended December 31, 2009, from 3.64%
in 2008. Investment earnings and lower interest rates on liabilities combined to increase net interest income.
Increases in non-accrual loans and other nonperforming assets compressed net interest margin.
Non-interest Income
The following table presents the major categories of our non-interest income (dollars are in thousands):
Bank charges and service fees
Wealth management revenues
Mortgage banking revenues
Gains (losses) on sales of loans, net
Gains on sales of securities, net
Other
Total non-interest income
For the Years Ended December 31,
Increase ( Decrease)
2010 – 2009
2010
2009
$
%
$
$
2,533
2,133
13,424
371
4,390
1,122
23,973
$
$
2,332
2,056
8,390
(339)
2,850
724
16,013
$ 201
7
5,034
710
1,540
398
$ 7,960
9 %
4 % (a)
60 % (b)
(209) % (c)
54 % (d)
55 % (e)
50 %
(a) Although wealth management revenues increased, we exited two lines of business in 2010. Our ESOP revenues and fees for
managing documents on insurance products sold by others declined. As a result, we expect wealth management revenues to
trend lower in future periods.
(b) Mortgage banking revenues increased because we have been expanding these operations in recent years. Low interest rates and
governmental support for the housing market have also contributed to higher mortgage banking revenues in recent periods. It is
uncertain how long these favorable conditions will continue.
In 2009 we sold commercial real estate loans at a loss to reduce our credit exposure. In 2010 we began to sell SBA loans at
gains. We anticipate more sales of SBA loans in 2011.
(c)
(d) Gains on sales of securities, net vary depending on the nature and volume of transactions.
(e)
In 2010 we sold a branch for a gain.
10
Non-interest Expense
The following table presents the major categories of our non-interest expense (dollars are in thousands):
For the Years Ended December 31,
2010
2009
Increase (Decrease)
2010– 2009
$
%
Salaries and employee benefits
Professional services
Other real estate costs
Occupancy
Data processing fees
Regulatory costs
Marketing and promotion
Depreciation and amortization
Office supplies and postage
Fraud loss on assets serviced by others
Other
Total non-interest expense
Efficiency ratio
$ 16,080
5,068
2,707
2,885
2,697
1,951
1,372
1,333
603
26,231
2,561
$ 63,488
134.38%
$ 15,008
3,064
8,169
2,508
2,330
1,466
1,277
1,465
611
-
3,205
$ 39,103
85.56%
$
$
1,072
2,004
(5,462)
377
367
485
95
(132)
(8)
26,231
(644)
24,385
48.82%
7 %
65 % (a)
(67) % (b)
15 % (c)
16 % (d)
33 % (e)
7 %
(9) %
(1) %
100 % (f)
(20) % (g)
62 %
(a) Professional services increased because of legal fees associated with problem credits, services required by mortgage banking
operations and costs related to the fraud loss on assets serviced by others.
(b) Other real estate costs will vary depending on the level of foreclosed assets and valuation allowances recorded to reduce the
carrying value of foreclosed properties.
(c) Occupancy has increased due to more mortgage banking locations
(d) Data processing fees increased due to the increased mortgage banking activity.
(e) Regulatory assessments for deposit insurance and regular examinations have been increasing significantly in recent periods.
(f) For information related to the fraud loss see Note 4 of our Consolidated Financial Statements.
(g) Other expenses decreased primarily due to an impairment of goodwill aggregating $409 thousand in the third quarter of 2009.
Income Tax Expense
Tax expense of $72 thousand was recognized in 2010. Although the Company has net operating loss
carryforwards aggregating $3.657 million for federal tax purposes, a provision for taxes was recorded for state tax
obligations. Due to tax loss carryforwards and attributes related to net deferred tax assets, the Company is not
likely to record income tax expense for several profitable periods.
In 2009, the tax benefit was $1.625 million, or 8.0% of pre-tax losses. This benefit reflects the net effect of tax
benefits resulting from operating losses and the cost of recording a valuation allowance for net deferred tax assets.
11
Financial Condition
Assets
The following table presents our assets by category (dollars are in thousands):
As of December 31,
2010
2009
Increase (Decrease)
2010 – 2009
$
%
Cash and cash equivalents
$
112,847
$
35,362
$ 77,485
219 %
(a)
Investment securities available for sale
137,032
212,661
(75,629)
(36) %
(b)
Federal Reserve Bank and Federal Home
Loan Bank of Des Moines stock
Loans held for sale-mortgage banking
Participating interests in mortgage loans
Loans and leases held for investment, net
Other loans held for sale
Other real estate, net
Premises and equipment, net
Interest receivable
Other assets
Premises and equipment held for sale, net
2,862
29,116
4,888
335,736
70,501
12,706
16,684
2,138
19,790
2,769
3,048
24,130
38,534
499,061
(186)
(6) %
(c)
4,986
21 %
(d)
(33,646)
(87) %
(e)
(163,325)
(33) %
(f)
-
70,501
100 %
(g)
7,253
20,422
2,970
5,453
75 %
(h)
(3,738)
(18) %
(i)
(832)
(28) %
(j)
24,642
(4,852)
(20) %
(k)
-
2,769
100 %
(i)
Total assets
$
747,069
$
868,083
$ (121,014)
(14) %
(a) We have been increasing liquid assets as part of a focus on managing liquidity and maintaining funds to finance the sale of
deposits. As a result, cash balances increased. Cash balances can also vary significantly on a daily basis.
(b) Investments decreased due to sales and repayments. Proceeds have been held in cash and cash equivalents.
(c) Investments in these stocks are mandated by third parities. Our required investment decreased due to reduced FHLB advances.
(d) Loans held for sale–mortgage banking have increased as we expanded mortgage banking operations.
(e) Participating interests in mortgage loans represent loans purchased from counterparties who service the assets for us. In 2010 the
balances decreased because one of the counterparties committed fraud. These balances will vary depending on the volume of
loans originated by the counterparties. See Note 4 of our Consolidated Financial Statements.
(f) Loans and leases held for investment have decreased as we have attempted to manage our credit exposure by reducing loans
outstanding and increasing the allowance for credit losses.
(g) In November 2010, we entered into an agreement to sell certain loans. See Note 3 of our Consolidated Financial Statements.
(h) ORE increased due to more foreclosure activity. See Note 10 of our Consolidated Financial Statements..
(i) As part of the agreement to sell certain assets and liabilities as announced in November, 2010, we agreed to sell certain premises
and equipment. See Note 3 of our Consolidated Financial Statements.
(j) Accrued interest receivable decreased due to lower rates and lower balances of earning assets.
(k) Other assets decreased due to the receipt of tax refunds in 2010 related to loss carryback periods.
12
Investment Securities Available for Sale
The following table presents the composition of the available-for-sale investment portfolio (in thousands):
Investment Portfolio Composition
2010
December 31,
2009
2008
Amortized
cost
Estimated
fair market
value
Amortized
cost
Estimated
fair market
value
Amortized
cost
Estimated
fair market
Value
$
965
$
1,000
$
1,223
$
1,262
$
1,505
$
1,543
1,863
1,978
2,500
2,599
2,891
2,917
89,056
89,689
86,600
87,017
23,037
23,170
930
997
1,797
1,887
37,896
39,024
39,518
1,911
41,255
2,113
118,375
2,521
117,211
2,685
138,851
13,482
129,185
14,018
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
$
134,243
$
137,032
$
213,016
$
212,661
$
217,662
$
209,857
See Note 1 of our Consolidated Financial Statements for management’s conclusion on other than temporary
impairment.
The following table presents contractual maturities for securities available for sale and yields thereon at December
31, 2010 (dollars are in thousands):
Investment Portfolio
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%
$
-
0.00%
-
0.00%
-
0.00%
-
0.00%
-
-
-
-
-
0.00% $
965
5.52% $ -
0.00% $
965
5.52%
0.00%
-
0.00%
1,863
6.50%
1,863
6.55%
0.00%
5,142
0.91%
83,914
2.65%
89,056
2.55%
0.00%
184
7.56%
746
6.06%
930
6.35%
0.00%
3,660
8.16%
35,858
8.82%
39,518
8.76%
-
0.00%
-
0.00% 1,139
7.55%
772
8.02%
1,911
7.74%
securities
$ -
0.00% $
-
0.00% $ 11,090
4.50% $
123,153
4.56% $ 134,243
4.55%
Unrealized holding gain on
securities available for sale
Total investment in securities
available for sale
2,789
$ 137,032
4.46%
(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.
13
As of December 31, 2010, we had $137.0 million of available-for-sale securities in the investment portfolio
compared to $212.7 million and $209.9 million at December 31, 2009 and 2008, respectively.
In 2010, investment securities decreased through sales and principal paydowns in order to manage liquidity and
capital. Net unrealized losses decreased and the portfolio had net unrealized gains as of December 31, 2010. The
unrealized gains are due to the narrowing of credit spread, the return of principal on securities, and the general
decline in market interest rates. During 2010, we realized $4.390 million of gains on sales of securities. See Notes
1 and 6 of our Consolidated Financial Statements for a discussion of impairment assessments.
At December 31, 2010, we held four securities, other than U.S. Government Agency CMOs, that exceeded 10%
of stockholders’ equity. The total carrying value of these four securities was $20.7 million. A significant portion
of our investment securities portfolio was pledged as collateral. See Note 6 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 $1.8 million of Federal Reserve Bank (“FRB”) stock as of December 31, 2010
and $1.3 million as of December 31, 2009, and $1.1 million and $1.8 million of FHLB of Des Moines stock as of
December 31, 2010 and 2009, respectively.
Loan Portfolio
The following table presents the composition of our loan portfolio (dollars are in thousands):
2010
2009
2008
2007
2006
December 31,
Loans and
Leases,
excluding
Loans Held
for Sale-
Mortgage
Banking
Other
Loans
Held for
Sale
Total Loans
and Leases
Held for
Total Loans
and Leases
Held for
Total
Loans and
Leases
Held for
Total Loans
and Leases
Held for
Total Loans
and Leases
Held for
Investment %
Investment %
Investment %
Investment %
Investment %
Commercial and industrial
$ 93,859 $ 17,242 $
76,617 22.5 $
124,773
23.2 $ 138,671 24.6 $
125,555 24.4 $
100,127 25.9
Real estate mortgage
262,597 50,745
211,852 62.2
266,051
49.5
265,360 47.2
181,000 35.1
124,551 32.2
Real estate construction
Participating interests in
mortgage loans
Agricultural
Other
44,289
3,303
40,986 12.0
96,327
17.9
108,713 19.3
167,345 32.5
89,619 23.2
4,888
-
4,888 1.4
38,534
7.2
28,584 5.1
24,357
4.7
56,125
14.5
15,114
-
15,114 4.4
23,142
4.3
22,023 3.9
17,074 3.3
14,286 3.7
7,211 982
6,229 1.8
7,397
1.4
8,793 1.5
7,693 1.5
6,037 1.6
Total principal amount of loans 427,958
Unearned income and net
72,272
355,686 104.4
556,224 103.5
572,144 101.6
523,024 101.5 390,745 101.0
unamortized deferred fees and
costs
Loans, net of unearned income
and unamortized fees and
costs
(357)
(60)
(297)
(0.1)
(582)
(0.1)
(807)
(0.1)
(1,111)
(0.2)
(686)
(0.2)
427,601
72,212
355,389 104.3
555,642 103.4
571,337 101.5
521,913 101.3 390,059 100.9
Less allowance for credit losses
(16,476)
(1,711)
(14,765) (4.3)
(18,047) (3.4)
(8,751) (1.5)
(6,599)
(1.3)
(3,370) (0.9)
Net loans
$ 411,125 $ 70,501 $
340,624 100.0 $
537,595 100.0 $ 562,586 100.0 $
515,314 100.0 $
386,689 100.0
14
Change in Loan Portfolio Composition
As of December 31,
Increase (Decrease)
2010 – 2009
2010
2009
$
%
Loans and Leases,
excluding Loans
Held for Sale-
Mortgage Banking
Other Loans
Held for Sale
Total Loans
and Leases
Held for
Investment
Total Loans
and Leases
Held for
Investment
Commercial and industrial
$
93,859 $ 17,242 $ 76,617 $
124,773 $ (48,156)
(39)%
Real estate mortgage
Real estate construction
262,597
50,745
211,852
266,051
(54,199)
(20)%
44,289
3,303
40,986
96,327
(55,341)
(57)%
Participating interests in mortgage loans
4,888
-
4,888
38,534
(33,646)
(87)%
Agricultural
Other
Total principal amount of loans
Unearned income and net unamortized
deferred fees and costs
Loans, net of unearned income and
unamortized fees and costs
15,114
-
15,114
23,142
(8,028)
(35)%
7,211
982
6,229
7,397 (1,168)
(16)%
427,958
72,272
355,686
556,224
(200,538)
(36)%
(357)
(60)
(297)
(582)
285
(49)%
427,601
72,212
355,389
555,642
(200,253)
(36)%
Less allowance for credit losses
(16,476)
(1,711)
(14,765)
(18,047)
3,282
(18)%
Net loans
$
411,125 $
70,501 $ 340,624 $ 537,595 $ (196,971)
(37)%
(a)
(a)
(b)
(c)
(a)
(a) Loan balances have generally decreased due to repayments, charge-offs and our efforts to reduce credit exposure. Loans held for
investment have also declined as a result of an agreement entered into in November 2010 to sell certain loans. See Note 3 of our
Consolidated Financial Statements.
(b) Construction loans have decreased because certain projects under construction have been completed and certain problem loans
were charged-off during the year.
(c) Participating interests in mortgage loans represent loans purchased from counterparties who service the assets for us. In 2010, the
balances decreased because one of the counterparties committed fraud. These balances will vary depending on the volume of
loans originated by the counterparties. See Note 4 of our Consolidated Financial Statements.
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 concentration limits, the
Bank sells loan participations to outside participants without recourse.
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)
$
2010
2009
2008
2007
2006
259,939
330,204
315,469
201,776
188,994
15
Concentrations of Credit
The following tables summarize the location of our borrowers as of December 31 (in thousands):
2010
Loans and Leases,
excluding Loans
Held for Sale-
Mortgage Banking
Other Loans
Held for Sale
Total Loans
and Leases
Held for
Investment
2009
Total Loans
and Leases
Held for
Investment
$
172,698
$
2,116
$
170,582
48 %
$
199,831
36 %
126,461
71,943
56,856
36,206
31,125
2,825
90,255
25
40,818
12
54,031
15
154,007
125,579
76,807
28
22
14
427,958
72,272
355,686
100 %
556,224
100 %
North Dakota
Minnesota
Arizona
Other
Total gross loans held for
investment
Unearned income and net
unamortized deferred fees
and costs
Allowance for credit losses
(16,476)
(1,711)
(14,765)
(357)
(60)
(297)
(582)
(18,047)
Net loans and leases
$
411,125
$
70,501
$
340,624
$
537,595
16
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):
Loans and Leases,
excluding Loans
Held for Sale-
Mortgage Banking
2010
Other Loans
Held for Sale
Total Loans
and Leases
Held for
Investment
2009
Total Loans
and Leases
Held for
Investment
North Dakota
$
162,364
$
-
$
162,364
46 %
$
184,282
33 %
Arizona
California
Minnesota
Texas
Kentucky
Idaho
Wisconsin
Colorado
Georgia
Other
Total gross loans held for
investment
Unearned income and net
unamortized deferred fees
and costs
84,966
31,736
56,985
28,108
10,717
9,095
7,515
6,333
6,323
23,816
33,335
40
29,537
1,347
-
-
515
-
1,674
5,824
51,631
31,696
27,448
26,761
10,717
9,095
7,000
6,333
4,649
17,992
14
9
8
7
3
3
2
2
1
5
134,967
39,848
81,514
28,944
11,927
9,292
9,840
-
6,465
49,145
24
7
15
5
2
2
2
-
1
9
427,958
72,272
355,686
100 %
556,224
100 %
(357)
(60)
(297)
(582)
(18,047)
Allowance for credit losses
(16,476)
(1,711)
(14,765)
Net loans and leases
$
411,125
$
70,501
$
340,624
$
537,595
17
The following table presents loans by type within our three primary states as of December 31 (in thousands):
Loans and Leases,
excluding Loans
Held for Sale-
Mortgage Banking
2010
Other Loans
Held for Sale
Total Loans
and Leases
Held for
Investment
2009
Total Loans
and Leases
Held for
Investment
North Dakota
Commercial and industrial
$
80,536
$
-
$
80,536
$
84,400
Construction
Agricultural
Land and land development
Owner-occupied commercial real estate
Non-owner-occupied commercial real estate
Small business administration
Consumer/participating interests
Subtotal
Arizona
Commercial and industrial
Construction
Agricultural
Land and land development
Owner-occupied commercial real estate
Non-owner-occupied commercial real estate
Small business administration
Consumer/participating interests
Subtotal
Minnesota
Commercial and industrial
Construction
Agricultural
Land and land development
Owner-occupied commercial real estate
Non-owner-occupied commercial real estate
Small business administration
Consumer/participating interests
Subtotal
$
$
$
$
1,029
13,673
10,682
24,941
12,567
3,116
15,820
162,364
9,243
-
-
8,621
19,286
28,560
8,937
10,319
84,966
3,656
2,002
30
7,903
16,555
19,524
885
6,430
$
$
$
$
-
-
-
1,029
13,673
10,682
4,572
22,422
12,321
-
24,941
27,960
-
12,567
12,419
-
-
3,116
15,820
-
$
162,364
8,637
$
606
-
-
-
-
-
8,621
$
$
2,434
17,754
184,282
19,740
2,136
-
18,541
18,472
814
23,508
1,763
26,797
32,497
$
$
1,491
2,972
7,446
7,347
33,335
$
51,631
3,029
$
627
-
2,002
-
3,303
15,819
2,102
827
4,457
30
4,600
736
17,422
58
1,973
5,042
33,503
134,967
10,589
4,698
33
12,641
18,675
25,203
1,025
8,650
$
56,985
$
29,537
$
27,448
$
81,514
18
Loan Maturities
The following table sets forth the remaining maturities of loans in our portfolio as of December 31, 2010 (in
thousands):
Maturities of Loans(1)
Commercial and industrial
Real estate mortgage
Real estate construction
Participating interests in mortgage
loans
Agricultural
Other
Total principal amount of loans
Over 1 year
through 5 years
One year
or less
Fixed
rate
Floating
rate
Over 5 years
Fixed
rate
Floating
rate
Total Loans
and Leases
Held for
Investment
$ 37,288
64,431
18,138
$ 25,081
65,097
6,014
$ 1,075
39,966
12,412
$ 7,342 $ 5,831
23,851
4,101
18,507
321
$ 76,617
211,852
40,986
4,888
4,838
1,907
$ 131,490
-
6,410
3,326
$ 105,928
-
705
290
$ 54,448
-
-
625
100
2,536
606
$ 26,895 $ 36,925
4,888
15,114
6,229
$ 355,686
(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 substantially 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 adequate to cover estimated
probable losses inherent in the loan and lease portfolio as of each balance sheet date. The provision for credit
losses for the year ended December 31, 2010 was $5.750 million as compared to $27.000 million in 2009. The
higher provision for credit losses in recent periods reflects macroeconomic forces which impaired the ability of
borrowers to repay debt which resulted in higher credit losses throughout the financial industry. During 2009, our
nonperforming loans increased significantly and our provision for credit losses increased accordingly. In 2010,
the balance of our nonperforming loans decreased significantly which contributed to the decrease in our provision
for credit losses.
Allowance for Credit Losses
See a discussion of critical accounting policies in Note 1 of our Consolidated Financial Statements for a summary
of the processes we use to estimate the allowance for credit losses.
19
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
Other
Total charge-offs
Recoveries:
Commercial and industrial
Real estate mortgage
Real estate construction
Agricultural
Other
Total recoveries
Net charge-offs
Provision for credit losses charged to
operations
Transferred to other loans held for sale
Balance of allowance for credit losses, end of
2010
2009
2008
2007
2006
$
18,047
$
8,751
$
6,599
$
3,370
$
3,188
(3,732)
(735)
(3,238)
-
(81)
(7,786)
19
309
127
-
10
465
(7,321)
(6,408)
(2,258)
(9,080)
-
(130)
(17,876)
12
1
149
-
10
172
(17,704)
(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)
5,750
27,000
7,750
3,750
16,476
18,047
(1,711)
-
8,751
-
6,599
-
(19)
-
-
-
(32)
(51)
3
-
-
-
20
23
(28)
210
3,370
-
period
$
14,765
$
18,047
$
8,751
$
6,599
$
3,370
Ratio of net charge-offs to average total loans
Ratio of net charge-offs to average loans and
(1.387)%
(2.948)%
(0.507)%
(0.121)%
(0.008)%
leases held for investment
(1.530)%
(3.235)%
(0.534)%
(0.129)%
(0.008)%
Average gross loans and leases held for
investment
Ratio of allowance for credit losses to loans
and leases held for investment(1)
Ratio of allowance for credit losses to loans
and leases held for investment(2)
Ratio of allowance for credit losses to total
nonperforming loans(1)
Ratio of allowance for credit losses to total
nonperforming loans(2)
Allowance for credit losses to total loans(1)
Allowance for credit losses to total loans(2)
(1) Excluding impact of pending sale
(2) Including impact of pending sale
$
478,492
$
547,336
$
525,311
$
402,615
$
334,058
4.70%
4.21%
92%
83%
3.62%
3.84%
3.49%
1.61%
1.33%
1.01%
-
50%
-
3.11%
-
-
38%
-
1.50%
-
-
-
122%
3,304%
-
1.26%
-
-
0.86%
-
The allowance for credit losses has been elevated in recent periods because of an increase in nonperforming assets
and deteriorating economic conditions.
See Notes 1 and 9 of our Consolidated Financial Statements and “Critical Accounting Policies” for further
information concerning accounting policies associated with the allowance for credit losses.
20
The table below presents 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)
December 31,
2010
2009
2008
2007
2006
Loans in
Category as a
Percentage of
Total Gross
Loans and
Leases Held
for Investment
Total
Loans and
Leases
Held for
Investment
Allowance
Loans in
Category as a
Percentage of
Total Gross
Loans and
Leases Held
for Investment
Total Loans
and Leases
Held for
Investment
Allowance
Loans in
Category as a
Percentage of
Total Gross
Loans and
Leases Held
for Investment
Loans in
Category as a
Percentage of
Total Gross
Loans and
Leases Held
for Investment
Total Loans
and Leases
Held for
Investment
Allowance
Loans in
Category as a
Percentage of
Total Gross
Loans and
Leases Held
for Investment
Total Loans
and Leases
Held for
Investment
Allowance
Total Loans
and Leases
Held for
Investment
Allowance
Loans and
Leases
Allowance
Other Loans
Held for Sale
Allowance
Commercial and
industrial (a)
Real estate
mortgage (b)
Real estate
$ 1,653 $
575 $ 1,078
22%
$
5,779
23%
$
1,268
24%
$
1,410
24%
$
1,602
26%
12,493
1,087
11,406
60%
6,672
48%
2,829
47%
1,956
35%
838
32%
construction (a)
2,031
36
1,995
11%
4,692
17%
4,293
19%
2,740
32%
534
23%
Participating
interests in
mortgage loans
14
-
14
Agricultural
174
-
174
111
13
98
Other
Total
1%
4%
2%
105
704
95
7%
4%
1%
86
180
95
5%
4%
1%
85
276
132
5%
3%
1%
140
14%
171
85
4%
1%
$
16,476 $
1,711 $
14,765
100%
$
18,047
100%
$
8,751
100%
$
6,599
100%
$
3,370
100%
(a) The portion of the allowance allocated to these types of loans decreased in recent periods due to lower principal balances for these loan
types.
(b) The portion of our allowance allocated to these types of loans increased in recent because of deterioration of the macro economy,
devaluation of real estate and/or impaired ability of our borrowers to repay their obligations.
Allowance for Credit Losses; Impact on Earnings.
We have established the allowance for credit losses to cover for estimated losses inherent to the loans and lease
portfolio at December 31, 2010. The allowance for credit losses is an estimate based upon several judgmental
factors. We are not aware of known trends, commitments or other events that could reasonably occur that would
materially affect our methodology or the assumptions used to estimate the allowance for credit losses. However,
changes in qualitative and quantitative factors could occur at any time and such changes could be of a material
nature. In addition, economic situations change, financial conditions of borrowers morph and other factors we
consider in arriving at our estimates may evolve. To the extent that these matters have negative developments, our
future earnings could be reduced by high provisions for credit losses.
21
Nonperforming Loans and Assets
The following table sets forth nonperforming assets, the allowance for credit losses and certain related ratios
(dollars are in thousands):
Nonperforming loans:
Loans 90 days or more delinquent and still
accruing interest
Non-accrual loans
Total nonperforming loans
Other real estate, net
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 total
nonperforming loans(1)
Ratio of allowance for credit losses to total
nonperforming loans(2)
(1) Excluding impact of pending sale
(2) Including impact of pending sale
2010
2009
December 31,
2008
2007
2006
$
-
17,862
17,862
12,706
$ 30,568
14,765
$
3.93%
$
1
35,889
35,890
7,253
$ 43,143
$ 18,047
6.19%
$ 6
22,909
22,915
10,189
33,104
8,751
3.92%
$
$
$ -
5,399
5,399
-
5,399
6,599
1.03%
$
$
$ 2
100
102
-
102
3,370
0.03%
$
$
5.10%
4.09%
6.94%
4.97%
4.22%
3.84%
1.09%
0.77%
0.03%
0.02%
92%
50%
38%
122%
3,304%
83%
-
-
-
-
Nonperforming Loans
The following table sets forth information concerning our nonperforming loans as of December 31 (dollars are in
thousands):
2010
2009
Balance, beginning of period
Additions to nonperforming
Charge-offs
Reclassified back to performing
Principal payments received
Transferred to other real estate
owned
Balance, end of period
$
$
35,890
7,385
(3,991)
(5,208)
(4,882)
(11,332)
17,862
$
$
23,225
31,268
(8,421)
(301)
(1,749)
(8,132)
35,890
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
Interest income recorded
Effect on interest income
2010
2009
$
1,601
$
1,827
427
23
$
1,174
$ 1,804
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
22
principal in accordance with the loan contract. Loans in this category must be well secured and in the process of
collection.
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. 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.
Restructured loans are loans for which concessions, including a reduced interest rate or a deferral of interest or
principal, have been granted due to the borrower’s weakened financial condition. Once a loan is restructured,
interest is accrued at the restructured rates when no loss of principal is anticipated. A loan that has performed in
accordance with restructured terms for one year is no longer reported as a restructured loan.
The table below summarizes the amounts of restructured loans as of December 31 (in thousands):
Restructured Loans
Total
Accrual
Non-accrual
$
2010
2009
2008
2007
2006
$
34,264 $
14,337
2,379
2,585
54
17,390
1,291
-
-
-
16,874
13,046
2,379
2,585
54
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 less cost to sell 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 at 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.
See Note 10 of our Consolidated Financial Statements for information on other real estate owned.
Impaired loans
See Note 8 of our Consolidated Financial Statements for information on impaired loans.
Potential Problem Loans
The macro economic environment is very challenging and asset values are declining throughout most of the
country. So long as these conditions persist, many loans are potentially problematic assets.
Notwithstanding the prior paragraph, we attempt to quantify potential problem loans with more immediate credit
risk. We estimate such loans totaled $12.4 million and $22.0 million at December 31, 2010 and 2009,
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.
23
Liabilities and Stockholders’ Equity
The following table presents our liabilities and stockholders’ equity (dollars are in thousands):
Deposits:
Non-interest-bearing
Interest-bearing-
Savings, interest checking and money
market
Time deposits $100,000 and over
Other time deposits
Non-interest-bearing held for sale
Interest-bearing held for sale
Short-term borrowings
FHLB advances
Other 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,
2010
2009
Increase (Decrease)
2010 – 2009
$
%
$
91,478
$
98,658
$
(7,180)
(7) % (a)
243,332
39,580
179,275
34,610
72,836
16,329
-
-
24,134
852
4,704
2,618
709,748
37,321
280,571
52,222
324,512
-
-
10,190
15,000
-
22,890
1,468
2,946
2,361
810,818
57,265
(37,239)
(12,642)
(145,237)
34,610
72,836
6,139
(15,000)
-
1,244
(616)
1,758
257
(101,070)
(19,944)
(13) % (a)
(24) % (b)
(45) % (b)
100 %
100 %
60 % (c)
(100) % (d)
- %
5 %
(42) %
60 % (e)
11 %
(12) %
(35) %
stockholders’ equity
$
747,069
$
868,083
$
(121,014)
(14) %
(a) These deposits decreased due to pending sale of certain deposits. See Note 3 of our Consolidated Financial Statements. These
types of accounts fluctuate daily due to the cash management activities of our customers.
(b) We have lowered rates paid on certificates of deposits in order to reduce the size of our balance sheet.
(c) Short-term borrowings are primarily customer repurchase agreements. These balances can vary significantly depending on
customer preferences.
(d) FHLB advances have decreased as the growth in deposits has been used to reduce borrowings.
(e) In 2010, we suspended payment on our dividends to preferred stockholders. Approximately $1.1 million of this increase relates to
dividends accrued and not paid.
24
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,
2010
Percent
of
deposits
Wgtd.
avg.
rate
Average
balance
2009
Percent
of
deposits
Average
balance
2008
Wgtd.
avg.
rate
Average
balance
Percent Wgtd.
avg.
rate
of
deposits
$ 282,880
11,156
40.55%
1.60%
0.61% $ 266,537
11,685
0.10%
36.60%
1.61%
0.89%
0.11%
$ 244,279
9,859
39.96% 1.67%
1.61% 0.33%
241,036
45,083
34.55%
6.46%
2.52%
2.21%
324,902
47,358
286,119
41.01%
2.47%
372,260
44.62%
6.50%
51.12%
2.66%
2.83%
232,367
58,378
38.01% 3.87%
9.55% 3.44%
2.68%
290,745
47.56% 3.78%
580,155
83.16%
1.52%
650,482
89.33%
1.90%
544,883
89.14% 2.77%
117,459
16.84%
-
77,736
10.67% -
66,388
10.86%
-
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
$ 697,614 100.00%
1.26% $ 728,218
100.00%
1.70%
$ 611,271
100.00% 2.47%
Time deposits, in denominations of $100,000 and over, totaled $39.6 million at December 31, 2010 as compared
to $52.2 million at December 31, 2009. The following table sets forth the amount and maturities of time deposits
of $100,000 and over as of December 31, 2010 (in thousands):
Time Deposits of $100,000 and Over
Deposits
Maturing in:
3 months or less
Over 3 months through 6 months
Over 6 months through 12 months
Over 12 months
$
Time Deposits
8,387
8,523
18,193
9,312
44,415
$
Held for Sale
$
1,463
140
2,274
958
4,835
$
Time Deposits, net
6,924
8,383
15,919
8,354
39,580
$
$
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
2010
2009
2008
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
$
$
$
16,329
0.48%
16,329
11,163
0.65%
$
$
$
10,190
0.70%
23,818
17,953
1.00%
$
$
$
16,844
0.88%
16,844
7,049
2.04%
Note 13 of our Consolidated Financial Statements summarizes the general terms of our short-term borrowings
outstanding at December 31, 2010 and 2009.
25
FHLB advances totaled $0 million and $15.0 million at December 31, 2010 and 2009, respectively, while long-
term borrowings totaled $0, for the same periods.
Notes 14 and 15 of our Consolidated Financial Statements summarize the general terms of our FHLB advances
and other borrowings at December 31, 2010 and 2009.
Guaranteed Preferred Beneficial Interests in Company’s Subordinated Debentures
See Note 16 of our Consolidated Financial Statements for a description of the subordinated debentures.
Capital Resources and Expenditures
Tier 1 leverage (Consolidated)
Tier 1 risk-based capital (Consolidated)
Total risk-based capital (Consolidated)
Tangible common equity (Consolidated)
Tier 1 leverage (BNC National Bank)
Tier 1 risk-based capital (BNC National Bank)
Total risk-based capital (BNC National Bank)
2010
2006
2009
8.58%
2008
2007
6.17%
9.01% 12.01% 7.12%
9.49% 12.32% 11.15% 12.58% 9.49%
13.28% 14.15% 12.95% 14.26% 10.89%
6.21%
2.24%
8.47% 3.72%
9.34% 12.57% 7.70%
7.53%
11.57% 12.25% 11.56% 13.18% 10.26%
12.85% 13.52% 12.81% 14.26% 10.94%
4.23%
8.54%
See Note 2 of our Consolidated Financial Statements for a discussion of regulatory capital and the current
operating environment.
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.
See Notes 21 and 22 of our Consolidated Financial Statements for a detailed description of each of these
instruments.
Contractual Obligations, Contingent Liabilities and Commitments
We are a party to financial instruments with risks that 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. See Note 21 of our Consolidated Financial Statements.
26
At December 31, 2010, the aggregate contractual obligations (excluding bank deposits) 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
$ 16,329
28,734
$ -
-
$ -
-
$ 24,134 $ 40,463
28,734
-
665
$ 45,728
385
$ 385
285
285
$
1,822
3,157
25,956 $ 72,354
$
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
Liquidity Risk Management
$ 90,225
$ 3,918
$ 2,496
$ 544 $ 97,183
2,394
$ 92,619
1,335
$ 5,253
-
$ 2,496
3,729
$ 544 $ 100,912
-
Liquidity risk is the possibility of being unable to meet financial obligations in a timely manner. The objectives of
liquidity management policies are to maintain adequate liquid assets and diversified liabilities. Diversification is
provided by varying debt instruments, maturities and counterparties.
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. We obtain funding and
liquidity through repayments and sales of assets. In addition, we obtain liquidity and funding from core deposits,
brokered deposits, repurchase agreements and overnight Federal funds. The Bank is a member of the FHLB of
Des Moines, which provides an opportunity to borrow funds. We have also obtained funding through the issuance
of subordinated notes, subordinated debentures and long-term borrowings.
We assess liquidity by our ability to raise cash when we need it at a reasonable cost and with a minimum of loss
of income. 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 also manage for anticipated future funding needs and
liquidity risk by projecting sources and uses of funds under normal as well as stressed environments. We have a
targeted range of liquidity metrics and manage our operations such that these targets can be achieved. We believe
27
our policies and guidelines will provide for 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.
Available borrowing capacity from the FHLB was approximately $76.1 million as of December 31, 2010. See
Note 14 of our Consolidated Financial Statements.
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 of 1933 and Section
21E of the Securities Exchange Act of 1934. 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.
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 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 rates of similar maturity; and (4) Yield curve risk – risk
resulting from unexpected changes in rates of different maturities from the same type of instrument. We have risk
management policies to monitor and limit exposure to interest rate risk. Historically, 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.
Our interest rate risk exposure is managed with the objective of managing the level and potential volatility of net
interest income, bearing in mind that we are in the business of taking 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. 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 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 Notes 1 and 18 of our Consolidated Financial Statements for a summary of our accounting
policies pertaining to such instruments.
28
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, 2010 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, 2010 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.
We monitor the results of net interest income simulation on a quarterly basis. 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 level of interest rates as of December 31, 2010, the downward scenarios for interest rate movements is
limited to -100bp, but a + 400bp scenario was also measured. 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 2010 is shown
below:
Net Interest Income Simulation
Movement in interest rates
-100bp
Unchanged
+100bp
+200bp
+300bp
+400bp
Projected 12-month net
interest income
Dollar change from
unchanged scenario
Percentage change from
unchanged scenario
$
22,327
$
22,292
$
35
0.16%
-
-
$
$
23,028
736
$
$
23,549
1,257
$
$
23,808
$
23,992
1,516
$
1,700
3.30%
5.64%
6.80%
7.63%
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, 15, and 20 percent
from the rates unchanged scenario for the +/- 100bp, 200bp, 300bp, and 400bp interest rate ramp scenarios,
respectively. When a given scenario falls outside of these limits, we review 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, 2010 (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.
The pending divestiture discussed in Note 3 of our Consolidated Financial Statements is expected to reduce net
interest income, but interest rate sensitivity after the pending divestiture is expected to be similar to the table
presented above.
29
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, 2010. Assets and liabilities are classified by the earliest
possible repricing date or maturity, whichever occurs first.
Interest Sensitivity Gap Analysis
Estimated maturity or repricing at December 31, 2010
0–3
4–12
months
months
1–5
years
Over
5 years
Total
(dollars are in thousands)
Interest-earning assets:
Interest-bearing deposits with banks
$ 112,847 $ -
$ - $ -
$ 112,847
Investment securities
FRB and FHLB stock
Fed Funds Sold
12,864
32,433
51,806
39,929
137,032
2,862
-
-
-
2,862
-
-
-
-
-
Loans held for sale-mortgage banking, fixed
rate
-
29,116
-
-
29,116
Loans held for sale-mortgage banking, floating
rate
-
-
-
-
-
Other loans held for sale, fixed rate
73
3,776
29,348
4,599
37,796
Other loans held for sale, floating rate
28,202
637
3,866
-
32,705
Loans held for investment, fixed rate
37,828
49,289
71,235
10,692
169,044
Loans held for investment, floating rate
171,414
1,500
13,431
-
186,345
Total interest-earning assets
$
366,090
$
116,751 $
169,686 $ 55,220
$ 707,747
Interest-bearing liabilities:
Interest checking and money market accounts
$
232,586
$ -
$ - $ -
$ 232,586
Interest checking and money market accounts
held for sale
Savings
Savings held for sale
Time deposits under $100,000
Time deposits $100,000 and over
46,798
-
-
-
46,798
11,709
-
-
-
11,709
963
-
-
-
963
30,233
60,421
38,319
50,302
179,275
4,510
25,759
9,311
-
39,580
Time deposits under $100,000 held for sale
17,577
2,611
52
-
20,240
Time deposits $100,000 and over held for sale
3,877
958
-
-
4,835
Short-term borrowings
FHLB advances
Other borrowings
Subordinated debentures
16,329
-
-
-
16,329
-
-
-
-
-
-
-
-
-
-
15,000
-
-
9,134
24,134
Total interest-bearing liabilities
$
379,582
$
89,749 $
47,682 $ 59,436
$ 576,449
Interest rate gap
$ (13,492)
$
27,002 $
122,004 $ (4,216)
$ 131,298
Cumulative interest rate gap at December 31, 2010
$ (13,492)
$
13,510 $
135,514 $ 131,298
Cumulative interest rate gap to total assets
(1.81%)
1.81%
18.14%
17.58%
30
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, 2010 and do not contemplate any actions we might undertake in response to changes in
market interest rates.
31
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors’ Report
Consolidated Balance Sheets as of December 31, 2010 and 2009
Consolidated Statements of Operations for the years ended December 31, 2010 and 2009
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2010
and 2009
Page
33
34
35
36
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2010 and 2009
37
Consolidated Statements of Cash Flows for the years ended December 31, 2010 and 2009
Notes to Consolidated Financial Statements
38
40
32
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, 2010 and 2009, and the related consolidated
statements of operations, comprehensive income (loss), 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,
2010 and 2009, 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 22, 2011
“ KPMG LLP Suite 1501 222 South 15th Street Omaha, NE 68102-1610 Suite 1600 233 South 13th Street Lincoln, NE 68508-2041 KPMG LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative (“KPMG International”), a Swiss entity.
Financial Statements
FINANCIAL INFORMATION
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31
(In thousands, except share data)
ASSETS
2010
2009
CASH AND CASH EQUIVALENTS
INVESTMENT SECURITIES AVAILABLE FOR SALE
FEDERAL RESERVE BANK AND FEDERAL HOME LOAN BANK STOCK
LOANS HELD FOR SALE-MORTGAGE BANKING
PARTICIPATING INTERESTS IN MORTGAGE LOANS
LOANS AND LEASES HELD FOR INVESTMENT
ALLOWANCE FOR CREDIT LOSSES
Net loans and leases held for investment
OTHER LOANS HELD FOR SALE, net
OTHER REAL ESTATE, net
PREMISES AND EQUIPMENT, net
INTEREST RECEIVABLE
OTHER ASSETS
PREMISES AND EQUIPMENT HELD FOR SALE, net
Total assets
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
Non-interest-bearing held for sale
Interest-bearing held for sale
Total deposits
SHORT-TERM BORROWINGS
FEDERAL HOME LOAN BANK ADVANCES
OTHER BORROWINGS
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY’S
SUBORDINATED DEBENTURES
ACCRUED INTEREST PAYABLE
ACCRUED EXPENSES
OTHER LIABILITIES
Total liabilities
STOCKHOLDERS’ EQUITY:
Preferred stock, $.01 par value – Authorized 2,000,000 shares:
Preferred Stock - 5% Series A 20,093 shares outstanding;
Preferred Stock - 9% Series B 1,005 shares outstanding;
Common stock, $.01 par value – Authorized 35,000,000 shares; 3,304,339 and
3,290,219 shares issued and outstanding
Capital surplus – common stock
Retained earnings (deficit)
Treasury stock (364,314 and 363,434 shares, respectively)
Accumulated other comprehensive gain (loss), net
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
$
112,847
137,032
2,862
29,116
4,888
350,501
(14,765)
340,624
70,501
12,706
16,684
2,138
19,790
2,769
747,069
$
$
35,362
212,661
3,048
24,130
38,534
517,108
(18,047)
537,595
-
7,253
20,422
2,970
24,642
-
868,083
$
91,478
$
98,658
243,332
39,580
179,275
34,610
72,836
661,111
16,329
-
-
24,134
852
4,704
2,618
709,748
280,571
52,222
324,512
-
-
755,963
10,190
15,000
-
22,890
1,468
2,946
2,361
810,818
19,411
1,075
19,187
1,098
33
27,036
(7,322)
(5,069)
2,157
37,321
747,069
$
33
26,885
16,078
(5,068)
(948)
57,265
868,083
$
See accompanying notes to consolidated financial statements.
34
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
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
Other borrowings
Subordinated debentures
Total interest expense
Net interest income
PROVISION FOR CREDIT LOSSES
NET INTEREST INCOME AFTER PROVISION FOR CREDIT
LOSSES
NON-INTEREST INCOME:
Bank charges and service fees
Wealth management revenues
Mortgage banking revenues
Gains (losses) on sales of loans, net
Gain on sales of securities, net
Other
Total non-interest income
NON-INTEREST EXPENSE:
Salaries and employee benefits
Professional services
Other real estate costs
Occupancy
Data processing fees
Regulatory costs
Marketing and promotion
Depreciation and amortization
Office supplies and postage
Fraud loss on assets serviced by others
Other
Total non-interest expense
Loss before income taxes
Income tax expense (benefit)
NET LOSS
Preferred stock costs
Net loss available to common shareholders
Basic loss per common share
Diluted loss per common share
2010
2009
$
24,675
$
29,774
8,613
93
129
33,510
8,808
73
113
-
1,244
10,238
23,272
5,750
14,261
409
144
44,588
12,386
179
1,078
3
1,253
14,899
29,689
27,000
17,522
2,689
2,533
2,133
13,424
371
4,390
1,122
23,973
16,080
5,068
2,707
2,885
2,697
1,951
1,372
1,333
603
26,231
2,561
63,488
(21,993)
72
(22,065)
(1,333)
(23,398)
(7.13)
(7.13)
$
$
$
$
2,332
2,056
8,390
(339)
2,850
724
16,013
15,008
3,064
8,169
2,508
2,330
1,466
1,277
1,465
611
-
3,205
39,103
(20,401)
(1,625)
(18,776)
(1,254)
(20,030)
(6.14)
(6.14)
$
$
$
$
See accompanying notes to consolidated financial statements.
35
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
For the Years Ended December 31
(In thousands)
NET LOSS
Unrealized gain (loss) on cash flow
2010
2009
$
(22,065)
$
(18,776)
hedge, net
$
-
$
(375)
Amortization of deferred gain in other
comprehensive income
Unrealized gain on securities available
for sale
Reclassification adjustment for gains
included in net income
Other comprehensive income,
before tax
(40)
7,535
(4,390)
3,105
Income tax (expense) benefit related to
items of other comprehensive income
-
(1,126)
10,299
(2,850)
5,948
(3,098)
Other comprehensive income
3,105
3,105
2,850
2,850
TOTAL COMPREHENSIVE LOSS
$
(18,960)
$
(15,926)
See accompanying notes to consolidated financial statements.
36
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
For the Years Ended December 31
(In thousands)
Capital
Surplus
Accumulated
Other
Preferred Stock
Common Stock
Common
Retained
Treasury Comprehensive
Shares
Amount
Shares
Amount
Stock
Earnings
Stock
Income (Loss)
Total
BALANCE, December 31, 2008
- $
-
3,299,163 $ 33 $
26,628 $
36,104 $
(5,020) $
(3,798) $ 53,947
Net loss
-
-
-
-
-
(18,776)
-
-
(18,776)
Other comprehensive income
-
-
-
-
-
-
-
2,850
2,850
Preferred stock issued
21,098
21,098
-
-
-
-
-
-
21,098
Discount on preferred stock, net
Preferred stock amortization, net
Dividend on preferred stock
Impact of share-based
compensation
-
-
-
-
(1,005)
-
-
-
-
-
-
(1,005)
192
-
-
-
(192)
-
-
-
-
-
-
-
(1,058)
-
-
(1,058)
- (8,944)
-
257
-
(48)
-
209
BALANCE, December 31, 2009
21,098 $
20,285
3,290,219 $ 33 $
26,885 $
16,078 $
(5,068) $
(948) $ 57,265
Net loss
-
-
-
-
-
(22,065)
-
-
(22,065)
Other comprehensive income
-
-
-
-
-
-
-
3,105
3,105
Preferred stock amortization, net
Dividend on preferred stock
Impact of share-based
compensation
-
-
-
201
-
-
-
(201)
-
-
-
-
-
-
-
(1,134)
-
-
(1,134)
-
14,120
-
151
-
(1)
-
150
BALANCE, December 31, 2010
21,098 $
20,486
3,304,339 $ 33 $
27,036 $
(7,322) $
(5,069) $
2,157 $ 37,321
See accompanying notes to consolidated financial statements
37
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31 (In thousands)
OPERATING ACTIVITIES:
Net loss
2010
2009
$
(22,065)
$
(18,776)
Adjustments to reconcile net income to net cash provided by
operating activities -
Provision for credit losses
Provision for other real estate losses
Depreciation and amortization
Net amortization of premiums and (discounts) on investment
securities and subordinated debentures
Share-based compensation
Change in interest receivable and other assets, net
Impairment of goodwill
Loss on disposals of bank premises and equipment, net
Fraud loss on assets serviced by others
Loss on sale of other real estate
Bank premises and equipment, net charges associated with branch
closure
Gain on sale of branch
Net realized gain on sales of investment securities
Provision (benefit) for deferred income taxes
Change in other liabilities, net
(Gains) losses on sale of loans, net
Proceeds from sales of loans
Originations of loans held for sale
Proceeds from sales of loans held for sale
Fair value adjustment for loans held for sale
Net cash provided by operating activities
INVESTING ACTIVITIES:
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 decrease (increase) in participating interests in mortgage loans
Net decrease (increase) in loans held for investment
Proceeds from sales of other real estate
Additions to bank premises and equipment
Proceeds from sales of bank premises and equipment
Net cash provided by (used in) investing activities
5,750
2,383
1,333
(269)
150
7,123
-
28
26,231
126
103
(403)
(4,390)
(1,243)
986
(371)
4,264
(662,095)
656,844
265
14,750
(49,946)
84,450
49,620
(556)
742
7,415
71,848
3,370
(604)
109
166,448
27,000
8,057
1,465
(2,836)
257
(5,656)
409
-
-
(1)
-
-
(2,850)
2,473
(1,532)
339
10,565
(491,027)
480,279
21
8,187
(138,560)
71,553
76,021
-
2,941
(9,950)
(11,094)
3,012
(1,091)
13
(7,155)
See accompanying notes to consolidated financial statements.
38
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, continued
For the Years Ended December 31 (In thousands)
FINANCING ACTIVITIES:
Net (decrease) increase in deposits
Net increase (decrease) in short-term borrowings
Repayments of Federal Home Loan Bank advances
Proceeds from Federal Home Loan Bank advances
Proceeds from issuance of preferred stock
Dividends paid on preferred stock
Net cash (used in) provided by 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 taxes paid (received)
2010
2009
(94,852)
6,139
(20,000)
5,000
-
-
(103,713)
77,485
35,362
$ 112,847 $
80,643
(6,654)
(1,087,300)
1,017,800
20,093
(821)
23,761
24,793
10,569
35,362
$ 10,855 $
$ (6,166) $
15,110
2,498
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Additions to other real estate in settlement of loans
$ 11,332 $
Transfer of net loans held for investment to loans held for sale
$ 70,501 $
$ 2,769 $
Transfer of premises and equipment to premises and equipment held for sale
Transfer of non-interest bearing deposits to non-interest bearing deposits held for sale $ 34,610 $
$ 72,836 $
Transfer of interest bearing deposits to interest bearing deposits held for sale
8,132
-
-
-
-
See accompanying notes to consolidated financial statements.
39
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 subsidiary, BNC Insurance
Services, Inc., collectively the Bank). The Company operates community banking and wealth management
businesses in Arizona, Minnesota and North Dakota from 18 locations. The Bank also conducts mortgage banking
from 10 locations in Arizona, Minnesota, Iowa, Kansas, Nebraska and Missouri.
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. Significant items subject to such estimates and
assumptions include the useful lives of premises and equipment, allowance for credit losses, valuation of other
real estate, income taxes and valuation and impairment of investment securities. Ultimate results could differ from
those estimates.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are significantly dependent on subjective assessments or estimates that may be
susceptible to significant change. The following items have been identified as “critical accounting policies”.
Allowance for Credit Losses
The Bank maintains its allowance for credit losses at a level considered adequate to provide for probable losses
related to the loan and lease portfolio as of the balance sheet dates. The loan and lease portfolio and other credit
exposures are reviewed regularly to evaluate the adequacy of the allowance for credit losses.
The methodology used to establish the allowance for credit losses incorporates quantitative and qualitative risk
considerations. Quantitative factors include our historical loss experience, delinquency information, charge-off
trends, collateral values, changes in nonperforming loans and other factors. Quantitative factors also incorporate
known information about individual borrowers, including sensitivity to interest rate movements or other
quantifiable external factors.
Qualitative factors include the general economic environment, the state of certain industries and factors unique to
our market areas. Size, complexity of individual credits, loan structure, waivers of loan policies and pace of
portfolio growth are other qualitative factors that are considered when we estimate the allowance for credit losses.
Our methodology has been consistently applied. However, we enhance our methodology as circumstances dictate
to keep pace with the complexity of the portfolio.
The allowance for credit losses has three components as follows:
40
Specific Reserves. The amount of specific reserves is determined through a loan-by-loan analysis of loans
over a minimum size. Included in problem loans are non-accrual or renegotiated, loans that meet the
impairment criteria in FASB ASC 310. A loan is impaired when, based on current information, 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: the present value of
expected cash flows at the loan’s effective interest rate, the loan’s observable market price or the fair value of
the collateral of the loan. Specific reserves may also be established for credits that have been internally
classified as credits requiring management’s attention due to underlying problems in the borrower’s business
or collateral concerns.
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, which have been excluded from the specific
reserve allocation. The Bank segments the homogeneous pools by type and uses historical loss information to
estimate a loss reserve for each pool.
Qualitative Reserve. Management also allocates reserves for other circumstances pertaining to the
measurement period. The factors considered include, but are not limited to, prevailing trends, economic
conditions, geographic influence, industry segments within the portfolio, management’s assessment of credit
risk inherent in the loan portfolio, delinquency data, historical loss experience and peer-group information.
Monitoring loans and analysis of loss components are the principal means by which management determines
estimated credit losses are reflected in the Bank’s allowance for credit losses on a timely basis. Management also
considers regulatory guidance in addition to the Bank’s own experience. 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 off against the allowance for losses.
Subsequent recoveries, if any, are credited to the allowance.
The allowance for credit losses is highly dependent upon variables affecting valuation, including appraisals of
collateral, evaluations of performance as well as 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. For nonperforming or impaired loans, appraisals are generally performed
annually or whenever circumstances warrant a new appraisal. Management regularly evaluates the appraised
value and costs to liquidate in order to estimate fair value. A provision for credit losses is made to adjust the
allowance to the amount determined appropriate through application of the above processes.
Income Taxes
The Company files consolidated federal and unitary state income tax returns.
The determination of current and deferred income taxes is based on analyses of many factors including
interpretation of federal and state income tax laws, differences between tax and financial reporting basis of assets
and liabilities, expected reversals of temporary differences, estimates of amounts due or owed and current
financial accounting standards. Actual results could differ significantly from the estimates and interpretations
used in determining the current and deferred income taxes.
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. 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 of a change in tax rates on
deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
41
Management assesses net deferred tax assets to determine whether they are realizable based upon accounting
standards and specific facts and circumstances. A valuation allowance is established to reduce net deferred tax
assets to amounts that are more likely than not expected to be realized.
Other-Than-Temporary Impairment
Declines in the fair value of individual available-for-sale or held-to-maturity securities below amortized cost,
which are deemed other-than-temporary, could result in a charge to earnings and establishment of a new cost
basis. Write-downs for other-than-temporary impairment are recorded in non-interest income as realized losses.
The Company assesses available information about our securities to determine whether impairment is other-than-
temporary. The information we consider includes, but is 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 other-than-temporary impairment has occurred requires judgment of factors that may
indicate an impairment loss has incurred. The Company adopted the guidance on other-than-temporary
impairments Accounting Standards Codification (ASC) 320, Investments-Debt and Equity Securities, which
amended the accounting for other-than-temporary impairments into credit-related and other factors. Any credit-
related impairments are realized through a charge to earnings. The amount of non-credit related impairments is
recognized through comprehensive income, net of income taxes.
Note 6 to these consolidated financial statements includes a summary of investment securities in a loss position at
December 31, 2010 and 2009.
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. The Company utilizes valuation techniques that
maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The
Company determines fair value based on assumptions that market participants would use in pricing an asset or
liability in the principal or most advantageous market.
FASB ASC 820, Fair Value Measurements and Disclosures 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
42
unobservable assumptions reflect our own estimates of assumptions that market participants would use in
pricing the asset or liability.
Management assigns a level to assets and liabilities accounted for at fair value and uses the methodologies
prescribed by ASC 820 to determine fair value.
OTHER SIGNIFICANT ACCOUNTING POLICIES
Investment Securities
Investment securities that the Bank intends to hold indefinitely as part of its asset/liability strategy, or that may be
sold in response to changes in interest rates or prepayment risk are classified as available for sale. Available for
sale securities are carried at fair value. Net unrealized gains and losses, net of deferred income taxes, on securities
available for sale are reported as a separate component of stockholders’ equity until realized (see Comprehensive
Income). All securities were classified as available for sale as of December 31, 2010 and 2009, except for Federal
Reserve Bank (FRB) and the Federal Home Loan Bank (FHLB) stock, which have an indeterminable maturity.
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, 2010 or 2009.
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-Mortgage Banking
Loans held for sale-mortgage banking are accounted for at fair value pursuant to the fair value option permitted by
FASB ASC 825, Financial Instruments. Gains and losses from the changes in fair value are included in mortgage
banking revenue.
Participating Interests in Mortgage Loans
The Bank purchases participating interests in mortgage loans (i.e. we own the loans) from mortgage banking
counterparties. 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
counterparties service BNC’s assets while they are outstanding. 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 the
accrual basis using the interest method prescribed in the loan agreement except when collectibility is in doubt.
Loans and leases 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, uncollected interest accrued in prior
years is charged off against the allowance for credit losses, unless collection of the principal and interest is
assured. 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 may be resumed when it is
determined that all amounts due are expected to be collected and the loan has exhibited a sustained level of
performance, generally at least six months.
43
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. Loans are reviewed for impairment on an individual
basis. 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 cash flows. 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.
Restructured loans are loans for which concessions, including a reduced interest rate or a deferral of interest or
principal, have been granted due to the borrower’s weakened financial condition. Once a loan is restructured,
interest is accrued at the restructured rates when no loss of principal is anticipated. A loan that has performed in
accordance with restructured terms for one year is no longer reported as a restructured loan.
Cash receipts on impaired loans are generally applied to principal except when the loan is well collateralized or
there are other circumstances that support recognition of interest. When an impaired loan is in non-accrual status,
cash receipts 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 deemed to be 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.
Loan Servicing and Transfers of Financial Assets
The Bank sells commercial business loans to third parties. The loans are generally sold 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.
The sales of loans are accounted for pursuant to FASB ASC 860, Transfers and Servicing.
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. If the carrying amount of an asset acquired through foreclosure is
in excess of the fair value less estimated costs to sell, the excess amount is charged to the allowance for credit
losses. Fair value is primarily determined based upon appraisals of the assets involved and management
periodically assesses appraised values to ascertain continued relevancy of the valuation. 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 expense. Operating expenses of properties are charged to other real estate costs.
Impairment of Long-Lived Assets and Intangible Assets
The Company reviews long-lived assets and intangible assets 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.
44
During the years ended December 31, 2010 and 2009, an impairment charge of $0 and $409 thousand,
respectively was recorded related to goodwill.
Other Loans Held for Sale, Premises and Equipment Held for Sale and Deposits Held For Sale
Other loans held for sale, premises and equipment held for sale and deposits held for sale are carried at the lower
of the carrying amount or fair value less costs to sell. 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. 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. The following
methods and assumptions are used by the Company in estimating fair value disclosures for its financial
instruments.
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. The intangible value of long-term customer relationships with depositors is not
taken into account in the fair values disclosed.
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.
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-Mortgage Banking. Loans held for sale-mortgage banking are accounted for at fair
value pursuant to the fair value option permitted by FASB ASC 825, Financial Instruments.
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. The estimated fair values are
not exit prices.
Other Loans Held for Sale. The fair value of other loans held for sale is determined by the agreed upon
contractual selling price.
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.
45
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.
Deposits Held for Sale. The fair value of deposits held for sale is determined by the agreed upon contractual
price.
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
FASB ASC 815, Derivatives and Hedging, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other contracts, and for hedging activities.
Accordingly, 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.
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.
The Company enters into interest rate lock commitments on certain mortgage loans, which are commitments to
originate loans whereby the interest rate on the loan is determined prior to funding. The Company also has
corresponding forward sales contracts related to these interest rate lock commitments. Both the mortgage loan
commitments and the related forward sales contracts are accounted for as derivatives and carried at fair value with
changes in fair value recorded in income.
Earnings (Loss) Per Share
Basic earnings (loss) 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
46
were exercised or converted into common stock or resulted in the issuance of common stock that then shared in
the earnings of the Company. 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 (Loss)
Comprehensive income (loss) is the total of net income (loss) and other comprehensive income (loss), 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 FASB
ASC 815.
The Company separately presents consolidated statements of comprehensive income (loss).
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
FASB ASC 718 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, 2010, the Company had four stock-based employee compensation plans, which are described
more fully in Note 28 to these consolidated financial statements.
RECENTLY ISSUED OR ADOPTED ACCOUNTING PRONOUNCEMENTS
FASB ASC 810, Consolidation, requires a qualitative rather than a quantitative analysis to determine the primary
beneficiary of a variable interest entity (VIE) for consolidation purposes. The primary beneficiary of a VIE is the
enterprise that has the power to direct the activities of the VIE that most significantly impact the VIE’s economic
performance and also has the obligation to absorb the losses of the VIE that could potentially be significant to the
VIE or the right to receive benefits of the VIE that could potentially be significant to the VIE. The provisions of
ASC 810 were effective January 1, 2009. The adoption of ASC 810 did not have a material impact on our
consolidated financial statements.
FASB ASC 860, Transfers and Servicing, removes the concept of a qualifying special-purpose entity. It clarifies
that a transferor must evaluate whether it has maintained effective control of a financial asset by considering its
continuing direct or indirect involvement with the transferred financial asset. The provisions of ASC 860 were
effective for financial asset transfers occurring after December 31, 2009. The adoption of ASC 860 did not have a
material impact on our consolidated financial statements.
FASB ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820), Improving Disclosures and Fair
Value Measurements, requires new investment fair market disclosures in order to increase the transparency in the
financial reporting of investments. The new disclosures and clarifications of existing disclosures are effective for
interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about
purchases, sales, issuances, and settlements in the rollforward of activity in Level 3 fair value measurements.
Those disclosures are effective for fiscal years beginning after December 15, 2010. The adoption of this ASU in
2010 did not have a material impact on the Company’s consolidated financial statements.
FASB ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for
Credit Losses, requires significant new disclosures about the allowance for credit losses and the credit quality of
financing receivables. The requirements are intended to enhance transparency regarding credit losses and the
credit quality of loan and lease receivables. Under this statement, allowance for credit losses and fair value are to
be disclosed by portfolio segment, while credit quality information, impaired financing receivables and
nonaccrual status are to be presented by class of financing receivable. Disclosure of the nature and extent, the
financial impact and segment information of troubled debt restructurings will also be required. The disclosures are
to be presented at the level of disaggregation that management uses when assessing and monitoring the portfolio’s
47
risk and performance. This ASU is effective for reporting periods after December 15, 2011 for non-public
companies.
FASB ASU No. 2010-18, Receivables (Topic 310): Effect of a Loan Modification When the Loan Is Part of a
Pool That is Accounted for as a Single Asset, clarifies the accounting for acquired loans that have evidence of a
deterioration in credit quality since origination (referred to as “Subtopic 310-30 Loans”). Under this ASU, an
entity may not apply troubled debt restructuring (“TDR”) accounting guidance to individual Subtopic 310-30
loans that are part of a pool, even if the modification of those loans would otherwise be considered a troubled debt
restructuring. Once a pool is established, individual loans should not be removed from the pool unless the entity
sells, forecloses, or writes off the loan. Entities would continue to consider whether the pool of loans is impaired
if expected cash flows for the pool change. Subtopic 310-30 loans that are accounted for individually would
continue to be subject to TDR accounting guidance. A one-time election to terminate accounting for loans as a
pool, which may be made on a pool-by-pool basis, is provided upon adoption of the ASU. This ASU is effective
for annual periods ending on or after July 15, 2010 and should be applied prospectively. Adoption of this ASU
did not have a material effect on the Company's consolidated financial statements.
RECLASSIFICATIONS
Certain amounts in the consolidated 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.
48
NOTE 2. Regulatory Capital and Current Operating Environment
BNCCORP and the Bank are subject to various regulatory capital requirements administered by the Federal
banking agencies. Failure to meet capital requirements mandated by regulators can initiate certain mandatory and
additional discretionary actions by regulators. Such actions, if undertaken, could have a direct material adverse
effect on the Company’s financial condition and results of operations. 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. With increasing frequency, regulators are imposing capital
requirements that are specific to individual institutions. The requirements are generally above the statutory ratios.
Actual capital amounts and ratios of BNCCORP and the Bank as of December 31 are presented in the tables
below (dollars in thousands):
2010
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
Tangible Capital (to total assets):
Consolidated tangible equity
BNC National Bank
Tangible Common Capital (to total assets):
Consolidated tangible common equity
2009
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
Tangible Capital (to total assets):
Consolidated tangible equity
BNC National Bank
Tangible Common Capital (to total assets):
Consolidated tangible common equity
Actual
To be Well
Capitalized
Amount
Ratio
Amount
Ratio
$ 65,601
63,380
13.23 %
12.80
$
N/A
49,515
N/A
10.0 %
46,885
57,106
9.46
11.53
46,885
57,106
37,226
59,622
6.17
7.53
4.98
8.00
N/A
29,709
N/A
37,932
N/A
N/A
N/A
6.0
N/A
5.0
N/A
N/A
16,740
2.24
N/A
N/A
$ 89,102
85,195
14.15 %
13.52
N/A
63,017
N/A
10.0 %
77,617
77,192
12.32
12.25
77,617
77,192
57,018
74,989
8.58
8.54
6.57
8.65
N/A
37,810
N/A
45,187
N/A
N/A
N/A
6.0
N/A
5.0
N/A
N/A
36,733
4.23
N/A
N/A
In the current operating environment, management believes banking entities are regularly required to maintain
capital ratios in excess of the statutory amounts required to remain well capitalized. We are managing capital
accordingly. After the pending divestiture discussed in Note 3 the regulatory capital ratios of the Bank will
improve.
49
As of December 31, 2010, the most recent notifications from the OCC categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. Management believes the Bank remains well
capitalized through the date for which subsequent events have been evaluated.
In February of 2010, the Bank entered into an agreement with the OCC with three articles primarily pertaining to
credit administration. The agreement requires the Bank’s board of directors to address three articles that can be
summarized as follows:
(1) Develop, and implement a written program to identify and monitor credit and underwriting exceptions
from loan policy;
(2) Adopt, implement and ensure adherence to a written asset diversification program that limits
concentrations of assets to prescribed limits; and
(3) Adopt, implement and ensure adherence to work out plans designed to reduce criticized assets. The work
out plans are to be updated quarterly.
Management believes policies and procedures implemented in 2010 adequately addressed the articles summarized
above. However, more time is needed before the OCC will remove the articles.
In April 2010, BNCCORP entered into a memorandum of understanding that restricts dividend payments and/or
payment of interest on the holding company’s common stock, preferred stock, and debt. Payments of this nature
are not permitted without prior written approval from the Federal Reserve Bank. The memorandum of
understanding also restricts the holding company from increasing debt without prior written consent from the
Federal Reserve.
NOTE 3. Pending Divestiture
On November 19, 2010, the Bank entered into a definitive agreement to sell certain loans, premises and
equipment and deposits in the Company’s Minnesota and Arizona markets. The transaction was approved by
regulators in January 2011 and was completed in March of 2011. The Bank is not prohibited from continuing to
service these markets as a result of this transaction, although the Bank has agreed not to solicit certain customers
for a limited period of time following the closing. After the sale, the Company will continue to offer a full
complement of banking, mortgage banking and wealth management services in North Dakota, Minnesota and
Arizona.
As of December 31, 2010, the assets and liabilities included in the divestiture have been classified as held for sale.
As of December 31, 2010, the carrying value of the loans held for sale related to the divestiture was $70.5 million.
The total loans held for sale as of December 31, 2010 is $72.2 million and the allowance for losses allocated to
these loans at year end is $1.7 million. The carrying value of premises and equipment held for sale related to the
divestiture was $2.8 million. The carrying value of deposits held for sale related to the divestiture was $107.5
million. There is no gain or loss expected to be incurred as a result of the divestiture.
NOTE 4. Fraud Loss on Assets Serviced by Others
In April of 2010, the Company discovered fraudulent activity perpetrated by an external company that was
engaged to service residential mortgage loans for BNC. Since the discovery of this activity, the Company and its
advisors have been diligently working to determine the scope of the loss and identify any remedies that may be
available. In the second quarter, the Company determined the scope of the losses and recorded a loss of $26.231
million. Our internal and external investigations have confirmed that this fraudulent activity was limited to this
external servicing company and that no bank employees were involved in or were aware of this wrongful conduct
by the servicing company. As such, we believe these losses are not indicative of other credit quality problems
within our loan portfolio.
50
In mid-year 2010, we submitted claims under our fidelity insurance policies seeking to recover the insured portion
of these losses. The policies together provide for total coverage of $15 million. However, as of mid-October, our
insurance carriers commenced a declaratory judgment action against the Company in an Arizona federal court
seeking a judicial determination that the losses associated with the servicing fraud are not covered by the policies.
We have subsequently filed a counter claim against the insurance carriers for failure to honor the policies and for
acting in bad faith. This litigation commenced in early 2011; and we anticipate discovery procedures will take all
of 2011 to complete.
We intend to vigorously pursue our claims to recover amounts due under the insurance policies and for losses
incurred as a result of our belief that the carriers acted in bad faith. While management believes we have strong
claims, there can be no assurances as to the outcome of this litigation, or if we will recover all or any portion of
the insured amounts.
NOTE 5. Restrictions on Cash and Cash Equivalents
The Bank is required to maintain reserve balances in cash on hand or with the FRB. The required reserve balances
were $25,000 as of December 31, 2010 and 2009.
NOTE 6. 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, 2010 or
2009. The carrying amount of available-for-sale securities and their approximate fair values were as follows as of
December 31 (in thousands):
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
2010
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
$
965
$
35
$
-
$
1,000
1,863
116
(1)
1,978
89,056
930
39,518
1,911
908
67
(275)
89,689
-
997
1,889
202
(152)
-
41,255
2,113
$
134,243
$
3,217
$
(428)
$ 137,032
51
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
2009
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
$
1,223
$
39
$
-
$
1,262
2,500
86,600
102
531
(3)
2,599
(114)
87,017
1,797
90
-
1,887
118,375
2,521
3,349
164
(4,513)
-
117,211
2,685
$
213,016
$
4,275
$
(4,630)
$ 212,661
The amortized cost and estimated fair market value of available-for-sale securities classified according to their
contractual maturities at December 31, 2010, 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
$
$
-
-
11,090
123,153
134,243
$
$
Estimated
Fair Value
-
-
11,490
125,542
137,032
For many types of investments, the actual payment will vary significantly from contractual maturities.
Securities carried at approximately $74.0 million and $129.0 million at December 31, 2010 and 2009,
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
$
2010
84,450
4,791
(401)
$
2009
71,553
2,850
-
52
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 (in thousands):
Less than 12 months
12 months or more
2010
Description of
Securities
#
Fair
Value
Unrealized
Loss
#
Fair
Value
Unrealized
Loss
#
Total
Fair
Value
Unrealized
Loss
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
-
$
- $
-
-
$ -
$
-
-
$
- $
-
-
-
-
1
57
(1)
1
57
(1)
5
19,822
(275)
-
-
-
5
19,822
(275)
-
-
-
-
-
-
-
-
-
obligations
2
339
(3)
2
7,276
(149)
State and municipal bonds
-
-
-
-
-
-
4
-
7,615
(152)
-
-
Total temporarily impaired
securities
7
$
20,161 $ (278)
3
$ 7,333 $
(150)
10
$
27,494 $
(428)
Description of
Securities
#
Fair
Value
Unrealized
Loss
#
Fair
Value
Unrealized
Loss
#
Fair
Value
Unrealized
Loss
Less than 12 months
12 months or more
Total
2009
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
-
$
- $
-
-
$
-
$ -
- $ -
$
-
-
-
-
1
57
(3)
1
57
(3)
6
34,394
(114)
-
-
-
6
34,394
(114)
-
-
-
-
-
-
-
-
-
obligations
8
29,622
(1,715)
State and municipal bonds
-
-
-
8
-
22,591
(2,798)
16
52,213
-
-
-
-
(4,513)
-
Total temporarily impaired
securities
14
$
64,016 $
(1,829)
9 $
22,648 $ (2,801)
23 $ 86,664
$ (4,630)
Management regularly evaluates each security with unrealized losses to determine whether losses are other–than-
temporary. When the evaluation is performed, management considers several factors including, but not limited to,
the amount of the unrealized loss, the length of time the security has been in a loss position, guarantees provided
by third parties, ratings on the security, cash flow from the security and collateral backing the security.
We have been receiving principal payments on all securities since acquisition and the current credit support on all
securities is higher than the credit support provided at the inception of the bond.
53
For the non-agency securities with unrealized losses at December 31, 2010, the collateral is generally based on
loans originated between 2001 and 2004, and as a result the loan to value ratios of the underlying loans generally
indicates risk of loss is relatively low.
All securities owned are investment grade, except one. For this security, and a few other securities that have been
in an unrealized loss position for a longer period, we obtained credit surveillance reports that provide prospective
analysis of the securities performance under various scenarios. The credit surveillance reports do not currently
project credit losses.
There were no securities that management concluded were other-than-temporarily impaired in either 2010 or
2009.
NOTE 7. 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
2010
1,772
1,090
2,862
$
$
2009
1,297
1,751
3,048
$
$
There is no contractual maturity on these investments; the investments are required by counterparties.
54
NOTE 8. Loans and Leases
Loan Portfolio Composition
The composition of loans and leases is as follows at December 31 (in thousands):
Loans and Leases,
excluding Loans
Held for Sale-
Mortgage Banking
2010
Other Loans
Held for Sale
Total Loans
and Leases
Held for
Investment
2009
Total Loans
and Leases
Held for
Investment
Commercial and industrial
$
93,859
$ 17,242
$
76,617
$ 124,773
Real estate:
Mortgage
Construction
262,597
50,745
211,852
266,051
44,289
3,303
40,986
96,327
Participating interests in mortgage loans
4,888
-
4,888
38,534
Agricultural
Other
15,114
-
15,114
23,142
7,211
982
6,229
7,397
Total gross loans held for investment
427,958
72,272
355,686
556,224
Unearned income and net unamortized deferred fees
and costs
(357)
(60)
(297)
(582)
Loans, net of unearned income and unamortized
fees and costs
Allowance for credit losses
Net loans and leases
427,601
72,212
355,389
555,642
(16,476)
(1,711)
(14,765)
(18,047)
$
411,125
$ 70,501
$
340,624
$ 537,595
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.
55
Impaired Loans
As of December 31, the Bank’s recorded investment in impaired loans and the related valuation allowance was as
follows (in thousands):
2010
2009
Recorded
Investment
Valuation
Allowance
Recorded
Investment
Valuation
Allowance
Impaired loans -
Valuation allowance required
$
17,819
$
2,710
$
33,821
$
3,998
No valuation allowance required
43
-
2,377
-
Total impaired loans
$
17,862
$
2,710
$
36,198
$
3,998
Impaired loans include loans the Bank will not be able to collect all amounts due in accordance with the terms of
the loan agreement.
The valuation allowance on impaired loans is included in the Bank’s allowance for credit losses. The following
tables present information on impaired loans for the years ended December 31 (in thousands):
Average recorded investment in impaired loans
$
19,964
$
37,766
Average recorded investment in impaired loans as a
percentage of average total loans
3.73%
6.29%
2010
2009
Year Ended
December 31, 2010
Year Ended
December 31, 2009
Interest income recognized on impaired loans
$
208
$
Interest income recognized on a cash basis during the
time of impairment
-
1
1
Nonperforming Loans
As of December 31, the Bank’s nonperforming loans were as follows (in thousands):
Loans 90 days or more delinquent and still accruing interest $
Non-accrual loans
-
$
1
17,862
35,889
Total nonperforming loans
$
17,862
$
35,890
2010
2009
The table below summarizes the amounts of restructured loans as of the dates indicated (in thousands):
Restructured loans
December 31,
2010
$ 34,264
2009
$ 14,337
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.
56
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 of unamortized deferred fees and
costs. At December 31, 2010, the future minimum annual lease payments for direct finance lease obligations were
as follows (in thousands):
2011
2012
2013
2014
2015
Thereafter
Total future minimum lease payments
Unguaranteed residual values
Total all payments
Unearned income
Net outstanding principal amount
$
$
225
24
-
-
-
-
249
243
492
(22)
470
Loans Pledged as Collateral
The table below presents loans pledged as collateral to the Federal Home Loan Bank, Federal Reserve Bank, and
the Bank of North Dakota as of December 31(in thousands):
Commercial and industrial
Real estate mortgage
Real estate construction
Agricultural
Loans held for sale
2010
2009
$
9,706
130,016
-
2,370
$
5,770
139,317
3,897
-
-
$ 142,092
22,826
$ 171,810
NOTE 9. 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
Loan recoveries
Transferred to other loans held for sale
2010
2009
$
18,047 $
5,750
8,751
27,000
(7,786)
(17,876)
465
16,476
(1,711)
172
18,047
-
Balance end of year
$
14,765 $
18,047
57
NOTE 10. 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. Each property is evaluated regularly and the
amounts provided to decrease the carrying amount are included in non-interest expense. A summary of the
activity related to ORE is presented below for the years ended December 31 (in thousands):
Balance, beginning of year
Transfers from nonperforming loans
Real estate sold
Net gains (losses) on sale of assets
Provision
Balance, end of year
2010
7,253
11,332
(3,370)
(126)
(2,383)
12,706
$
$
2009
10,189
8,132
(3,012)
1
(8,057)
7,253
$
$
NOTE 11. 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
2010
5,220
11,393
1,611
9,133
27,357
(10,673)
16,684
$
$
2009
6,692
12,957
1,807
9,440
30,896
(10,474)
20,422
$
$
Depreciation and amortization expense totaled approximately $1.3 million and $1.5 million for the years ended
December 31, 2010 and 2009, respectively.
NOTE 12. Deposits
The scheduled maturities of time deposits as of December 31, 2010 are as follows (in thousands):
2011
2012
2013
2014
2015
Thereafter
Time Deposits
$
$
145,946
24,019
5,314
10,946
7,403
50,302
243,930
Deposits-
Held for Sale
$
$
21,454
3,196
373
52
-
-
25,075
$
$
Time Deposits, net
124,492
20,823
4,941
10,894
7,403
50,302
218,855
At December 31, 2010 and 2009, the Bank had $67.0 million and $115.8 million, respectively, of time deposits
that had been acquired through a broker.
58
The following table shows a summary of interest expense by product type as of December 31 (in thousands):
Savings
Interest checking
Money market
Time deposits
2010
11
659
1,070
7,068
8,808
$
$
2009
13
349
2,028
9,996
12,386
$
$
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 13. 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 reserve borrowings-U. S. Treasury tax and loan retainer
Repurchase agreements with customers, renewable daily, interest payable monthly,
rates ranging from 0.25% to 0.90% in 2010, and 0.50% to 1.15% in 2009, secured
by government agency collateralized mortgage obligations
2010
2009
$
2,000
$
1,315
14,329
8,875
$
16,329
$
10,190
The weighted average interest rate on short-term borrowings outstanding as of December 31, 2010 and 2009 was
0.48% and 0.70%, 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, 2010, $14.3 million of securities sold under repurchase agreements, with a weighted average
interest rate of 0.56%, maturing in 2010, were collateralized by government agency collateralized mortgage
obligations having a market value of $23.7 million and unamortized principal balances of $22.5 million. At
December 31, 2009, $8.9 million of securities sold under repurchase agreements, with a weighted average interest
rate of 0.80%, maturing in 2010, were collateralized by government agency collateralized mortgage obligations
having a market value of $19.5 million and unamortized principal balances of $19.4 million.
59
NOTE 14. Federal Home Loan Bank Advances
FHLB advances consisted of the following at December 31 (in thousands):
Year of Maturity
2010
2013
2015
Amount
$
$
-
-
-
-
2010
Weighted
Average
Rate
2009
Weighted
Average
Rate
Amount
- % $
-
-
- %
-
15,000
-
15,000
- %
3.99
-
3.99 %
As of December 31, 2010, the Bank had $0 of FHLB advances outstanding. On March 10, 2010 the Bank
exercised its option to repay the $15.0 million advance maturing in 2013 that was outstanding as of December 31,
2009. The Bank exercised this option without a prepayment penalty.
At December 31, 2010, the Bank has mortgage loans with unamortized principal balances of approximately
$125.1 million and securities with unamortized principal balances of approximately $21.9 million which were
pledged as collateral to the FHLB. The Bank has the ability to draw advances up to approximately $76 million
based upon the mortgage loans and securities that are currently pledged, subject to a requirement to purchase
additional FHLB stock.
At December 31, 2010 the Bank’s ability to borrow funds from the FHLB is limited to borrowings of a short
maturity, (i.e. 30 days or less).
NOTE 15. Other Borrowings
As of December 31, 2010, BNC National Bank had a secured federal funds line with the Bank of North Dakota.
No funds were advanced on the line as of December 31, 2010 and 2009. Interest on the line if advanced upon
would be at the federal funds rate. The line is secured by marketable securities with a carrying value of $6.2
million as of December 31, 2010 resulting in unused borrowing capacity of $5.0 million.
NOTE 16. Guaranteed Preferred Beneficial Interest’s in Company’s Subordinated
Debentures
In July 2007, BNCCORP issued $15.0 million of floating rate subordinated debentures. The interest rate paid on
the securities is equal to the three month LIBOR plus 1.40%. The interest rate at December 31, 2010 was 1.69%
and the interest rate reset on January 3, 2011 to 1.70%. The subordinated debentures mature on October 1, 2037.
On or after October 1, 2012, the subordinated debentures may be redeemed at par and the corresponding
debentures may be prepaid at the option of BNCCORP, subject to approval by the Federal Reserve.
In July 2000, BNCCORP issued $7.5 million of subordinated debentures at 12.05%. The subordinated debentures
are subject to mandatory redemption on July 19, 2030. On or after July 19, 2010, the subordinated debentures
may be redeemed and the corresponding debentures may be prepaid at the option of BNCCORP at declining
redemption prices. Redemption is subject to approval by the Federal Reserve.
Commencing in January 2010, BNCCORP deferred interest payments on its subordinated debentures as it is
permitted pursuant to contractual terms of the agreements. While the subordinated debenture agreements permit
interest to be deferred for up to 60 months, interest on the subordinated debentures continues to accrue during
deferment and has been recorded in the consolidated financial statements at December 31, 2010.
The agreements that contractually permit the deferral of interest on the subordinated debentures require that
dividends on junior securities be suspended while interest payments on the subordinated debentures are deferred.
60
NOTE 17. Stockholders’ Equity
On January 16, 2009, BNCCORP 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
(CPP). 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 on January 16, 2009.
As a result of participating in the CPP, there are two series of preferred stock outstanding. One series is perpetual,
non-voting and pays dividends at 5% of its liquidation preference per annum until the fifth anniversary of the
Treasury Department’s investment and thereafter pays a dividend of 9%. There are 20,093 shares of this series
outstanding as of December 31, 2010 and 2009. Each share has a liquidation preference of $1,000 per share. This
series of shares can not be redeemed without prior approval from regulatory authorities.
The second series of preferred stock has the same voting rights and privileges as the other series, except that this
series pays dividends at 9% of its liquidation preference per annum and may not be redeemed until the other series
has been redeemed. There are 1,005 shares of this series outstanding at December 31, 2010 and 2009.
The relative fair value method was used to allocate the values of the two series of preferred stock. Management
assumed both series of preferred stock would be redeemed in five years. A 6.51% discount rate was used to
determine the values of the preferred stock.
As a result of deferring interest on subordinated debentures, BNCCORP was contractually required to cease
payment of dividends on the CPP preferred stock beginning with the quarterly payment due February 2010. The
Treasury department is permitted to appoint a representative to the Board of Directors (the Board) of BNCCORP
if dividend payments on the CPP preferred stock have not been made for six consecutive quarters. The Company
has recorded the accrued dividends in the consolidated financial statement as of December 31, 2010.
BNCCORP and the Bank are subject to certain minimum capital requirements (see Note 2 to these consolidated
financial statements). BNCCORP is subject to certain restrictions on the amount of dividends it may declare
without prior regulatory approval pursuant to the Federal Reserve Act. The terms of the preferred stock issued
under the CPP precludes certain dividend payments to common shareholders and certain repurchases of
outstanding shares of common stock until the preferred shares have been redeemed.
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, 2010, the Bank would require prior
regulatory approval to pay any dividends to BNCCORP.
On May 30, 2001, BNCCORP’s 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.
61
NOTE 18. Derivative Instruments and Hedging Activities
Risk Management Objective of Using Derivatives
The Company is exposed to certain risks arising from both its business operations and economic conditions. The
Company manages economic risks, including interest rate and liquidity risk, primarily by managing the amount,
sources, and duration of its assets and liabilities and secondarily through the use of derivative financial
instruments. In prior periods, the Company entered into derivative financial instruments to manage exposures that
arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the
value of which are determined by interest rates. The Company’s derivative financial instruments were used to
manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its
known or expected cash payments principally related to certain variable-rate loan assets.
Fair Values of Derivative Instruments on the Consolidated Balance Sheets
The Company had an interest rate floor that matured in January 2010.The table below presents the fair value of
the Company’s derivative financial instruments as well as their classification on the Consolidated Balance Sheets
as of December 31, 2010 and 2009 (in thousands):
Tabular Disclosure of Fair Values of Derivative Instruments
Asset Derivatives
Liability Derivatives
2010
2009
2010
2009
Balance
Sheet
Fair
Balance
Sheet
Balance
Sheet
Fair
Balance
Fair
Sheet
Fair
Location
Value
Location
Value
Location
Value
Location
Value
Derivatives Designated as Hedging
Instruments
Interest Rate Floor
Other
Assets
$
Total Derivatives Designated as
Hedging Instruments
$
Derivatives Not Designated as
Hedging Instruments
Interest Rate Floor
Other
Assets
$
Total Derivatives Not Designated as
Hedging Instruments
$
-
-
-
-
Other
Other
Other
Assets
$ -
Liabilities
$
-
Liabilities
$
-
$ -
$
-
$ -
Other
Other
Other
Assets
$
49 Liabilities
$
-
Liabilities
$ -
$
49
$
-
$ -
62
Cash Flow Hedges of Interest Rate Risk
The Company’s objective in using interest rate derivatives is to manage its exposure to interest rate movements.
To accomplish this objective, the Company primarily used interest rate floors as part of its interest rate risk
management strategies. Interest rate floors involve the receipt of variable-rate amounts from a counterparty if
interest rates fall below the strike rate on the contract in exchange for an up front premium.
Effect of Derivative Instruments on the Statements of Operations
The tables below present the effect of the Company’s derivative financial instruments on the Statements of
Operations for the years ended December 31 (in thousands):
Amount of Gain or (Loss)
Recognized in OCI on
Derivative (Effective
Portion)
Derivatives in Cash
Flow Hedging
Relationships
2010
2009
Location of Gain or
(Loss) Reclassified
from Accumulated
OCI into Income
(Effective Portion)
Amount of Gain or (Loss)
Reclassified from Accumulated
OCI into Income (Effective
Portion)
2010
2009
Location of Gain or
(Loss) Recognized in
Income on Derivative
(Ineffective portion
and Amount Excluded
from Effectiveness
Testing)
Amount of Gain or (Loss)
Recognized in Income on
Derivative (Ineffective
Portion and Amount
Excluded from
Effectiveness Testing)
2010
2009
Interest Rate Floor
$
Total
$
-
-
$
43
Interest Income
$
Other Income
$
40
-
1,545
10
Other Income
$
-
$
(12)
$
43
$
40
$
1,555
$
-
$
(12)
63
Non-designated Hedges
The Company does not use derivatives for trading or speculative purposes. Derivatives not designated as hedges
are used to manage the Company’s exposure to interest rate movements and other identified risks but do not meet
the strict hedge accounting requirements. Changes in the fair value of derivatives not designated in hedging
relationships are recorded directly in earnings. The Company’s $50 million interest rate floor disqualified for
hedge accounting as of April 1, 2009; accordingly, the changes in fair value of the floor subsequent to March 31,
2009 were recognized directly in earnings.
The amount recorded in operations shown in the table below represents the net effect of changes in fair value of
the interest rate floor and cash receipts for the years ended December 31 (in thousands):
Derivatives Not
Designated as Hedging
Instruments
Location of Gain or
(Loss) Recognized in
Income on Derivative
Interest Rate Floor
Other Income
Total
NOTE 19. Fair Value Measurements
Amount of Gain or (Loss)
Recognized in Income on
Derivative
2010
2009
$
$
(7)
$
23
(7)
$
23
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 (in thousands):
ASSETS
Securities available for sale
Loans held for sale-mortgage banking
Commitments to originate mortgage loans
Total assets at fair value
LIABILITIES
Commitments to sell mortgage loans
Total liabilities at fair value
ASSETS
Securities available for sale
Loans held for sale-mortgage banking
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
2010
$ 137,032
29,116
488
$ 166,636
$ -
-
-
$ -
$ 137,032
29,116
488
$ 166,636
$
-
-
-
$ -
$ 470
$ 470
$ -
$ -
$ 470
$ 470
$ -
$ -
Total
Level 1
Level 2
Level 3
2009
$ 212,661
24,130
427
49
$ 237,267
$
-
-
-
-
$ -
$ 212,661
24,130
427
49
$ 237,267
$ -
-
-
-
$ -
$ 675
$ 675
$ -
-
$
$ 675
$ 675
$ -
$ -
64
Changes in the fair value of assets and liabilities determined on a recurring basis in the tables above had no net
impact on our Consolidated Statements of Operations for the years ended December 31, 2010 and 2009. 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 assets at fair value on a
nonrecurring basis in accordance with U.S. 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 the following table provides the level of valuation
assumptions used to determine the carrying value at December 31 (in thousands):
2010
Impaired loans(1)
Other real estate(2)
Total
Total
15,152
12,706
27,858
$
$
Level 1
-
-
-
$
$
Level 2
15,152
12,706
27,858
$
$
Total gains/
Level 3
(losses)
$
$
-
-
-
$
$
(3,182)
(2,509)
(5,691)
2009
Impaired loans(1)
Other real estate(2)
Total
Total
32,200
7,253
39,453
$
$
Level 1
-
-
-
$
$
Level 2
Level 3
(losses)
Total gains/
$
$
32,200
7,253
39,453
$
$
$
$
(7,268)
(8,056)
(15,324)
(1) Represents the carrying value and related write-downs of loans based on the appraised value of the collateral.
(2) Represents the fair value of the collateral less estimated selling costs and are based upon appraised values.
65
NOTE 20. 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 stock
Loans held for sale-mortgage banking
Participating interests in mortgage loans
Loans and leases held for investment, net
Other loans held for sale, net
Accrued interest receivable
Derivative financial instruments
Other assets
Other assets held for sale
Liabilities and Stockholders’ Equity:
Deposits, noninterest-bearing
Deposits, interest-bearing
Deposits, noninterest-bearing held for sale
Deposits, interest-bearing held for sale
Borrowings and advances
Accrued interest payable
Accrued expenses
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
Mortgage banking commitments to sell loans
2010
2009
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
$ 112,847
137,032
$
112,847
137,032
$
35,362
212,661
$
35,362
212,661
2,862
29,116
4,888
335,736
70,501
2,138
-
695,120
49,180
2,769
$ 747,069
$
91,478
462,187
34,610
72,836
16,329
852
4,704
24,134
707,130
2,618
37,321
$ 747,069
2,862
29,116
4,888
334,413
70,501
2,138
-
693,797
3,048
24,130
38,534
499,061
-
2,970
216
815,982
52,101
-
$ 868,083
91,478
461,944
34,610
72,836
16,329
852
4,704
$
98,658
657,305
-
-
25,190
1,468
2,946
$
$
3,048
24,130
38,534
494,242
-
2,970
216
811,163
98,658
658,647
-
-
25,278
1,468
2,946
$
$
11,356
694,109
$
22,890
808,457
2,361
11,266
798,263
$
57,265
$ 868,083
$
$
31
37
488
470
1,026
$
$
64
41
427
675
1,207
66
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, which are binding, provided there is no
violation of any condition in the contract, and generally have fixed expiration dates or other termination clauses.
The contractual amount represents the Bank’s exposure to credit loss in the event of default by the borrower. At
December 31, 2010, 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 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.
In our mortgage banking operations we commit to extend credit for purposes of originating residential loans. We
underwrite these commitments to determine whether 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 three counterparties. As of December 31,
2010, there was a $26.6 million limit to our loan commitment with these relationships.
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 up to the letter’s contractual amount. At December 31, 2010, 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):
2010
2009
Fixed
Rate
Variable
Rate
Fixed
Rate
Variable
Rate
Commitments to extend credit
$
8,871
$
45,058
$
11,996
$
60,819
Standby and commercial letters of credit
1,274
2,455
761
3,320
In addition to the amounts in the table above, our mortgage banking commitments to fund loans totaled $43.3
million for 2010 and $29.2 million for 2009. Also, our mortgage banking commitments to sell loans totaled $72.0
million for 2010 and $53.1 million for 2009.
Mortgage Banking Obligations
Through its mortgage banking operations, the Company originates and sells residential mortgage loans servicing
released to third parties. These loans are sold without recourse to the Bank. However, standard industry practices
require representations and warranties which generally require sellers to reimburse a portion of the sales proceeds
if a sold loan defaults or pays off shortly after the sale of the loan (i.e. generally within four months of the sale.).
The Company has recorded an obligation of $500 thousand and $326 thousand as of December 31, 2010 and 2009
67
for the estimated obligation reimbursement. Bank management believes the recorded obligation adequately
addresses potential reimbursement obligations existing as of December 31, 2010 and 2009.
NOTE 22. Guarantees and Contingent Consideration
Guaranteed Preferred Beneficial Interests In Company’s Subordinated Debentures
BNCCORP fully and unconditionally guarantees the Company’s subordinated debentures.
Performance and Financial Standby Letters of Credit
As of December 31, 2010 and 2009, the Bank had outstanding $2.3 million and $481 thousand of performance
standby letters of credit and $7.2 million and $13.3 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.
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. The related party transactions have under terms 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 was
$674,000 and $1.8 million at December 31, 2010 and 2009, respectively. Originations in 2010 and 2009 totaled
$375,000 and $425,000, respectively. Loan paydowns in 2010 and 2009 were $1.5 million and $818,000,
respectively. The total amount of deposits received from these parties was $2.0 million and $1.4 million at
December 31, 2010 and 2009, 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, 2010, BNCCORP and its
affiliates were in compliance with these requirements.
68
NOTE 24. Income Taxes
The expense (benefit) for income taxes on operations consists of the following for the years ended December 31 (in
thousands):
Current:
Federal
State
Deferred:
Federal
State
Valuation allowance
Total
2010
2009
$
-
120
120
$
(4,138)
40
(4,098)
(7,222)
(1,658)
8,832
(48)
72
$
(2,899)
(1,165)
6,537
2,473
(1,625)
$
The expense (benefit) for federal income taxes on operations expected at the statutory rate differs from the actual
expense (benefit) for the years ended December 31 (in thousands):
Tax (benefit) at 34% statutory rate
State taxes (net of Federal benefit)
Tax-exempt interest
Cash surrender values of bank-owned life
insurance
Other, net
Deferred tax valuation allowance
2010
(7,478)
(1,110)
(38)
(177)
43
(8,760)
8,832
72
$
$
$
$
2009
(6,936)
(1,114)
(138)
(175)
201
(8,162)
6,537
(1,625)
69
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 credit losses
Fraud loss on assets serviced by others
Acquired intangibles
Unrealized loss on securities available for sale
Net operating loss carryforwards
Alternative minimum tax credits
Other real estate owned
Other
Deferred tax asset
Deferred tax liability:
Unrealized gain on securities available for sale
Discount accretion on securities
Leases
Premises and equipment
Other
Deferred tax liability
Valuation allowance
Net deferred tax asset
2010
2009
$ 6,673
5,709
257
-
2,659
612
2,672
335
18,917
1,066
1,603
173
604
259
3,705
15,212
(15,164)
$ 4,701
-
279
135
1,469
551
2,596
536
10,267
6
1,759
216
561
199
2,741
7,526
(7,526)
$ 48
$ -
During 2010, the valuation allowance for net deferred tax assets was increased such that net deferred tax assets
were reduced to $48,000. The valuation allowance was required because cumulative losses in the 36 month period
ended December 31, 2010 exceeded earnings.
The Company is able to carry forward federal tax net operating losses aggregating $3.657 million as of December
31, 2010. The carry forward period is 20 years. The Company is able to carry forward state tax net operating
losses aggregating $17.8 million as of December 31, 2010. The net operating losses expire between 2011 and
2031.
At December 31, 2010, the Company had an unrecognized tax benefit of $97,000. 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 $13,000 of interest accrued at December 31, 2010 and no penalties. Interest included in tax
expense for 2010 is approximately a benefit of $7,000.
The Company does not expect its unrecognized tax benefits to significantly increase or decrease within the next
twelve months.
The Company files consolidated federal and unitary state income tax returns where allowed. Tax years ended
December 31, 2007 through 2009 remain open to federal examination. During 2010, the Internal Revenue Service
opened an examination of the Company’s 2009 federal income tax return. All issues have been settled, but a final
report has not yet been issued. The expected results of this examination did not have a material impact on our
consolidated financial statements. Tax years ended December 31, 2006 through 2009 remain open to state
examinations.
70
NOTE 25. Loss Per Share
The following table shows the amounts used in computing per share results (in thousands, except share and per
share data):
Net loss per share was calculated as follows:
Denominator for basic loss per share:
Average common shares outstanding
Dilutive common stock options
Diluted common shares
Numerator:
Net loss
Preferred stock costs
Net loss available to common shareholders
Basic loss per common share
Diluted loss per common share
2010
2009
3,281,719
0
3,281,719
3,261,831
11,891
3,273,722
$
$
$
$
(22,065)
(1,333)
(23,398)
(7.13)
(7.13)
$
$
$
$
(18,776)
(1,254)
(20,030)
(6.14)
(6.14)
At December 31, 2010 and 2009, options totaling 269,700 and 41,700, 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 $3.00 to $7.38.
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 75% 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 2010 and 2009, BNCCORP
and its subsidiaries made matching contributions of up to 50% of eligible 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 $426,000 and $365,000 for 2010, and 2009, 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, 2010, the assets in the plan
totaled $15.7 million and included $157,000 (106,407 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.
71
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). However, the agreement governing the preferred stock issued to the Treasury department precludes
payment of “golden parachutes” to senior executive officers of the Company so long as the preferred stock is
outstanding.
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, 2010 and 2009 was $1.729 million and $1.358 million,
respectively, for facilities, and $40,000 and $49,000, respectively, for equipment and other items. At December
31, 2010, the total minimum annual base lease payments for operating leases were as follows (in thousands):
2011
2012
2013
2014
2015
Thereafter
$
665
219
166
141
144
1,822
NOTE 28. Share-Based Compensation
The Company has four 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 cannot exceed 250,000 shares. Under the 2002
Stock Incentive Plan, the aggregate number of shares cannot exceed 125,000 shares. Under the 2006 Stock
Incentive Plan, the aggregate number of shares cannot exceed 200,000 shares. Under the 2010 Stock Incentive
Plan, the aggregate number of shares cannot exceed 250,000 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, 2010 are as follows:
1995
Stock
Incentive
Plan
2002
Stock
Incentive
Plan
2006
Stock
Incentive
Plan
2010
Stock
Incentive
Plan
Total
Total Shares Available
46,251
-
15,850
250,000
312,101
Maximum Restricted Shares Available
46,251
-
15,850
35,000
97,101
The Company recognized share-based compensation expense of $38,000 and $262,000 for the years ended
December 31, 2010 and 2009, respectively, related to restricted stock.
The tax benefits associated with share-based compensation would have been approximately $2,000 and $56,000
for the years ended December 31, 2010 and 2009, respectively if the Company had not been in a full valuation
allowance.
At December 31, 2010, the Company had $77,000 of unamortized restricted stock compensation. At December
31, 2009, the Company had $91,000 of unamortized restricted stock compensation. Restricted shares of stock
granted generally have vesting and amortization periods of at least three years.
72
Following is a summary of restricted stock activities for the years ended December 31:
2010
Number
Restricted
Stock
Shares
8,500
15,000
(3,000)
-
20,500
Weighted
Average
Grant Date
Fair Value
$
12.04
1.61
11.93
-
4.42
2009
Number
Restricted
Stock
Shares
Weighted
Average
Grant Date
Fair Value
37,332
-
(28,832)
-
8,500
$
12.35
-
12.44
-
12.04
Nonvested, beginning of year
Granted
Vested
Forfeited
Nonvested, end of year
The Company granted 240,000 stock options on March 17, 2010. The stock options have a two year vesting
period and a ten year contractual term. The exercise price is equal to the market price on grant date, which was
$3.00. The fair value of each share option is estimated on the date of grant using a Black-Scholes methodology
with the assumptions noted below:
Expected volatility
Dividend yield
Risk-free interest rate – seven year treasury yield
Expected life of stock option
32.56%
0.00%
3.201%
7 years
The Company recognized share-based compensation expense of $111,000 and $0 for the years ended December
31, 2010 and 2009, respectively, related to share options. At December 31, 2010, the Company had $169,000 of
unamortized compensation cost related to non-vested stock options granted.
BNC has a policy of issuing shares from treasury shares already held when options are exercised.
Following is a summary of fully vested stock options and options expected to vest as of December 31, 2010:
Number
Weighted-average exercise price
Weighted-average remaining contractual term
Stock Options
Outstanding
269,700
$3.49
7.9 years
Stock Options
Currently
Exercisable
41,700
$6.20
0.5 years
Stock Options
Vested and
Expected to Vest
269,700
$3.49
7.9 years
73
Following is a summary of stock option transactions for the years ended December 31:
2010
2009
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
41,700
240,000
-
(12,000)
269,700
41,700
$
1.23
$
-
$ 1.23
Weighted
Average
Exercise Price
Options to
Purchase
Shares
$
$
$
6.20
3.00
-
3.00
3.49
6.20
44,200
-
-
(2,500)
41,700
41,700
$
-
$
-
$ 3.91
Following is a summary of the status of options outstanding at December 31, 2010:
Weighted
Average
Exercise Price
6.34
-
-
8.75
6.20
6.20
$
$
$
Options with exercise
prices ranging from:
$3.00 to $3.00
$5.94 to $7.38
Outstanding Options
Weighted Average
Remaining
Number
Contractual Life
Weighted
Average
Exercise Price
Exercisable Options
Weighted
Average
Exercise Price
Number
228,000
41,700
269,700
9.3 years
0.5 years
$
3.00
6.20
$
-
41,700
41,700
-
6.20
74
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 securities available for sale
Investment in subsidiaries
Receivable from subsidiaries
Other
Total assets
Liabilities and stockholders’ equity:
Subordinated debentures
Payable to subsidiaries
Accrued expenses and other liabilities
Total liabilities
2010
2009
$
$
$
2,377
-
57,807
883
473
61,540
23,120
43
3,664
26,827
$
$
$
4,339
1,463
77,894
159
7,404
91,259
23,118
7,135
1,781
32,034
Preferred stock, $.01 par value. Authorized 2,000,000 shares:
Preferred Stock - 5% Series A 20,093 shares issued and outstanding;
19,411
19,187
Preferred Stock - 9% Series B 1,005 shares issued and outstanding;
1,075
1,098
Common stock, $.01 par value – Authorized 35,000,000 shares; 3,304,339 and
3,290,219 shares issued and outstanding
Capital surplus – common stock
Retained earnings
Treasury stock (364,314 and 363,434 shares, respectively)
Accumulated other comprehensive income (loss), net of income taxes
Total stockholders’ equity
Total liabilities and stockholders’ equity
33
27,036
(7,322)
(5,069)
(451)
34,713
61,540
$
33
26,885
16,078
(5,068)
1,012
59,225
91,259
$
75
Parent Company Only
Condensed Statements of Operations
For the Years Ended December 31
(In thousands)
Income:
Management fee income
Interest
Gain on sale of securities
Other
Total income
Expenses:
Interest
Salaries and benefits
Legal and other professional
Depreciation and amortization
Other
Total expenses
Income (loss) before income tax benefit and equity in income of
subsidiaries
Income tax expense
Income (loss) before equity in income of subsidiaries
Equity in loss of subsidiaries
Net loss
2010
2009
$
1,596
$
1,555
27
2,150
38
3,811
1,279
708
542
1
677
3,207
604
(582)
22
(22,087)
1,376
-
41
2,972
1,292
749
534
1
958
3,534
(562)
(783)
(1,345)
(17,431)
$
(22,065)
$
(18,776)
76
Parent Company Only
Condensed Statements of Cash Flows
For the Years Ended December 31
(In thousands)
Operating activities:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities -
Equity in undistributed loss of subsidiaries
Depreciation and amortization
Impairment of goodwill
Share based compensation
Other noncash expense
Deferred income taxes
Change in prepaid expenses and other receivables
Net realized gain on sale of investment securities
Change in accrued expenses and other liabilities
Net cash used in operating activities
Investing activities:
Increase in investment in subsidiaries
Proceeds from sale of investment securities
Net cash (used in) provided by investing activities
Financing activities:
Proceeds from issuance of preferred stock
Payment of preferred stock dividends
Net cash provided by financing activities
Net increase (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 (received)
NOTE 30. Subsequent Events
2010
2009
$ (22,065)
$
(18,776)
22,087
3
-
150
-
-
6,206
(2,150)
(6,343)
(2,112)
(2,000)
2,150
150
-
-
-
(1,962)
4,339
17,431
5
154
257
105
352
(6,950)
-
5,961
(1,461)
(15,001)
-
(15,001)
20,093
(1,058)
19,035
2,573
1,766
$ 2,377
$
4,339
$
-
$
1,149
$ (5,972)
$
2,310
The Company has evaluated subsequent events from the balance sheet date through March 22, 2011, the date at
which the financial statements were available to be issued, and determined there are no other items to disclose.
77
78
CORPORATE DATA
Investor Relations
Gregory K. Cleveland, CPA
President/CEO
602-852-3526
Timothy J. Franz, CPA
Chief Financial Offi cer
612-305-2213
General Inquiries:
BNCCORP, INC.
322 East Main Avenue
Bismarck, North Dakota 58501
Telephone (701) 250-3040
Facsimile (701) 222-3653
E-mail Inquiries:
corp@bncbank.com
Annual Meeting
The 2011 annual meeting of stockholders will be
held on Wednesday, June 15, 2011 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 OTC
Markets under the symbol: “BNCC.” There were 72
record holders of the Company’s common stock at
March 11, 2011.
COMMON STOCK PRICES
For the Years Ended December 31,
Low
2010(1)
2009(1)
High
High Low
$8.50 $5.30
First Quarter
$4.00 $1.80
$5.60
$8.50
Second Quarter $3.19 $1.80
$5.00
$8.00
$2.25 $1.40
Third Quarter
$1.95
$5.50
$2.00 $1.41
Fourth Quarter
(1) The quotes represent the high and low closing
sales prices as reported by OTC Markets.
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). Th e Company operates community banking and wealth management
businesses in Arizona, Minnesota and North Dakota from 18 locations. BNC
also conducts mortgage banking from 10 locations in Arizona, Minnesota,
Iowa, Kansas, Nebraska and Missouri.
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
Offi cer, Manchester Companies, Inc.
Gregory K. Cleveland, CPA
President and
Chief Executive Offi cer
Tracy Scott, CPA
Retired Co-Founder of BNCCORP, INC.
Bradley D. Bonga
Founder and President/CEO
Bonga and Associates, LLC
BNCCORP, Inc. Annual Report 2010
Gaylen Ghylin, CPA
EVP, Secretary and 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 Offi cer,
Johnsen Trailer Sales, Inc.
Michael O’Rourke
Attorney / Author
Stephen H. Roman
Partner
FirstStrategic LLC
DIRECTORS
BNC National Bank
Julie L. Andresen
Gregory K. Cleveland
Shawn Cleveland
Timothy J. Franz
David Hoekstra
Mark E. Peiler
Scott Spillman
SUBSIDIARIES
BNC National Bank
Headquarters:
20175 North 67th Ave
Glendale, AZ 85308
Bank 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
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
240 Investors Bldg (Baker Center)
733 Marquette Avenue South
Minneapolis, MN 55402
Golden Valley
650 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
Perimeter
17550 North Perimeter Drive
Scottsdale, AZ 85255
Mortgage Banking Branches:
Scottsdale
8330 East Hartford Drive
Scottsdale, AZ 85255
Wichita
7200 West 13th
Wichita, KS 67212
Wichita
1718 North Webb Road
Wichita, KS 67206
Andover
511 North Andover Road
Andover, Kansas 67002
Overland Park
7007 College Boulevard
Overland Park, KS 66211
Topeka
2110 SW Belle Avenue
Topeka, KS 66614
Davenport
3709 Harrison Street
Davenport, IA 52806
Belton
17122 BelRay Place
Belton, MO 64012
Lincoln
3600 Village Drive
Lincoln, NE 68516
Grand Island
819 North Diers Avenue
Grand Island, NE 68803
EXECUTIVE OFFICERS
BNCCORP and Subsidiaries
Gregory K. Cleveland, CPA
President and Chief Executive Offi cer
Timothy J. Franz, CPA
Chief Financial Offi cer
Shawn Cleveland, CPA
Chief Operating Offi cer, BNC National Bank
Dave Hoekstra, CPA
Chief Credit Offi cer and President – BNC National Bank,
North Dakota Market
Mark E. Peiler, CFA
Senior Vice President – Chief Investment Offi cer
79