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2012 Annual Report
CORPORATE DATA
Investor Relations
Gregory K. Cleveland, CPA (Inactive)
President/CEO
602-852-3526
Timothy J. Franz, CPA (Inactive)
Chief Financial Officer
612-305-2213
General Inquiries:
BNCCORP, INC.
322 East Main Avenue
Bismarck, North Dakota 58501
Telephone (701) 250-3040
Facsimile (701) 222-3653
E-mail Inquiries:
corp@bncbank.com
Annual Meeting
The 2013 annual meeting of stockholders will be
held on Wednesday, June 19, 2013 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 63
record holders of the Company’s common stock at
March 13, 2013.
COMMON STOCK PRICES
For the Years Ended December 31,
2012(1)
2011(1)
High Low
Low
High
First Quarter
$6.77 $2.02
$3.15
$1.55
Second Quarter $2.50 $2.00
$3.09 $2.15
Third Quarter
$6.50 $2.11
$1.75
$2.50
$1.41
$10.55 $6.10
Fourth Quarter
$3.15
(1) The quotes represent the high and low closing
sales prices as reported by OTC Markets.
Stock Transfer Agent and Registrar
American Stock Transfer & Trust Company
59 Maiden Lane, Plaza Level
New York, NY 10038
(800) 937-5449
DIRECTORS, BNCCORP, INC.
Mark W. Sheffert
Chairman of the Board of BNCCORP, INC.
Chairman and Chief Executive
Officer, Manchester Companies, Inc.
Gregory K. Cleveland, CPA (Inactive)
President and
Chief Executive Officer
Tracy Scott, CPA (Inactive)
Retired Co-Founder of BNCCORP, INC.
Gaylen Ghylin, CPA (Inactive)
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 Officer,
Johnsen Trailer Sales, Inc.
Michael O’Rourke
Attorney / Author
Stephen H. Roman
Partner
FirstStrategic LLC
DIRECTORS
BNC National Bank
Gregory K. Cleveland
Shawn Cleveland
Timothy J. Franz
Dave 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
Touchmark 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 Ave, South
Minneapolis, MN 55402
Perimeter
17550 North Perimeter Drive
Scottsdale, AZ 85255
Mortgage Banking Branches:
Scottsdale
17550 North Perimeter Drive
Scottsdale, AZ 85255
Glendale
6685 W. Beardsley
Glendale, AZ 85383
Golden Valley
650 Douglas Drive
Golden Valley, MN 55422
Wichita
2868 North Ridge Road
Wichita, KS 67205
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
Moline
800 36th Avenue
Moline, IL 61265
Independence
19045 E. Valley View
Independence, MO 64055
Lincoln
6120 Apples Way
Lincoln, NE 68516
Omaha
4900 Dodge Street
Omaha, NE 68132
EXECUTIVE OFFICERS OF
BNCCORP and Subsidiaries
Gregory K. Cleveland, CPA (Inactive)
President and Chief Executive Officer
Timothy J. Franz, CPA (Inactive)
Chief Financial Officer
Shawn Cleveland, CPA
Chief Operating Officer,
BNC National Bank
Dave Hoekstra, CPA (Inactive)
Chief Credit Officer and
President, BNC National Bank – North Dakota Market
Mark E. Peiler, CFA
Senior Vice President - Chief Investment Officer
BNCCORP, INC. Annual Report 2012
89
BNCCORP, INC. (BNCCORP or the Company) is a bank holding company
registered under the Bank Holding Company Act of 1956, headquartered
in Bismarck, North Dakota. It is the parent company of BNC National
Bank (the Bank). The Company operates community banking and wealth
management businesses in Arizona, Minnesota and North Dakota from
14 locations. BNC also conducts mortgage banking from 12 locations in
Arizona, Minnesota, North Dakota, Illinois, Kansas, Nebraska and Missouri.
GREGORY K. CLEVELAND
President and Chief Executive Officer
“Our performance
during the past year
was highlighted by our
strong fundamental
earnings power, solid
capital foundation, and
sharp focus on providing
community banking
services for an attractive
and vibrant market.”
TO OUR SHAREHOLDERS, CUSTOMERS,
EMPLOYEES AND COMMUNITY:
I am pleased to report that BNCCORP delivered outstanding operational and financial results in
2012. Our performance during the past year was highlighted by our strong fundamental earnings
power, solid capital foundation, and sharp focus on providing community banking services for an
attractive and vibrant market. In addition to these and other positive developments, we can truly
say that this was the period when BNC achieved the “escape velocity” to break free of the effects
of the Great Recession that have weighed down the performance of so many financial institutions
in recent years.
As a result of our progress, the Company entered 2013 in the strongest position we’ve been in for
several years—and we have the forward momentum to deliver growing shareholder value in the
months and years ahead.
Meaningful Financial Progress
Net income was $26.6 million for 2012 (before preferred stock costs), a sharp increase over the
$4.2 million reported in 2011. Diluted earnings per common share were $7.52 for 2012, up
from $0.86 for the prior year. These results represented a healthy return on average assets of
3.74% and a return on average common equity of 76.77%.
Earnings benefitted from a sharp increase in non-interest income, largely driven by our mortgage
banking business, as well as decreased credit costs. In addition to our profitable operations, the
Company recognized a tax benefit of some $5.3 million in 2012, primarily due to the reversal
of a significant portion of our valuation allowance on deferred tax assets. We also received $7.5
million as a settlement of an insurance claim related to the fraudulent activity by an outside
residential mortgage loan servicing provider as reported in 2010.
In recent years, we have focused on several priorities that we believe are vital for the long-term
stability of the Company: credit quality, liquidity and capital. We made strides in all three areas
in 2012.
The provision for credit losses declined to $100 thousand in 2012, from $1.6 million in 2011.
Nonperforming assets were $15.6 million or 2.03% of total assets at year-end 2012, down from
$16.3 million or 2.45% at the end of 2011. The allowance for credit losses as a percentage of
total loans at December 31, 2012 was 2.62%, compared to 2.94% at December 31, 2011. We
remain vigilant with respect to asset quality, and will continue to take reasonable and prudent
measures to properly manage credit risk.
Total assets rose to $770.8 million at year-end 2012, an increase of $105.7 million during the
past 12 months. A key contributor to our asset growth was the $79.4 million increase in cash and
investment securities since year-end 2011, due to our continued emphasis on liquidity. In addition,
in 2012 we had higher balances of loans held for sale as a result of mortgage banking operations.
BNCCORP, INC. Annual Report 2012
1
1
In terms of capital, our total common stockholders’ equity at year-end 2012 was $47.8 million, more than twice the level of a year ago, without
resorting to an equity offering. Our book value per common share increased substantially to $14.49 at December 31, 2012, from $6.42 a year
earlier. The Bank’s capital ratios are well in excess of the regulatory standards for “well capitalized” institutions.
Core Banking for Our Communities
BNC has successfully focused on growing our business by providing superior banking and financial services solutions. For example, anticipating
the recovery of the housing market from the depths of the recession, we increased our emphasis on mortgage banking—originating a record of
over $1 billion in mortgages in the past year. We also have emphasized other core banking services that are responsive to the needs of our markets,
such as commercial and industrial lending in North Dakota (including financing for owner-occupied commercial real estate), and Small Business
Administration loans in Arizona.
Total deposits at year-end 2012 were $649.6 million, an increase of $73.3 million. This was largely due to deposit growth at our North Dakota
branch offices, which are well-positioned to continue to benefit from the vitality of this robust market.
Continuing our commitment to the wealth management business, we sponsored a well-attended wealth management seminar in Bismarck in
October 2012, featuring the nationally recognized economist and financial writer John Mauldin. We had an opportunity to acquaint Mr. Mauldin
with the strength of the local economy, and particularly its role in U.S. energy independence, leading to a favorable mention of BNC in his online
newsletter in December.
The above are just a few examples of our strong community banking emphasis. A dedication to serving the communities in which we live and work
sets off a virtuous cycle: our services help to grow local businesses and the financial well-being of our neighbors, who in turn support the growth of
BNC. We’re proud of the involvement of our employees in the community—both in providing exceptional service and participating in volunteer
activities and charitable works. We look forward to growing our pool of talented, skilled and engaged people in the years to come.
Challenges and Opportunities
Admittedly, the current economic environment presents a number of challenges. The recession led to a significant expansion in banking regulations
and historically low interest rates, both of which will continue to press upon the financial performance of companies in our industry. We also
remain concerned about the lack of a clear, consistent approach to our nation’s fiscal issues.
That said, BNCCORP enters 2013 with powerful forward momentum and we are well positioned to benefit from the opportunities we see in our
business and marketplace. We have a solid core community banking franchise, profitable operations, and a sound capital base. Just as important,
we have a team that has shown determination and ability in withstanding a challenging economic cycle, serving customers’ needs, and producing
growing value for shareholders.
We appreciate the commitment to excellence of our employees, the guidance of our Board of Directors, and the support of our shareholders, and
we look forward to delivering many more years of progress in the future.
Sincerely,
GREGORY K. CLEVELAND
President and Chief Executive Officer
2
2
BNCCORP, INC. Annual Report 2012
BNCCORP, INC.
INDEX TO YEAR END FINANCIAL REPORT
December 31, 2012
TABLE OF CONTENTS
Selected Financial Data ....................................................................................................... 5
Business ............................................................................................................................... 8
Management’s Discussion and Analysis of Financial Condition and Results
of Operations ....................................................................................................................... 9
Quantitative and Qualitative Disclosures about Market Risk .......................................... 32
Consolidated Financial Statements .................................................................................... 36
BNCCORP, INC. Annual Report 2012
3
Selected Financial Data
The selected consolidated financial data presented below should be read in conjunction with our consolidated
financial statements and the notes thereto (dollars in thousands, except share and per share data):
For the Years Ended December 31,
2012
2011
2010
2009
2008
$
23,992 $
25,749
$ 33,510 $ 44,588 $
46,026
5,521
6,272
10,238
14,899
18,471
19,477
23,272
29,689
100
1,625
5,750
27,000
42,938
20,237
23,973
16,013
-
-
26,231
-
19,215
26,811
7,750
10,395
26,501
737
(5,280)
22
72
(1,625)
$ 26,624 $
4,208
$ (22,065) $ (18,776)
$
2,218
(1,462)
(1,394)
(1,333)
(1,254)
Non-interest expense, excluding fraud loss on assets serviced by others
39,965
33,859
37,257
39,103
Net income (loss) available to common shareholders
$ 25,162 $ 2,814
$
(23,398) $
(20,030)
$
2,218
Investments securities available for sale
300,549
242,630
137,032
212,661
Federal Reserve Bank and Federal Home Loan Bank stock
2,601
2,750
2,862
3,048
Loans held for sale-mortgage banking
95,095
68,622
29,116
24,130
Loans and leases held for investment, net of unearned income
289,469
293,211
350,501
517,108
209,857
5,989
13,403
542,753
$
770,776 $
665,158
$ 747,069 $ 868,083 $
861,498
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
Income tax expense (benefit)
Net income (loss)
Preferred stock costs
Balance Sheet Data: (at end of period)
Total assets
Other loans held for sale, net
Allowance for credit losses
Deposits held for sale
Total deposits
Core deposits
Short-term borrowings
Federal Home Loan Bank advances
debentures
Preferred stockholders’ equity
Common stockholders’ equity
Guaranteed preferred beneficial interests in Company’s subordinated
-
-
70,501
(10,091)
(10,630)
(14,765)
(18,047)
(8,751)
-
-
107,446
-
-
649,604
576,255
661,111
755,963
675,321
584,604
516,436
594,152
640,169
11,700
8,635
16,329
10,190
-
-
-
15,000
575,637
16,844
84,500
22,430
22,427
24,134
22,890
23,025
20,888
20,687
20,486
20,285
47,842
21,180
16,835
36,980
53,947
-
-
-
-
-
Book value per common share outstanding
$ 14.49 $
6.42
$ 5.09 $ 11.24 $
16.35
Tangible book value
$ 14.49 $
6.42
$ 5.09 $ 11.24 $
16.23
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 total assets
Nonperforming loans to loans and leases held for investment
Allowance for credit losses to total loans
Allowance for credit losses to total nonperforming loans
3.74
76.77
65.08%
2.85%
2.63%
0.61%
15.77%
85.26%
3.11%
2.89%
(2.79)%
(2.09)%
(90.47)%
(38.88)%
134.38%
85.56%
3.20%
2.95%
3.58%
3.37%
0.28%
3.85%
71.22%
3.64%
3.35%
$ 7.64 $
0.86
$ (7.13) $ (6.14)
0.67
$ 7.52 $
0.86
$ (7.13) $ (6.14)
0.67
$
$
3,294,562
3,344,280
3,300,652
3,282,182
3,282,182
3,301,007
3,281,719
3,261,831
3,281,719
3,273,722
3,304,339
3,290,219
3,291,697
3,319,225
3,299,163
2.03%
1.36%
3.63%
2.62%
96%
2.45%
0.93%
2.10%
2.94%
172%
4.09%
2.39%
5.10%
3.84%
83%
4.97%
4.13%
6.94%
3.11%
50%
3.84%
2.66%
4.22%
1.50%
38%
2
Net loan charge-offs to average loans and leases held for investment
(0.225)%
(1.780)%
(1.530)%
(3.235)%
(1.066)%
This page was intentionally left blank.
4
BNCCORP, INC. Annual Report 2012
Selected Financial Data
The selected consolidated financial data presented below should be read in conjunction with our consolidated
financial statements and the notes thereto (dollars in thousands, except share and per share data):
19,215
26,811
7,750
10,395
-
26,501
737
209,857
5,989
13,403
542,753
-
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
Income tax expense (benefit)
Net income (loss)
Preferred stock costs
For the Years Ended December 31,
2012
2011
2010
2009
2008
$
23,992 $
25,749
$ 33,510 $ 44,588 $
46,026
5,521
6,272
10,238
14,899
18,471
19,477
23,272
29,689
100
1,625
5,750
27,000
42,938
20,237
23,973
16,013
-
-
26,231
-
(5,280)
22
72
(1,625)
$ 26,624 $
4,208
$ (22,065) $ (18,776)
$
2,218
(1,462)
(1,394)
(1,333)
(1,254)
-
Non-interest expense, excluding fraud loss on assets serviced by others
39,965
33,859
37,257
39,103
Net income (loss) available to common shareholders
$ 25,162 $ 2,814
$
(23,398) $
(20,030)
$
2,218
Balance Sheet Data: (at end of period)
Total assets
$
770,776 $
665,158
$ 747,069 $ 868,083 $
861,498
Investments securities available for sale
300,549
242,630
137,032
212,661
Federal Reserve Bank and Federal Home Loan Bank stock
2,601
2,750
2,862
3,048
Loans held for sale-mortgage banking
95,095
68,622
29,116
24,130
Loans and leases held for investment, net of unearned income
289,469
293,211
350,501
517,108
Other loans held for sale, net
Allowance for credit losses
Deposits held for sale
Total deposits
Core deposits
Short-term borrowings
Federal Home Loan Bank advances
Guaranteed preferred beneficial interests in Company’s subordinated
debentures
Preferred stockholders’ equity
Common stockholders’ equity
-
-
70,501
-
(10,091)
(10,630)
-
-
(14,765)
107,446
(18,047)
(8,751)
-
-
649,604
576,255
661,111
755,963
675,321
584,604
516,436
594,152
640,169
11,700
8,635
16,329
10,190
-
-
-
15,000
575,637
16,844
84,500
22,430
22,427
24,134
22,890
23,025
20,888
20,687
20,486
20,285
-
47,842
21,180
16,835
36,980
53,947
Book value per common share outstanding
$ 14.49 $
6.42
$ 5.09 $ 11.24 $
16.35
Tangible book value
$ 14.49 $
6.42
$ 5.09 $ 11.24 $
16.23
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 total assets
Nonperforming loans to loans and leases held for investment
3.74
76.77
65.08%
2.85%
2.63%
0.61%
15.77%
85.26%
3.11%
2.89%
(2.79)%
(2.09)%
(90.47)%
(38.88)%
134.38%
85.56%
3.20%
2.95%
3.58%
3.37%
0.28%
3.85%
71.22%
3.64%
3.35%
$ 7.64 $
0.86
$ (7.13) $ (6.14)
$ 7.52 $
0.86
$ (7.13) $ (6.14)
3,294,562
3,344,280
3,300,652
3,282,182
3,282,182
3,301,007
3,281,719
3,261,831
3,281,719
3,273,722
3,304,339
3,290,219
$
$
0.67
0.67
3,291,697
3,319,225
3,299,163
2.03%
1.36%
3.63%
2.45%
0.93%
2.10%
4.09%
2.39%
5.10%
4.97%
4.13%
6.94%
3.84%
2.66%
4.22%
Net loan charge-offs to average loans and leases held for investment
(0.225)%
(1.780)%
(1.530)%
(3.235)%
(1.066)%
Allowance for credit losses to total loans
Allowance for credit losses to total nonperforming loans
2.62%
96%
2.94%
172%
3.84%
83%
3.11%
50%
1.50%
38%
2
BNCCORP, INC. Annual Report 2012
5
Quarterly Financial Data
Interest income
Interest expense
Net interest income
First
Quarter
Second
Quarter
2012
Third
Quarter
Fourth
Quarter
YTD
$
6,131 $
5,904
$
6,095
$
5,862
$ 23,992
1,486
1,505
1,328
1,202
5,521
4,645
4,399
4,767
4,660
18,471
Provision for credit losses
100
-
-
-
100
Net interest income after provision for
credit losses
Non-interest income
Non-interest expense
Income before income taxes
Income tax expense (benefit)
NET INCOME
Preferred stock costs
Net income available to common
shareholders
4,545
4,399
4,767
4,660
18,371
5,697
8,672
10,753
10,021
16,826
12,303
9,662
42,938
8,969
39,965
1,570
5,131
9,290
5,353
21,344
2
101
(5,755)
372
(5,280)
$ 1,568
$ 5,030
$ 15,045
$ 4,981
$ 26,624
(358)
(362)
(369)
(373)
(1,462)
$ 1,210
$ 4,668
$ 14,676
$
4,608
$ 25,162
Basic earnings per common share
Diluted earnings per common share
$
$
0.37
0.37
$
$
1.42
1.42
$
$
4.46
4.41
$
$
1.40
1.34
$
$
7.64
7.52
Interest income
Interest expense
Net interest income
credit losses
Non-interest income
Non-interest expense
Provision for credit losses
Net interest income after provision for
Income before income taxes
Income tax expense (benefit)
NET INCOME
Preferred stock costs
Net income available to common
shareholders
First
Quarter
Second
Quarter
Fourth
Quarter
YTD
2011
Third
Quarter
$
6,907 $
6,256
$
6,199 $
6,387 $ 25,749
1,747
1,560
1,587
1,378
6,272
5,160
4,696
4,612
5,009
19,477
600
500
275
250
1,625
4,560
4,196
4,337
4,759
17,852
4,036
8,023
4,717
8,262
6,074
8,819
5,410
8,755
20,237
33,859
573
651
1,592
1,414
4,230
-
2
(2)
22
22
$ 573 $ 649
$ 1,594 $ 1,392
$ 4,208
(339)
(345)
(354)
(356)
(1,394)
$ 234 $ 304
$ 1,240 $ 1,036
$ 2,814
Basic earnings per common share
Diluted earnings per common share
$
$
0.07 $
0.07 $
0.09
0.09
$
$
0.38 $
0.38 $
0.31
0.31
$
$
0.86
0.86
Average common shares:
Basic
Diluted
3,291,907
3,291,907
3,291,569
3,294,562
3,312,205
3,295,247
3,329,105
3,441,881
3,294,562
3,344,280
Average common shares:
Basic
Diluted
3,283,839
3,282,426
3,289,756
3,289,756
3,283,839
3,282,426
3,289,756
3,289,756
3,282,182
3,282,182
6
BNCCORP, INC. Annual Report 2012
3
4
Provision for credit losses
100
-
-
-
100
Quarterly Financial Data
Interest income
Interest expense
Net interest income
Net interest income after provision for
credit losses
Non-interest income
Non-interest expense
Income before income taxes
Income tax expense (benefit)
NET INCOME
Preferred stock costs
Net income available to common
shareholders
First
Quarter
Second
Quarter
Fourth
Quarter
YTD
2012
Third
Quarter
$
6,131 $
5,904
$
6,095
$
5,862
$ 23,992
1,486
1,505
1,328
1,202
5,521
4,645
4,399
4,767
4,660
18,471
4,545
4,399
4,767
4,660
18,371
5,697
8,672
10,753
10,021
16,826
12,303
9,662
42,938
8,969
39,965
1,570
5,131
9,290
5,353
21,344
2
101
(5,755)
372
(5,280)
$ 1,568
$ 5,030
$ 15,045
$ 4,981
$ 26,624
(358)
(362)
(369)
(373)
(1,462)
$ 1,210
$ 4,668
$ 14,676
$
4,608
$ 25,162
Basic earnings per common share
Diluted earnings per common share
$
$
0.37
0.37
$
$
1.42
1.42
$
$
4.46
4.41
$
$
1.40
1.34
$
$
7.64
7.52
Interest income
Interest expense
Net interest income
Provision for credit losses
Net interest income after provision for
credit losses
Non-interest income
Non-interest expense
Income before income taxes
Income tax expense (benefit)
First
Quarter
Second
Quarter
2011
Third
Quarter
Fourth
Quarter
YTD
$
6,907 $
6,256
$
6,199 $
6,387 $ 25,749
1,747
1,560
1,587
1,378
6,272
5,160
4,696
4,612
5,009
19,477
600
500
275
250
1,625
4,560
4,196
4,337
4,759
17,852
4,036
8,023
4,717
8,262
6,074
8,819
5,410
8,755
20,237
33,859
573
651
1,592
1,414
4,230
-
2
(2)
22
22
NET INCOME
$ 573 $ 649
$ 1,594 $ 1,392
$ 4,208
Preferred stock costs
Net income available to common
shareholders
(339)
(345)
(354)
(356)
(1,394)
$ 234 $ 304
$ 1,240 $ 1,036
$ 2,814
Basic earnings per common share
Diluted earnings per common share
$
$
0.07 $
0.07 $
0.09
0.09
$
$
0.38 $
0.38 $
0.31
0.31
$
$
0.86
0.86
Average common shares:
Basic
Diluted
3,291,907
3,291,907
3,291,569
3,294,562
3,312,205
3,295,247
3,329,105
3,441,881
3,294,562
3,344,280
Average common shares:
Basic
Diluted
3,283,839
3,282,426
3,289,756
3,289,756
3,283,839
3,282,426
3,289,756
3,289,756
3,282,182
3,282,182
3
4
BNCCORP, INC. Annual Report 2012
7
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 North Dakota, Minnesota and Arizona from 14 locations. The Company
also conducts mortgage banking from 12 locations in Arizona, Minnesota, Illinois, Kansas, Nebraska and
Missouri.
Operating Strategy
We are a community bank that focuses on business banking. Our primary strategy is to build value for
shareholders by providing relationship-based financial services to small and mid-sized businesses, business
owners, their employees and professionals. The key elements of our strategy include:
(cid:120)
Providing individualized, high-level customer service. A significant portion of our strategic focus centers
around our dedication to providing the highest level of customer service and establishing and maintaining
long-term relationships. We believe that many of our competitors have emphasized retail banking and
financial services for large companies, leaving the small and mid-sized business market underserved. Our
consistent focus on the needs of such small and mid-sized businesses, as well as the individuals associated
with them, has allowed us to compete effectively in this market segment.
(cid:120) Diversification of products and services. We offer a wide variety of traditional and nontraditional financial
products and services in order to meet the financial needs of our customer base, establish new relationships in
the markets we serve and expand our business opportunities. We also seek to leverage our existing
relationships with our banking clients by cross-selling our products and services, as well as offering
relationship pricing to those clients who utilize a multitude of our products and services. We will continue to
capitalize on the opportunities presented in the mortgage origination arena.
(cid:120)
Expand opportunistically. Our strategy involves growing our banking businesses within the markets that we
serve and expanding into other attractive markets. Our strategy also includes offering a broad array of
personal financial products and services to high net worth individuals and senior managers of the businesses
with which we have established relationships. Our current strategies include a focus on expansion in North
Dakota where we believe the demand for our services is particularly strong due to increased demand
generated by the oil and gas and agricultural industries and generally favorable economic conditions. In
Arizona, we will continue to grow organically focusing on small businesses and the SBA arena.
(cid:120) Managing credit risk. We adhere to a uniform set of credit standards that are designed to ensure proper
management of credit risk throughout our organization. Because we centrally administer our loan policies,
we have been able to efficiently and continually monitor our loans and the loan review process despite our
growth within the markets that we serve and our expansion into new markets. We focus on relationship
building to grow loans.
(cid:120)
Emphasize deposit growth. We emphasize growing low-cost core deposits as a key strategy. Federal
depository insurance can offer a strategic advantage to banks because it permits them to attract funds at a low
cost. Historically, we have utilized this advantage to attract stable low cost deposits in each of our banking
markets. We routinely conduct market surveys to compare our cost of deposits to competitors and attempt to
price slightly below market. We believe our commitment to high customer service facilitates this approach.
In recent years, we have expanded our mortgage banking operations. The mortgage banking business can be
strategically counter cyclical to community banking. For example, low interest rates and government support for
the housing industry has provided favorable conditions for mortgage banking and, as a result, it has made
significant contributions to earnings in recent periods. The continuation of these recent favorable mortgage
banking conditions is subject to uncertainty.
Management’s Discussion and Analysis of Financial Condition and
Results of Operations
The following table summarizes selected income statement data and earnings per share data (in thousands, except
SELECTED INCOME STATEMENT DATA
Overview
per share data):
Interest income
Interest expense
Net interest income
Provision for credit losses
Non-interest income
Non-interest expense
Income before income taxes
Income tax expense (benefit)
Net income
Preferred stock costs
EARNINGS PER SHARE DATA
Basic earnings per common share
Diluted earnings per common share
The following is an brief overview of recent periods:
2012
2011
$
$
23,992
5,521
18,471
100
42,938
39,965
21,344
(5,280)
26,624
(1,462)
25,749
6,272
19,477
1,625
20,237
33,859
4,230
22
4,208
(1,394)
$
$
7.64
7.52
$
$
0.86
0.86
Net income available to common shareholders
$
25,162
$
2,814
(cid:120)
In 2012, the Company was exceptionally profitable. Results from core banking and mortgage banking
operations in 2012 were enhanced by a non-recurring legal settlement and a non-recurring income tax
(cid:120) Credit quality stabilized in 2012. In 2011, operations were characterized by lower non-performing assets,
lower provisions for credit losses, and improved capital ratios at the Bank.
(cid:120) Net interest income has been decreasing due to lower interest rates which have reduced the net interest
margin. Our total assets have generally been declining since 2009, but this trend was partially reversed in
2012. For more information, see discussion of net interest income that follows in the MD&A.
(cid:120) Non-interest income has been significantly impacted by gains on sales of loans and mortgage banking
revenues. Decreasing interest rates have also facilitated realized and unrealized gains on investment
securities. Non-interest income in 2012 includes $7.5 million of income associated with a settlement with
insurance carriers. For more information, see discussion of non-interest income that follows in the
benefit.
MD&A.
(cid:120) Non-interest expense has been significantly impacted by higher volumes in mortgage banking and higher
compensation as we have added and rewarded producers. In 2012, professional fees also included a
contingent fee of $2.5 million paid to our advisors when insurance litigation was settled. For more
information, see discussion of non-interest expense that follows in the MD&A.
(cid:120)
(cid:120)
(cid:120)
In 2012, we recorded a significant tax benefit when the valuation allowance related to deferred tax assets
was reversed. In future periods, tax expense is expected to be recognized at more normal effective rates.
In early 2011, we sold certain loans, other assets and deposits in our Arizona and Minnesota markets to
improve regulatory capital. Since then, regulatory capital ratios have steadily improved.
In 2011 and 2012, we deferred payments on the Company’s preferred stock and subordinated debentures
as contractually permitted. We became current on these obligations in early 2013.
8
BNCCORP, INC. Annual Report 2012
5
6
Business
General
Missouri.
Operating Strategy
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 North Dakota, Minnesota and Arizona from 14 locations. The Company
also conducts mortgage banking from 12 locations in Arizona, Minnesota, Illinois, Kansas, Nebraska and
We are a community bank that focuses on business banking. Our primary strategy is to build value for
shareholders by providing relationship-based financial services to small and mid-sized businesses, business
owners, their employees and professionals. The key elements of our strategy include:
(cid:120)
Providing individualized, high-level customer service. A significant portion of our strategic focus centers
around our dedication to providing the highest level of customer service and establishing and maintaining
long-term relationships. We believe that many of our competitors have emphasized retail banking and
financial services for large companies, leaving the small and mid-sized business market underserved. Our
consistent focus on the needs of such small and mid-sized businesses, as well as the individuals associated
with them, has allowed us to compete effectively in this market segment.
(cid:120) Diversification of products and services. We offer a wide variety of traditional and nontraditional financial
products and services in order to meet the financial needs of our customer base, establish new relationships in
the markets we serve and expand our business opportunities. We also seek to leverage our existing
relationships with our banking clients by cross-selling our products and services, as well as offering
relationship pricing to those clients who utilize a multitude of our products and services. We will continue to
capitalize on the opportunities presented in the mortgage origination arena.
(cid:120)
Expand opportunistically. Our strategy involves growing our banking businesses within the markets that we
serve and expanding into other attractive markets. Our strategy also includes offering a broad array of
personal financial products and services to high net worth individuals and senior managers of the businesses
with which we have established relationships. Our current strategies include a focus on expansion in North
Dakota where we believe the demand for our services is particularly strong due to increased demand
generated by the oil and gas and agricultural industries and generally favorable economic conditions. In
Arizona, we will continue to grow organically focusing on small businesses and the SBA arena.
(cid:120) Managing credit risk. We adhere to a uniform set of credit standards that are designed to ensure proper
management of credit risk throughout our organization. Because we centrally administer our loan policies,
we have been able to efficiently and continually monitor our loans and the loan review process despite our
growth within the markets that we serve and our expansion into new markets. We focus on relationship
building to grow loans.
(cid:120)
Emphasize deposit growth. We emphasize growing low-cost core deposits as a key strategy. Federal
depository insurance can offer a strategic advantage to banks because it permits them to attract funds at a low
cost. Historically, we have utilized this advantage to attract stable low cost deposits in each of our banking
markets. We routinely conduct market surveys to compare our cost of deposits to competitors and attempt to
price slightly below market. We believe our commitment to high customer service facilitates this approach.
In recent years, we have expanded our mortgage banking operations. The mortgage banking business can be
strategically counter cyclical to community banking. For example, low interest rates and government support for
the housing industry has provided favorable conditions for mortgage banking and, as a result, it has made
significant contributions to earnings in recent periods. The continuation of these recent favorable mortgage
banking conditions is subject to uncertainty.
Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Overview
The following table summarizes selected income statement data and earnings 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
Non-interest expense
Income before income taxes
Income tax expense (benefit)
Net income
Preferred stock costs
$
2012
2011
23,992
5,521
18,471
100
42,938
39,965
21,344
(5,280)
26,624
(1,462)
$
25,749
6,272
19,477
1,625
20,237
33,859
4,230
22
4,208
(1,394)
Net income available to common shareholders
$
25,162
$
2,814
EARNINGS PER SHARE DATA
Basic earnings per common share
Diluted earnings per common share
The following is an brief overview of recent periods:
$
$
7.64
7.52
$
$
0.86
0.86
(cid:120)
In 2012, the Company was exceptionally profitable. Results from core banking and mortgage banking
operations in 2012 were enhanced by a non-recurring legal settlement and a non-recurring income tax
benefit.
(cid:120) Credit quality stabilized in 2012. In 2011, operations were characterized by lower non-performing assets,
lower provisions for credit losses, and improved capital ratios at the Bank.
(cid:120) Net interest income has been decreasing due to lower interest rates which have reduced the net interest
margin. Our total assets have generally been declining since 2009, but this trend was partially reversed in
2012. For more information, see discussion of net interest income that follows in the MD&A.
(cid:120) Non-interest income has been significantly impacted by gains on sales of loans and mortgage banking
revenues. Decreasing interest rates have also facilitated realized and unrealized gains on investment
securities. Non-interest income in 2012 includes $7.5 million of income associated with a settlement with
insurance carriers. For more information, see discussion of non-interest income that follows in the
MD&A.
(cid:120)
(cid:120) Non-interest expense has been significantly impacted by higher volumes in mortgage banking and higher
compensation as we have added and rewarded producers. In 2012, professional fees also included a
contingent fee of $2.5 million paid to our advisors when insurance litigation was settled. For more
information, see discussion of non-interest expense that follows in the MD&A.
In 2012, we recorded a significant tax benefit when the valuation allowance related to deferred tax assets
was reversed. In future periods, tax expense is expected to be recognized at more normal effective rates.
In early 2011, we sold certain loans, other assets and deposits in our Arizona and Minnesota markets to
improve regulatory capital. Since then, regulatory capital ratios have steadily improved.
In 2011 and 2012, we deferred payments on the Company’s preferred stock and subordinated debentures
as contractually permitted. We became current on these obligations in early 2013.
(cid:120)
(cid:120)
5
6
BNCCORP, INC. Annual Report 2012
9
In recent years, the ratio of our common stockholders’ equity to total assets has been low and the leverage at the
holding company has been relatively high. In 2012, earnings have increased common equity, but management
continues to assess the Company’s capital structure.
Net income in 2012 was $26.624 million, or $7.52 per diluted share, compared to net income of $4.208 million, or
General
$0.86 per diluted share in 2011.
Net Interest Income
Assets
Taxable investments
Tax-exempt investments
Participating interests in mortgage loans
Loans held for sale-mortgage banking
Loans and leases held for investment
Allowance for credit losses
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
Borrowings:
FHLB advances
Other borrowings
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):
Federal funds sold/interest-bearing due from $
35,172 $ 80
0.23% $
63,570 $ 161
0.25% $
47,470 $ 111
For the Year ended December 31,
For the Year ended December 31,
For the Year ended December 31,
2012
2011
2010
Interest Average
Interest
Average
Interest Average
Average
balance
earned
yield or
Average
or owed
cost
balance
earned
or owed
yield or
Average
earned
yield or
cost
balance
or owed
cost
241,923
6,195
2.56%
204,463
7,606
31,096
967
3.11%
9,123
331
-
-
0.00%
1,101
45
66,288
2,263
3.41%
33,317
1,342
284,507
14,487
5.09%
328,091
16,264
3.72%
3.63%
4.09%
4.03%
4.96%
167,572
8,631
2,111
93
20,144
665
29,039
1,263
478,492
22,747
(10,560)
-
-
(12,754)
-
- (17,201) -
11,155
51,597
$
711,178
8,997
53,360
$
689,268
9,929
53,146
$
790,702
Total interest-earning assets
648,426
23,992
3.70%
626,911
25,749
4.11%
727,627
33,510
4.61%
$
271,089
645
0.24% $
253,054
940
0.37% $
282,880
1,729
15,549
16
0.10%
12,655
13
0.10%
11,156
11
Total interest-bearing deposits
479,647
3,857
0.80%
476,395
4,773
1.00%
580,155
8,808
127,446
2,368
1.86%
139,254
65,563 828
1.26%
71,432
2,812
1,008
2.02%
186,978
5,426
1.41%
99,141 1,642
Short-term borrowings
13,329
70
0.53%
15,583
132
0.85%
11,163
73
203
1
0.49%
11
-
0.00%
2,899
112
-
-
0.00%
-
-
0.00%
10
1
10.00%
Subordinated debentures
22,428 1,593
7.10%
23,437
1,367
5.83%
23,491 1,244
Total interest-bearing liabilities
515,607
5,521
1.07%
515,426
6,272
1.22%
617,718
10,238
Non-interest-bearing demand accounts
125,367
-
0.00%
124,208
-
0.00%
117,459
-
Total deposits and interest-bearing
liabilities
Other non-interest-bearing liabilities
Total liabilities
Stockholders’ equity
Total liabilities and stockholders’
640,974
16,636
657,610
53,568
equity
Net interest income
Net interest spread
Net interest margin
$
711,178
$
689,268
$
790,702
$ 18,471
$ 19,477
$ 23,272
2.63%
2.85%
2.89%
3.11%
2.95%
3.20%
Ratio of average interest-earning assets
to average interest-bearing liabilities
125.76%
121.63%
117.79%
639,634
11,201
650,835
38,433
735,177
9,272
744,449
46,253
0.23%
5.15%
4.41%
3.30%
4.35%
4.75%
-
0.61%
0.10%
2.90%
1.66%
1.52%
0.65%
3.86%
5.30%
1.66%
0.00%
10
BNCCORP, INC. Annual Report 2012
7
8
In recent years, the ratio of our common stockholders’ equity to total assets has been low and the leverage at the
holding company has been relatively high. In 2012, earnings have increased common equity, but management
continues to assess the Company’s capital structure.
General
Net income in 2012 was $26.624 million, or $7.52 per diluted share, compared to net income of $4.208 million, or
$0.86 per diluted share in 2011.
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):
For the Year ended December 31,
2012
Interest Average
earned
or owed
Average
balance
yield or
cost
For the Year ended December 31,
2011
Interest
earned
or owed
Average
balance
Average
yield or
cost
For the Year ended December 31,
2010
Interest Average
yield or
earned
cost
or owed
Average
balance
Assets
Federal funds sold/interest-bearing due from $
Taxable investments
Tax-exempt investments
Participating interests in mortgage loans
Loans held for sale-mortgage banking
Loans and leases held for investment
Allowance for credit losses
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
Total interest-bearing liabilities
Non-interest-bearing demand accounts
Total deposits and interest-bearing
liabilities
Other non-interest-bearing liabilities
Total liabilities
Stockholders’ equity
Total liabilities and stockholders’
equity
Net interest income
Net interest spread
Net interest margin
35,172 $ 80
6,195
241,923
967
31,096
-
-
2,263
66,288
14,487
284,507
-
(10,560)
23,992
648,426
0.23% $
2.56%
3.11%
0.00%
3.41%
5.09%
-
3.70%
63,570 $ 161
7,606
204,463
331
9,123
45
1,101
1,342
33,317
16,264
328,091
-
(12,754)
25,749
626,911
0.25% $
3.72%
3.63%
4.09%
4.03%
4.96%
47,470 $ 111
8,631
167,572
93
2,111
665
20,144
1,263
29,039
22,747
478,492
- (17,201) -
33,510
727,627
4.11%
0.23%
5.15%
4.41%
3.30%
4.35%
4.75%
-
4.61%
11,155
51,597
711,178
$
8,997
53,360
689,268
$
9,929
53,146
790,702
$
$
271,089
15,549
645
16
0.24% $
0.10%
253,054
12,655
940
13
0.37% $
0.10%
282,880
11,156
1,729
11
0.61%
0.10%
2,368
127,446
65,563 828
3,857
479,647
1.86%
1.26%
0.80%
139,254
71,432
476,395
2,812
1,008
4,773
2.02%
1.41%
1.00%
5,426
186,978
99,141 1,642
8,808
580,155
2.90%
1.66%
1.52%
70
13,329
1
203
-
-
22,428 1,593
5,521
515,607
-
125,367
0.53%
0.49%
0.00%
7.10%
1.07%
0.00%
640,974
16,636
657,610
53,568
15,583
11
-
23,437
515,426
124,208
639,634
11,201
650,835
38,433
132
-
-
1,367
6,272
-
0.85%
0.00%
0.00%
5.83%
1.22%
0.00%
73
11,163
112
2,899
10
1
23,491 1,244
10,238
617,718
-
117,459
0.65%
3.86%
10.00%
5.30%
1.66%
0.00%
735,177
9,272
744,449
46,253
$
711,178
$
689,268
$
790,702
$ 18,471
$ 19,477
$ 23,272
2.63%
2.85%
2.89%
3.11%
2.95%
3.20%
Ratio of average interest-earning assets
to average interest-bearing liabilities
125.76%
121.63%
117.79%
7
8
BNCCORP, INC. Annual Report 2012
11
The following table allocates changes in our interest income and interest expense between the changes related to
volume and rates (in thousands):
For the Years Ended December 31,
For the Years Ended December 31,
2012 Compared to 2011
2011 Compared to 2010
Change Due to
Change Due to
Volume
Rate
Total
Volume
Rate
Total
impacted by the low rate environment.
Non-interest Income
Interest Earned on Interest-
Earning Assets
Federal funds sold/interest-
bearing due from
Taxable investments
Tax-exempt investments
Participating interests in
mortgage loans
Loans held for sale- mortgage
banking
Loans held for investment
Total increase (decrease) in
$
(66)
1,233
690
$
(15)
(2,644)
(54)
$
(81)
(1,411)
636
$ 40
1,667
257
$
10
(2,692)
(19)
$ 50
(1,025)
238
(23)
(23)
(46)
(748)
128
(620)
1,153
(2,208)
(232)
432
921
(1,776)
177
(7,419)
(98)
936
79
(6,483)
interest income
779
(2,536)
(1,757)
(6,026)
(1,735)
(7,761)
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
63
3
(358)
-
(295)
3
(167)
2
(622)
-
(789)
2
(229)
(79)
(17)
-
-
-
(215)
(101)
(45)
1
-
226
(444)
(180)
(62)
1
-
226
(1,193)
(415)
34
(56)
-
(3)
(1,421)
(219)
25
(56)
(1)
126
(2,614)
(634)
59
(112)
(1)
123
(259)
(492)
(751)
(1,798)
(2,168)
(3,966)
income
$ 1,038
$
(2,044)
$
(1,006)
$
(4,228)
$
433
$
(3,795)
Net interest income was $18.471 million in 2012 compared to $19.477 million in 2011, a decrease of $1.006
million or 5.2%. The net interest margin decreased to 2.85% for the year ended December 31, 2012 from 3.11%
in 2011.
In 2012, net interest income was lower as the impact of lower interest rates more than offset the impact of higher
balances of assets and liabilities. Interest expense in 2012 included $546 thousand of costs incurred when we
exercised call options on $60 million of brokered deposits to replace them with lower cost deposits. Our ability to
lower our cost of funds in the future may be limited because interest rates are currently historically low. In 2012,
earning assets increased as loans held for sale in mortgage banking operations and investments available for sale
increased when we deployed funds from new deposits and liquidity built in prior periods. As 2012 progressed, we
increased commercial lending, particularly in North Dakota.
Net interest income was $19.477 million in 2011 compared to $23.272 million in 2010, a decrease of $3.795
million or 16.3%. The net interest margin decreased to 3.11% for the year ended December 31, 2011, from 3.20%
in 2010.
9
12
BNCCORP, INC. Annual Report 2012
In 2011, lower balances of assets and liabilities combined to reduce net interest income. Earning assets and
interest bearing liabilities decreased in 2011 due to the sale of loans described in Note 3 of our Consolidated
Financial Statements. We also stopped buying participating interests. Investments increased as we deployed
liquidity built up in prior periods. In 2011, we were able to reduce interest expense more than interest income was
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 on sales of loans, net
Gains on sales of securities, net
Insurance claim settlement
Other
For the Years Ended December 31,
2012 – 2011
2012
2011
$
%
Increase ( Decrease)
$
2,492
$
2,218
$ 274
12 % (a)
1,204
29,658
1,110
279
7,500
695
1,282
11,285
1,427
2,830
(78)
(6) %
18,373
163 % (b)
(317)
(22) % (c)
(2,551)
(90) % (d)
-
7,500
100 % (e)
1,195
(500)
(42) % (f)
Total non-interest income
$
42,938
$
20,237
$ 22,701
112 %
(a) Bank charges and service fees increased in 2012 primarily due to growth in new accounts.
(b) Mortgage banking revenues have been significant in recent years due to low interest rates and governmental support for the
housing market. In the near term, we expect mortgage banking revenues to be elevated. Over the longer term, mortgage
banking revenues may not be sustained at current levels as interest rates will inevitably rise.
(c)
In recent years, we have been selling SBA loans at gains as the secondary market is currently acquisitive and the loans can be
sold for attractive prices. While sales of loans can vary significantly, we currently anticipate sales of SBA loans to continue for
the foreseeable future.
(d) Gains on sales of securities, net vary depending on the nature and volume of transactions.
(e)
In 2012, we recognized $7.5 million of revenue associated with settlement of our claims against insurers related to a fraud that
was perpetrated upon us during 2010.
(f)
In 2011, we received a distribution of $300 thousand from an investment in a SBIC fund.
10
The following table allocates changes in our interest income and interest expense between the changes related to
volume and rates (in thousands):
For the Years Ended December 31,
For the Years Ended December 31,
2012 Compared to 2011
2011 Compared to 2010
Change Due to
Change Due to
Volume
Rate
Total
Volume
Rate
Total
Interest Earned on Interest-
Earning Assets
Federal funds sold/interest-
Taxable investments
Tax-exempt investments
Participating interests in
mortgage loans
Loans held for sale- mortgage
Total increase (decrease) in
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
Total increase (decrease) in
interest expense
Increase (decrease) in net interest
bearing due from
$
(66)
$
(15)
$
(81)
$ 40
$
10
$ 50
1,233
690
(2,644)
(54)
(1,411)
1,667
636
257
(2,692)
(19)
(1,025)
238
(23)
(23)
(46)
(748)
128
(620)
banking
1,153
(232)
921
177
(98)
79
Loans held for investment
(2,208)
432
(1,776)
(7,419)
936
(6,483)
interest income
779
(2,536)
(1,757)
(6,026)
(1,735)
(7,761)
63
3
(229)
(79)
(17)
-
-
(358)
(295)
(167)
(622)
(789)
-
3
2
-
2
(215)
(101)
(444)
(1,193)
(180)
(415)
(1,421)
(219)
(2,614)
(634)
(45)
(62)
34
25
59
1
1
(56)
-
-
-
(56)
(1)
(112)
(1)
Subordinated debentures
-
226
226
(3)
126
123
(259)
(492)
(751)
(1,798)
(2,168)
(3,966)
income
$ 1,038
$
(2,044)
$
(1,006)
$
(4,228)
$
433
$
(3,795)
Net interest income was $18.471 million in 2012 compared to $19.477 million in 2011, a decrease of $1.006
million or 5.2%. The net interest margin decreased to 2.85% for the year ended December 31, 2012 from 3.11%
in 2011.
In 2012, net interest income was lower as the impact of lower interest rates more than offset the impact of higher
balances of assets and liabilities. Interest expense in 2012 included $546 thousand of costs incurred when we
exercised call options on $60 million of brokered deposits to replace them with lower cost deposits. Our ability to
lower our cost of funds in the future may be limited because interest rates are currently historically low. In 2012,
earning assets increased as loans held for sale in mortgage banking operations and investments available for sale
increased when we deployed funds from new deposits and liquidity built in prior periods. As 2012 progressed, we
increased commercial lending, particularly in North Dakota.
Net interest income was $19.477 million in 2011 compared to $23.272 million in 2010, a decrease of $3.795
million or 16.3%. The net interest margin decreased to 3.11% for the year ended December 31, 2011, from 3.20%
in 2010.
9
In 2011, lower balances of assets and liabilities combined to reduce net interest income. Earning assets and
interest bearing liabilities decreased in 2011 due to the sale of loans described in Note 3 of our Consolidated
Financial Statements. We also stopped buying participating interests. Investments increased as we deployed
liquidity built up in prior periods. In 2011, we were able to reduce interest expense more than interest income was
impacted by the low rate environment.
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 on sales of loans, net
Gains on sales of securities, net
Insurance claim settlement
Other
Total non-interest income
For the Years Ended December 31,
Increase ( Decrease)
2012 – 2011
2012
2011
$
%
$
$
2,492
1,204
29,658
1,110
279
7,500
695
42,938
$
$
2,218
1,282
11,285
1,427
2,830
-
1,195
20,237
$ 274
(78)
18,373
(317)
(2,551)
7,500
(500)
$ 22,701
12 % (a)
(6) %
163 % (b)
(22) % (c)
(90) % (d)
100 % (e)
(42) % (f)
112 %
(a) Bank charges and service fees increased in 2012 primarily due to growth in new accounts.
(b) Mortgage banking revenues have been significant in recent years due to low interest rates and governmental support for the
housing market. In the near term, we expect mortgage banking revenues to be elevated. Over the longer term, mortgage
banking revenues may not be sustained at current levels as interest rates will inevitably rise.
In recent years, we have been selling SBA loans at gains as the secondary market is currently acquisitive and the loans can be
sold for attractive prices. While sales of loans can vary significantly, we currently anticipate sales of SBA loans to continue for
the foreseeable future.
(c)
(d) Gains on sales of securities, net vary depending on the nature and volume of transactions.
(e)
In 2012, we recognized $7.5 million of revenue associated with settlement of our claims against insurers related to a fraud that
was perpetrated upon us during 2010.
In 2011, we received a distribution of $300 thousand from an investment in a SBIC fund.
(f)
BNCCORP, INC. Annual Report 2012
13
10
Non-interest Expense
The following table presents the major categories of our non-interest expense (dollars are in thousands):
Financial Condition
Assets
Salaries and employee benefits
Professional services
Data processing fees
Marketing and promotion
Occupancy
Regulatory costs
Depreciation and amortization
Office supplies and postage
Other real estate costs
Other
Total non-interest expense
Efficiency ratio
For the Years Ended December 31,
2012
2011
Increase (Decrease)
2012– 2011
$
%
$
17,040
7,165
2,859
2,089
1,935
1,213
1,120
684
2,038
3,822
$ 39,965
65.08%
$ 14,972
4,307
2,673
1,559
2,028
1,742
1,172
590
2,295
2,521
$ 33,859
85.26%
$
$
2,068
2,858
186
530
(93)
(529)
(52)
94
(257)
1,301
6,106
(20.18)%
14 % (a)
66 % (b)
7 %
34 % (c)
(5) %
(30) % (d)
(4) %
16 %
(11) % (e)
52 % (f)
18 %
(a) Compensation costs have increased due to higher volume in mortgage banking, additional mortgage banking and banking
professionals and incentives accrued for producers. Wages in the North Dakota market are impacted by competitive pressures.
(b) Professional services have been elevated due to the costs incurred to investigate and litigate the fraud loss discussed in Note 4 of
our Consolidated Financial Statements. In 2012, professional fees include $2.5 million of contingent fees paid when insurance
litigation was settled. Higher volumes in mortgage banking operations also impacted professional fees.
In 2012, marketing and promotion costs increased in our mortgage banking operations.
(c)
(d) Regulatory costs related to FDIC insurance decreased due to lower deposit balances after the divestiture discussed in Note 3 of
our Consolidated Financial Statements.
(e) 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.
(f) Other expenses increased due to increases in the cost of carrying insurance and a non-recurring write off previously deferred
costs associated with a capital offering.
Income Tax Expense (Benefit)
The Company has recognized a tax benefit of $5.280 million in 2012, resulting primarily from the reversal of
virtually all of our valuation allowance on deferred tax assets. The valuation allowance was reversed because we
had achieved several consecutive profitable periods and the likelihood that future pre-tax earnings will utilize the
remaining deferred tax assets. The tax benefit recorded by reversing the valuation allowance was reduced by
estimated income tax expense related to 2012 earnings. Tax expense was $22 thousand in 2011.
The following table presents our assets by category (dollars are in thousands):
As of December 31,
2012
2011
Increase (Decrease)
2012 – 2011
$
%
Cash and cash equivalents
$
40,790
$
19,296
$ 21,494
111 % (a)
Investment securities available for sale
300,549
242,630
57,919
24 % (b)
Federal Reserve Bank and Federal Home
Loan Bank of Des Moines stock
Loans held for sale-mortgage banking
Loans and leases held for investment, net
Other real estate, net
Premises and equipment, net
Interest receivable
Other assets
Total assets
2,601
95,095
279,378
5,131
15,932
2,590
28,710
2,750
68,622
282,581
10,145
16,035
2,411
20,688
(149)
(5) % (c)
26,473
39 % (d)
(3,203)
(1) % (e)
(5,014)
(49) % (f)
(103)
(1) %
179
7 %
8,022
39 % (g)
$
770,776
$
665,158
$ 105,618
16 %
(a) Cash balances can vary significantly on a daily basis, but we tend to favor higher liquidity.
Investments have increased as we have been emphasizing liquidity in recent years.
Investments in these stocks are mandated by third parties.
(b)
(c)
(d) Mortgage banking loans held for sale have increased due to higher volume of originations in these operations.
(e)
In recent years, loans held for investment have decreased as we have attempted to manage credit risk by reducing exposure. In
later 2012, we began to re-emphasize commercial lending, particularly in North Dakota.
(f) Other real estate decreased as reducing problem assets has been an area of focus in recent years. See Note 10 of our Consolidated
(g) Other assets have increased due to the balances of derivatives related to our mortgage banking operations. See Note 18 of our
Financial Statements.
Consolidated Financial Statements.
14
BNCCORP, INC. Annual Report 2012
11
12
Non-interest Expense
The following table presents the major categories of our non-interest expense (dollars are in thousands):
Financial Condition
Assets
Increase (Decrease)
The following table presents our assets by category (dollars are in thousands):
For the Years Ended December 31,
2012– 2011
2012
2011
$
%
Salaries and employee benefits
$
17,040
$ 14,972
$
2,068
14 % (a)
Professional services
Data processing fees
Marketing and promotion
Occupancy
Regulatory costs
Depreciation and amortization
Office supplies and postage
Other real estate costs
Other
7,165
2,859
2,089
1,935
1,213
1,120
684
2,038
3,822
4,307
2,673
1,559
2,028
1,742
1,172
590
2,295
2,521
2,858
66 % (b)
186
7 %
530
34 % (c)
(93)
(5) %
(529)
(30) % (d)
(52)
(4) %
94
16 %
(257)
(11) % (e)
1,301
52 % (f)
Total non-interest expense
$ 39,965
$ 33,859
$
6,106
18 %
Efficiency ratio
65.08%
85.26%
(20.18)%
(a) Compensation costs have increased due to higher volume in mortgage banking, additional mortgage banking and banking
professionals and incentives accrued for producers. Wages in the North Dakota market are impacted by competitive pressures.
(b) Professional services have been elevated due to the costs incurred to investigate and litigate the fraud loss discussed in Note 4 of
our Consolidated Financial Statements. In 2012, professional fees include $2.5 million of contingent fees paid when insurance
litigation was settled. Higher volumes in mortgage banking operations also impacted professional fees.
(c)
In 2012, marketing and promotion costs increased in our mortgage banking operations.
(d) Regulatory costs related to FDIC insurance decreased due to lower deposit balances after the divestiture discussed in Note 3 of
(e) Other real estate costs will vary depending on the level of foreclosed assets and valuation allowances recorded to reduce the
(f) Other expenses increased due to increases in the cost of carrying insurance and a non-recurring write off previously deferred
our Consolidated Financial Statements.
carrying value of foreclosed properties.
costs associated with a capital offering.
Income Tax Expense (Benefit)
The Company has recognized a tax benefit of $5.280 million in 2012, resulting primarily from the reversal of
virtually all of our valuation allowance on deferred tax assets. The valuation allowance was reversed because we
had achieved several consecutive profitable periods and the likelihood that future pre-tax earnings will utilize the
remaining deferred tax assets. The tax benefit recorded by reversing the valuation allowance was reduced by
estimated income tax expense related to 2012 earnings. Tax expense was $22 thousand in 2011.
As of December 31,
2012
2011
Increase (Decrease)
2012 – 2011
$
%
Cash and cash equivalents
$
40,790
$
19,296
$ 21,494
111 % (a)
Investment securities available for sale
300,549
242,630
57,919
24 % (b)
Federal Reserve Bank and Federal Home
Loan Bank of Des Moines stock
Loans held for sale-mortgage banking
Loans and leases held for investment, net
Other real estate, net
Premises and equipment, net
Interest receivable
Other assets
Total assets
2,601
95,095
279,378
5,131
15,932
2,590
28,710
2,750
68,622
282,581
10,145
16,035
2,411
20,688
(149)
(5) % (c)
26,473
39 % (d)
(3,203)
(1) % (e)
(5,014)
(49) % (f)
(103)
(1) %
179
7 %
8,022
39 % (g)
$
770,776
$
665,158
$ 105,618
16 %
(a) Cash balances can vary significantly on a daily basis, but we tend to favor higher liquidity.
Investments have increased as we have been emphasizing liquidity in recent years.
(b)
(c)
Investments in these stocks are mandated by third parties.
(d) Mortgage banking loans held for sale have increased due to higher volume of originations in these operations.
(e)
In recent years, loans held for investment have decreased as we have attempted to manage credit risk by reducing exposure. In
later 2012, we began to re-emphasize commercial lending, particularly in North Dakota.
(f) Other real estate decreased as reducing problem assets has been an area of focus in recent years. See Note 10 of our Consolidated
Financial Statements.
(g) Other assets have increased due to the balances of derivatives related to our mortgage banking operations. See Note 18 of our
Consolidated Financial Statements.
11
12
BNCCORP, INC. Annual Report 2012
15
Investment Securities Available for Sale
The following table presents the composition of the available-for-sale investment portfolio (in thousands):
December 31,
2012
2011
Amortized
cost
Estimated
fair market
value
Amortized
cost
Estimated
fair market
value
$
60,673
$
63,587
$
57,912
$
59,300
20,727
20,608
6,004
6,171
13,498
13,554
-
-
122,404
123,015
127,551
127,547
36,167
36,411
4,656
35,944
4,803
38,571
13,169
11,179
22,670
13,321
11,487
24,804
U.S. government agency
mortgage-backed securities
guaranteed by GNMA
U.S. government agency
mortgage-backed securities
issued by FNMA
U.S. government agency small
business administration pools
guaranteed by SBA
Collateralized mortgage
obligations guaranteed by
GNMA/VA
Collateralized mortgage
obligations issued by FNMA
or FHLMC
Other collateralized mortgage
obligations
State and municipal bonds
Total investments
$
294,069
$
300,549
$
238,485
$
242,630
There were no securities that management concluded were other-than-temporarily impaired during 2012 or 2011.
See Note 6 of our Consolidated Financial Statements.
(1) Yields include adjustments for tax-exempt income.
(2) Based on amortized cost rather than fair value.
The following table presents contractual maturities for securities available for sale and yields thereon at December
31, 2012 (dollars are in thousands):
Within 1 year
within 5 years
within 10 years
After 10 years
Total
Amount Yield (1) Amount Yield (1) Amount Yield (1)
Amount
Yield (1)
Amount Yield (1)
After 1 but
After 5 but
U.S. government agency
mortgage-backed securities
guaranteed by GNMA(2) (3)
U.S. government agency
mortgage-backed securities
issued by FNMA(2) (3)
U.S. government agency small
business administration pools
guaranteed by SBA(2) (3)
Collateralized mortgage
obligations guaranteed by
GNMA/VA(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
Unrealized gain on securities
available for sale
Total investment in securities
available for sale
$ -
0.00%
$
141
6.56% $
30
8.53% $
60,502
2.38% $
60,673
2.39%
-
0.00%
0.00%
0.00%
20,727
2.10%
20,727
2.10%
-
0.00%
0.00%
0.00%
13,498
2.34%
13,498
2.34%
-
0.00%
0.00% 10,525
1.46%
111,879
1.90%
122,404
1.86%
-
-
-
0.00%
0.00%
554
6.15%
35,614
1.17%
36,168
1.25%
-
0.00%
0.00%
-
0.00%
4,656
5.70%
4,656
5.70%
-
0.00%
-
0.00% 2,108
8.05%
33,835
4.57%
35,943
4.77%
-
-
-
-
-
securities
$ -
0.00% $
141
0.00% $ 13,217
$
280,711
$ 294,069
2.35%
6,480
$ 300,549
2.30%
(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.
As of December 31, 2012, we had $300.5 million of available-for-sale securities in the investment portfolio
compared to $242.6 million at December 31, 2011.
In 2012, investment securities increased as we have deployed funds from new deposits and emphasized liquidity.
Net unrealized gains increased as of December 31, 2012 as compared to December 31, 2011 due to the decline in
market interest rates and shorter remaining lives of investments.
In 2011, investment securities increased as cash balances built up in prior periods was invested in order to
increase income from earning assets. Net unrealized gains increased as of December 31, 2011 as compared to
December 31, 2010 due to the general decline in market interest rates. During 2011, we realized $2.830 million
of net gains on sales of securities. While these gains can vary from period to period, we capitalized on conditions
that had been increasing the value of mortgage based investment portfolios.
At December 31, 2012, we held no securities, other than U.S. Government Agency mortgage-backed securities
and collateralized mortgage obligations, that exceeded 10% of stockholders’ equity. A portion of our investment
securities portfolio was pledged as collateral.
See Note 6 of our Consolidated Financial Statements for more information about investment securities.
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, 2012
and 2011, and $795 thousand and $1.0 million of FHLB of Des Moines stock as of December 31, 2012 and 2011,
respectively.
16
BNCCORP, INC. Annual Report 2012
13
14
Investment Securities Available for Sale
The following table presents the composition of the available-for-sale investment portfolio (in thousands):
December 31,
2012
Estimated
Amortized
fair market
Amortized
cost
value
cost
2011
Estimated
fair market
value
$
60,673
$
63,587
$
57,912
$
59,300
20,727
20,608
6,004
6,171
13,498
13,554
-
-
122,404
123,015
127,551
127,547
36,167
36,411
4,656
35,944
4,803
38,571
13,169
11,179
22,670
13,321
11,487
24,804
U.S. government agency
mortgage-backed securities
guaranteed by GNMA
U.S. government agency
mortgage-backed securities
issued by FNMA
U.S. government agency small
business administration pools
guaranteed by SBA
Collateralized mortgage
obligations guaranteed by
GNMA/VA
Collateralized mortgage
obligations issued by FNMA
Other collateralized mortgage
or FHLMC
obligations
State and municipal bonds
Total investments
$
294,069
$
300,549
$
238,485
$
242,630
There were no securities that management concluded were other-than-temporarily impaired during 2012 or 2011.
See Note 6 of our Consolidated Financial Statements.
The following table presents contractual maturities for securities available for sale and yields thereon at December
31, 2012 (dollars are in thousands):
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)
U.S. government agency small
business administration pools
guaranteed by SBA(2) (3)
Collateralized mortgage
obligations guaranteed by
GNMA/VA(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%
$
141
6.56% $
30
8.53% $
60,502
2.38% $
60,673
2.39%
-
0.00%
-
0.00%
-
0.00%
-
0.00%
-
0.00%
-
-
-
-
-
0.00%
0.00%
-
-
0.00%
20,727
2.10%
20,727
2.10%
0.00%
13,498
2.34%
13,498
2.34%
0.00% 10,525
1.46%
111,879
1.90%
122,404
1.86%
0.00%
554
6.15%
35,614
1.17%
36,168
1.25%
0.00%
-
0.00%
4,656
5.70%
4,656
5.70%
-
0.00%
-
0.00% 2,108
8.05%
33,835
4.57%
35,943
4.77%
securities
$ -
0.00% $
141
0.00% $ 13,217
$
280,711
$ 294,069
2.35%
Unrealized gain on securities
available for sale
Total investment in securities
available for sale
6,480
$ 300,549
2.30%
(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.
As of December 31, 2012, we had $300.5 million of available-for-sale securities in the investment portfolio
compared to $242.6 million at December 31, 2011.
In 2012, investment securities increased as we have deployed funds from new deposits and emphasized liquidity.
Net unrealized gains increased as of December 31, 2012 as compared to December 31, 2011 due to the decline in
market interest rates and shorter remaining lives of investments.
In 2011, investment securities increased as cash balances built up in prior periods was invested in order to
increase income from earning assets. Net unrealized gains increased as of December 31, 2011 as compared to
December 31, 2010 due to the general decline in market interest rates. During 2011, we realized $2.830 million
of net gains on sales of securities. While these gains can vary from period to period, we capitalized on conditions
that had been increasing the value of mortgage based investment portfolios.
At December 31, 2012, we held no securities, other than U.S. Government Agency mortgage-backed securities
and collateralized mortgage obligations, that exceeded 10% of stockholders’ equity. A portion of our investment
securities portfolio was pledged as collateral.
See Note 6 of our Consolidated Financial Statements for more information about investment securities.
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, 2012
and 2011, and $795 thousand and $1.0 million of FHLB of Des Moines stock as of December 31, 2012 and 2011,
respectively.
13
14
BNCCORP, INC. Annual Report 2012
17
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 December
2012
2011
2010
2009
2008
$
218,068
220,177
259,939
330,204
315,469
Concentrations of Credit
The following table summarizes the location of our borrowers as of December 31 (dollars are in thousands):
North Dakota
Minnesota
Arizona
Other
Total gross loans
2012
2011
$
176,653
61 %
$
157,622
54 %
38,188
29,238
45,386
13
10
16
61,089
28,382
46,248
21
9
16
held for investment $
289,465
100 %
$
293,341
100 %
Loans
The following table presents our loan portfolio (dollars are in thousands):
2012
2011
2010
2009
2008
Amount
%
Amount
%
Amount
%
Amount
%
Amount
%
Loans held for sale-
mortgage banking $ 95,095 100.0 $
68,622
100.0
$
29,116
29.2
$ 24,130 100.0 $
13,403
100.0
-
-
-
-
70,501
70.8
-
-
-
-
31 (in thousands):
95,095 100.0
68,622
100.0
99,617
100.0
24,130 100.0
13,403
100.0
Other loans held for
sale
Loans held for
sale, net
Commercial and
industrial
Commercial real
estate
SBA
Consumer
Land and land
development
116,891 40.4
109,746
37.4
120,620
87,258
30.1
15,823 5.5
115,704
39.4
152,287
9,958
3.4
26,614
9.2
23,038
7.9
34.4
43.4
3.2
225,470
43.6
243,823
44.9
152,194
29.4
142,586
26.3
9,260
1.8
10,555
1.9
7.4
34,439
6.7
39,089
7.2
10.8
0.9
73,530
14.2
22,797
4.4
70,783
36,724
13.1
6.7
11,064
25,841
37,761
3,225
Construction
11,814
4.1
31,065
10.7
29,350
5,545
10.0
1.9
Unearned income
and net
unamortized
deferred (fees)
and costs
Loans, net of
unearned
income and
unamortized
fees and costs
289,465 100.0
293,341
100.0
350,798
100.1
517,690 100.1
543,560
100.1
4
-
(130)
-
(297)
(0.1)
(582)
(0.1)
(807)
(0.1)
$
289,469
100.0 $
293,211
100.0
$ 350,501
100.0
$ 517,108
100.0 $ 542,753
100.0
The following table presents the change in our loan portfolio (dollars are in thousands):
Increase (Decrease)
December 31,
2012 – 2011
2012
2011
$
%
Loans held for sale-mortgage banking
$
95,095
$
68,622
$
26,473
38.6 %
(a)
Commercial and industrial
Commercial real estate
SBA
Consumer
Land and land development
Construction
116,891
87,258
15,823
26,614
31,065
11,814
109,746
115,704
9,958
23,038
29,350
5,545
7,145
6.5 %
(b)
(28,446)
(24.6) %
(b)
5,865
58.9 %
3,576
15.5 %
(b)
1,715
6,269
5.8 %
(b)
113.1 %
289,465
293,341
(3,876)
(1.3) %
Unearned income and net unamortized
deferred fees and costs
Loans, net of unearned income and
unamortized fees and costs
4
(130)
134
(103.1) %
$
289,469
$
293,211
$
(3,742)
(1.3) %
(a) Mortgage banking loans held for sale increased in 2012 as originations of mortgage banking loans have increased.
(b) Loan balances have generally decreased due to repayments, charge-offs and our efforts to reduce credit exposures. As 2012
progressed we increased commercial lending, particularly in North Dakota.
18
BNCCORP, INC. Annual Report 2012
15
16
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 December
31 (in thousands):
2012
2011
2010
2009
2008
$
218,068
220,177
259,939
330,204
315,469
Concentrations of Credit
The following table summarizes the location of our borrowers as of December 31 (dollars are in thousands):
North Dakota
Minnesota
Arizona
Other
Total gross loans
2012
2011
$
176,653
61 %
$
157,622
54 %
38,188
29,238
45,386
13
10
16
61,089
28,382
46,248
21
9
16
held for investment $
289,465
100 %
$
293,341
100 %
Loans
The following table presents our loan portfolio (dollars are in thousands):
2012
2011
2010
2009
2008
Amount
%
Amount
%
Amount
%
Amount
%
Amount
%
mortgage banking $ 95,095 100.0 $
68,622
100.0
$
29,116
29.2
$ 24,130 100.0 $
13,403
100.0
-
-
-
-
70,501
70.8
-
-
-
-
sale, net
95,095 100.0
68,622
100.0
99,617
100.0
24,130 100.0
13,403
100.0
116,891 40.4
109,746
37.4
120,620
225,470
43.6
243,823
44.9
87,258
30.1
15,823 5.5
115,704
39.4
152,287
152,194
29.4
142,586
26.3
9,958
3.4
9,260
1.8
10,555
1.9
26,614
9.2
23,038
7.9
7.4
34,439
6.7
39,089
7.2
34.4
43.4
3.2
10.8
0.9
11,064
25,841
37,761
3,225
Construction
11,814
4.1
31,065
10.7
29,350
5,545
10.0
1.9
73,530
14.2
22,797
4.4
70,783
36,724
13.1
6.7
289,465 100.0
293,341
100.0
350,798
100.1
517,690 100.1
543,560
100.1
4
-
(130)
-
(297)
(0.1)
(582)
(0.1)
(807)
(0.1)
Loans held for sale-
Other loans held for
sale
Loans held for
Commercial and
industrial
Commercial real
estate
SBA
Consumer
Land and land
development
Unearned income
and net
unamortized
deferred (fees)
and costs
Loans, net of
unearned
income and
unamortized
fees and costs
$
289,469
100.0 $
293,211
100.0
$ 350,501
100.0
$ 517,108
100.0 $ 542,753
100.0
The following table presents the change in our loan portfolio (dollars are in thousands):
Loans held for sale-mortgage banking
$
95,095
$
68,622
$
26,473
38.6 %
(a)
Commercial and industrial
Commercial real estate
SBA
Consumer
Land and land development
Construction
Increase (Decrease)
December 31,
2012 – 2011
2012
2011
$
%
116,891
87,258
15,823
26,614
31,065
11,814
109,746
115,704
9,958
23,038
29,350
5,545
7,145
6.5 %
(b)
(28,446)
(24.6) %
(b)
5,865
58.9 %
3,576
15.5 %
(b)
1,715
6,269
5.8 %
(b)
113.1 %
289,465
293,341
(3,876)
(1.3) %
Unearned income and net unamortized
deferred fees and costs
Loans, net of unearned income and
unamortized fees and costs
4
(130)
134
(103.1) %
$
289,469
$
293,211
$
(3,742)
(1.3) %
(a) Mortgage banking loans held for sale increased in 2012 as originations of mortgage banking loans have increased.
(b) Loan balances have generally decreased due to repayments, charge-offs and our efforts to reduce credit exposures. As 2012
progressed we increased commercial lending, particularly in North Dakota.
15
16
BNCCORP, INC. Annual Report 2012
19
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 (dollars are in thousands):
The following table presents loans by type within our three primary states as of December 31 (in thousands):
North Dakota
Arizona
California
Minnesota
Colorado
Wisconsin
Other
Total gross loans held
for investment
2012
2011
$
168,198
58 %
$ 147,275
50 %
40,215
22,088
17,561
7,686
6,489
27,228
14
8
6
3
2
9
32,902
11
23,092
8
20,718
7
7,736
6,765
54,853
3
2
19
$
289,465
100 %
$ 293,341
100 %
Owner-occupied commercial real estate
24,107
25,526
North Dakota
Commercial and industrial
Construction
Agricultural
Land and land development
Commercial real estate
Small business administration
Consumer
Subtotal
Arizona
Construction
Agricultural
Commercial and industrial
Land and land development
Commercial real estate
Small business administration
Consumer
Subtotal
Minnesota
Construction
Agricultural
Commercial and industrial
Land and land development
Commercial real estate
Small business administration
Consumer
Subtotal
Owner-occupied commercial real estate
667
550
Owner-occupied commercial real estate
-
-
2012
Total Loans
and Leases
Held for
Investment
2011
Total Loans
and Leases
Held for
Investment
$ 65,793
$ 65,986
10,824
2,533
15,047
13,043
12,240
10,579
12,644
12,100
2,428
2,333
25,115
15,175
$ 168,198
$ 147,275
$ 1,421
$ 2,552
-
-
-
-
5,663
5,832
16,699
14,070
12,881
7,085
2,884
2,813
$ 40,215
$ 32,902
$ 1,154
$ 1,316
-
2,090
24
28
1,145
1,649
14,767
14,665
62
77
409
893
$ 17,561
$ 20,718
20
BNCCORP, INC. Annual Report 2012
17
18
Our borrowers use loan proceeds for projects in various geographic areas. The following table summarizes the
The following table presents loans by type within our three primary states as of December 31 (in thousands):
locations where our borrowers are using loan proceeds as of December 31 (dollars are in thousands):
North Dakota
$
168,198
58 %
$ 147,275
50 %
2012
2011
Arizona
California
Minnesota
Colorado
Wisconsin
Other
40,215
22,088
17,561
7,686
6,489
27,228
14
8
6
3
2
9
32,902
11
23,092
8
20,718
7
7,736
6,765
54,853
3
2
19
Total gross loans held
for investment
$
289,465
100 %
$ 293,341
100 %
North Dakota
Commercial and industrial
Construction
Agricultural
Land and land development
2012
Total Loans
and Leases
Held for
Investment
2011
Total Loans
and Leases
Held for
Investment
$ 65,793
$ 65,986
10,824
2,533
15,047
13,043
12,240
10,579
Owner-occupied commercial real estate
24,107
25,526
Commercial real estate
Small business administration
Consumer
Subtotal
Arizona
Commercial and industrial
Construction
Agricultural
Land and land development
12,644
12,100
2,428
2,333
25,115
15,175
$ 168,198
$ 147,275
$ 1,421
$ 2,552
-
-
-
-
5,663
5,832
Owner-occupied commercial real estate
667
550
Commercial real estate
Small business administration
Consumer
Subtotal
Minnesota
Commercial and industrial
Construction
Agricultural
Land and land development
16,699
14,070
12,881
7,085
2,884
2,813
$ 40,215
$ 32,902
$ 1,154
$ 1,316
-
2,090
24
28
1,145
1,649
Owner-occupied commercial real estate
-
-
Commercial real estate
Small business administration
Consumer
Subtotal
14,767
14,665
62
77
409
893
$ 17,561
$ 20,718
17
18
BNCCORP, INC. Annual Report 2012
21
Loan Maturities(1)
The following table sets forth the remaining maturities of loans in our portfolio as of December 31, 2012 (in
thousands):
Commercial and industrial
Commercial real estate
SBA
Consumer
Land and land development
Construction
Over 1 year
through 5 years
One year
or less
$ 42,930
Fixed
rate
$ 41,673
Floating
rate
$ 11,335
Over 5 years
Fixed
rate
Floating
rate
$ 16,315 $ 4,638
40,714
912
2,720
6,447
1,549
16,320
151
14,779
4,280
-
17,898
1,155
3,727
15,546
79
9,017
1,966
5,175
1,091
6,932
3,309
11,639
213
3,701
3,254
Total Loans
and Leases
Held for
Investment
$ 116,891
87,258
15,823
26,614
31,065
11,814
Total principal amount of loans
$ 95,272
$ 77,203
$ 49,740
$ 40,496 $
26,754
$ 289,465
(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
In recent periods, challenging macroeconomic forces have impaired the ability of borrowers to repay debt which
resulted in higher credit losses throughout the financial industry.
We provide for credit losses to maintain our allowance for credit losses at a level adequate to cover estimated
probable losses inherent in the portfolio as of each balance sheet date. The provision for credit losses for the year
ended December 31, 2012 was $100 thousand as compared to $1.625 million in 2011. The provision for credit
losses decreased in 2012 as credit quality stabilized.
Allowance for Credit Losses
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.
The following table summarizes activity in the allowance for credit losses and certain ratios (dollars are in
thousands):
Analysis of Allowance for Credit Losses
Balance of allowance for credit losses, beginning
of period
Charge-offs:
Commercial and industrial
Commercial real estate
SBA
Consumer
Land and land development
Construction
Total charge-offs
Recoveries:
Commercial and industrial
Commercial real estate
SBA
Consumer
Land and land development
Construction
Total recoveries
Net charge-offs
2012
2011
2010
2009
2008
For the Years ended December 31,
$
10,630
$
14,765
$
18,047
$
8,751
$
6,599
(70)
(767)
(10)
(58)
-
-
(905)
11
38
12
18
187
-
266
(639)
(83)
(4,549)
(105)
(1,049)
(731)
-
(6,517)
49
506
21
34
67
-
677
(5,840)
(3,112)
(283)
(620)
(533)
(3,238)
-
(7,786)
14
-
5
319
127
-
465
(7,321)
5,750
16,476
-
-
(6,408)
(1,993)
(394)
(9,081)
-
(17,876)
12
-
11
149
-
172
(17,704)
27,000
18,047
-
-
(739)
(219)
(459)
(4,529)
-
(5,946)
84
-
68
196
-
348
(5,598)
7,750
8,751
Provision for credit losses charged to operations
100
1,625
10,091
10,550
Transferred (to) from other loans held for sale
-
80
(1,711)
-
-
period
$
10,091
$
10,630
$
14,765
$
18,047
$
8,751
(0.182)%
(1.611)%
(1.387)%
(2.948)%
(0.507)%
(0.225)%
(1.780)%
(1.530)%
(3.235)%
(0.534)%
investment
$
284,507
$
328,091
$
478,492
$
547,336
$
525,311
Balance of allowance for credit losses, end of
Ratio of net charge-offs to average total loans
Ratio of net charge-offs to average loans and
leases held for investment
Average gross loans and leases held for
Ratio of allowance for credit losses to loans and
leases held for investment
Ratio of allowance for credit losses to total
nonperforming loans
Allowance for credit losses to total loans
Ratio of nonperforming loans to total assets
3.49%
96%
2.62%
1.36%
3.63%
172%
2.94%
0.93%
4.21%
83%
3.84%
2.39%
3.49%
50%
3.11%
4.13%
1.61%
38%
1.50%
2.66%
For several years, the allowance for credit losses has been elevated in recent periods because of an increase in
nonperforming assets and deteriorating economic conditions.
In 2012, the level of nonperforming loans stabilized. At December 31, 2012, nonperforming loans included one
loan with a balance of approximately $5.8 million that is involved with bankruptcy proceedings. We are well
collateralized and remain optimistic the courts will ultimately award full recovery.
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 as of
December 31 (dollars are in thousands).
22
BNCCORP, INC. Annual Report 2012
19
20
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
Commercial and industrial
$ 42,930
$ 41,673
$ 11,335
$ 16,315 $ 4,638
$ 116,891
Commercial real estate
SBA
Consumer
Land and land development
Construction
40,714
912
2,720
6,447
1,549
16,320
151
14,779
4,280
-
17,898
1,155
3,727
15,546
79
9,017
1,966
5,175
1,091
3,309
11,639
213
3,701
6,932
3,254
87,258
15,823
26,614
31,065
11,814
Total principal amount of loans
$ 95,272
$ 77,203
$ 49,740
$ 40,496 $
26,754
$ 289,465
(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
In recent periods, challenging macroeconomic forces have impaired the ability of borrowers to repay debt which
resulted in higher credit losses throughout the financial industry.
We provide for credit losses to maintain our allowance for credit losses at a level adequate to cover estimated
probable losses inherent in the portfolio as of each balance sheet date. The provision for credit losses for the year
ended December 31, 2012 was $100 thousand as compared to $1.625 million in 2011. The provision for credit
losses decreased in 2012 as credit quality stabilized.
Allowance for Credit Losses
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.
The following table sets forth the remaining maturities of loans in our portfolio as of December 31, 2012 (in
The following table summarizes activity in the allowance for credit losses and certain ratios (dollars are in
thousands):
Loan Maturities(1)
thousands):
Analysis of Allowance for Credit Losses
2012
2011
2010
2009
2008
For the Years ended December 31,
$
10,630
$
14,765
$
18,047
$
8,751
$
6,599
Balance of allowance for credit losses, beginning
of period
Charge-offs:
Commercial and industrial
Commercial real estate
SBA
Consumer
Land and land development
Construction
Total charge-offs
Recoveries:
Commercial and industrial
Commercial real estate
SBA
Consumer
Land and land development
Construction
Total recoveries
Net charge-offs
(70)
(767)
(10)
(58)
-
-
(905)
11
38
12
18
187
-
266
(639)
(83)
(4,549)
(105)
(1,049)
(731)
-
(6,517)
49
506
21
34
67
-
677
(5,840)
Provision for credit losses charged to operations
100
1,625
Transferred (to) from other loans held for sale
Balance of allowance for credit losses, end of
10,091
-
10,550
(3,112)
(283)
(620)
(533)
(3,238)
-
(7,786)
14
-
5
319
127
-
465
(7,321)
5,750
16,476
(6,408)
(1,993)
-
(394)
(9,081)
-
(17,876)
12
-
-
11
149
-
172
(17,704)
27,000
18,047
(739)
(219)
-
(459)
(4,529)
-
(5,946)
84
-
-
68
196
-
348
(5,598)
7,750
8,751
80
(1,711)
-
-
period
$
10,091
$
10,630
$
14,765
$
18,047
$
8,751
Ratio of net charge-offs to average total loans
Ratio of net charge-offs to average loans and
leases held for investment
Average gross loans and leases held for
(0.182)%
(1.611)%
(1.387)%
(2.948)%
(0.507)%
(0.225)%
(1.780)%
(1.530)%
(3.235)%
(0.534)%
investment
$
284,507
$
328,091
$
478,492
$
547,336
$
525,311
Ratio of allowance for credit losses to loans and
leases held for investment
Ratio of allowance for credit losses to total
nonperforming loans
Allowance for credit losses to total loans
Ratio of nonperforming loans to total assets
3.49%
96%
2.62%
1.36%
3.63%
172%
2.94%
0.93%
4.21%
83%
3.84%
2.39%
3.49%
50%
3.11%
4.13%
1.61%
38%
1.50%
2.66%
For several years, the allowance for credit losses has been elevated in recent periods because of an increase in
nonperforming assets and deteriorating economic conditions.
In 2012, the level of nonperforming loans stabilized. At December 31, 2012, nonperforming loans included one
loan with a balance of approximately $5.8 million that is involved with bankruptcy proceedings. We are well
collateralized and remain optimistic the courts will ultimately award full recovery.
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 as of
December 31 (dollars are in thousands).
19
20
BNCCORP, INC. Annual Report 2012
23
Allocation of the Allowance for Loan Losses
2012
2011
2010
2009
2008
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
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
Commercial and
industrial
Commercial real
estate
SBA
Consumer
Land and land
development
Construction
$ 2,546
40% $
1,639
37% $
1,362
34% $
7,440
44% $
2,095
4,790
616
382
1,609
148
30%
5,518
40%
9,818
44%
4,494
29%
1,281
6%
9%
436
448
11%
4%
2,532
57
3%
407
3%
260
2%
264
8%
1,182
7%
1,162
7%
844
10%
1,939
11%
3,849
14%
3,564
2%
57
1%
842
4%
703
45%
26%
2%
7%
13%
7%
Total
$
10,091
100% $
10,630
100% $
14,765
100% $
18,047
100% $
8,751
100%
The amount of the allowance for losses can vary depending on macroeconomic conditions and risk in the
portfolio. The allocation of the allowance for losses can vary depending on relative volume of asset groups in the
portfolio and risks therein.
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, 2012 and December 31, 2011. 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.
The following table sets forth nonperforming assets, the allowance for credit losses and certain related ratios
Nonperforming Loans and Assets
(dollars are in thousands):
2012
2011
2010
2009
2008
As of December 31,
Loans 90 days or more delinquent and still
Nonperforming loans:
accruing interest
Non-accrual loans
Total nonperforming loans
Other real estate, net
$
12
$
-
$
-
$
1
$ 6
10,500
10,512
5,131
6,169
6,169
10,145
17,862
17,862
12,706
35,889
35,890
7,253
Total nonperforming assets
$ 15,643
$ 16,314
$ 30,568
$ 43,143
Allowance for credit losses
$ 10,091
$
10,630
$
14,765
$ 18,047
Ratio of total nonperforming loans to total loans
2.73%
1.70%
3.93%
6.19%
$
$
Ratio of total nonperforming loans to loans and
leases held for investment
Ratio of total nonperforming assets to total assets
Ratio of nonperforming loans to total assets
Ratio of allowance for credit losses to total
nonperforming loans
Nonperforming Loans
3.63%
2.03%
1.36%
2.10%
2.45%
0.93%
5.10%
4.09%
2.39%
6.94%
4.97%
4.13%
96%
172%
83%
50%
38%
The following table sets forth information concerning our nonperforming loans as of December 31 (in thousands):
22,909
22,915
10,189
33,104
8,751
3.92%
4.22%
3.84%
2.66%
2012
2011
Balance, beginning of period
$
6,169
$
17,862
Additions to nonperforming
Charge-offs
Reclassified back to performing
Principal payments received
Transferred to other real estate
5,880
(354)
(815)
(368)
-
6,312
(3,895)
(3,616)
(4,442)
(6,052)
Balance, end of period
$
10,512
$
6,169
At December 31, 2012, nonperforming loans include one loan relationship with an aggregate balance of $5.8
million which is currently in bankruptcy proceedings. We are well collateralized on this loan and remain
optimistic the courts will ultimately award us full recovery.
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
2012
2011
$
$
919
329
590
$
1,057
149
908
$
Loans 90 days or more delinquent and still accruing interest include loans over 90 days past due which we
believe, based on our specific analysis of the loans, do not present doubt about the collection of interest and
principal in accordance with the loan contract. Loans in this category must be well secured and in the process of
collection.
24
BNCCORP, INC. Annual Report 2012
21
22
Allocation of the Allowance for Loan Losses
2012
2011
2010
2009
2008
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
Loans in
Category as a
Percentage of
Total Gross
Loans and
Leases Held
Total Loans
and Leases
Held for
Investment
for Investment
Allowance
for Investment
Total Loans
and Leases
Held for
Investment
Allowance
Total Loans
and Leases
Held for
Investment
Allowance
$ 2,546
40% $
1,639
37% $
1,362
34% $
7,440
44% $
2,095
30%
5,518
40%
9,818
44%
4,494
29%
1,281
6%
9%
436
448
11%
4%
2,532
57
3%
407
3%
260
2%
264
8%
1,182
7%
1,162
7%
844
10%
1,939
11%
3,849
14%
3,564
2%
57
1%
842
4%
703
45%
26%
2%
7%
13%
7%
Commercial and
industrial
Commercial real
estate
SBA
Consumer
Land and land
development
Construction
4,790
616
382
1,609
148
Total
$
10,091
100% $
10,630
100% $
14,765
100% $
18,047
100% $
8,751
100%
The amount of the allowance for losses can vary depending on macroeconomic conditions and risk in the
portfolio. The allocation of the allowance for losses can vary depending on relative volume of asset groups in the
portfolio and risks therein.
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, 2012 and December 31, 2011. 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.
Nonperforming Loans and Assets
The following table sets forth nonperforming assets, the allowance for credit losses and certain related ratios
(dollars are in thousands):
2012
2011
As of December 31,
2010
2009
2008
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 nonperforming loans to total assets
Ratio of allowance for credit losses to total
nonperforming loans
$
12
10,500
10,512
5,131
$ 15,643
$ 10,091
2.73%
$
-
6,169
6,169
10,145
$ 16,314
10,630
$
1.70%
$
-
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%
$
$
3.63%
2.03%
1.36%
2.10%
2.45%
0.93%
5.10%
4.09%
2.39%
6.94%
4.97%
4.13%
4.22%
3.84%
2.66%
96%
172%
83%
50%
38%
Nonperforming Loans
The following table sets forth information concerning our nonperforming loans as of December 31 (in thousands):
Balance, beginning of period
Additions to nonperforming
Charge-offs
Reclassified back to performing
Principal payments received
Transferred to other real estate
Balance, end of period
2012
6,169
5,880
(354)
(815)
(368)
-
10,512
$
$
2011
17,862
6,312
(3,895)
(3,616)
(4,442)
(6,052)
6,169
$
$
At December 31, 2012, nonperforming loans include one loan relationship with an aggregate balance of $5.8
million which is currently in bankruptcy proceedings. We are well collateralized on this loan and remain
optimistic the courts will ultimately award us full recovery.
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
2012
2011
$
$
919
329
590
$
$
1,057
149
908
Loans 90 days or more delinquent and still accruing interest include loans over 90 days past due which we
believe, based on our specific analysis of the loans, do not present doubt about the collection of interest and
principal in accordance with the loan contract. Loans in this category must be well secured and in the process of
collection.
21
22
BNCCORP, INC. Annual Report 2012
25
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.
Troubled Debt Restructuring (TDR)
The table below summarizes the amounts of restructured loans as of December 31 (in thousands):
Total
Accrual
Non-accrual
$
2012
2011
2010
2009
2008
12,368 $
7,871
12,848 $ 7,270
18,482
1,291
-
34,264
14,337
2,379
$
4,497
5,578
15,782
13,046
2,379
See Note 9 of our Consolidated Financial Statements for information on troubled debt restructuring.
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 9 of our Consolidated Financial Statements for information on impaired loans.
Potential Problem Loans
In recent years, the macroeconomic environment is very challenging and asset values were 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 there are loans risk rated “watch list” which are not impaired aggregating $5.2 million and $5.0
million at December 31, 2012 and 2011, respectively. Also, we estimate there are loans risk rated “substandard”
which are not impaired aggregating $3.1 million and $18.8 million at December 31, 2012 and 2011, 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.
26
BNCCORP, INC. Annual Report 2012
23
24
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 under $100,000
Time deposits $100,000 and over
Short-term borrowings
Guaranteed preferred beneficial
interests in Company's subordinated
debentures
Accrued interest payable
Accrued expenses
Other liabilities
Total liabilities
Stockholders' equity
Total liabilities and
As of December 31,
2012
2011
Increase (Decrease)
2012 – 2011
$
%
$
131,593
$ 116,864
$
14,729
13 % (a)
313,051
128,150
76,810
11,700
22,430
5,045
10,144
3,123
702,046
68,730
269,075
128,255
62,061
8,635
22,427
3,609
6,244
6,121
623,291
41,867
43,976
16 % (a)
(105)
- % (b)
14,749
24 % (b)
3,065
35 % (c)
3
- %
1,436
40 % (d)
3,900
62 % (e)
(2,998)
(49) % (f)
78,755
13 %
26,863
64 % (g)
stockholders’ equity
$
770,776
$
665,158
$
105,618
16 %
(a) Economic conditions in North Dakota, our primary market, have been relatively robust. These types of accounts fluctuate daily
due to the cash management activities of our customers. As a result, we have experienced growth.
(b) These deposits increased due to growth. Economic conditions in North Dakota, our primary market, have been relatively robust.
(c) Short-term borrowings are primarily customer repurchase agreements. These balances can vary significantly depending on
customer preferences.
(d)
In 2010, we suspended payment of interest on our subordinated debt. At December 31, 2012 and 2011, respectively,
approximately $4.8 million and $3.2 million of the balance relates to interest accrued but not paid. We made interest payments in
early 2013 to get current on these obligations. See Note 17 of our Consolidated Financial Statements.
(e)
In 2010, we suspended payment on our dividends to preferred stockholders. At December 31, 2012 and 2011, respectively,
approximately $3.7 million and $2.5 million of the balance relates to dividends accrued but not paid. We made a dividend
payment in mid February 2013 to get current on the preferred stock. See Note 17 of our Consolidated Financial Statements. The
remainder of the increase relates to a higher reserve for potential mortgage banking obligations (See Note 20 of our Consolidated
Financial Statement), accounts payable, and accrued incentives for producers.
(f) Other liabilities decreased $2.1 million due to the decrease in the fair value of mortgage banking derivatives. See Note 19 of our
Consolidated Financial Statements. The 2011 balance also included approximately $900,000 of funds held in suspense until they
could be applied.
(g) The increase in stockholder equity relates primarily to earnings. Managing capital has been a focus of management in recent
periods and this will continue in the future. Management will continue to evaluate the capital condition of the Company.
Mortgage Banking Obligations
Included in accrued expenses, is an estimate of mortgage banking reimbursement obligations which aggregated
$1.5 million and $800,000 at December 31, 2012 and 2011, respectively. Although we sell mortgage banking
loans without recourse, industry standards require standard representations and warranties which require sellers to
reimburse investors for economic losses if loans default or prepay after the sale. To estimate the obligation, we
track historical reimbursements and calculate the ratio of reimbursement to loan production volumes. Using
reimbursement ratios and recent production levels, we estimate the future reimbursement amounts and record the
estimated obligation.
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.
Troubled Debt Restructuring (TDR)
The table below summarizes the amounts of restructured loans as of December 31 (in thousands):
Total
Accrual
Non-accrual
$
12,368 $
7,871
$
4,497
12,848 $ 7,270
5,578
34,264
14,337
2,379
18,482
1,291
-
15,782
13,046
2,379
2012
2011
2010
2009
2008
See Note 9 of our Consolidated Financial Statements for information on troubled debt restructuring.
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.
See Note 9 of our Consolidated Financial Statements for information on impaired loans.
Impaired loans
Potential Problem Loans
In recent years, the macroeconomic environment is very challenging and asset values were 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 there are loans risk rated “watch list” which are not impaired aggregating $5.2 million and $5.0
million at December 31, 2012 and 2011, respectively. Also, we estimate there are loans risk rated “substandard”
which are not impaired aggregating $3.1 million and $18.8 million at December 31, 2012 and 2011, 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.
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 under $100,000
Time deposits $100,000 and over
Short-term borrowings
Guaranteed preferred beneficial
interests in Company's subordinated
debentures
Accrued interest payable
Accrued expenses
Other liabilities
Total liabilities
Stockholders' equity
Total liabilities and
As of December 31,
2012
2011
Increase (Decrease)
2012 – 2011
$
%
$
131,593
$ 116,864
$
14,729
13 % (a)
313,051
128,150
76,810
11,700
22,430
5,045
10,144
3,123
702,046
68,730
269,075
128,255
62,061
8,635
22,427
3,609
6,244
6,121
623,291
41,867
43,976
(105)
14,749
3,065
16 % (a)
- % (b)
24 % (b)
35 % (c)
3
1,436
3,900
(2,998)
78,755
- %
40 % (d)
62 % (e)
(49) % (f)
13 %
26,863
64 % (g)
stockholders’ equity
$
770,776
$
665,158
$
105,618
16 %
(a) Economic conditions in North Dakota, our primary market, have been relatively robust. These types of accounts fluctuate daily
due to the cash management activities of our customers. As a result, we have experienced growth.
(b) These deposits increased due to growth. Economic conditions in North Dakota, our primary market, have been relatively robust.
(c) Short-term borrowings are primarily customer repurchase agreements. These balances can vary significantly depending on
(d)
(e)
customer preferences.
In 2010, we suspended payment of interest on our subordinated debt. At December 31, 2012 and 2011, respectively,
approximately $4.8 million and $3.2 million of the balance relates to interest accrued but not paid. We made interest payments in
early 2013 to get current on these obligations. See Note 17 of our Consolidated Financial Statements.
In 2010, we suspended payment on our dividends to preferred stockholders. At December 31, 2012 and 2011, respectively,
approximately $3.7 million and $2.5 million of the balance relates to dividends accrued but not paid. We made a dividend
payment in mid February 2013 to get current on the preferred stock. See Note 17 of our Consolidated Financial Statements. The
remainder of the increase relates to a higher reserve for potential mortgage banking obligations (See Note 20 of our Consolidated
Financial Statement), accounts payable, and accrued incentives for producers.
(f) Other liabilities decreased $2.1 million due to the decrease in the fair value of mortgage banking derivatives. See Note 19 of our
Consolidated Financial Statements. The 2011 balance also included approximately $900,000 of funds held in suspense until they
could be applied.
(g) The increase in stockholder equity relates primarily to earnings. Managing capital has been a focus of management in recent
periods and this will continue in the future. Management will continue to evaluate the capital condition of the Company.
Mortgage Banking Obligations
Included in accrued expenses, is an estimate of mortgage banking reimbursement obligations which aggregated
$1.5 million and $800,000 at December 31, 2012 and 2011, respectively. Although we sell mortgage banking
loans without recourse, industry standards require standard representations and warranties which require sellers to
reimburse investors for economic losses if loans default or prepay after the sale. To estimate the obligation, we
track historical reimbursements and calculate the ratio of reimbursement to loan production volumes. Using
reimbursement ratios and recent production levels, we estimate the future reimbursement amounts and record the
estimated obligation.
23
24
BNCCORP, INC. Annual Report 2012
27
Deposits
FHLB advances totaled $0 at December 31, 2012 and 2011, respectively.
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):
Notes 14 and 15 of our Consolidated Financial Statements summarize the general terms of our FHLB advances
and other borrowings at December 31, 2012 and 2011.
For the Years Ended December 31,
2012
Percent
of
deposits
Wgtd.
avg.
rate
Average
balance
2011
Percent
of
deposits
Average
balance
2010
Wgtd.
avg.
rate
Average
balance
Percent Wgtd.
avg.
rate
of
deposits
Interest checking and
MMDAs
$
271,089
44.81%
0.24% $ 253,054
42.13%
0.37%
$ 282,880
40.55% 0.61%
Savings deposits
15,549
2.57%
0.10%
12,655
2.11%
0.10%
11,156
1.60% 0.10%
Time deposits (CDs):
CDs under $100,000
127,446
21.06%
1.86%
139,254
23.19%
2.02%
186,978
26.80% 2.90%
CDs $100,000 and over
65,563
10.84%
1.26%
71,432
11.89%
1.41%
99,141
14.21% 1.66%
Total time deposits
Total interest-bearing
deposits
Non-interest-bearing
demand deposits
193,009
31.90%
1.66%
210,686
35.08%
1.81%
286,119
41.01% 2.47%
479,647
79.28%
0.80%
476,395
79.32%
1.00%
580,155
83.16% 1.52%
operating environment. Improving capital ratios has been a focus of management in recent years.
125,367
20.72%
-
124,208
20.68% -
117,459
16.84% -
Total deposits
$
605,014 100.00%
0.64% $ 600,603
100.00%
0.79%
$ 697,614
100.00% 1.26%
In 2010, we were attempting to reduce deposits to improve capital ratios either by selling the deposits or reducing
rates paid. Since the middle of 2011, we have returned to growing deposits and throughout 2012 we have
attempted to capitalize on economic growth in North Dakota.
Time deposits, in denominations of $100,000 and over, totaled $76.8 million at December 31, 2012 as compared
to $62.1 million at December 31, 2011. The following table sets forth the amount and maturities of time deposits
of $100,000 and over as of December 31, 2012 (in thousands):
Maturing in:
3 months or less
Over 3 months through 6 months
Over 6 months through 12 months
Over 12 months
$
$
29,548
8,730
21,609
16,923
76,810
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):
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)
2012
11.17%
2011
7.59%
2010
6.17%
2009
2008
8.58% 9.01%
20.49% 13.71%
9.46% 12.32% 11.15%
22.43% 17.56% 12.89% 14.15% 12.95%
6.21%
10.68%
3.17%
9.41%
2.24%
7.53%
4.23% 6.21%
8.54% 9.34%
Tier 1 risk-based capital (BNC National Bank)
19.80% 16.95% 11.53% 12.25% 11.56%
Total risk-based capital (BNC National Bank)
21.06% 18.22% 12.80% 13.52% 12.81%
See Note 2 of our Consolidated Financial Statements for a discussion of regulatory capital and the current
The Federal Reserve has recently issued a Notice of Proposed Rulemaking (NPR) which would significantly
change regulatory capital calculations for community banks. The NPR would require community banks to
incorporate provisions of the BASEL III framework when calculating regulatory capital. We have not completed
our assessment of the NPR, but it is generally believed the proposed standards would impose higher capital
requirements and impose significantly more complex calculations when deriving regulatory capital ratios. The
NPR is currently subject to a comment period.
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 20 and 21 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 20 of our Consolidated Financial Statements.
2011
2010
$
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
2012
$ 11,700
0.38%
$ 16,949
$ 13,329
0.53%
8,635
0.92%
$
$ 21,165
$ 15,583
$
$
0.85%
16,329
0.48%
16,329
11,163
0.65%
Note 13 of our Consolidated Financial Statements summarizes the general terms of our short-term borrowings
outstanding at December 31, 2012 and 2011.
28
BNCCORP, INC. Annual Report 2012
25
26
2008
3.17%
9.41%
2009
2010
2011
2012
8.58% 9.01%
6.17%
7.59%
11.17%
20.49% 13.71%
9.46% 12.32% 11.15%
22.43% 17.56% 12.89% 14.15% 12.95%
4.23% 6.21%
2.24%
6.21%
8.54% 9.34%
7.53%
10.68%
19.80% 16.95% 11.53% 12.25% 11.56%
21.06% 18.22% 12.80% 13.52% 12.81%
Deposits
FHLB advances totaled $0 at December 31, 2012 and 2011, respectively.
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):
Notes 14 and 15 of our Consolidated Financial Statements summarize the general terms of our FHLB advances
and other borrowings at December 31, 2012 and 2011.
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)
Interest checking and
MMDAs
Time deposits (CDs):
Total time deposits
Total interest-bearing
deposits
Non-interest-bearing
demand deposits
For the Years Ended December 31,
2012
Percent
Wgtd.
Average
balance
of
deposits
avg.
rate
Average
balance
2011
Percent
of
deposits
Wgtd.
avg.
rate
2010
Percent Wgtd.
Average
of
balance
deposits
avg.
rate
$
271,089
44.81%
0.24% $ 253,054
42.13%
0.37%
$ 282,880
40.55% 0.61%
Savings deposits
15,549
2.57%
0.10%
12,655
2.11%
0.10%
11,156
1.60% 0.10%
CDs under $100,000
127,446
21.06%
1.86%
139,254
23.19%
2.02%
186,978
26.80% 2.90%
CDs $100,000 and over
65,563
10.84%
1.26%
71,432
11.89%
1.41%
99,141
14.21% 1.66%
193,009
31.90%
1.66%
210,686
35.08%
1.81%
286,119
41.01% 2.47%
479,647
79.28%
0.80%
476,395
79.32%
1.00%
580,155
83.16% 1.52%
125,367
20.72%
-
124,208
20.68% -
117,459
16.84% -
Total deposits
$
605,014 100.00%
0.64% $ 600,603
100.00%
0.79%
$ 697,614
100.00% 1.26%
In 2010, we were attempting to reduce deposits to improve capital ratios either by selling the deposits or reducing
rates paid. Since the middle of 2011, we have returned to growing deposits and throughout 2012 we have
attempted to capitalize on economic growth in North Dakota.
Time deposits, in denominations of $100,000 and over, totaled $76.8 million at December 31, 2012 as compared
to $62.1 million at December 31, 2011. The following table sets forth the amount and maturities of time deposits
of $100,000 and over as of December 31, 2012 (in thousands):
Maturing in:
3 months or less
Over 3 months through 6 months
Over 6 months through 12 months
Over 12 months
$
29,548
8,730
21,609
16,923
76,810
$
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):
2012
2011
2010
Short-term borrowings outstanding at period end
$ 11,700
$
8,635
$
16,329
Weighted average interest rate at period end
0.38%
0.92%
Maximum month end balance during the period
Average borrowings outstanding for the period
Weighted average interest rate for the period
$ 16,949
$ 21,165
$ 13,329
$ 15,583
$
$
0.53%
0.85%
0.48%
16,329
11,163
0.65%
Note 13 of our Consolidated Financial Statements summarizes the general terms of our short-term borrowings
outstanding at December 31, 2012 and 2011.
See Note 2 of our Consolidated Financial Statements for a discussion of regulatory capital and the current
operating environment. Improving capital ratios has been a focus of management in recent years.
The Federal Reserve has recently issued a Notice of Proposed Rulemaking (NPR) which would significantly
change regulatory capital calculations for community banks. The NPR would require community banks to
incorporate provisions of the BASEL III framework when calculating regulatory capital. We have not completed
our assessment of the NPR, but it is generally believed the proposed standards would impose higher capital
requirements and impose significantly more complex calculations when deriving regulatory capital ratios. The
NPR is currently subject to a comment period.
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 20 and 21 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 20 of our Consolidated Financial Statements.
25
26
BNCCORP, INC. Annual Report 2012
29
At December 31, 2012, the aggregate contractual obligations (excluding bank deposits) and commitments
were as follows (in thousands):
following items:
On an on-going basis, we use a variety of factors to assess our liquidity position including, but not limited to, the
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
$
11,700
92,271
$ -
-
$ -
-
$
22,430 $ 34,130
92,271
-
720
887
710
1,536
3,853
Total
$
104,691
$
887
$
710
$
23,966 $ 130,254
Other Commitments:
Less than 1
year
1 to 3 years
3 to 5 years
After 5 years
Total
Amount of Commitment - Expiration by Period
(cid:120)
(cid:120)
Stability of our deposit base,
(cid:120) Amount of pledged investments,
(cid:120) Amount of unpledged investments,
(cid:120) Liquidity of our loan portfolio, and
Potential loan demand.
Our liquidity assessment process segregates our balance sheet into liquid assets and short-term liabilities assumed
to be vulnerable to non-replacement over a 30 day horizon in abnormally stringent conditions. Assumptions for
the vulnerable short-term liabilities are based upon historical factors. We have a targeted range for our liquidity
position over this horizon and manage operations to achieve these targets.
We further project cash flows over a 12 month horizon based on our assets and liabilities and sources and uses of
funds for anticipated events.
Pursuant to our contingency funding plan, we also estimate cash flows over a 12 month horizon under a variety of
stressed scenarios to identify potential funding needs and funding sources. Our contingency plan identifies actions
that could be taken in response to adverse liquidity events.
Commitments to lend
Standby and commercial letters of
credit
Total
Liquidity Risk Management
$ 203,468
$
7,347
$
4,136
$
52 $
215,003
We believe this process, combined with our policies and guidelines, should provide for adequate levels of
736
$ 204,204
724
$ 8,071
-
$ 4,136
1,460
$ 52 $ 216,463
-
liquidity to fund the anticipated needs of on- and off- balance sheet items.
Liquidity risk is the possibility of being unable to meet all present and future financial obligations in a timely
manner. Liquidity risk management encompasses our ability to meet all present and future financial obligations in
a timely manner. The objectives of liquidity management policies are to maintain adequate liquid assets, liability
diversification among instruments, maturities and customers and a presence in both the wholesale purchased
funds market and the retail deposit market.
The Consolidated Statements of Cash Flows in the Consolidated Financial Statements present data on cash and
cash equivalents provided by and used in operating, investing and financing activities. In addition to liquidity
from core deposit growth, together with repayments and maturities of loans and investments, we utilize brokered
deposits, sell securities under agreements to repurchase and borrow overnight Federal funds. The Bank is a
member of the FHLB of Des Moines. Advances from the FHLB are collateralized by the Bank’s mortgage loans
and various investment securities. We have also obtained funding through the issuance of subordinated notes,
subordinated debentures and long-term borrowings.
Our liquidity is defined by our ability to meet our cash and collateral obligations at a reasonable cost and with a
minimum 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 acquired in time of need.
We measure our liquidity position on an as needed basis, but no less frequently than monthly. We measure our
liquidity position using the total of the following items:
1. Estimated liquid assets less estimated volatile liabilities using the aforementioned methodology ($166.8
million as of December 31, 2012);
2. Borrowing capacity from the FHLB ($47.9 million as of December 31, 2012); and
3. Capacity to issue brokered deposits with maturities of less than 12 months ($102.8 million as of
December 31, 2012).
30
BNCCORP, INC. Annual Report 2012
27
28
At December 31, 2012, the aggregate contractual obligations (excluding bank deposits) and commitments
were as follows (in thousands):
On an on-going basis, we use a variety of factors to assess our liquidity position including, but not limited to, the
following items:
(cid:120)
Stability of our deposit base,
(cid:120) Amount of pledged investments,
(cid:120) Amount of unpledged investments,
(cid:120) Liquidity of our loan portfolio, and
(cid:120)
Potential loan demand.
Our liquidity assessment process segregates our balance sheet into liquid assets and short-term liabilities assumed
to be vulnerable to non-replacement over a 30 day horizon in abnormally stringent conditions. Assumptions for
the vulnerable short-term liabilities are based upon historical factors. We have a targeted range for our liquidity
position over this horizon and manage operations to achieve these targets.
We further project cash flows over a 12 month horizon based on our assets and liabilities and sources and uses of
funds for anticipated events.
Pursuant to our contingency funding plan, we also estimate cash flows over a 12 month horizon under a variety of
stressed scenarios to identify potential funding needs and funding sources. Our contingency plan identifies actions
that could be taken in response to adverse liquidity events.
We believe this process, combined with our policies and guidelines, should provide for adequate levels of
liquidity to fund the anticipated needs of on- and off- balance sheet items.
Contractual Obligations:
year
1 to 3 years
3 to 5 years
After 5 years
Total
Payments due by period
Less than 1
Total borrowings
$
11,700
$ -
$ -
$
22,430 $ 34,130
Commitments to sell loans
92,271
-
-
-
92,271
Annual rental commitments under
non-cancelable operating leases
720
887
710
1,536
3,853
Total
$
104,691
$
887
$
710
$
23,966 $ 130,254
Other Commitments:
year
1 to 3 years
3 to 5 years
After 5 years
Total
Amount of Commitment - Expiration by Period
Less than 1
Commitments to lend
$ 203,468
$
7,347
$
4,136
$
52 $
215,003
736
724
-
-
1,460
$ 204,204
$ 8,071
$ 4,136
$ 52 $ 216,463
Standby and commercial letters of
credit
Total
Liquidity Risk Management
Liquidity risk is the possibility of being unable to meet all present and future financial obligations in a timely
manner. Liquidity risk management encompasses our ability to meet all present and future financial obligations in
a timely manner. The objectives of liquidity management policies are to maintain adequate liquid assets, liability
diversification among instruments, maturities and customers and a presence in both the wholesale purchased
funds market and the retail deposit market.
The Consolidated Statements of Cash Flows in the Consolidated Financial Statements present data on cash and
cash equivalents provided by and used in operating, investing and financing activities. In addition to liquidity
from core deposit growth, together with repayments and maturities of loans and investments, we utilize brokered
deposits, sell securities under agreements to repurchase and borrow overnight Federal funds. The Bank is a
member of the FHLB of Des Moines. Advances from the FHLB are collateralized by the Bank’s mortgage loans
and various investment securities. We have also obtained funding through the issuance of subordinated notes,
subordinated debentures and long-term borrowings.
Our liquidity is defined by our ability to meet our cash and collateral obligations at a reasonable cost and with a
minimum 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 acquired in time of need.
We measure our liquidity position on an as needed basis, but no less frequently than monthly. We measure our
liquidity position using the total of the following items:
1. Estimated liquid assets less estimated volatile liabilities using the aforementioned methodology ($166.8
million as of December 31, 2012);
2. Borrowing capacity from the FHLB ($47.9 million as of December 31, 2012); and
3. Capacity to issue brokered deposits with maturities of less than 12 months ($102.8 million as of
December 31, 2012).
27
28
BNCCORP, INC. Annual Report 2012
31
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
Net Interest Income Simulation
Market risk arises from changes in interest rates, exchange rates, and commodity prices and equity prices and
represents the possibility that changes in future market rates or prices will have a negative impact on our earnings
or value. Our principal market risk is interest rate risk.
Interest rate risk arises from changes in interest rates. Interest rate risk can result from: (1) Repricing risk – timing
differences in the maturity/repricing of assets, liabilities, and off-balance-sheet contracts; (2) Options risk – the
effect of embedded options, such as loan prepayments, interest rate caps/floors, and deposit withdrawals; (3)
Basis risk – risk resulting from unexpected changes in the spread between two or more different rates of similar
maturity, and the resulting impact on the behavior of lending and funding rates; and (4) Yield curve risk – risk
resulting from unexpected changes in the spread between two or more rates of different maturities from the same
type of instrument. We have risk management policies to monitor and limit exposure to interest rate risk. To date
we have not conducted trading activities as a means of managing interest rate risk. Our asset/liability management
process is utilized to manage our interest rate risk. The measurement of interest rate risk associated with financial
instruments is meaningful only when all related and offsetting on-and off-balance-sheet transactions are
aggregated, and the resulting net positions are identified.
Our interest rate risk exposure is actively managed with the objective of managing the level and potential
volatility of net interest income in addition to the long-term growth of equity, bearing in mind that we will always
be in the business of taking on rate risk and that rate risk immunization is not entirely possible. Also, it is
recognized that as exposure to interest rate risk is reduced, so too may the overall level of net interest income and
equity. In general, the assets and liabilities generated through ordinary business activities do not naturally create
offsetting positions with respect to repricing or maturity characteristics. Access to the derivatives market can be
an important element in maintaining our interest rate risk position within policy guidelines. Using derivative
instruments, principally interest rate floors, caps, and interest rate swaps, the interest rate sensitivity of specific
transactions, as well as pools of assets or liabilities, can be adjusted to maintain the desired interest rate risk
profile. See Note 1 of our Consolidated Financial Statements for a summary of our accounting policies pertaining
to such instruments.
Our primary tool for measuring and managing interest rate risk is net interest income simulation. This exercise
includes our assumptions regarding the changes in interest rates and the impact on our current balance sheet.
Interest rate caps and floors are included to the extent that they are exercised in the 12-month simulation period.
Additionally, changes in prepayment behavior of the residential mortgage, CMOs, and mortgage-backed
securities portfolios in each rate environment are captured using industry estimates of prepayment speeds for
various coupon segments of the portfolio. For purposes of this simulation, projected month end balances of the
various balance sheet accounts are held constant at their December 31, 2012 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, 2012 level. The static balance sheet assumption is made so as to project the interest rate risk to net interest
income embedded in the existing balance sheet. With knowledge of the balance sheet’s existing net interest
income profile, more informed strategies and tactics may be developed as it relates to the structure/mix of growth.
We monitor the results of net interest income simulation on a regular basis. Net interest income is generally
simulated for the upcoming 12-month horizon in seven interest rate scenarios. The scenarios generally modeled
are parallel interest rate ramps of +/- 100bp, 200bp, and 300bp along with a rates unchanged scenario. Given the
current low absolute level of interest rates as of December 31, 2012, the downward scenarios for interest rate
movements is limited to -100bp but a +400bp scenario has been added. 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 increase of 100 basis points each
The net interest income simulation result for the 12-month horizon that covers the calendar year of 2012 is shown
Movement in interest rates
-100bp
Unchanged
+100bp
+200bp
+300bp
+400bp
unchanged scenario
$
(1,228)
-
289
550
$
823 $
1,173
$
19,169
$
20,397
20,686
20,947
$
21,220
$
21,570
$
$
$
$
(6.02)%
-
1.42%
2.70%
4.03%
5.75%
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, 2012 (without forward adjustments for planned growth and anticipated business activities)
and do not contemplate any actions we might undertake in response to changes in market interest rates.
Static gap analysis is another tool that may be used for interest rate risk measurement. The net differences
between the amount of assets, liabilities, equity and off-balance-sheet instruments repricing within a cumulative
calendar period is typically referred to as the “rate sensitivity position” or “gap position.” The following table sets
forth our rate sensitivity position as of December 31, 2012. Assets and liabilities are classified by the earliest
possible repricing date or maturity, whichever occurs first.
month.
below:
Projected 12-month net
interest income
Dollar change from
Percentage change from
unchanged scenario
32
BNCCORP, INC. Annual Report 2012
29
30
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, 2012 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, 2012 level. The static balance sheet assumption is made so as to project the interest rate risk to net interest
income embedded in the existing balance sheet. With knowledge of the balance sheet’s existing net interest
income profile, more informed strategies and tactics may be developed as it relates to the structure/mix of growth.
We monitor the results of net interest income simulation on a regular basis. Net interest income is generally
simulated for the upcoming 12-month horizon in seven interest rate scenarios. The scenarios generally modeled
are parallel interest rate ramps of +/- 100bp, 200bp, and 300bp along with a rates unchanged scenario. Given the
current low absolute level of interest rates as of December 31, 2012, the downward scenarios for interest rate
movements is limited to -100bp but a +400bp scenario has been added. 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 increase of 100 basis points each
month.
The net interest income simulation result for the 12-month horizon that covers the calendar year of 2012 is shown
below:
Quantitative and Qualitative Disclosures About Market Risk
Net Interest Income Simulation
Movement in interest rates
-100bp
Unchanged
+100bp
+200bp
+300bp
+400bp
Projected 12-month net
interest income
Dollar change from
$
19,169
$
20,397
unchanged scenario
$
(1,228)
-
$
$
20,686
289
$
$
20,947
$
21,220
$
21,570
550
$
823 $
1,173
Percentage change from
unchanged scenario
(6.02)%
-
1.42%
2.70%
4.03%
5.75%
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, 2012 (without forward adjustments for planned growth and anticipated business activities)
and do not contemplate any actions we might undertake in response to changes in market interest rates.
Static gap analysis is another tool that may be used for interest rate risk measurement. The net differences
between the amount of assets, liabilities, equity and off-balance-sheet instruments repricing within a cumulative
calendar period is typically referred to as the “rate sensitivity position” or “gap position.” The following table sets
forth our rate sensitivity position as of December 31, 2012. Assets and liabilities are classified by the earliest
possible repricing date or maturity, whichever occurs first.
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.
Note 1 of our Consolidated Financial Statements includes a summary of our critical accounting policies and their
Critical Accounting Policies
related impact on the Company.
Market risk arises from changes in interest rates, exchange rates, and commodity prices and equity prices and
represents the possibility that changes in future market rates or prices will have a negative impact on our earnings
or value. Our principal market risk is interest rate risk.
Interest rate risk arises from changes in interest rates. Interest rate risk can result from: (1) Repricing risk – timing
differences in the maturity/repricing of assets, liabilities, and off-balance-sheet contracts; (2) Options risk – the
effect of embedded options, such as loan prepayments, interest rate caps/floors, and deposit withdrawals; (3)
Basis risk – risk resulting from unexpected changes in the spread between two or more different rates of similar
maturity, and the resulting impact on the behavior of lending and funding rates; and (4) Yield curve risk – risk
resulting from unexpected changes in the spread between two or more rates of different maturities from the same
type of instrument. We have risk management policies to monitor and limit exposure to interest rate risk. To date
we have not conducted trading activities as a means of managing interest rate risk. Our asset/liability management
process is utilized to manage our interest rate risk. The measurement of interest rate risk associated with financial
instruments is meaningful only when all related and offsetting on-and off-balance-sheet transactions are
aggregated, and the resulting net positions are identified.
Our interest rate risk exposure is actively managed with the objective of managing the level and potential
volatility of net interest income in addition to the long-term growth of equity, bearing in mind that we will always
be in the business of taking on rate risk and that rate risk immunization is not entirely possible. Also, it is
recognized that as exposure to interest rate risk is reduced, so too may the overall level of net interest income and
equity. In general, the assets and liabilities generated through ordinary business activities do not naturally create
offsetting positions with respect to repricing or maturity characteristics. Access to the derivatives market can be
an important element in maintaining our interest rate risk position within policy guidelines. Using derivative
instruments, principally interest rate floors, caps, and interest rate swaps, the interest rate sensitivity of specific
transactions, as well as pools of assets or liabilities, can be adjusted to maintain the desired interest rate risk
profile. See Note 1 of our Consolidated Financial Statements for a summary of our accounting policies pertaining
to such instruments.
Our primary tool for measuring and managing interest rate risk is net interest income simulation. This exercise
includes our assumptions regarding the changes in interest rates and the impact on our current balance sheet.
Interest rate caps and floors are included to the extent that they are exercised in the 12-month simulation period.
29
30
BNCCORP, INC. Annual Report 2012
33
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 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, 2012 and do not contemplate any actions we might undertake in response to changes in
market interest rates.
Interest Sensitivity Gap Analysis
Estimated maturity or repricing at December 31, 2012
0–3
4–12
months
months
1–5
years
Over
5 years
Total
Interest-earning assets:
Interest-bearing deposits with banks
$ 40,790
$ -
$ - $ -
$
40,790
Investment securities (a)
FRB and FHLB stock
Fed Funds Sold
22,572
34,206
128,785
90,292
275,855
2,601
-
-
-
2,601
-
-
-
-
-
Loans held for sale-mortgage banking, fixed
rate
-
95,095
-
-
95,095
Loans held for sale-mortgage banking, floating
rate
-
-
-
-
-
Loans held for investment, fixed rate
27,278
36,783
70,845
23,379
158,285
Loans held for investment, floating rate
117,308
5,228
6,774
1,874
131,184
Total interest-earning assets
$
210,549
$
171,312 $
206,404 $ 115,545
$ 703,810
Interest-bearing liabilities:
Interest checking and money market accounts
$
296,006
$ -
$ - $ -
$ 296,006
Savings
Time deposits under $100,000
Time deposits $100,000 and over
Short-term borrowings
FHLB advances
Other borrowings
Subordinated debentures
17,045
-
-
-
17,045
16,131
31,323
30,292
50,404
128,150
29,548
30,339
16,571
352
76,810
11,700
-
-
-
11,700
-
-
-
-
-
-
-
-
-
-
15,000
-
-
7,430
22,430
Total interest-bearing liabilities
$
385,430
$
61,662 $
46,863 $ 58,186
$ 552,141
Interest rate gap
$ (174,881)
$
109,650 $
159,541 $ 57,359
$ 151,669
Cumulative interest rate gap at December 31, 2012
$ (174,881)
$ (65,231)
$
94,310 $ 151,669
Cumulative interest rate gap to total assets
(22.69)%
(8.46)%
12.24%
19.68%
(a) Values for investment securities reflect the timing of the estimated principal cash flows from the securities
based on par values, which vary from the amortized cost and fair value of our investments.
34
BNCCORP, INC. Annual Report 2012
31
32
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 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, 2012 and do not contemplate any actions we might undertake in response to changes in
market interest rates.
Interest Sensitivity Gap Analysis
Estimated maturity or repricing at December 31, 2012
0–3
4–12
months
months
1–5
years
Over
5 years
Total
Interest-bearing deposits with banks
$ 40,790
$ -
$ - $ -
$
40,790
Interest-earning assets:
Investment securities (a)
FRB and FHLB stock
Fed Funds Sold
Loans held for sale-mortgage banking, fixed
Loans held for sale-mortgage banking, floating
rate
rate
22,572
34,206
128,785
90,292
275,855
2,601
-
-
-
2,601
-
-
-
-
-
95,095
-
-
95,095
-
-
-
-
-
-
Loans held for investment, fixed rate
27,278
36,783
70,845
23,379
158,285
Loans held for investment, floating rate
117,308
5,228
6,774
1,874
131,184
Total interest-earning assets
$
210,549
$
171,312 $
206,404 $ 115,545
$ 703,810
Interest checking and money market accounts
$
296,006
$ -
$ - $ -
$ 296,006
Interest-bearing liabilities:
Savings
Time deposits under $100,000
Time deposits $100,000 and over
Short-term borrowings
FHLB advances
Other borrowings
Subordinated debentures
17,045
-
-
-
17,045
16,131
31,323
30,292
50,404
128,150
29,548
30,339
16,571
352
76,810
11,700
-
-
-
11,700
-
-
-
-
-
-
-
-
-
-
15,000
-
-
7,430
22,430
Total interest-bearing liabilities
$
385,430
$
61,662 $
46,863 $ 58,186
$ 552,141
Interest rate gap
$ (174,881)
$
109,650 $
159,541 $ 57,359
$ 151,669
Cumulative interest rate gap at December 31, 2012
$ (174,881)
$ (65,231)
$
94,310 $ 151,669
Cumulative interest rate gap to total assets
(22.69)%
(8.46)%
12.24%
19.68%
(a) Values for investment securities reflect the timing of the estimated principal cash flows from the securities
based on par values, which vary from the amortized cost and fair value of our investments.
31
32
BNCCORP, INC. Annual Report 2012
35
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors’ Report
Consolidated Balance Sheets as of December 31, 2012 and 2011
Page
37
39
Consolidated Statements of Operations for the Years Ended December 31, 2012 and 2011 40
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2012
and 2011 41
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2012 and
2011 42
Consolidated Statements of Cash Flows for the Years Ended December 31, 2012 and 2011
Notes to Consolidated Financial Statements
43
45
“
The Board of Directors
BNCCORP, INC.:
KPMG LLP
Suite 1501
222 South 15th Street
Omaha, NE 68102-1610
Suite 1600
233 South 13th Street
Lincoln, NE 68508-2041
Independent Auditors’ Report
We have audited the accompanying consolidated financial statements of BNCCORP, INC. and its
subsidiaries (the Company), which comprise the consolidated balance sheets as of December 31, 2012 and
2011, and the related consolidated statements of operations, comprehensive income, stockholders’ equity,
and cash flows for the years then ended, and the related notes to the consolidated financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with U.S. generally accepted accounting principles; this includes the design,
implementation, and maintenance of internal control relevant to the preparation and fair presentation of
consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
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 audits to obtain reasonable assurance about
whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the
assessment of the risks of material misstatement of the consolidated financial statements, whether due to
fraud or error. In making those risk assessments, the auditor considers internal control relevant to the
entity’s preparation and fair presentation of the consolidated financial statements in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on
the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also
includes evaluating the appropriateness of accounting policies used and the reasonableness of significant
accounting estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
audit opinion.
36
BNCCORP, INC. Annual Report 2012
33
KPMG LLP is a Delaware limited liability partnership,
the U.S. member firm of KPMG International Cooperative
(“KPMG International”), a Swiss entity.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors’ Report
Consolidated Balance Sheets as of December 31, 2012 and 2011
Consolidated Statements of Operations for the Years Ended December 31, 2012 and 2011 40
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2012
and 2011 41
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2012 and
2011 42
Consolidated Statements of Cash Flows for the Years Ended December 31, 2012 and 2011
Notes to Consolidated Financial Statements
Page
37
39
43
45
“
The Board of Directors
BNCCORP, INC.:
KPMG LLP
Suite 1501
222 South 15th Street
Omaha, NE 68102-1610
Suite 1600
233 South 13th Street
Lincoln, NE 68508-2041
Independent Auditors’ Report
We have audited the accompanying consolidated financial statements of BNCCORP, INC. and its
subsidiaries (the Company), which comprise the consolidated balance sheets as of December 31, 2012 and
2011, and the related consolidated statements of operations, comprehensive income, stockholders’ equity,
and cash flows for the years then ended, and the related notes to the consolidated financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with U.S. generally accepted accounting principles; this includes the design,
implementation, and maintenance of internal control relevant to the preparation and fair presentation of
consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
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 audits to obtain reasonable assurance about
whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the
assessment of the risks of material misstatement of the consolidated financial statements, whether due to
fraud or error. In making those risk assessments, the auditor considers internal control relevant to the
entity’s preparation and fair presentation of the consolidated financial statements in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on
the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also
includes evaluating the appropriateness of accounting policies used and the reasonableness of significant
accounting estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
audit opinion.
33
BNCCORP, INC. Annual Report 2012
KPMG LLP is a Delaware limited liability partnership,
the U.S. member firm of KPMG International Cooperative
(“KPMG International”), a Swiss entity.
37
Opinion
In our opinion, the consolidated financial statements referred to above present fairly in all material
respects, the financial position of BNCCORP, INC. and its subsidiaries as of December 31, 2012 and 2011,
and the results of their operations and their cash flows for the years then ended in accordance with
U.S. generally accepted accounting principles.
Omaha, Nebraska
March 28, 2013
ASSETS
2012
2011
Financial Statements
FINANCIAL INFORMATION
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31
(In thousands, except share data)
CASH AND CASH EQUIVALENTS
INVESTMENT SECURITIES AVAILABLE FOR SALE
FEDERAL RESERVE BANK AND FEDERAL HOME LOAN BANK STOCK
LOANS HELD FOR SALE-MORTGAGE BANKING
LOANS AND LEASES HELD FOR INVESTMENT
LIABILITIES AND STOCKHOLDERS’ EQUITY
ALLOWANCE FOR CREDIT LOSSES
Net loans and leases held for investment
OTHER REAL ESTATE, net
PREMISES AND EQUIPMENT, net
ACCRUED INTEREST RECEIVABLE
OTHER ASSETS
Total assets
DEPOSITS:
Non-interest-bearing
Interest-bearing –
Savings, interest checking and money market
Time deposits under $100,000
Time deposits $100,000 and over
Total deposits
SHORT-TERM BORROWINGS
SUBORDINATED DEBENTURES
ACCRUED INTEREST PAYABLE
ACCRUED EXPENSES
OTHER LIABILITIES
Total liabilities
STOCKHOLDERS’ EQUITY:
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY’S
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; 3,300,652 and
3,301,007 shares issued and outstanding
Capital surplus – common stock
Retained earnings (deficit)
Treasury stock (368,001 and 367,646 shares, respectively)
Accumulated other comprehensive income, net
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to consolidated financial statements.
$
40,790
$
19,296
300,549
2,601
95,095
289,469
(10,091)
279,378
5,131
15,932
2,590
28,710
242,630
2,750
68,622
293,211
(10,630)
282,581
10,145
16,035
2,411
20,688
$
770,776
$
665,158
$
131,593
$
116,864
313,051
128,150
76,810
649,604
11,700
22,430
5,045
10,144
3,123
702,046
269,075
128,255
62,061
576,255
8,635
22,427
3,609
6,244
6,121
623,291
19,859
1,029
19,635
1,052
33
27,257
20,655
(5,064)
4,961
68,730
33
27,217
(4,508)
(5,076)
3,514
41,867
$
770,776
$
665,158
38
BNCCORP, INC. Annual Report 2012
2
36
In our opinion, the consolidated financial statements referred to above present fairly in all material
respects, the financial position of BNCCORP, INC. and its subsidiaries as of December 31, 2012 and 2011,
and the results of their operations and their cash flows for the years then ended in accordance with
U.S. generally accepted accounting principles.
Opinion
Omaha, Nebraska
March 28, 2013
Financial Statements
FINANCIAL INFORMATION
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31
(In thousands, except share data)
ASSETS
2012
2011
CASH AND CASH EQUIVALENTS
INVESTMENT SECURITIES AVAILABLE FOR SALE
FEDERAL RESERVE BANK AND FEDERAL HOME LOAN BANK STOCK
LOANS HELD FOR SALE-MORTGAGE BANKING
LOANS AND LEASES HELD FOR INVESTMENT
ALLOWANCE FOR CREDIT LOSSES
Net loans and leases held for investment
OTHER REAL ESTATE, net
PREMISES AND EQUIPMENT, net
ACCRUED INTEREST RECEIVABLE
OTHER ASSETS
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
DEPOSITS:
Non-interest-bearing
Interest-bearing –
Savings, interest checking and money market
Time deposits under $100,000
Time deposits $100,000 and over
Total deposits
SHORT-TERM 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; 3,300,652 and
3,301,007 shares issued and outstanding
Capital surplus – common stock
Retained earnings (deficit)
Treasury stock (368,001 and 367,646 shares, respectively)
Accumulated other comprehensive income, net
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
$
40,790
300,549
2,601
95,095
289,469
(10,091)
279,378
5,131
15,932
2,590
28,710
770,776
$
$
19,296
242,630
2,750
68,622
293,211
(10,630)
282,581
10,145
16,035
2,411
20,688
665,158
$
131,593
$
116,864
313,051
128,150
76,810
649,604
11,700
22,430
5,045
10,144
3,123
702,046
269,075
128,255
62,061
576,255
8,635
22,427
3,609
6,244
6,121
623,291
19,859
1,029
19,635
1,052
33
27,257
20,655
(5,064)
4,961
68,730
770,776
$
33
27,217
(4,508)
(5,076)
3,514
41,867
665,158
$
See accompanying notes to consolidated financial statements.
2
BNCCORP, INC. Annual Report 2012
39
36
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the Years Ended December 31
(In thousands)
2012
2011
$
26,624
$
4,208
$
2,614
$
4,187
Unrealized gain on securities available
NET INCOME
for sale
Reclassification adjustment for gain
included in net income
Other comprehensive income,
before tax
Income tax expense (benefit) related to
items of other comprehensive income
Other comprehensive income
TOTAL COMPREHENSIVE INCOME
(279)
2,335
(888)
1,447
(2,830)
1,357
-
1,357
1,447
$
28,071
1,357
$
5,565
See accompanying notes to consolidated financial statements.
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
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 on sales of loans, net
Gain on sales of securities, net
Insurance claim settlement
Other
Total non-interest income
NON-INTEREST EXPENSE:
Salaries and employee benefits
Professional services
Data processing fees
Marketing and promotion
Occupancy
Regulatory costs
Depreciation and amortization
Office supplies and postage
Other real estate costs
Other
Total non-interest expense
Income before income taxes
Income tax expense (benefit)
Net income
Preferred stock costs
Net income available to common shareholders
Basic earnings per common share
Diluted earnings per common share
2012
2011
$
16,750
$
17,651
6,162
967
113
23,992
3,857
71
1,593
5,521
18,471
100
7,627
331
140
25,749
4,773
132
1,367
6,272
19,477
1,625
18,371
17,852
2,492
1,204
29,658
1,110
279
7,500
695
42,938
17,040
7,165
2,859
2,089
1,935
1,213
1,120
684
2,038
3,822
39,965
21,344
(5,280)
26,624
(1,462)
25,162
7.64
7.52
$
$
$
$
$
$
$
$
2,218
1,282
11,285
1,427
2,830
-
1,195
20,237
14,972
4,307
2,673
1,559
2,028
1,742
1,172
590
2,295
2,521
33,859
4,230
22
4,208
(1,394)
2,814
0.86
0.86
See accompanying notes to consolidated financial statements.
40
BNCCORP, INC. Annual Report 2012
37
38
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the Years Ended December 31
(In thousands)
NET INCOME
Unrealized gain on securities available
2012
2011
$
26,624
$
4,208
for sale
$
2,614
$
4,187
Reclassification adjustment for gain
included in net income
Other comprehensive income,
before tax
Income tax expense (benefit) related to
items of other comprehensive income
Other comprehensive income
TOTAL COMPREHENSIVE INCOME
(279)
2,335
(888)
1,447
1,447
$
28,071
(2,830)
1,357
-
1,357
1,357
$
5,565
NET INTEREST INCOME AFTER PROVISION FOR CREDIT
18,371
17,852
See accompanying notes to consolidated financial statements.
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended December 31
(In thousands, except per share data)
2012
2011
$
16,750
$
17,651
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
Subordinated debentures
Total interest expense
Net interest income
PROVISION FOR CREDIT LOSSES
LOSSES
NON-INTEREST INCOME:
Bank charges and service fees
Wealth management revenues
Mortgage banking revenues
Gains on sales of loans, net
Gain on sales of securities, net
Insurance claim settlement
Other
Total non-interest income
NON-INTEREST EXPENSE:
Salaries and employee benefits
Professional services
Data processing fees
Marketing and promotion
Occupancy
Regulatory costs
Depreciation and amortization
Office supplies and postage
Other real estate costs
Other
Total non-interest expense
Income before income taxes
Income tax expense (benefit)
Net income
Preferred stock costs
Net income available to common shareholders
Basic earnings per common share
Diluted earnings per common share
6,162
967
113
23,992
3,857
71
1,593
5,521
18,471
100
2,492
1,204
29,658
1,110
279
7,500
695
42,938
17,040
7,165
2,859
2,089
1,935
1,213
1,120
684
2,038
3,822
39,965
21,344
(5,280)
26,624
(1,462)
7,627
331
140
25,749
4,773
132
1,367
6,272
19,477
1,625
2,218
1,282
11,285
1,427
2,830
-
1,195
20,237
14,972
4,307
2,673
1,559
2,028
1,742
1,172
590
2,295
2,521
33,859
4,230
22
(1,394)
2,814
0.86
0.86
$
4,208
$
$
$
$
25,162
7.64
7.52
$
$
$
See accompanying notes to consolidated financial statements.
37
38
BNCCORP, INC. Annual Report 2012
41
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
For the Years Ended December 31
(In thousands, except share data)
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31 (In thousands)
Preferred Stock
Common Stock
Common
Earnings
Treasury Comprehensive
Shares
Amount
Shares
Amount
Stock
(Deficit)
Stock
Income
Total
Adjustments to reconcile net income to net cash provided by (used
Capital
Surplus
Retained
Accumulated
Other
OPERATING ACTIVITIES:
Net income
BALANCE, December 31, 2010
21,098 $
20,486
3,304,339 $ 33 $ 27,036 $
(7,322) $
(5,069) $
2,157 $ 37,321
Net income
-
-
-
Other comprehensive income
-
-
-
Preferred stock amortization, net
Accrued dividend on preferred
stock
Impact of share-based
compensation
-
201
-
-
-
-
-
- (3,332)
-
-
-
-
-
-
4,208
-
-
4,208
-
-
-
1,357
1,357
-
(201)
-
-
-
Net amortization of premiums and (discounts)
-
(1,193)
-
-
(1,193)
Share-based compensation
181
-
(7)
-
174
BALANCE, December 31, 2011
21,098 $
20,687
3,301,007 $ 33 $ 27,217 $
(4,508) $
(5,076) $
3,514 $ 41,867
Net income
-
-
-
-
-
26,624
-
-
26,624
Other comprehensive income
-
-
-
-
-
-
-
1,447
1,447
Preferred stock amortization, net
Accrued dividend on preferred
-
201
-
-
-
(201)
-
-
-
stock
-
-
-
-
-
(1,260)
-
-
(1,260)
Impact of share-based
compensation
-
- (355)
-
40
-
12
-
52
BALANCE, December 31, 2012
21,098 $
20,888
3,300,652 $ 33 $ 27,257 $
20,655 $
(5,064) $
4,961 $ 68,730
See accompanying notes to consolidated financial statements
in) operating activities -
Provision for credit losses
Provision for other real estate losses
Depreciation and amortization
Change in interest receivable and other assets, net
Loss on disposals of bank premises and equipment, net
(Gain) loss on sale of other real estate
Net realized gain on sales of investment securities
Provision (benefit) for deferred income taxes
Change in other liabilities, net
Gains on sales of loans, net
Unrealized gain on mortgage banking derivatives
Proceeds from sales of loans
Funding of 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 (used in) 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 in participating interests in mortgage loans
Cash used to finance divestiture
Net (increase) decrease 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
See accompanying notes to consolidated financial statements.
2012
2011
$
26,624
$
4,208
100
1,700
1,120
5,510
52
2,358
17
108
(279)
(4,743)
189
(1,110)
(4,923)
12,141
(1,168,092)
1,142,126
(650)
12,248
(113,244)
8,853
42,688
(481)
630
-
-
(7,786)
3,206
(1,042)
8
(67,168)
1,625
1,775
1,171
2,345
(652)
174
50
(62)
(2,830)
-
-
4,381
(1,427)
14,831
(697,908)
660,480
(2,078)
(13,917)
(237,631)
100,439
33,435
(73)
185
4,888
(10,966)
36,887
6,900
(596)
2,793
(63,739)
42
BNCCORP, INC. Annual Report 2012
39
40
Preferred Stock
Common Stock
Common
Earnings
Treasury Comprehensive
Shares
Amount
Shares
Amount
Stock
(Deficit)
Stock
Income
Total
BALANCE, December 31, 2010
21,098 $
20,486
3,304,339 $ 33 $ 27,036 $
(7,322) $
(5,069) $
2,157 $ 37,321
Net income
-
-
-
-
4,208
-
-
4,208
Other comprehensive income
-
-
-
-
-
-
1,357
1,357
Preferred stock amortization, net
-
201
-
-
(201)
-
-
-
Accrued dividend on preferred
stock
Impact of share-based
compensation
-
-
-
-
(1,193)
-
-
(1,193)
-
- (3,332)
181
-
(7)
-
174
BALANCE, December 31, 2011
21,098 $
20,687
3,301,007 $ 33 $ 27,217 $
(4,508) $
(5,076) $
3,514 $ 41,867
Net income
-
-
-
-
-
26,624
-
-
26,624
Other comprehensive income
-
-
-
-
-
-
-
1,447
1,447
Preferred stock amortization, net
-
201
-
-
-
(201)
-
-
-
-
-
-
-
-
stock
-
-
-
-
-
(1,260)
-
-
(1,260)
BALANCE, December 31, 2012
21,098 $
20,888
3,300,652 $ 33 $ 27,257 $
20,655 $
(5,064) $
4,961 $ 68,730
-
- (355)
-
40
-
12
-
52
Accrued dividend on preferred
Impact of share-based
compensation
See accompanying notes to consolidated financial statements
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
For the Years Ended December 31
(In thousands, except share data)
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31 (In thousands)
Capital
Surplus
Retained
Accumulated
Other
OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by (used
2012
2011
$
26,624
$
4,208
in) operating activities -
Provision for credit losses
Provision for other real estate losses
Depreciation and amortization
Net amortization of premiums and (discounts)
Share-based compensation
Change in interest receivable and other assets, net
Loss on disposals of bank premises and equipment, net
(Gain) loss on sale of other real estate
Net realized gain on sales of investment securities
Provision (benefit) for deferred income taxes
Change in other liabilities, net
Gains on sales of loans, net
Unrealized gain on mortgage banking derivatives
Proceeds from sales of loans
Funding of 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 (used in) 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 in participating interests in mortgage loans
Cash used to finance divestiture
Net (increase) decrease 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
100
1,700
1,120
5,510
52
2,358
17
108
(279)
(4,743)
189
(1,110)
(4,923)
12,141
(1,168,092)
1,142,126
(650)
12,248
(113,244)
8,853
42,688
(481)
630
-
-
(7,786)
3,206
(1,042)
8
(67,168)
1,625
1,775
1,171
2,345
174
(652)
50
(62)
(2,830)
-
4,381
(1,427)
-
14,831
(697,908)
660,480
(2,078)
(13,917)
(237,631)
100,439
33,435
(73)
185
4,888
(10,966)
36,887
6,900
(596)
2,793
(63,739)
See accompanying notes to consolidated financial statements.
39
40
BNCCORP, INC. Annual Report 2012
43
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, continued
For the Years Ended December 31 (In thousands)
FINANCING ACTIVITIES:
Net decrease in deposits held for sale
Net increase in deposits
Net increase (decrease) in short-term borrowings
Repayments of Federal Home Loan Bank advances
Proceeds from Federal Home Loan Bank advances
Net cash provided by (used in) 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)
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Additions to other real estate in settlement of loans
Loans sold in divestiture
Deposits transferred in divestiture
See accompanying notes to consolidated financial statements.
2012
2011
-
73,349
3,065
(10,810)
10,810
76,414
21,494
19,296
$ 40,790 $
(30,792)
22,590
(7,693)
(1,050)
1,050
(15,895)
(93,551)
112,847
19,296
$ 4,086 $
707 $
$
5,223
(391)
$
$
$
- $
- $
- $
6,052
65,688
76,654
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). BNCCORP operates community banking and wealth management
businesses in Arizona, Minnesota and North Dakota from 14 locations. The Bank also conducts mortgage banking
from 12 locations in Arizona, Minnesota, Illinois, 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 allowance for credit losses, valuation of other real estate, reserve for potential mortgage
banking obligations, fair values of financial instruments (including derivatives), impairment of investments,
income taxes, and the useful lives of premises and equipment. 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, variances from 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:
44
BNCCORP, INC. Annual Report 2012
41
42
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, continued
For the Years Ended December 31 (In thousands)
FINANCING ACTIVITIES:
Net decrease in deposits held for sale
Net increase in deposits
Net increase (decrease) in short-term borrowings
Repayments of Federal Home Loan Bank advances
Proceeds from Federal Home Loan Bank advances
Net cash provided by (used in) financing activities
CASH AND CASH EQUIVALENTS, beginning of year
CASH AND CASH EQUIVALENTS, end of year
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid
Income taxes paid (received)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Additions to other real estate in settlement of loans
Loans sold in divestiture
Deposits transferred in divestiture
See accompanying notes to consolidated financial statements.
2012
2011
-
73,349
3,065
(10,810)
10,810
76,414
21,494
19,296
(30,792)
22,590
(7,693)
(1,050)
1,050
(15,895)
(93,551)
112,847
$ 40,790 $
19,296
$ 4,086 $
5,223
$
707 $
(391)
$
$
$
- $
- $
- $
6,052
65,688
76,654
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). BNCCORP operates community banking and wealth management
businesses in Arizona, Minnesota and North Dakota from 14 locations. The Bank also conducts mortgage banking
from 12 locations in Arizona, Minnesota, Illinois, 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 allowance for credit losses, valuation of other real estate, reserve for potential mortgage
banking obligations, fair values of financial instruments (including derivatives), impairment of investments,
income taxes, and the useful lives of premises and equipment. 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, variances from 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:
41
42
BNCCORP, INC. Annual Report 2012
45
Specific Reserves. The amount of specific reserves is determined through a loan-by-loan analysis of
problematic 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 loans which have been excluded from the specific reserve allocation.
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.
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.
46
BNCCORP, INC. Annual Report 2012
43
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:
(cid:120) Recent and expected performance of the securities;
(cid:120) Financial condition of issuers or guarantors;
(cid:120) Seniority of invested tranches and subordinated credit support;
(cid:120) Recent cash flows;
(cid:120) Vintage of origination;
(cid:120) Location of collateral;
(cid:120) Ratings of securities (ratings are not relied upon);
(cid:120) Value of underlying collateral;
(cid:120) Delinquency and foreclosure data;
(cid:120) Historical losses and estimated severity of future losses;
(cid:120) Credit surveillance data which summarize retrospective performance; and
(cid:120) 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, 2012 and 2011.
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
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.
44
Specific Reserves. The amount of specific reserves is determined through a loan-by-loan analysis of
problematic 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 loans which have been excluded from the specific reserve allocation.
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.
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.
43
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:
(cid:120) Recent and expected performance of the securities;
(cid:120) Financial condition of issuers or guarantors;
(cid:120) Recent cash flows;
(cid:120) Seniority of invested tranches and subordinated credit support;
(cid:120) Vintage of origination;
(cid:120) Location of collateral;
(cid:120) Ratings of securities (ratings are not relied upon);
(cid:120) Value of underlying collateral;
(cid:120) Delinquency and foreclosure data;
(cid:120) Historical losses and estimated severity of future losses;
(cid:120) Credit surveillance data which summarize retrospective performance; and
(cid:120) 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, 2012 and 2011.
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
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.
44
BNCCORP, INC. Annual Report 2012
47
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, 2012 and 2011, 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, 2012 or 2011.
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.
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 collectability 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.
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 is also 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 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
The Company reviews long-lived 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.
There were no impairment charges in 2012 or 2011.
48
BNCCORP, INC. Annual Report 2012
45
46
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, 2012 and 2011, 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, 2012 or 2011.
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.
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 collectability 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.
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 is also 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 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
The Company reviews long-lived 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.
There were no impairment charges in 2012 or 2011.
45
46
BNCCORP, INC. Annual Report 2012
49
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.
Comprehensive Income
Accrued Interest Receivable. The fair value of accrued interest receivable equals the amount receivable due
to the current nature of the amounts receivable.
Derivative Financial Instruments. The fair value of the Company’s derivatives are based upon quoted
prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets
that are not active, and model-based valuation techniques for which significant assumptions are observable in
the market.
Interest-Bearing Deposits. Fair values of interest-bearing deposit liabilities are estimated by discounting
future cash flow payment streams using rates at which comparable current deposits with comparable
maturities are being issued.
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 Company enters into interest rate lock commitments on certain mortgage loans related to our mortgage
banking operations on a best efforts basis, 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.
The Company also commits to originate and sell certain loans related to our mortgage banking operations on a
mandatory delivery basis. To hedge interest rate risk the Company sells short positions in mortgage backed
securities related to the loans sold on a mandatory delivery basis. The commitments to originate and short
positions are accounted for as derivatives and carried at fair value with changes in fair value recorded in income.
Earnings Per Share
Basic earnings per share (EPS) excludes dilution and is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding during the applicable period.
Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of common stock that then shared in
the earnings of the Company. Such potential dilutive instruments include stock options and contingently issuable
stock. Note 24 to these consolidated financial statements includes disclosure of the Company’s EPS calculations.
Comprehensive income is the total of net income and accumulated other comprehensive income, which for the
Company, is generally comprised of unrealized gains and losses on securities available for sale and unrealized
gains and losses on hedging instruments qualifying for cash flow hedge accounting treatment pursuant to FASB
ASC 815.
Cash and Cash Equivalents
due from banks and federal funds sold.
Share-Based Compensation
For purposes of the Consolidated Statements of Cash Flows, cash and cash equivalents include cash on hand, cash
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, 2012, the Company had four stock-based employee compensation plans, which are described
more fully in Note 27 to these consolidated financial statements.
RECENTLY ISSUED OR ADOPTED ACCOUNTING PRONOUNCEMENTS
FASB ASU 2010-20, Receivables (Topic 310), 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 is required. The disclosures
50
BNCCORP, INC. Annual Report 2012
47
48
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.
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.
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 Company enters into interest rate lock commitments on certain mortgage loans related to our mortgage
banking operations on a best efforts basis, 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.
The Company also commits to originate and sell certain loans related to our mortgage banking operations on a
mandatory delivery basis. To hedge interest rate risk the Company sells short positions in mortgage backed
securities related to the loans sold on a mandatory delivery basis. The commitments to originate and short
positions are accounted for as derivatives and carried at fair value with changes in fair value recorded in income.
Earnings Per Share
Basic earnings per share (EPS) excludes dilution and is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding during the applicable period.
Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of common stock that then shared in
the earnings of the Company. Such potential dilutive instruments include stock options and contingently issuable
stock. Note 24 to these consolidated financial statements includes disclosure of the Company’s EPS calculations.
Comprehensive Income
Comprehensive income is the total of net income and accumulated other comprehensive income, which for the
Company, is generally comprised of unrealized gains and losses on securities available for sale and unrealized
gains and losses on hedging instruments qualifying for cash flow hedge accounting treatment pursuant to FASB
ASC 815.
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.
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.
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.
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.
At December 31, 2012, the Company had four stock-based employee compensation plans, which are described
more fully in Note 27 to these consolidated financial statements.
RECENTLY ISSUED OR ADOPTED ACCOUNTING PRONOUNCEMENTS
FASB ASU 2010-20, Receivables (Topic 310), 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 is required. The disclosures
47
48
BNCCORP, INC. Annual Report 2012
51
In December 2012, the FASB issued for public comment a draft proposal designed to improve financial reporting
about expected credit losses on loans and other financial assets held by banks, financial institutions and other
organizations. The proposed ASU, Financial Instruments - Credit Losses, proposes a new accounting model
which would change the definition from inherent credit losses to expected credit losses, which could result in
more timely recognition of credit losses, and also would provide additional transparency about credit risk.
Stakeholders have been asked to review and provide comments to the FASB on the proposal by April 30, 2013.
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.
are to be presented at the level of disaggregation that management uses when assessing and monitoring the
portfolio’s risk and performance. For BNCCORP, this ASU was effective as of December 31, 2011. Adoption of
this ASU did not have a material impact on the Company’s consolidated financial statements other than changes
to disclosures. See Note 9 to these consolidated financial statements.
FASB ASU 2011-02, Receivables (Topic 310), A Creditor’s Determination of Whether a Restructuring is a
Troubled Debt Restructuring, clarifies when the restructuring of a receivable should be considered a troubled debt
restructuring (TDR). FASB issued the guidance in response to constituents’ concerns that creditors were
inconsistently applying the guidance for indentifying TDRs. The ASU provides additional guidance for
determining whether the creditor has granted a concession and whether the debtor is experiencing financial
difficulty. For nonpublic companies, this ASU is effective for annual periods ending after December 15, 2012,
including interim periods within those annual periods. Information related to this ASU and the related disclosures
are included in Note 9 to these consolidated financial statements.
In April 2011, the FASB issued ASU 2011-03, Transfers and Servicing (Topic 860), Reconsideration of Effective
Control for Repurchase Agreements. Topic 860, Transfers and Servicing, prescribes when an entity may or may
not recognize a sale upon the transfer of financial assets subject to repurchase agreements. That determination is
based, in part, on whether the entity has maintained effective control over the transferred assets. The amendments
in this ASU remove from the assessment of effective control (1) the criterion requiring the transferor to have the
ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default
by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. Other
criteria applicable to the assessment of effective control are not changed by the amendments in this ASU. This
ASU is effective for the first interim or annual period beginning on or after December 15, 2011 and should be
applied prospectively to transactions or modification of existing transactions that occur on or after the effective
date. The adoption of this ASU in 2012 did not have a material impact on the Company’s consolidated financial
statements.
In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820), Amendments to Achieve
Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amendments in
this ASU changes the wording used to describe the requirements in U.S. GAAP for measuring fair value and for
disclosing information about fair value measurements in order to improve consistency in wording between U.S.
GAAP and IFRS. For BNCCORP, this ASU is effective for annual periods beginning after December 15, 2011.
The adoption of this ASU in 2012 did not have a material impact on the Company’s consolidated financial
statements other than to change the disclosures relating to fair value measurements.
In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income (Topic 220), which
requires companies to report total net income, each component of comprehensive income, and total
comprehensive income on the face of the income statement, or as two consecutive statements. The components of
comprehensive income are not changed, nor does the ASU affect how earnings per share is calculated or
reported. This ASU is effective for fiscal years and interim periods beginning after December 15, 2012 for non-
public companies. The adoption of this ASU in 2013 is not anticipated to have a material impact on the
Company’s consolidated financial statements.
In December 2011, the FASB issued ASU 2011-12, Deferral of the Effective Date for Amendments to the
Presentation of Reclassifications of Items out of Accumulated Other Comprehensive Income in Accounting
Standards Update No. 2011—5(Topic 220). This ASU defers the requirement to separately present items
reclassified out of accumulated other comprehensive income on the face of the statement of income. Instead, the
proposed standard would require those adjustments be presented either within other comprehensive income of the
comprehensive income statement or in the notes as U.S. GAAP currently requires. This ASU does not change the
other requirements of the new standard, which become effective as originally planned. The effective date of this
ASU is expected to be consistent with the newly issued standard on comprehensive income noted above.
52
BNCCORP, INC. Annual Report 2012
49
50
In December 2012, the FASB issued for public comment a draft proposal designed to improve financial reporting
about expected credit losses on loans and other financial assets held by banks, financial institutions and other
organizations. The proposed ASU, Financial Instruments - Credit Losses, proposes a new accounting model
which would change the definition from inherent credit losses to expected credit losses, which could result in
more timely recognition of credit losses, and also would provide additional transparency about credit risk.
Stakeholders have been asked to review and provide comments to the FASB on the proposal by April 30, 2013.
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.
are to be presented at the level of disaggregation that management uses when assessing and monitoring the
portfolio’s risk and performance. For BNCCORP, this ASU was effective as of December 31, 2011. Adoption of
this ASU did not have a material impact on the Company’s consolidated financial statements other than changes
to disclosures. See Note 9 to these consolidated financial statements.
FASB ASU 2011-02, Receivables (Topic 310), A Creditor’s Determination of Whether a Restructuring is a
Troubled Debt Restructuring, clarifies when the restructuring of a receivable should be considered a troubled debt
restructuring (TDR). FASB issued the guidance in response to constituents’ concerns that creditors were
inconsistently applying the guidance for indentifying TDRs. The ASU provides additional guidance for
determining whether the creditor has granted a concession and whether the debtor is experiencing financial
difficulty. For nonpublic companies, this ASU is effective for annual periods ending after December 15, 2012,
including interim periods within those annual periods. Information related to this ASU and the related disclosures
are included in Note 9 to these consolidated financial statements.
In April 2011, the FASB issued ASU 2011-03, Transfers and Servicing (Topic 860), Reconsideration of Effective
Control for Repurchase Agreements. Topic 860, Transfers and Servicing, prescribes when an entity may or may
not recognize a sale upon the transfer of financial assets subject to repurchase agreements. That determination is
based, in part, on whether the entity has maintained effective control over the transferred assets. The amendments
in this ASU remove from the assessment of effective control (1) the criterion requiring the transferor to have the
ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default
by the transferee, and (2) the collateral maintenance implementation guidance related to that criterion. Other
criteria applicable to the assessment of effective control are not changed by the amendments in this ASU. This
ASU is effective for the first interim or annual period beginning on or after December 15, 2011 and should be
applied prospectively to transactions or modification of existing transactions that occur on or after the effective
date. The adoption of this ASU in 2012 did not have a material impact on the Company’s consolidated financial
statements.
In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820), Amendments to Achieve
Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amendments in
this ASU changes the wording used to describe the requirements in U.S. GAAP for measuring fair value and for
disclosing information about fair value measurements in order to improve consistency in wording between U.S.
GAAP and IFRS. For BNCCORP, this ASU is effective for annual periods beginning after December 15, 2011.
The adoption of this ASU in 2012 did not have a material impact on the Company’s consolidated financial
statements other than to change the disclosures relating to fair value measurements.
In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income (Topic 220), which
requires companies to report total net income, each component of comprehensive income, and total
comprehensive income on the face of the income statement, or as two consecutive statements. The components of
comprehensive income are not changed, nor does the ASU affect how earnings per share is calculated or
reported. This ASU is effective for fiscal years and interim periods beginning after December 15, 2012 for non-
public companies. The adoption of this ASU in 2013 is not anticipated to have a material impact on the
Company’s consolidated financial statements.
In December 2011, the FASB issued ASU 2011-12, Deferral of the Effective Date for Amendments to the
Presentation of Reclassifications of Items out of Accumulated Other Comprehensive Income in Accounting
Standards Update No. 2011—5(Topic 220). This ASU defers the requirement to separately present items
reclassified out of accumulated other comprehensive income on the face of the statement of income. Instead, the
proposed standard would require those adjustments be presented either within other comprehensive income of the
comprehensive income statement or in the notes as U.S. GAAP currently requires. This ASU does not change the
other requirements of the new standard, which become effective as originally planned. The effective date of this
ASU is expected to be consistent with the newly issued standard on comprehensive income noted above.
49
50
BNCCORP, INC. Annual Report 2012
53
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
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):
Actual
For Capital Adequacy
Purposes
To be Well Capitalized
Amount in Excess of
Well Capitalized
Amount
Ratio
Amount
Ratio
Amount
Ratio
Amount
Ratio
2012
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 Equity (to total assets):
Consolidated tangible equity
BNC National Bank
Tangible Common Equity (to total
assets):
Consolidated tangible common
$ 90,766
22.43 %
$ 32,371
(cid:149)8.0 %
$
N/A
N/A %
$
N/A
84,003
21.06
31,905
(cid:149)8.0
39,881
10.0
44,122
N/A
11.06 %
NOTE 3. Divestiture
82,908
78,954
82,908
78,954
68,690
84,330
20.49
19.80
11.17
10.68
8.92
10.97
16,185
15,953
29,679
29,579
N/A
N/A
(cid:149)4.0
(cid:149)4.0
(cid:149)4.0
(cid:149)4.0
N/A
N/A
N/A
23,929
N/A
36,973
N/A
N/A
N/A
6.0
N/A
5.0
N/A
N/A
N/A
N/A
55,025
13.80
N/A
N/A
41,981
5.68
N/A
N/A
N/A
N/A
equity
47,801
6.21
N/A
N/A
N/A
N/A
N/A
N/A
2011
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 Equity (to total assets):
Consolidated tangible equity
BNC National Bank
Tangible Common Equity (to total
assets):
Consolidated tangible common
$ 65,518
17.56 %
$ 29,850
(cid:149)8.0 %
$
N/A
N/A %
$
N/A
N/A
67,853
18.22
29,799
(cid:149)8.0
37,249
10.0
30,604
8.22 %
51,138
13.71
63,124
16.95
51,138
63,124
41,803
67,028
7.59
9.41
6.28
10.12
14,925
14,899
26,938
26,831
N/A
N/A
(cid:149)4.0
(cid:149)4.0
(cid:149)4.0
(cid:149)4.0
N/A
N/A
N/A
N/A
N/A
N/A
22,349
6.0
40,775
10.95
N/A
N/A
N/A
N/A
33,539
5.0
29,585
4.41
N/A
N/A
N/A
N/A
N/A
N/A
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 be considered well capitalized. We are managing
capital accordingly.
table.
Although Tangible Common Equity (TCE) is not a regulatory capital measure, TCE is a ratio that is commonly
used to assess the capital strength of banking entities. Accordingly, we have included the ratio in the preceding
The most recent notifications from the Office of the Comptroller of the Currency (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 April 2010, BNCCORP entered into a memorandum of understanding that restricted payments related to its
common stock, preferred stock, and debt. This memorandum was terminated in the fourth quarter of 2012.
Accrued dividends on preferred stock are $3.7 million and accrued interest payable on debt is $4.8 million at
December 31, 2012. Subsequent to year end, the Company began to bring these obligations current and as of
February 15, 2013, we were current on the obligations.
On March 11, 2011, the previously announced sale of certain assets and liabilities was consummated. The sale
included the Company’s Scottsdale, Arizona branch premises; certain Arizona-based deposit accounts and loans;
and certain deposit accounts and loans of the Company’s offices in Minneapolis and Golden Valley, Minnesota.
The Company continues to offer a full range of banking services in the Arizona and Minnesota markets following
the sale.
The sale did not affect our North Dakota, wealth management, or mortgage banking operations. Loans sold in the
sale were $65.7 million, deposits transferred were $76.7 million, and the sale of the Scottsdale branch was $2.8
million. There was no significant gain or loss incurred as a result of the divestiture.
NOTE 4. Fraud Loss on Assets Serviced by Others
As previously reported, the Company discovered fraudulent activity in April of 2010 by an external company that
was servicing residential mortgage loans for the Company. Subsequently, the Company and its advisors have been
diligently addressing this matter.
In 2010, we submitted claims under our fidelity insurance policies seeking to recover the insured portion of these
losses. The policies together provided for total coverage of $15 million. After we submitted the insurance claims,
the insurance carriers contended our claims were not insurable and as a result we sued the insurance carriers for
failure to honor the policies and for acting in bad faith.
In the third quarter of 2012, we reached a settlement with the insurers and collected $7.5 million, which was
recognized in non-interest income. After reflecting the contingent fee paid to advisors, the net pre-tax earnings
from the settlement of this claim was approximately $5.0 million in 2012.
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 $0 as of December 31, 2012 and $25,000 as of December 31, 2011.
equity
21,116
3.17
N/A
N/A
N/A
N/A
N/A
N/A
54
BNCCORP, INC. Annual Report 2012
51
52
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
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):
Actual
Purposes
To be Well Capitalized
For Capital Adequacy
Amount in Excess of
Well Capitalized
Amount
Ratio
Amount
Ratio
Amount
Ratio
Amount
Ratio
$ 90,766
22.43 %
$ 32,371
(cid:149)8.0 %
$
N/A
N/A %
$
N/A
N/A
84,003
21.06
31,905
(cid:149)8.0
39,881
10.0
44,122
11.06 %
2012
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 Equity (to total assets):
Consolidated tangible equity
BNC National Bank
Tangible Common Equity (to total
Consolidated tangible common
assets):
equity
2011
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 Equity (to total assets):
Consolidated tangible equity
BNC National Bank
Tangible Common Equity (to total
Consolidated tangible common
assets):
equity
82,908
78,954
82,908
78,954
68,690
84,330
20.49
19.80
11.17
10.68
8.92
10.97
51,138
13.71
63,124
16.95
51,138
63,124
41,803
67,028
7.59
9.41
6.28
10.12
47,801
6.21
N/A
N/A
N/A
N/A
N/A
N/A
$ 65,518
17.56 %
$ 29,850
(cid:149)8.0 %
$
N/A
N/A %
$
N/A
N/A
67,853
18.22
29,799
(cid:149)8.0
37,249
10.0
30,604
8.22 %
N/A
23,929
N/A
36,973
N/A
N/A
N/A
6.0
N/A
5.0
N/A
N/A
N/A
N/A
55,025
13.80
N/A
N/A
41,981
5.68
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
22,349
6.0
40,775
10.95
N/A
N/A
N/A
N/A
33,539
5.0
29,585
4.41
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
(cid:149)4.0
(cid:149)4.0
(cid:149)4.0
(cid:149)4.0
N/A
N/A
(cid:149)4.0
(cid:149)4.0
(cid:149)4.0
(cid:149)4.0
N/A
N/A
16,185
15,953
29,679
29,579
N/A
N/A
14,925
14,899
26,938
26,831
N/A
N/A
51
21,116
3.17
N/A
N/A
N/A
N/A
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 be considered well capitalized. We are managing
capital accordingly.
Although Tangible Common Equity (TCE) is not a regulatory capital measure, TCE is a ratio that is commonly
used to assess the capital strength of banking entities. Accordingly, we have included the ratio in the preceding
table.
The most recent notifications from the Office of the Comptroller of the Currency (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 April 2010, BNCCORP entered into a memorandum of understanding that restricted payments related to its
common stock, preferred stock, and debt. This memorandum was terminated in the fourth quarter of 2012.
Accrued dividends on preferred stock are $3.7 million and accrued interest payable on debt is $4.8 million at
December 31, 2012. Subsequent to year end, the Company began to bring these obligations current and as of
February 15, 2013, we were current on the obligations.
NOTE 3. Divestiture
On March 11, 2011, the previously announced sale of certain assets and liabilities was consummated. The sale
included the Company’s Scottsdale, Arizona branch premises; certain Arizona-based deposit accounts and loans;
and certain deposit accounts and loans of the Company’s offices in Minneapolis and Golden Valley, Minnesota.
The Company continues to offer a full range of banking services in the Arizona and Minnesota markets following
the sale.
The sale did not affect our North Dakota, wealth management, or mortgage banking operations. Loans sold in the
sale were $65.7 million, deposits transferred were $76.7 million, and the sale of the Scottsdale branch was $2.8
million. There was no significant gain or loss incurred as a result of the divestiture.
NOTE 4. Fraud Loss on Assets Serviced by Others
As previously reported, the Company discovered fraudulent activity in April of 2010 by an external company that
was servicing residential mortgage loans for the Company. Subsequently, the Company and its advisors have been
diligently addressing this matter.
In 2010, we submitted claims under our fidelity insurance policies seeking to recover the insured portion of these
losses. The policies together provided for total coverage of $15 million. After we submitted the insurance claims,
the insurance carriers contended our claims were not insurable and as a result we sued the insurance carriers for
failure to honor the policies and for acting in bad faith.
In the third quarter of 2012, we reached a settlement with the insurers and collected $7.5 million, which was
recognized in non-interest income. After reflecting the contingent fee paid to advisors, the net pre-tax earnings
from the settlement of this claim was approximately $5.0 million in 2012.
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 $0 as of December 31, 2012 and $25,000 as of December 31, 2011.
BNCCORP, INC. Annual Report 2012
55
52
The amortized cost and estimated fair market value of available-for-sale securities classified according to their
contractual maturities at December 31, 2012, were as follows (in thousands):
Amortized
Cost
Estimated
Fair Value
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
141
13,217
280,711
143
13,746
286,660
$
294,069
$
300,549
For many types of investments, the actual payments will vary significantly from contractual maturities.
Securities carried at approximately $59.0 million and $73.7 million at December 31, 2012 and 2011, 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):
2012
2011
Sales proceeds
$
8,853
$ 100,439
Gross realized gains
Gross realized losses
279
-
3,348
(518)
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, 2012 or
2011. 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
U.S. government agency small
business administration pools
guaranteed by SBA
Collateralized mortgage
obligations guaranteed by
GNMA/VA
Collateralized mortgage
obligations issued by FNMA or
FHLMC
Other collateralized mortgage
obligations
State and municipal bonds
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/VA
Collateralized mortgage
obligations issued by FNMA or
FHLMC
Other collateralized mortgage
obligations
State and municipal bonds
2012
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
$
60,673
$
3,007
$
(93)
$
63,587
20,727
188
(307)
20,608
13,498
87
(31)
13,554
122,404
1,319
(708)
123,015
36,167
342
(98)
36,411
4,656
35,944
148
2,646
(1)
(19)
4,803
38,571
$
294,069
$
7,737
$
(1,257)
$ 300,549
2011
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
$
57,912
$
1,388
$
-
$
59,300
6,004
127,551
13,169
169
837
169
(2)
6,171
(841)
127,547
(17)
13,321
11,179
22,670
238,485
$
313
2,134
5,010
$
(5)
-
(865)
11,487
24,804
$ 242,630
$
56
BNCCORP, INC. Annual Report 2012
53
54
The amortized cost and estimated fair market value of available-for-sale securities classified according to their
contractual maturities at December 31, 2012, 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
$
$
-
141
13,217
280,711
294,069
$
$
Estimated
Fair Value
-
143
13,746
286,660
300,549
For many types of investments, the actual payments will vary significantly from contractual maturities.
Securities carried at approximately $59.0 million and $73.7 million at December 31, 2012 and 2011, 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
$
2012
8,853
279
-
2011
$ 100,439
3,348
(518)
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, 2012 or
2011. 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
U.S. government agency small
business administration pools
guaranteed by SBA
Collateralized mortgage
obligations guaranteed by
GNMA/VA
Collateralized mortgage
obligations issued by FNMA or
FHLMC
obligations
Other collateralized mortgage
State and municipal bonds
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/VA
Collateralized mortgage
obligations issued by FNMA or
FHLMC
obligations
Other collateralized mortgage
Amortized
Unrealized
Unrealized
Cost
Losses
Fair
Value
Gross
Estimated
2012
Gross
Gains
$
60,673
$
3,007
$
(93)
$
63,587
20,727
188
(307)
20,608
13,498
87
(31)
13,554
122,404
1,319
(708)
123,015
36,167
342
(98)
36,411
4,656
35,944
148
2,646
(1)
(19)
4,803
38,571
$
294,069
$
7,737
$
(1,257)
$ 300,549
Amortized
Unrealized
Unrealized
Cost
Losses
Fair
Value
Gross
Estimated
2011
Gross
Gains
$
57,912
$
1,388
$
-
$
59,300
6,004
127,551
13,169
11,179
22,670
169
837
169
313
(2)
6,171
(841)
127,547
(17)
(5)
13,321
11,487
24,804
State and municipal bonds
2,134
-
$
238,485
$
5,010
$
(865)
$ 242,630
53
54
BNCCORP, INC. Annual Report 2012
57
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
2012
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
U.S. government agency small
business administration
pools guaranteed by SBA
Collateralized mortgage
obligations guaranteed by
GNMA/VA
Collateralized mortgage
obligations issued by
FNMA or FHLMC
Other collateralized mortgage
2
$
9,238 $ (93)
-
$ - $
-
2
$
9,238 $
(93)
Total
$
2,601
$
2,750
2
15,398
(304)
1
53
(3)
3
15,451
(307)
There is no contractual maturity on these investments; the investments are required by counterparties.
1
3,348
(31)
-
-
-
1
3,348
(31)
6
36,023
(329)
4
16,601
(379)
10
52,624
(708)
2
8,498
(98)
-
-
-
2
8,498
(98)
There were no securities that were other-than-temporarily impaired during 2012 or 2011.
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
795
944
2012
2011
$
1,806
$
1,806
obligations
1
602
(1)
-
-
-
State and municipal bonds
2
4,103
(19)
-
-
-
1
2
602
(1)
4,103
(19)
Total temporarily impaired
securities
16
$
77,210 $ (875)
5
$ 16,654 $
(382)
21
$
93,864 $
(1,257)
Description of
Securities
#
Fair
Value
Unrealized
Loss
#
Fair
Value
Unrealized
Loss
#
Fair
Value
Unrealized
Loss
Less than 12 months
12 months or more
Total
2011
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/VA
Collateralized mortgage
obligations issued by
FNMA or FHLMC
Other collateralized mortgage
-
$
- $
-
-
$
-
-
- $ -
$
-
$
-
-
-
1
55
(2)
1
55
(2)
16
73,619
(841)
-
-
-
16
73,619
(841)
1
4,679
(17)
-
-
-
1
4,679
(17)
obligations
1
233
(5)
State and municipal bonds
-
-
-
-
-
-
-
1
233
-
-
-
(5)
-
Total temporarily impaired
securities
18
$
78,531 $
(863)
1 $
55
$
(2)
19 $ 78,586
$ (865)
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, the level of credit support provided by
subordinate tranches, and the collateral underlying the security.
58
BNCCORP, INC. Annual Report 2012
55
56
NOTE 8. Loans and Leases
The composition of loans and leases is as follows at December 31 (in thousands):
Loans held for sale-mortgage banking
$
95,095
$
68,622
2012
2011
Commercial and industrial
Commercial real estate
SBA
Consumer
Land and land development
Construction
Unearned income and net
unamortized deferred (fees) and
costs
Loans, net of unearned income and
unamortized (fees) and costs
Allowance for credit losses
Net loans and leases held for
$
116,891
$
109,746
87,258
15,823
26,614
31,065
11,814
289,465
115,704
9,958
23,038
29,350
5,545
293,341
4
(130)
289,469
(10,091)
293,211
(10,630)
investment
$
279,378
$
282,581
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
2012
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
U.S. government agency small
business administration
pools guaranteed by SBA
Collateralized mortgage
obligations guaranteed by
Collateralized mortgage
obligations issued by
FNMA or FHLMC
Other collateralized mortgage
Total temporarily impaired
securities
U.S. government agency
mortgage-backed securities
guaranteed by GNMA
U.S. government agency
mortgage-backed securities
Collateralized mortgage
obligations guaranteed by
GNMA/VA
Collateralized mortgage
obligations issued by
FNMA or FHLMC
Other collateralized mortgage
Total temporarily impaired
securities
2
$
9,238 $ (93)
-
$ - $
-
2
$
9,238 $
(93)
issued by FNMA
2
15,398
(304)
1
53
(3)
3
15,451
(307)
1
3,348
(31)
-
-
-
1
3,348
(31)
GNMA/VA
6
36,023
(329)
4
16,601
(379)
10
52,624
(708)
2
8,498
(98)
-
-
-
2
8,498
(98)
obligations
1
602
(1)
-
-
-
State and municipal bonds
2
4,103
(19)
-
-
-
1
2
602
(1)
4,103
(19)
16
$
77,210 $ (875)
5
$ 16,654 $
(382)
21
$
93,864 $
(1,257)
Description of
Securities
#
Fair
Value
Unrealized
Loss
#
Fair
Value
Unrealized
Loss
#
Fair
Value
Unrealized
Loss
Less than 12 months
12 months or more
Total
2011
-
$
- $
-
-
$
-
-
- $ -
$
-
issued by FNMA
-
-
-
1
55
(2)
1
55
(2)
16
73,619
(841)
-
-
-
16
73,619
(841)
1
4,679
(17)
-
-
-
1
4,679
(17)
obligations
1
233
(5)
-
-
1
233
State and municipal bonds
-
-
-
-
-
-
-
-
(5)
-
18
$
78,531 $
(863)
1 $
55
(2)
19 $ 78,586
$ (865)
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, the level of credit support provided by
subordinate tranches, and the collateral underlying the security.
$
$
There were no securities that were other-than-temporarily impaired during 2012 or 2011.
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
2012
1,806
795
2,601
$
$
2011
1,806
944
2,750
$
$
There is no contractual maturity on these investments; the investments are required by counterparties.
NOTE 8. Loans and Leases
The composition of loans and leases is as follows at December 31 (in thousands):
Loans held for sale-mortgage banking
$
95,095
$
68,622
2012
2011
Commercial and industrial
Commercial real estate
SBA
Consumer
Land and land development
Construction
Unearned income and net
unamortized deferred (fees) and
costs
Loans, net of unearned income and
unamortized (fees) and costs
Allowance for credit losses
Net loans and leases held for
$
116,891
$
109,746
87,258
15,823
26,614
31,065
11,814
289,465
115,704
9,958
23,038
29,350
5,545
293,341
4
(130)
289,469
(10,091)
293,211
(10,630)
investment
$
279,378
$
282,581
55
56
BNCCORP, INC. Annual Report 2012
59
Loans to Related Parties
Note 22 to these consolidated financial statements includes information relating to loans to executive officers,
directors, principal shareholders and associates of such persons.
NOTE 9. Allowance for Credit Losses
Transactions in the allowance for credit losses were as follows for the years ended December 31 (in thousands):
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
Commercial real estate
Consumer
2012
2011
$ 20,704
$
23,861
46,991
14,855
45,246
14,822
$ 82,550
$
83,929
Commercial
and
Commercial
Land and
land
industrial
real estate
SBA
Consumer
development Construction
Total
of period
$ 1,639 $ 5,518 $
436
$
448
$ 2,508 $
81
$ 10,630
966
(70)
11
1
(767)
38
178
(10)
12
(26)
(58)
18
(1,086)
67
100
-
-
(905)
187
-
266
period
$ 2,546 $ 4,790 $
616
$
382
$ 1,609 $ 148
$ 10,091
2012
2011
Commercial
and
Commercial
Land and
land
industrial
real estate
SBA
Consumer
development Construction
Total
of period
$ 1,362 $ 9,818 $ 407
$ 1,182
$ 1,939 $
57
$ 14,765
231
(83)
49
(257)
(4,549)
506
113
(105)
21
281
(1,049)
34
1,233
(731)
24
1,625
-
(6,517)
67
-
677
1,559
5,518
436
448
2,508
81
10,550
80
-
-
-
-
-
80
$ 1,639 $ 5,518 $ 436
$ 448
$
2,508 $
81
$ 10,630
Balance, beginning
Provision for credit
losses
Loans charged off
Loan recoveries
Balance, end of
Balance, beginning
Provision for credit
losses
Loans charged off
Loan recoveries
Transferred to other
loans held for
sale
Balance, end of
period
60
BNCCORP, INC. Annual Report 2012
57
58
Loans to Related Parties
Note 22 to these consolidated financial statements includes information relating to loans to executive officers,
directors, principal shareholders and associates of such persons.
NOTE 9. Allowance for Credit Losses
Transactions in the allowance for credit losses were as follows for the years ended December 31 (in thousands):
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):
Loans Pledged as Collateral
Commercial and industrial
Commercial real estate
Consumer
2012
2011
$ 20,704
$
23,861
46,991
14,855
45,246
14,822
$ 82,550
$
83,929
Commercial
and
industrial
Commercial
real estate
Balance, beginning
2012
Land and
land
SBA
Consumer
development Construction
Total
of period
$ 1,639 $ 5,518 $
436
$
448
$ 2,508 $
81
$ 10,630
Provision for credit
losses
Loans charged off
Loan recoveries
Balance, end of
966
(70)
11
1
(767)
38
178
(10)
12
(26)
(58)
18
(1,086)
67
100
-
-
(905)
187
-
266
period
$ 2,546 $ 4,790 $
616
$
382
$ 1,609 $ 148
$ 10,091
Commercial
and
industrial
Commercial
real estate
Balance, beginning
2011
Land and
land
SBA
Consumer
development Construction
Total
of period
$ 1,362 $ 9,818 $ 407
$ 1,182
$ 1,939 $
57
$ 14,765
Provision for credit
losses
Loans charged off
Loan recoveries
Transferred to other
loans held for
sale
Balance, end of
period
231
(83)
49
1,559
(257)
(4,549)
506
5,518
113
(105)
21
436
281
(1,049)
34
448
1,233
(731)
67
2,508
24
-
-
81
1,625
(6,517)
677
10,550
80
-
-
-
-
-
80
$ 1,639 $ 5,518 $ 436
$ 448
$
2,508 $
81
$ 10,630
57
58
BNCCORP, INC. Annual Report 2012
61
Performing and non-accrual loans
The Bank’s key credit quality indicator is the loan’s performance status, defined as accrual or non-accrual.
Performing loans are considered to have a lower risk of loss and are on accrual status. 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 principal and 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. Delinquent balances are determined based on the contractual terms of the
loan adjusted for charge-offs and payments applied to principal.
The following table sets forth information regarding the Bank’s performing and non-accrual loans at December 31
(in thousands):
Current
31-89 Days
Past Due
90 Days or More
Past Due and
Total
Performing
2012
Non-accrual
Total
Land and land development
29,350
-
Commercial and industrial:
Business loans
$
64,390 $ 3
$
-
$ 64,393 $ 3,211
$ 67,604
Agriculture
Owner-occupied
16,319
-
-
16,319
-
16,319
commercial real estate
32,968
-
-
32,968
-
32,968
Loans held for sale
68,622
-
-
68,622 -
68,622
Commercial real estate
82,761
-
-
82,761
4,497
87,258
SBA
Consumer:
Automobile
Home equity
1st mortgage
Other
15,823
-
-
15,823
-
15,823
Total gross loans
$
355,600 $ 194 $
-
$ 355,794 $ 6,169
$
361,963
5,762
58
-
5,820
-
5,820
3,779
-
-
3,779
-
3,779
9,462
-
-
9,462
-
9,462
7,534
8
11
7,553
-
7,553
Land and land development
28,273
-
-
28,273
2,792
31,065
Construction
Total loans held for
investment
11,814
-
-
11,814 -
11,814
278,885
69
11
278,965 10,500
289,465
Loans held for sale
95,094
-
1
95,095 -
95,095
Total gross loans
$
373,979 $ 69 $
12
$ 374,060 $ 10,500
$ 384,560
2011
90 Days or
31-89 Days
More Past Due
Total
Current
Past Due
and Accruing
Performing
Non-accrual
Total
$
62,952 $ 1 $
-
$ 62,953 $ 247
$
63,200
13,060
64
-
13,124
-
13,124
Commercial and industrial:
Business loans
Agriculture
Owner-occupied
SBA
Consumer:
Automobile
Home equity
1st mortgage
Other
Construction
Total loans held for
investment
commercial real estate
33,422
Commercial real estate
110,597
-
9,958
-
-
33,422
-
110,597
5,107
9,958
-
33,422
115,704
9,958
-
-
-
-
-
-
-
-
-
3,082
-
3,347
-
9,257
121
6,408
8
5,545
-
3,082
-
3,347
-
3,082
3,347
9,378
815
10,193
6,416
-
29,350
-
5,545 -
6,416
29,350
5,545
286,978
194
-
287,172 6,169
293,341
The following table indicates the effect on income if interest on non-accrual 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
Impaired loans
2012
2011
$
228
$
406
-
4
$
228
$
402
Impaired loans include loans the Bank will not be able to collect all amounts due in accordance with the terms of
the loan agreement. Impaired loans include non-accruing and loans that have been modified in a troubled debt
restructuring. All loans are individually reviewed for impairment.
The following table summarizes impaired loans and related allowances as of and for the years ended December
31, 2012 and 2011 (in thousands):
62
BNCCORP, INC. Annual Report 2012
59
60
Performing and non-accrual loans
The Bank’s key credit quality indicator is the loan’s performance status, defined as accrual or non-accrual.
Performing loans are considered to have a lower risk of loss and are on accrual status. 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 principal and 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. Delinquent balances are determined based on the contractual terms of the
loan adjusted for charge-offs and payments applied to principal.
The following table sets forth information regarding the Bank’s performing and non-accrual loans at December 31
(in thousands):
31-89 Days
90 Days or More
Total
2012
Commercial and industrial:
Business loans
Agriculture
Owner-occupied
commercial real estate
Commercial real estate
SBA
Consumer:
Automobile
Home equity
1st mortgage
Other
31-89 Days
Past Due
90 Days or
More Past Due
and Accruing
Total
Performing
Current
Non-accrual
Total
2011
$
62,952 $ 1 $
-
$ 62,953 $ 247
$
63,200
13,060
64
-
13,124
-
13,124
33,422
110,597
-
-
9,958
-
3,082
-
3,347
-
9,257
121
6,408
8
5,545
-
-
-
-
-
-
-
-
-
-
33,422
110,597
-
5,107
9,958
-
33,422
115,704
9,958
3,082
-
3,347
-
3,082
3,347
9,378
815
10,193
6,416
-
29,350
-
5,545 -
6,416
29,350
5,545
286,978
194
-
287,172 6,169
293,341
Commercial and industrial:
Agriculture
Owner-occupied
SBA
Consumer:
Automobile
Home equity
1st mortgage
Other
Construction
Total loans held for
investment
Current
Past Due
Past Due and
Performing
Non-accrual
Total
Land and land development
29,350
-
Business loans
$
64,390 $ 3
$
-
$ 64,393 $ 3,211
$ 67,604
16,319
-
-
16,319
-
16,319
Construction
Total loans held for
investment
commercial real estate
32,968
-
-
32,968
-
32,968
Loans held for sale
68,622
-
-
68,622 -
68,622
Commercial real estate
82,761
-
-
82,761
4,497
87,258
15,823
-
-
15,823
-
15,823
Total gross loans
$
355,600 $ 194 $
-
$ 355,794 $ 6,169
$
361,963
5,762
58
-
5,820
-
5,820
3,779
-
-
3,779
-
3,779
9,462
-
-
9,462
-
9,462
7,534
8
11
7,553
-
7,553
Land and land development
28,273
-
-
28,273
2,792
31,065
11,814
-
-
11,814 -
11,814
278,885
69
11
278,965 10,500
289,465
Loans held for sale
95,094
-
1
95,095 -
95,095
Total gross loans
$
373,979 $ 69 $
12
$ 374,060 $ 10,500
$ 384,560
The following table indicates the effect on income if interest on non-accrual 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
2012
2011
$
228
$
406
-
4
$
228
$
402
Impaired loans
Impaired loans include loans the Bank will not be able to collect all amounts due in accordance with the terms of
the loan agreement. Impaired loans include non-accruing and loans that have been modified in a troubled debt
restructuring. All loans are individually reviewed for impairment.
The following table summarizes impaired loans and related allowances as of and for the years ended December
31, 2012 and 2011 (in thousands):
59
60
BNCCORP, INC. Annual Report 2012
63
2012
Unpaid
Principal
Recorded
Investment
Related
Allowance
Average
Recorded
Balance
Interest
Income
Recognized
$
3,220
$ 3,201 $
601 $ 3,204
$
-
-
-
-
-
-
-
-
-
6,857
4,497
1,200
4,640
-
-
-
-
-
-
-
-
661
-
-
-
-
-
-
-
-
-
-
-
-
-
-
661
300
661
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
10,738 $
8,359
$
2,101 $ 8,505
$
-
$
-
$ -
$
- $ -
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Impaired loans with an allowance recorded:
Commercial and industrial:
Business loans
Agriculture
Owner-occupied commercial real estate
Commercial real estate
SBA
Consumer:
Automobile
Home equity
1st mortgage
Other
Land and land development
Construction
Loans held for sale
Total impaired loans with an allowance
recorded
Impaired loans without an allowance
recorded:
Commercial and industrial:
Business loans
Agriculture
Owner-occupied commercial real estate
Commercial real estate
SBA
Consumer:
Automobile
Home equity
1st mortgage
Other
Construction
Loans held for sale
Total impaired loans without an
allowance recorded
TOTAL IMPAIRED LOANS
Land and land development
2,130
2,130
-
2,130
$
$
2,130
$
2,130
12,868
$ 10,489
$
$
- $
2,130
2,101 $
10,635
$
$
-
-
debt restructuring.
Impaired loans with an allowance recorded:
Commercial and industrial:
Owner-occupied commercial real estate
Commercial real estate
Business loans
Agriculture
SBA
Consumer:
Automobile
Home equity
1st mortgage
Other
Land and land development
Construction
Loans held for sale
Total impaired loans with an allowance
Impaired loans without an allowance
recorded:
Commercial and industrial:
Business loans
Agriculture
Owner-occupied commercial real estate
Commercial real estate
SBA
Consumer:
Automobile
Home equity
1st mortgage
Other
Land and land development
Construction
Loans held for sale
Total impaired loans without an
allowance recorded
TOTAL IMPAIRED LOANS
2011
Unpaid
Principal
Recorded
Investment
Related
Allowance
Average
Recorded
Balance
Interest
Income
Recognized
$ 232
$
220 $
220 $
227
$
-
-
7,206
-
-
-
-
-
-
-
-
-
-
5,107
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
777
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
5,238
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$ -
$ - $
-
$
$
-
-
-
4
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
-
$ - $
-
$ 7,438
$ 5,327 $
997
$
$
-
5,465
$
$
-
4
recorded
$ 7,438
$ 5,327 $
997
$
5,465
$
4
Troubled Debt Restructuring (TDR)
Included in loans receivable, net, are certain loans that have been modified in order to maximize collection of loan
balances. If the Company, for legal or economic reasons related to the borrower’s financial difficulties, grants a
concession compared to the original terms and conditions of the loan, the modified loan is considered a troubled
During 2012, the Company adopted FASB ASU No. 2011-02, Receivables (Topic 310), A Creditor’s
Determination of Whether a Restructuring is a Troubled Debt Restructuring, which modified guidance for
identifying restructurings of receivables that constitute a TDR. No additional loans modified since December 31,
2011, were identified as TDR’s as a result of adopting these provisions.
64
BNCCORP, INC. Annual Report 2012
61
62
Impaired loans with an allowance recorded:
Commercial and industrial:
Owner-occupied commercial real estate
Commercial real estate
Business loans
Agriculture
SBA
Consumer:
Automobile
Home equity
1st mortgage
Other
Land and land development
Construction
Loans held for sale
Total impaired loans with an allowance
recorded
Impaired loans without an allowance
recorded:
Commercial and industrial:
Business loans
Agriculture
Owner-occupied commercial real estate
Commercial real estate
SBA
Consumer:
Automobile
Home equity
1st mortgage
Other
Construction
Loans held for sale
Total impaired loans without an
allowance recorded
TOTAL IMPAIRED LOANS
2012
Unpaid
Principal
Recorded
Investment
Related
Allowance
Average
Recorded
Balance
Interest
Income
Recognized
$
3,220
$ 3,201 $
601 $ 3,204
$
-
-
-
-
-
-
-
-
-
6,857
4,497
1,200
4,640
-
-
-
-
-
-
-
-
661
-
-
-
-
-
-
-
-
-
-
-
-
-
-
661
300
661
-
-
-
-
-
-
$
10,738 $
8,359
$
2,101 $ 8,505
$
-
$
-
$ -
$
- $ -
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
$
2,130
$
2,130
- $
2,130
12,868
$ 10,489
2,101 $
10,635
$
$
$
$
-
-
Land and land development
2,130
2,130
-
2,130
Impaired loans with an allowance recorded:
Commercial and industrial:
Business loans
Agriculture
Owner-occupied commercial real estate
Commercial real estate
SBA
Consumer:
Automobile
Home equity
1st mortgage
Other
Land and land development
Construction
Loans held for sale
Total impaired loans with an allowance
2011
Unpaid
Principal
Recorded
Investment
Related
Allowance
Average
Recorded
Balance
Interest
Income
Recognized
$ 232
-
-
7,206
-
$
220 $
-
-
5,107
-
220 $
-
-
777
-
227
-
-
5,238
-
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
4
-
-
-
-
-
-
-
-
recorded
$ 7,438
$ 5,327 $
997
$
5,465
$
4
Impaired loans without an allowance
recorded:
Commercial and industrial:
Business loans
Agriculture
Owner-occupied commercial real estate
Commercial real estate
SBA
Consumer:
Automobile
Home equity
1st mortgage
Other
Land and land development
Construction
Loans held for sale
Total impaired loans without an
allowance recorded
TOTAL IMPAIRED LOANS
$ -
-
-
-
-
$ - $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
$ 7,438
$ - $
$ 5,327 $
-
997
$
$
-
5,465
$
$
-
4
Troubled Debt Restructuring (TDR)
Included in loans receivable, net, are certain loans that have been modified in order to maximize collection of loan
balances. If the Company, for legal or economic reasons related to the borrower’s financial difficulties, grants a
concession compared to the original terms and conditions of the loan, the modified loan is considered a troubled
debt restructuring.
During 2012, the Company adopted FASB ASU No. 2011-02, Receivables (Topic 310), A Creditor’s
Determination of Whether a Restructuring is a Troubled Debt Restructuring, which modified guidance for
identifying restructurings of receivables that constitute a TDR. No additional loans modified since December 31,
2011, were identified as TDR’s as a result of adopting these provisions.
61
62
BNCCORP, INC. Annual Report 2012
65
Commercial real estate
-
-
-
Commercial and industrial:
Business loans
Agriculture
Owner-occupied commercial real estate
SBA
Consumer:
Automobile
Home equity
1st mortgage
Other
Land and land development
Construction
Loans held for sale
2012
Number of
Contracts
Pre-Modification
Post-Modification
Outstanding
Recorded
Investment
Outstanding
Recorded
Investment
1
$
202
$ 202
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1
$ 202
$
202
The table below summarizes the amounts of restructured loans as of December 31 (in thousands):
Accrual
Non-accrual
Total
Allowance
2012
Commercial and industrial:
Business loans
Agriculture
Owner-occupied commercial real estate
Commercial real estate
SBA
Consumer:
Automobile
Home equity
1st mortgage
Other
Land and land development
Construction
Loans held for sale
Commercial and industrial:
Business loans
Agriculture
Owner-occupied commercial real estate
Commercial real estate
SBA
Consumer:
Automobile
Home equity
1st mortgage
Other
Land and land development
Construction
Loans held for sale
$
$
$
$
101
-
-
3,810
-
-
-
799
-
3,161
-
-
7,871
$
$
-
-
-
4,497
-
-
-
-
-
-
-
-
4,497
$
$
101
-
-
8,307
-
-
-
799
-
3,161
-
-
12,368
$
$
2
-
-
1,276
-
-
-
16
-
63
-
-
1,357
Accrual
Non-accrual
Total
Allowance
2011
-
-
-
3,904
-
-
-
-
-
3,366
-
-
7,270
$
$
-
-
-
4,763
-
-
-
815
-
-
-
-
5,578
$
$
-
-
-
8,667
-
-
-
815
-
3,366
-
-
12,848
$
$
-
-
-
554
-
-
-
122
-
67
-
-
743
TDR concessions can include reduction of interest rates, extension of maturity dates, forgiveness of principal
and/or interest due, or acceptance of real estate or other assets in full or partial satisfaction of the debt. Loan
modifications are not reported as TDR’s after 12 months if the loan was modified at a market rate of interest for
comparable risk loans, and the loan is performing in accordance with the terms of the restructured agreement for
at least six months.
When a loan is modified as a TDR, there may be a direct, material impact on the loans within the Balance Sheet,
as principal balances may be partially forgiven. The financial effects of TDR’s are presented in the following
table and represent the difference between the outstanding recorded balance pre-modification and post-
modification, for the periods ending December 31 (in thousands):
66
BNCCORP, INC. Annual Report 2012
63
64
2012
Number of
Contracts
Pre-Modification
Outstanding
Recorded
Investment
Post-Modification
Outstanding
Recorded
Investment
Commercial and industrial:
Business loans
Agriculture
Owner-occupied commercial real estate
1
-
-
$
202
-
-
$ 202
-
-
Commercial real estate
SBA
Consumer:
Automobile
Home equity
1st mortgage
Other
Land and land development
Construction
Loans held for sale
-
-
-
-
-
-
-
-
-
-
-
-
-
1
-
-
-
-
-
-
-
$ 202
-
-
-
-
-
-
-
202
$
The table below summarizes the amounts of restructured loans as of December 31 (in thousands):
Accrual
Non-accrual
Total
Allowance
2012
$
101
$
-
$
101
$
Commercial and industrial:
Business loans
Agriculture
Owner-occupied commercial real estate
Commercial real estate
SBA
Consumer:
Automobile
Home equity
1st mortgage
Other
Land and land development
Construction
Loans held for sale
Commercial and industrial:
Business loans
Agriculture
Owner-occupied commercial real estate
Commercial real estate
SBA
Consumer:
Automobile
Home equity
1st mortgage
Other
Land and land development
Construction
Loans held for sale
$
7,871
$
4,497
$
12,368
$
1,357
Accrual
Non-accrual
Total
Allowance
2011
$
$
-
$
$
-
-
3,810
-
-
-
799
-
3,161
-
-
-
-
-
3,904
-
-
-
-
-
3,366
-
-
-
-
4,497
-
-
-
-
-
-
-
-
-
-
4,763
-
-
-
815
-
-
-
-
-
-
8,307
-
-
-
799
-
3,161
-
-
-
-
-
8,667
-
-
-
815
-
3,366
-
-
2
-
-
1,276
-
-
-
16
-
63
-
-
-
-
-
554
-
-
-
122
-
67
-
-
743
$
7,270
$
5,578
$
12,848
$
TDR concessions can include reduction of interest rates, extension of maturity dates, forgiveness of principal
and/or interest due, or acceptance of real estate or other assets in full or partial satisfaction of the debt. Loan
modifications are not reported as TDR’s after 12 months if the loan was modified at a market rate of interest for
comparable risk loans, and the loan is performing in accordance with the terms of the restructured agreement for
at least six months.
When a loan is modified as a TDR, there may be a direct, material impact on the loans within the Balance Sheet,
as principal balances may be partially forgiven. The financial effects of TDR’s are presented in the following
table and represent the difference between the outstanding recorded balance pre-modification and post-
modification, for the periods ending December 31 (in thousands):
63
64
BNCCORP, INC. Annual Report 2012
67
Commercial and industrial:
Business loans
Agriculture
Owner-occupied commercial real estate
Commercial real estate
SBA
Consumer:
Automobile
Home equity
1st mortgage
Other
Land and land development
Construction
Loans held for sale
Number of
Contracts
-
-
-
2
-
-
-
-
1
-
-
-
-
3
2011
NOTE 10. Other Real Estate
Pre-Modification
Outstanding
Recorded
Investment
Post-Modification
Outstanding
Recorded
Investment
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):
$
-
-
-
$ -
-
-
4,280
3,938
-
-
-
-
1,380
-
-
-
-
$ 5,660
$
-
-
-
-
815
-
-
-
-
4,753
2012
2011
Balance, beginning of year
$
10,145
$
12,706
Transfers from nonperforming loans
-
Real estate sold
Net gains (losses) on sale of assets
Provision
(3,206)
(108)
(1,700)
6,052
(6,900)
62
(1,775)
Balance, end of year
$
5,131
$
10,145
The following is a summary of ORE as of December 31 (in thousands):
2012
Other real estate
$
8,146
Valuation allowance
(3,015)
Other real estate, net
$
5,131
2011
15,530
(5,385)
10,145
$
$
NOTE 11. Premises and Equipment, net
Loans that were non-accrual prior to modification remain on non-accrual for at least six months following
modification. Non-accrual TDR loans that have performed according to the modified terms for six months may be
returned to accruing status. Loans that were accruing prior to modification remain on accrual status after the
modification as long as the loan continues to perform under the new terms.
The following table indicates the effect on income if interest on 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
2012
2011
$
691
$
651
329
145
$
362
$
506
The amount of additional funds committed to borrowers who are in TDR status was $232,000 at December 31,
2012 and $364,000 at December 31, 2011.
TDRs are evaluated separately in the Bank’s allowance methodology based on the expected cash flows or
collateral values for loans in this status.
The Bank had $0 of restructured loans that were modified in a troubled-debt restructuring within the previous 12
months for which there was a payment default (i.e. 90 days delinquent).
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 and equipment
2012
2011
$
5,220
$
5,220
11,704
655
8,854
26,433
(10,501)
11,593
536
8,799
26,148
(10,113)
$
15,932
$
16,035
Depreciation and amortization expense totaled approximately $1.1 million and $1.2 million for the years ended
December 31, 2012 and 2011, respectively.
68
BNCCORP, INC. Annual Report 2012
65
66
2011
NOTE 10. Other Real Estate
Number of
Contracts
Pre-Modification
Post-Modification
Outstanding
Recorded
Investment
Outstanding
Recorded
Investment
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
2012
10,145
-
(3,206)
(108)
(1,700)
5,131
$
$
2011
12,706
6,052
(6,900)
62
(1,775)
10,145
$
$
The following is a summary of ORE as of December 31 (in thousands):
2012
Other real estate
$
8,146
Valuation allowance
(3,015)
Other real estate, net
$
5,131
2011
15,530
(5,385)
10,145
$
$
3
$ 5,660
$
4,753
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 and equipment
2012
5,220
11,704
655
8,854
26,433
(10,501)
15,932
$
$
2011
5,220
11,593
536
8,799
26,148
(10,113)
16,035
$
$
Depreciation and amortization expense totaled approximately $1.1 million and $1.2 million for the years ended
December 31, 2012 and 2011, respectively.
Commercial and industrial:
Business loans
Agriculture
Owner-occupied commercial real estate
Commercial real estate
SBA
Consumer:
Automobile
Home equity
1st mortgage
Other
Land and land development
Construction
Loans held for sale
-
$
-
$ -
-
-
2
-
-
-
-
1
-
-
-
-
-
-
-
-
4,280
3,938
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1,380
815
Loans that were non-accrual prior to modification remain on non-accrual for at least six months following
modification. Non-accrual TDR loans that have performed according to the modified terms for six months may be
returned to accruing status. Loans that were accruing prior to modification remain on accrual status after the
modification as long as the loan continues to perform under the new terms.
The following table indicates the effect on income if interest on 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
2012
2011
$
691
$
651
329
145
$
362
$
506
The amount of additional funds committed to borrowers who are in TDR status was $232,000 at December 31,
2012 and $364,000 at December 31, 2011.
TDRs are evaluated separately in the Bank’s allowance methodology based on the expected cash flows or
collateral values for loans in this status.
The Bank had $0 of restructured loans that were modified in a troubled-debt restructuring within the previous 12
months for which there was a payment default (i.e. 90 days delinquent).
65
66
BNCCORP, INC. Annual Report 2012
69
market value of $22.6 million and unamortized principal balances of $21.2 million. At December 31, 2011, $8.6
million of securities sold under repurchase agreements, with a weighted average interest rate of 0.92% were
collateralized by government agency collateralized mortgage obligations having a market value of $21.0 million
and unamortized principal balances of $19.5 million.
NOTE 14. Federal Home Loan Bank Advances
As of December 31, 2012, the Bank had $0 of FHLB advances outstanding. At December 31, 2012, the Bank has
mortgage loans with unamortized principal balances of approximately $73.3 million and securities with
unamortized principal balances of approximately $4.5 million which were pledged as collateral to the FHLB. The
Bank has the ability to draw advances up to approximately $47.9 million based upon the mortgage loans and
securities that are currently pledged, subject to a requirement to purchase additional FHLB stock.
The following table presents selected information regarding other borrowings at December 31, 2012 (in
Line
Outstanding
Available
$
2,000
$
-
$
2,000
10,000
12,000
-
-
10,000
12,000
$
24,000
$
-
$
24,000
Collateral
Pledged
$
13,383
Line
Outstanding
Available
$
$
10,707
10,707
$
$
-
-
$
$
10,707
10,707
NOTE 15. Other Borrowings
thousands):
Unsecured Borrowing Lines:
Bank of North Dakota
Zions First National Bank
US Bank
Total
Secured Borrowing Lines:
Bank of North Dakota
Total
obligations.
Debentures
NOTE 12. Deposits
The scheduled maturities of time deposits as of December 31, 2012 are as follows (in thousands):
2013
2014
2015
2016
2017
$ 107,341
22,441
5,086
12,092
7,244
Thereafter
50,756
$ 204,960
At December 31, 2012 and 2011, the Bank had $65.0 million and $59.8 million, respectively, of time deposits that
had been acquired through a broker.
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
2012
15
197
449
3,196
3,857
$
$
2011
13
352
588
3,820
4,773
$
$
Deposits Received from Related Parties
Note 22 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):
At December 31, 2012 the pledged collateral was comprised of municipal bonds and collateralized mortgage
Federal reserve borrowings-U. S. Treasury tax and loan retainer
Repurchase agreements with customers, renewable daily, interest payable monthly,
rates ranging from 0.30% to 1.00% in 2012, and from 0.40% to 3.25% in 2011,
secured by government agency collateralized mortgage obligations
2012
2011
$
-
$
-
11,700
8,635
$
11,700
$
8,635
The weighted average interest rate on short-term borrowings outstanding as of December 31, 2012 and 2011 was
0.38% and 0.92%, 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, 2012, $11.7 million of securities sold under repurchase agreements, with a weighted average
interest rate of 0.38%, were collateralized by government agency collateralized mortgage obligations having a
NOTE 16. Guaranteed Preferred Beneficial Interest’s in Company’s Subordinated
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, 2012 was 1.76%
and the interest rate reset on January 2, 2013 to 1.71%. The subordinated debentures mature on October 1, 2037.
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 FRB.
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. Because regulations related to the regulatory capital treatment of these subordinated
debentures have changed, we currently believe these subordinated debentures may be redeemable at par.
Redemption is subject to approval by the FRB.
Commencing in January 2010, BNCCORP deferred interest payments on its subordinated debentures as permitted
pursuant to contractual terms of the agreements. While the subordinated debenture agreements permit interest to
70
BNCCORP, INC. Annual Report 2012
67
68
The scheduled maturities of time deposits as of December 31, 2012 are as follows (in thousands):
NOTE 12. Deposits
2013
2014
2015
2016
2017
$ 107,341
22,441
5,086
12,092
7,244
Thereafter
50,756
$ 204,960
At December 31, 2012 and 2011, the Bank had $65.0 million and $59.8 million, respectively, of time deposits that
had been acquired through a broker.
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
2012
2011
$
15
$
13
197
449
3,196
352
588
3,820
$
3,857
$
4,773
Deposits Received from Related Parties
Note 22 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 0.30% to 1.00% in 2012, and from 0.40% to 3.25% in 2011,
secured by government agency collateralized mortgage obligations
11,700
8,635
2012
2011
$
11,700
$
8,635
The weighted average interest rate on short-term borrowings outstanding as of December 31, 2012 and 2011 was
0.38% and 0.92%, 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, 2012, $11.7 million of securities sold under repurchase agreements, with a weighted average
interest rate of 0.38%, were collateralized by government agency collateralized mortgage obligations having a
market value of $22.6 million and unamortized principal balances of $21.2 million. At December 31, 2011, $8.6
million of securities sold under repurchase agreements, with a weighted average interest rate of 0.92% were
collateralized by government agency collateralized mortgage obligations having a market value of $21.0 million
and unamortized principal balances of $19.5 million.
NOTE 14. Federal Home Loan Bank Advances
As of December 31, 2012, the Bank had $0 of FHLB advances outstanding. At December 31, 2012, the Bank has
mortgage loans with unamortized principal balances of approximately $73.3 million and securities with
unamortized principal balances of approximately $4.5 million which were pledged as collateral to the FHLB. The
Bank has the ability to draw advances up to approximately $47.9 million based upon the mortgage loans and
securities that are currently pledged, subject to a requirement to purchase additional FHLB stock.
NOTE 15. Other Borrowings
The following table presents selected information regarding other borrowings at December 31, 2012 (in
thousands):
Unsecured Borrowing Lines:
Bank of North Dakota
US Bank
Zions First National Bank
Total
Secured Borrowing Lines:
Bank of North Dakota
Total
$
$
$
$
Collateral
Pledged
$
13,383
Line
2,000
10,000
12,000
24,000
Outstanding
$
-
-
-
-
$
Available
$
$
2,000
10,000
12,000
24,000
Line
10,707
10,707
Outstanding
$
$
-
-
Available
$
$
10,707
10,707
At December 31, 2012 the pledged collateral was comprised of municipal bonds and collateralized mortgage
obligations.
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, 2012 was 1.76%
and the interest rate reset on January 2, 2013 to 1.71%. The subordinated debentures mature on October 1, 2037.
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 FRB.
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. Because regulations related to the regulatory capital treatment of these subordinated
debentures have changed, we currently believe these subordinated debentures may be redeemable at par.
Redemption is subject to approval by the FRB.
Commencing in January 2010, BNCCORP deferred interest payments on its subordinated debentures as permitted
pursuant to contractual terms of the agreements. While the subordinated debenture agreements permit interest to
67
68
BNCCORP, INC. Annual Report 2012
71
be deferred for up to 60 months, interest on the subordinated debentures continues to accrue during deferment. At
December 31, 2012, accrued interest owed on the subordinated debentures aggregated $4.8 million, which is
included in interest payable. At December 31, 2011, accrued interest owed on the subordinated debentures
aggregated $3.2 million, which is included in interest payable. Subsequent to December 31, 2012, the Company
began to bring these obligations current and as of January 19, 2013, we were current on the obligations.
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.
NOTE 17. Stockholders’ Equity
ASSETS
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, the Company issued two series of preferred stock. Both series of stock are
perpetual and classified as non-voting.
LIABILITIES
NOTE 18. Fair Value Measurements
The following table summarizes the financial assets and liabilities of the Company for which fair values are
determined on a recurring basis as of December 31 (in thousands):
Carrying Value at December 31, 2012
Twelve Months Ended
December 31, 2012
Total
Level 1
Level 2
Level 3
Total gains/(losses)
Securities available for sale
$
300,549
$
$
300,549
$
-
$
-
Loans held for sale
Commitments to originate mortgage
loans
95,095
4,499
95,095
-
649
4,499
-
2,183
Total assets at fair value
$ 400,143
$
-
$
400,143
$
-
$ 2,832
-
-
-
The first series of stock 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 were 20,093 shares of this
series outstanding as of December 31, 2012 and 2011. 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 pays dividends at 9%, of its liquidation preference, per annum and may not be
redeemed until the first series has been redeemed. There were 1,005 shares of this series outstanding at December
31, 2012 and 2011.
As a result of deferring interest on the subordinated debentures, BNCCORP was contractually required to cease
payment of dividends on the CPP preferred stock beginning with the quarterly payment due February 2010. At
December 31, 2012, the Company has recorded the accrued dividends aggregating $3.7 million which is included
in other liabilities in the consolidated financial statements. At December 31, 2011, the Company has recorded the
accrued dividends aggregating $2.5 million which is included in other liabilities in the consolidated financial
statements. Subsequent to December 31, 2012, the Company began to bring these obligations current and as of
February 15, 2013, we were current on the obligations.
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.
On May 30, 2001, BNCCORP’s Board of Directors 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.
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 plan was amended in 2011 such that it now expires on May 30, 2021.
72
BNCCORP, INC. Annual Report 2012
69
70
Commitments to sell mortgage loans $
2,233
Mortgage banking short positions
Total liabilities at fair value
52
$ 2,285
$
$
-
-
-
$
2,233
52
$ 2,285
$
$
-
$
2,143
-
-
(52)
$ 2,091
Carrying Value at December 31, 2011
Twelve Months Ended
December 31, 2011
Total
Level 1
Level 2
Level 3
Total gains/(losses)
Securities available for sale
$
242,630
$
$ 242,630
$
-
$
68,622
68,622
-
2,078
-
-
ASSETS
Loans held for sale
Commitments to originate mortgage
loans
2,316
-
2,316
-
Total assets at fair value
$
313,568
$
-
$ 313,568
$
-
$ 3,906
-
1,828
LIABILITIES
Commitments to sell mortgage loans $
4,376
Total liabilities at fair value
$
4,376
$
$
-
-
$ 4,376
$
4,376
$
$
-
-
$
$
(3,906)
(3,906)
The unrealized gains recognized during 2012 resulted from a new hedging strategy where loans are sold on a
mandatory delivery basis. We began to deliver loans on a mandatory delivery basis as it generally improves
margins in the mortgage banking operations. We also sell short positions in mortgage-backed securities to hedge
interest rate risk on the loans committed for mandatory delivery. The commitments to originate mortgage banking
loans and our short positions are derivatives and recorded at fair value. The fair values of the commitments to
originate loans under mandatory delivery are generally greater than the fair value of our short positions. This
asymmetry resulted in unrealized gains in 2012.
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):
be deferred for up to 60 months, interest on the subordinated debentures continues to accrue during deferment. At
December 31, 2012, accrued interest owed on the subordinated debentures aggregated $4.8 million, which is
included in interest payable. At December 31, 2011, accrued interest owed on the subordinated debentures
aggregated $3.2 million, which is included in interest payable. Subsequent to December 31, 2012, the Company
began to bring these obligations current and as of January 19, 2013, we were current on the obligations.
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.
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.
The first series of stock 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 were 20,093 shares of this
series outstanding as of December 31, 2012 and 2011. 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 pays dividends at 9%, of its liquidation preference, per annum and may not be
redeemed until the first series has been redeemed. There were 1,005 shares of this series outstanding at December
31, 2012 and 2011.
As a result of deferring interest on the subordinated debentures, BNCCORP was contractually required to cease
payment of dividends on the CPP preferred stock beginning with the quarterly payment due February 2010. At
December 31, 2012, the Company has recorded the accrued dividends aggregating $3.7 million which is included
in other liabilities in the consolidated financial statements. At December 31, 2011, the Company has recorded the
accrued dividends aggregating $2.5 million which is included in other liabilities in the consolidated financial
statements. Subsequent to December 31, 2012, the Company began to bring these obligations current and as of
February 15, 2013, we were current on the obligations.
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.
On May 30, 2001, BNCCORP’s Board of Directors 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.
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 plan was amended in 2011 such that it now expires on May 30, 2021.
NOTE 18. Fair Value Measurements
The following table summarizes the financial assets and liabilities of the Company for which fair values are
determined on a recurring basis as of December 31 (in thousands):
Carrying Value at December 31, 2012
Twelve Months Ended
December 31, 2012
Total
Level 1
Level 2
Level 3
Total gains/(losses)
As a result of participating in the CPP, the Company issued two series of preferred stock. Both series of stock are
LIABILITIES
perpetual and classified as non-voting.
Commitments to sell mortgage loans $
2,233
Mortgage banking short positions
Total liabilities at fair value
52
$ 2,285
loans
Total assets at fair value
4,499
$ 400,143
$
$
$
ASSETS
Securities available for sale
Loans held for sale
Commitments to originate mortgage
$
300,549
95,095
$
-
-
-
-
-
-
-
$
300,549
95,095
$
4,499
400,143
2,233
$
$
52
$ 2,285
$
$
$
-
-
-
-
$
-
649
2,183
$ 2,832
-
$
2,143
-
-
(52)
$ 2,091
Carrying Value at December 31, 2011
Twelve Months Ended
December 31, 2011
Total
Level 1
Level 2
Level 3
Total gains/(losses)
ASSETS
Securities available for sale
Loans held for sale
Commitments to originate mortgage
$
242,630
68,622
$
loans
Total assets at fair value
2,316
313,568
$
LIABILITIES
Commitments to sell mortgage loans $
$
Total liabilities at fair value
4,376
4,376
$
$
$
-
-
-
-
$ 242,630
68,622
$
-
-
$
-
2,078
2,316
$ 313,568
-
-
1,828
$ 3,906
$
-
-
$ 4,376
4,376
$
$
$
-
-
$
$
(3,906)
(3,906)
The unrealized gains recognized during 2012 resulted from a new hedging strategy where loans are sold on a
mandatory delivery basis. We began to deliver loans on a mandatory delivery basis as it generally improves
margins in the mortgage banking operations. We also sell short positions in mortgage-backed securities to hedge
interest rate risk on the loans committed for mandatory delivery. The commitments to originate mortgage banking
loans and our short positions are derivatives and recorded at fair value. The fair values of the commitments to
originate loans under mandatory delivery are generally greater than the fair value of our short positions. This
asymmetry resulted in unrealized gains in 2012.
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):
69
70
BNCCORP, INC. Annual Report 2012
73
2012
NOTE 19. Fair Value of Financial Instruments
Impaired loans(1)
Other real estate(2)
Total
Total
8,394
5,131
13,525
$
$
Level 1
Level 2
Level 3
(losses)
$
$
-
-
-
$
$
8,394
5,131
13,525
$
$
-
-
-
$
$
(1,431)
(1,808)
(3,239)
Total gains/
2011
Impaired loans(1)
Other real estate(2)
Total
Total
4,330
10,145
14,475
$
$
Level 1
-
-
-
$
$
Level 2
4,330
10,145
14,475
$
$
Total gains/
Level 3
(losses)
$
$
-
-
-
$
$
(65)
(1,713)
(1,778)
(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.
The estimated fair values of the Company’s financial instruments are as follows as of December 31
(in thousands):
Level in Fair
Value
Measurement
Hierarchy
2012
2011
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
Level 1
$
40,790
$
40,790
$
19,296
$
19,296
Assets:
sale
Cash and cash equivalents
Investment securities available for
Federal Reserve Bank and Federal
Home Loan Bank stock
Loans held for sale-mortgage
Commitments to originate mortgage
Loans and leases held for investment,
banking
loans
net
Accrued interest receivable
Liabilities and Stockholders’ Equity:
Deposits, noninterest-bearing
Deposits, interest-bearing
Short-term borrowings
Accrued interest payable
Accrued expenses
Commitments to sell mortgage loans
Mortgage banking short positions
Guaranteed preferred beneficial
interests in Company’s
subordinated debentures
Financial instruments with off-
balance-sheet risk:
Commitments to extend credit
Standby and commercial letters of
credit
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
300,549
300,549
242,630
242,630
2,601
2,750
2,750
95,095
4,499
68,622
2,315
2,601
95,095
4,499
279,378
2,590
131,593
518,011
11,700
5,045
10,144
2,233
52
$
725,502
$
724,829
$
278,705
282,581
2,590
2,411
620,605
$
$
$
$
116,864
$
459,391
131,593
520,795
11,700
5,045
10,144
2,233
52
8,635
3,609
6,244
4,376
-
68,622
2,315
282,787
2,411
620,811
116,864
460,506
8,635
3,609
6,244
4,376
-
Level 2
22,430
14,849
22,427
12,731
$
701,208
$
696,411
$
621,546
$
612,965
Level 2
Level 2
$
$
-
-
$
94
$
$
40
$
14
$
$
25
-
-
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BNCCORP, INC. Annual Report 2012
71
72
Impaired loans(1)
Other real estate(2)
Total
Total
Level 1
Level 2
Level 3
(losses)
$
8,394
$
-
$
8,394
$
-
$
(1,431)
5,131
-
5,131
-
(1,808)
$
13,525
$
-
$
13,525
$
-
$
(3,239)
2012
2011
Total gains/
Total gains/
Impaired loans(1)
Other real estate(2)
Total
Total
Level 1
Level 2
Level 3
(losses)
$
4,330
$
-
$
4,330
$
10,145
-
10,145
$
14,475
$
-
$
14,475
$
-
-
-
$
(65)
(1,713)
$
(1,778)
(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.
NOTE 19. Fair Value of Financial Instruments
The estimated fair values of the Company’s financial instruments are as follows as of December 31
(in thousands):
Assets:
Cash and cash equivalents
Investment securities available for
sale
Federal Reserve Bank and Federal
Home Loan Bank stock
Loans held for sale-mortgage
banking
Commitments to originate mortgage
loans
Loans and leases held for investment,
net
Accrued interest receivable
Liabilities and Stockholders’ Equity:
Deposits, noninterest-bearing
Deposits, interest-bearing
Short-term borrowings
Accrued interest payable
Accrued expenses
Commitments to sell mortgage loans
Mortgage banking short positions
Guaranteed preferred beneficial
interests in Company’s
subordinated debentures
Financial instruments with off-
balance-sheet risk:
Commitments to extend credit
Standby and commercial letters of
credit
Level in Fair
Value
Measurement
Hierarchy
2012
2011
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
Level 1
$
40,790
$
40,790
$
19,296
$
19,296
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
Level 2
300,549
300,549
242,630
242,630
$
$
2,601
95,095
4,499
279,378
2,590
725,502
131,593
518,011
11,700
5,045
10,144
2,233
52
$
$
2,601
2,750
2,750
95,095
4,499
68,622
2,315
278,705
2,590
724,829
282,581
2,411
620,605
$
$
116,864
459,391
8,635
3,609
6,244
4,376
131,593
520,795
11,700
5,045
10,144
2,233
52
$
$
68,622
2,315
282,787
2,411
620,811
116,864
460,506
8,635
3,609
6,244
4,376
-
-
22,430
701,208
$
$
14,849
696,411
$
22,427
621,546
$
12,731
612,965
Level 2
Level 2
$
$
-
-
$
94
$
$
14
$
-
-
$
40
$
25
71
72
BNCCORP, INC. Annual Report 2012
75
NOTE 20. 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 our customers as well as to manage our 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, 2012, 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. See Note 1 and 18 to these consolidated financial statements for more information on
financial instruments and derivatives related to our mortgage banking operations.
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, 2012, 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):
2012
2011
Fixed
Rate
Variable
Rate
Fixed
Rate
Variable
Rate
Commitments to extend credit
$
17,738
$
37,378
$
12,063
$
36,165
Standby and commercial letters of credit
523
937
1,051
1,462
In addition to the amounts in the table above, our mortgage banking commitments to fund loans totaled $161.0
million at December 31, 2012 and $93.5 million at December 31, 2011. Also, our mortgage banking commitments
to sell loans totaled $253.2 million at December 31, 2012 and $160.1 million at December 31, 2011.
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 Company. 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 following is a summary of activity related to mortgage banking reimbursement obligations at
December 31 (in thousands):
2012
2011
Balance, beginning of period
$
800
$
501
Provision
Write offs
849
(149)
404
(105)
Balance, end of period
$
1,500
$
800
NOTE 21. 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, 2012 and 2011, the Bank had outstanding $942 thousand and $1.7 million, respectively, of
performance standby letters of credit and $4.7 million and $6.1 million, respectively, 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 22. 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 been made 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
$2.6 million and $1.3 million at December 31, 2012 and 2011, respectively. Originations in 2012 and 2011 totaled
$1.5 million and $709,000, respectively. Loan paydowns in 2012 and 2011 were $162,000 and $124,000,
respectively. The total amount of deposits received from these parties was $2.3 million and $1.9 million at
December 31, 2012 and 2011, 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, 2012, BNCCORP and its
affiliates were in compliance with these requirements.
76
BNCCORP, INC. Annual Report 2012
73
74
NOTE 20. 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 our customers as well as to manage our 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, 2012, 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. See Note 1 and 18 to these consolidated financial statements for more information on
financial instruments and derivatives related to our mortgage banking operations.
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, 2012, 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):
2012
2011
Fixed
Rate
Variable
Rate
Fixed
Rate
Variable
Rate
Commitments to extend credit
$
17,738
$
37,378
$
12,063
$
36,165
Standby and commercial letters of credit
523
937
1,051
1,462
In addition to the amounts in the table above, our mortgage banking commitments to fund loans totaled $161.0
million at December 31, 2012 and $93.5 million at December 31, 2011. Also, our mortgage banking commitments
to sell loans totaled $253.2 million at December 31, 2012 and $160.1 million at December 31, 2011.
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 Company. 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 following is a summary of activity related to mortgage banking reimbursement obligations at
December 31 (in thousands):
2012
2011
Balance, beginning of period
$
800
$
501
Provision
Write offs
849
(149)
404
(105)
Balance, end of period
$
1,500
$
800
NOTE 21. 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, 2012 and 2011, the Bank had outstanding $942 thousand and $1.7 million, respectively, of
performance standby letters of credit and $4.7 million and $6.1 million, respectively, 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 22. 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 been made 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
$2.6 million and $1.3 million at December 31, 2012 and 2011, respectively. Originations in 2012 and 2011 totaled
$1.5 million and $709,000, respectively. Loan paydowns in 2012 and 2011 were $162,000 and $124,000,
respectively. The total amount of deposits received from these parties was $2.3 million and $1.9 million at
December 31, 2012 and 2011, 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, 2012, BNCCORP and its
affiliates were in compliance with these requirements.
73
74
BNCCORP, INC. Annual Report 2012
77
NOTE 23. Income Taxes
The expense (benefit) for income taxes on operations consists of the following for the years ended December 31 (in
thousands):
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):
Current:
Federal
State
Deferred:
Federal
State
Valuation allowance
Total
2012
2011
$
343
7
350
6,106
1,523
(13,259)
(5,630)
(5,280)
$
$
$
17
5
22
997
386
(1,383)
-
22
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 expense (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
2012
7,257
1,198
(287)
(178)
(11)
7,979
(13,259)
(5,280)
$
$
$
$
2011
1,438
388
(116)
(179)
(126)
1,405
(1,383)
22
Deferred tax asset:
Loans, primarily due to credit losses
Fraud loss on assets serviced by others
Acquired intangibles
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
Other
Premises and equipment
Deferred tax liability
Valuation allowance
Net deferred tax asset
2012
2011
$ 4,639
$
9,299
17,636
-
216
1,387
900
1,694
463
2,468
983
-
759
291
4,501
4,798
(7)
4,607
5,709
236
3,456
612
2,602
414
1,581
1,571
84
739
347
4,322
13,314
(13,266)
$ 4,791
$
48
At December 31, 2011, a valuation allowance related to our net deferred tax assets was required because the
realization of tax benefits related to deferred tax assets was not sufficiently certain. During 2012, virtually all of
the valuation allowance related to deferred tax assets was reversed because of several consecutive profitable
quarters and management’s assessment that it was more likely than not that benefits related to deferred tax assets
would be realized.
and 2032.
The Company is able to carry forward federal tax net operating losses aggregating $1.525 million as of December
31, 2012. The carry forward period is 17 to 19 years. The Company is able to carry forward state tax net operating
losses aggregating $12.7 million as of December 31, 2012. The state net operating losses expire between 2014
The Company files consolidated federal and unitary state income tax returns where allowed. Tax years ended
December 31, 2009 through 2012 remain open to federal examination. During 2010, the Internal Revenue Service
opened an examination of the Company’s 2009 federal income tax return. The audit was completed in 2011. Tax
years ended December 31, 2008 through 2012 remain open to state examinations.
78
BNCCORP, INC. Annual Report 2012
75
76
NOTE 23. Income Taxes
thousands):
Current:
Federal
State
Deferred:
Federal
State
Valuation allowance
2012
2011
$
343
$
7
350
6,106
1,523
(13,259)
(5,630)
17
5
22
997
386
-
22
(1,383)
Total
$
(5,280)
$
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 expense (benefit) at 34% statutory rate
$
7,257
$
2012
2011
State taxes (net of Federal benefit)
Tax-exempt interest
Cash surrender values of bank-owned life
insurance
Other, net
Deferred tax valuation allowance
1,198
(287)
(178)
(11)
7,979
(13,259)
$
(5,280)
$
1,438
388
(116)
(179)
(126)
1,405
(1,383)
22
The expense (benefit) for income taxes on operations consists of the following for the years ended December 31 (in
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
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
2012
2011
$ 4,639
-
216
1,387
900
1,694
463
9,299
2,468
983
-
759
291
4,501
4,798
(7)
$
4,607
5,709
236
3,456
612
2,602
414
17,636
1,581
1,571
84
739
347
4,322
13,314
(13,266)
$ 4,791
$
48
At December 31, 2011, a valuation allowance related to our net deferred tax assets was required because the
realization of tax benefits related to deferred tax assets was not sufficiently certain. During 2012, virtually all of
the valuation allowance related to deferred tax assets was reversed because of several consecutive profitable
quarters and management’s assessment that it was more likely than not that benefits related to deferred tax assets
would be realized.
The Company is able to carry forward federal tax net operating losses aggregating $1.525 million as of December
31, 2012. The carry forward period is 17 to 19 years. The Company is able to carry forward state tax net operating
losses aggregating $12.7 million as of December 31, 2012. The state net operating losses expire between 2014
and 2032.
The Company files consolidated federal and unitary state income tax returns where allowed. Tax years ended
December 31, 2009 through 2012 remain open to federal examination. During 2010, the Internal Revenue Service
opened an examination of the Company’s 2009 federal income tax return. The audit was completed in 2011. Tax
years ended December 31, 2008 through 2012 remain open to state examinations.
75
76
BNCCORP, INC. Annual Report 2012
79
NOTE 24. Earnings Per Share
NOTE 26. Commitments and Contingencies
The following table shows the amounts used in computing per share results (in thousands, except share and per
share data):
Net income per share was calculated as follows:
Denominator for basic earnings per share:
Average common shares outstanding
Dilutive common stock options
Denominator for diluted earnings per share
Numerator (in thousands):
Net income
Preferred stock costs
Net income available to common shareholders
Basic earnings per common share
Diluted earnings per common share
NOTE 25. Benefit Plans
2012
2011
3,291,660
52,620
3,344,280
3,282,182
-
3,282,182
$
$
$
$
26,624
(1,462)
25,162
7.64
7.52
$
$
$
$
4,208
(1,394)
2,814
0.86
0.86
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 limits set by law. At their discretion,
BNCCORP and its subsidiaries may provide matching contributions to the plan. In 2012 and 2011, 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 $464,000 and $378,000 for 2012 and 2011, 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, 2012, the assets in the plan
totaled $17.7 million and included $853,000 (83,000 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.
Employment Agreements and Noncompete Covenants
The Company has entered into an employment agreement with its President and Chief Executive Officer. The
Company has also entered into an employment agreement with its Chief Credit Officer. 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 owned by the Treasury Department.
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, 2012 and 2011 was $908,000 and $970,000, respectively, for
facilities, and $37,000 and $42,000, respectively, for equipment and other items. At December 31, 2012, the total
minimum annual base lease payments for operating leases were as follows (in thousands):
2013
2014
2015
2016
2017
Thereafter
$
720
439
448
447
263
1,536
NOTE 27. 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. 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 in plan, total shares available, and maximum restricted shares available as of December 31, 2012 are
as follows:
Incentive
Incentive
Incentive
Incentive
2002
Stock
Plan
2006
Stock
Plan
2010
Stock
Plan
1995
Stock
Plan
Total
Total Shares in Plan
Total Shares Available
250,000
125,000
200,000
250,000
825,000
79,451
-
15,850
250,000
345,301
Maximum Restricted Shares Available
79,451
-
15,850
35,000
130,301
The Company recognized share-based compensation expense of $31,000 and $42,000 for the years ended
December 31, 2012 and 2011, respectively, related to restricted stock.
The tax benefits associated with share-based compensation would have been approximately $14,000 and $10,000
for the years ended December 31, 2012 and 2011, respectively, if the Company had not been in a full valuation
allowance.
At December 31, 2012, the Company had $3,000 of unamortized restricted stock compensation. At December 31,
2011, the Company had $35,000 of unamortized restricted stock compensation. Restricted shares of stock granted
generally have vesting and amortization periods of at least three years.
80
BNCCORP, INC. Annual Report 2012
77
78
NOTE 24. Earnings Per Share
NOTE 26. Commitments and Contingencies
The following table shows the amounts used in computing per share results (in thousands, except share and per
share data):
Net income per share was calculated as follows:
Denominator for basic earnings per share:
Average common shares outstanding
Dilutive common stock options
Denominator for diluted earnings per share
Numerator (in thousands):
Net income
Preferred stock costs
Net income available to common shareholders
Basic earnings per common share
Diluted earnings per common share
NOTE 25. Benefit Plans
2012
2011
3,291,660
52,620
3,344,280
3,282,182
-
3,282,182
$
$
$
$
26,624
(1,462)
25,162
7.64
7.52
$
4,208
(1,394)
2,814
0.86
0.86
$
$
$
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 limits set by law. At their discretion,
BNCCORP and its subsidiaries may provide matching contributions to the plan. In 2012 and 2011, 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 $464,000 and $378,000 for 2012 and 2011, 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, 2012, the assets in the plan
totaled $17.7 million and included $853,000 (83,000 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.
Employment Agreements and Noncompete Covenants
The Company has entered into an employment agreement with its President and Chief Executive Officer. The
Company has also entered into an employment agreement with its Chief Credit Officer. 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 owned by the Treasury Department.
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, 2012 and 2011 was $908,000 and $970,000, respectively, for
facilities, and $37,000 and $42,000, respectively, for equipment and other items. At December 31, 2012, the total
minimum annual base lease payments for operating leases were as follows (in thousands):
2013
2014
2015
2016
2017
Thereafter
$
720
439
448
447
263
1,536
NOTE 27. 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. 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 in plan, total shares available, and maximum restricted shares available as of December 31, 2012 are
as follows:
1995
Stock
Incentive
Plan
2002
Stock
Incentive
Plan
2006
Stock
Incentive
Plan
2010
Stock
Incentive
Plan
Total
Total Shares in Plan
Total Shares Available
250,000
125,000
200,000
250,000
825,000
79,451
-
15,850
250,000
345,301
Maximum Restricted Shares Available
79,451
-
15,850
35,000
130,301
The Company recognized share-based compensation expense of $31,000 and $42,000 for the years ended
December 31, 2012 and 2011, respectively, related to restricted stock.
The tax benefits associated with share-based compensation would have been approximately $14,000 and $10,000
for the years ended December 31, 2012 and 2011, respectively, if the Company had not been in a full valuation
allowance.
At December 31, 2012, the Company had $3,000 of unamortized restricted stock compensation. At December 31,
2011, the Company had $35,000 of unamortized restricted stock compensation. Restricted shares of stock granted
generally have vesting and amortization periods of at least three years.
77
78
BNCCORP, INC. Annual Report 2012
81
Following is a summary of restricted stock activities for the years ended December 31:
Following is a summary of stock option transactions for the years ended December 31:
2012
2011
Number
Restricted
Stock
Shares
9,100
-
(5,800)
-
3,300
Weighted
Average
Grant Date
Fair Value
$
4.47
-
6.16
-
1.50
Number
Restricted
Stock
Shares
20,500
-
(11,400)
-
9,100
Weighted
Average
Grant Date
Fair Value
$
4.42
-
4.39
-
4.47
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 $29,000 and $140,000 for the years ended
December 31, 2012 and 2011, respectively, related to share options. At December 31, 2012, the Company had $0
of unamortized compensation cost related to non-vested stock options granted.
Options with exercise
prices of:
The Company is permitted to issue shares from treasury shares already held when options are exercised.
Following is a summary of vested stock options and options expected to vest as of December 31, 2012:
Number
Weighted-average exercise price
Weighted-average remaining contractual term
Stock Options
Outstanding
228,000
$3.00
7.3 years
Stock Options
Currently
Exercisable
228,000
$3.00
7.3 years
Stock Options
Vested and
Expected to Vest
228,000
$3.00
7.3 years
Outstanding, beginning of year
Granted
Exercised
Forfeited
Outstanding, end of year
Exercisable, end of year
Weighted average fair value of
Granted
Exercised
Forfeited
-
-
-
$
$
$
3.76
2012
2011
Options to
Purchase
Shares
236,500
-
(8,500)
228,000
228,000
$
$
$
$
$
$
Weighted
Average
Exercise Price
3.14
-
-
7.00
3.00
3.00
Options to
Purchase
Shares
Weighted
Average
Exercise Price
269,700
-
-
(33,200)
236,500
122,500
$
$
$
$
$
$
3.49
-
-
5.99
3.14
3.28
$
$
-
-
$ 2.82
Following is a summary of the status of options outstanding at December 31, 2012:
Outstanding Options
Exercisable Options
Weighted Average
Remaining
Weighted
Average
Weighted
Average
Number
Contractual Life
Exercise Price
Number
Exercise Price
$3.00 to $3.00
228,000
7.3 years
$
3.00
228,000
$
3.00
82
BNCCORP, INC. Annual Report 2012
79
80
Following is a summary of restricted stock activities for the years ended December 31:
Following is a summary of stock option transactions for the years ended December 31:
Outstanding, beginning of year
Granted
Exercised
Forfeited
Outstanding, end of year
Exercisable, end of year
Weighted average fair value of
Granted
Exercised
Forfeited
2012
2011
Options to
Purchase
Shares
Weighted
Average
Exercise Price
236,500
-
(8,500)
-
228,000
228,000
$
$
$
$
$
$
3.14
-
7.00
-
3.00
3.00
Options to
Purchase
Shares
269,700
-
-
(33,200)
236,500
122,500
Weighted
Average
Exercise Price
3.49
-
-
5.99
3.14
3.28
$
$
$
$
$
$
$
$
$
-
3.76
-
$
$
-
-
$ 2.82
Following is a summary of the status of options outstanding at December 31, 2012:
The Company recognized share-based compensation expense of $29,000 and $140,000 for the years ended
December 31, 2012 and 2011, respectively, related to share options. At December 31, 2012, the Company had $0
of unamortized compensation cost related to non-vested stock options granted.
Options with exercise
prices of:
Outstanding Options
Weighted Average
Remaining
Number
Contractual Life
Weighted
Average
Exercise Price
Exercisable Options
Weighted
Average
Exercise Price
Number
$3.00 to $3.00
228,000
7.3 years
$
3.00
228,000
$
3.00
2012
2011
Number
Restricted
Stock
Shares
9,100
-
(5,800)
-
Weighted
Average
Grant Date
Fair Value
$
4.47
6.16
-
-
Number
Restricted
Stock
Shares
20,500
-
(11,400)
-
9,100
Weighted
Average
Grant Date
Fair Value
$
4.42
-
4.39
-
4.47
Nonvested, beginning of year
Granted
Vested
Forfeited
Nonvested, end of year
3,300
1.50
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 is permitted to issue shares from treasury shares already held when options are exercised.
Following is a summary of vested stock options and options expected to vest as of December 31, 2012:
Number
Weighted-average exercise price
Weighted-average remaining contractual term
Stock Options
Outstanding
228,000
$3.00
7.3 years
Stock Options
Currently
Exercisable
Stock Options
Vested and
Expected to Vest
228,000
$3.00
7.3 years
228,000
$3.00
7.3 years
79
80
BNCCORP, INC. Annual Report 2012
83
NOTE 28. Condensed Financial Information-Parent Company Only
Condensed financial information of BNCCORP, INC. 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
2012
2011
$
$
$
$
$
$
12,630
-
78,961
1,179
2,337
95,107
22,430
54
9,305
31,789
3,242
-
63,129
155
241
66,767
22,427
42
6,396
28,865
Preferred stock, $.01 par value. Authorized 2,000,000 shares:
Preferred Stock - 5% Series A 20,093 shares issued and outstanding;
19,859
19,635
Preferred Stock - 9% Series B 1,005 shares issued and outstanding;
1,029
1,052
Common stock, $.01 par value – Authorized 35,000,000 shares 3,300,652 and
3,301,007 shares issued and outstanding
Capital surplus – common stock
Retained earnings
Treasury stock (368,001 and 367,646 shares, respectively)
Accumulated other comprehensive loss, net of income taxes
Total stockholders’ equity
Total liabilities and stockholders’ equity
33
27,257
20,655
(5,064)
(451)
63,318
95,107
$
$
33
27,217
(4,508)
(5,076)
(451)
37,902
66,767
Income:
Interest
Management fee income
Gain on sale of securities
Other
Total income
Expenses:
Interest
Salaries and benefits
Legal and other professional
Depreciation and amortization
Other
Total expenses
subsidiaries
Income tax expense (benefit)
Parent Company Only
Condensed Statements of Operations
For the Years Ended December 31
(In thousands)
2012
2011
$
1,652
$
1,661
8
-
38
1,698
1,631
856
618
1
887
3,993
(2,295)
3,089
794
25,830
6
-
38
1,705
1,402
748
517
1
831
3,499
(1,794)
(16)
(1,810)
6,018
Loss before income tax expense (benefit) and equity in income of
Income (loss) before equity in income of subsidiaries
Equity in earnings of subsidiaries
Net income
$
26,624
$
4,208
84
BNCCORP, INC. Annual Report 2012
81
82
NOTE 28. Condensed Financial Information-Parent Company Only
Condensed financial information of BNCCORP, INC. 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
2012
2011
$
12,630
$
3,242
-
-
78,961
1,179
2,337
63,129
155
241
95,107
$
66,767
$
$
54
9,305
31,789
42
6,396
28,865
Preferred stock, $.01 par value. Authorized 2,000,000 shares:
Preferred Stock - 5% Series A 20,093 shares issued and outstanding;
19,859
19,635
Preferred Stock - 9% Series B 1,005 shares issued and outstanding;
1,029
1,052
Common stock, $.01 par value – Authorized 35,000,000 shares 3,300,652 and
3,301,007 shares issued and outstanding
Capital surplus – common stock
Retained earnings
Treasury stock (368,001 and 367,646 shares, respectively)
Accumulated other comprehensive loss, net of income taxes
Total stockholders’ equity
Total liabilities and stockholders’ equity
33
27,257
20,655
(5,064)
(451)
63,318
33
27,217
(4,508)
(5,076)
(451)
37,902
$
95,107
$
66,767
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
22,430
$
22,427
Other
Total expenses
Loss before income tax expense (benefit) and equity in income of
subsidiaries
Income tax expense (benefit)
Income (loss) before equity in income of subsidiaries
Equity in earnings of subsidiaries
Net income
2012
2011
$
1,652
$
1,661
8
-
38
1,698
1,631
856
618
1
887
3,993
(2,295)
3,089
794
25,830
6
-
38
1,705
1,402
748
517
1
831
3,499
(1,794)
(16)
(1,810)
6,018
$
26,624
$
4,208
81
82
BNCCORP, INC. Annual Report 2012
85
Parent Company Only
Condensed Statements of Cash Flows
For the Years Ended December 31
(In thousands)
NOTE 29. Subsequent Events
The Company has evaluated subsequent events from the balance sheet date through March 28, 2013, the date at
which the financial statements were available to be issued, and determined there are no other items to disclose.
Operating activities:
Net income
Adjustments to reconcile net income to net cash provided by (used in)
$ 26,624
$
4,208
2012
2011
operating activities -
Equity in undistributed income of subsidiaries
Depreciation and amortization
Share based compensation
Change in prepaid expenses and other receivables
Net realized gain on sale of investment securities
Change in accrued expenses and other liabilities
Net cash provided by (used in) operating activities
Investing activities:
Dividend paid by subsidiaries
Proceeds from sale of investment securities
Net cash provided by (used in) investing activities
Financing activities:
Proceeds from issuance of preferred stock
Payment of preferred stock dividends
Net cash provided by (used in) 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 received
(25,830)
3
40
(3,109)
-
1,660
(612)
10,000
-
10,000
-
-
-
9,388
3,242
(6,018)
3
181
953
-
1,538
865
-
-
-
-
-
-
865
2,377
$ 12,630
$
3,242
$ 3,259
$
-
$ 699
$
(391)
86
BNCCORP, INC. Annual Report 2012
83
84
Parent Company Only
Condensed Statements of Cash Flows
For the Years Ended December 31
(In thousands)
NOTE 29. Subsequent Events
The Company has evaluated subsequent events from the balance sheet date through March 28, 2013, the date at
which the financial statements were available to be issued, and determined there are no other items to disclose.
Operating activities:
Net income
operating activities -
Adjustments to reconcile net income to net cash provided by (used in)
Equity in undistributed income of subsidiaries
Depreciation and amortization
Share based compensation
Change in prepaid expenses and other receivables
Net realized gain on sale of investment securities
Change in accrued expenses and other liabilities
Net cash provided by (used in) operating activities
Investing activities:
Dividend paid by subsidiaries
Proceeds from sale of investment securities
Net cash provided by (used in) investing activities
Financing activities:
Proceeds from issuance of preferred stock
Payment of preferred stock dividends
Net cash provided by (used in) 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 received
2012
2011
$ 26,624
$
4,208
(25,830)
3
40
(3,109)
-
1,660
(612)
10,000
-
10,000
-
-
-
9,388
3,242
(6,018)
3
181
953
-
1,538
865
-
-
-
-
-
-
865
2,377
$ 12,630
$
3,242
$ 3,259
$
-
$ 699
$
(391)
83
84
BNCCORP, INC. Annual Report 2012
87
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88
BNCCORP, INC. Annual Report 2012
CORPORATE DATA
Investor Relations
Gregory K. Cleveland, CPA (Inactive)
President/CEO
602-852-3526
Timothy J. Franz, CPA (Inactive)
Chief Financial Officer
612-305-2213
General Inquiries:
BNCCORP, INC.
322 East Main Avenue
Bismarck, North Dakota 58501
Telephone (701) 250-3040
Facsimile (701) 222-3653
E-mail Inquiries:
corp@bncbank.com
Annual Meeting
The 2013 annual meeting of stockholders will be
held on Wednesday, June 19, 2013 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 63
record holders of the Company’s common stock at
March 13, 2013.
COMMON STOCK PRICES
For the Years Ended December 31,
2012(1)
2011(1)
High Low
Low
High
First Quarter
$6.77 $2.02
$3.15
$1.55
Second Quarter $2.50 $2.00
$3.09 $2.15
Third Quarter
$6.50 $2.11
$1.75
$2.50
$1.41
$10.55 $6.10
Fourth Quarter
$3.15
(1) The quotes represent the high and low closing
sales prices as reported by OTC Markets.
Stock Transfer Agent and Registrar
American Stock Transfer & Trust Company
59 Maiden Lane, Plaza Level
New York, NY 10038
(800) 937-5449
DIRECTORS, BNCCORP, INC.
Mark W. Sheffert
Chairman of the Board of BNCCORP, INC.
Chairman and Chief Executive
Officer, Manchester Companies, Inc.
Gregory K. Cleveland, CPA (Inactive)
President and
Chief Executive Officer
Tracy Scott, CPA (Inactive)
Retired Co-Founder of BNCCORP, INC.
Gaylen Ghylin, CPA (Inactive)
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 Officer,
Johnsen Trailer Sales, Inc.
Michael O’Rourke
Attorney / Author
Stephen H. Roman
Partner
FirstStrategic LLC
DIRECTORS
BNC National Bank
Gregory K. Cleveland
Shawn Cleveland
Timothy J. Franz
Dave 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
Touchmark 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 Ave, South
Minneapolis, MN 55402
Perimeter
17550 North Perimeter Drive
Scottsdale, AZ 85255
Mortgage Banking Branches:
Scottsdale
17550 North Perimeter Drive
Scottsdale, AZ 85255
Glendale
6685 W. Beardsley
Glendale, AZ 85383
Golden Valley
650 Douglas Drive
Golden Valley, MN 55422
Wichita
2868 North Ridge Road
Wichita, KS 67205
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
Moline
800 36th Avenue
Moline, IL 61265
Independence
19045 E. Valley View
Independence, MO 64055
Lincoln
6120 Apples Way
Lincoln, NE 68516
Omaha
4900 Dodge Street
Omaha, NE 68132
EXECUTIVE OFFICERS OF
BNCCORP and Subsidiaries
Gregory K. Cleveland, CPA (Inactive)
President and Chief Executive Officer
Timothy J. Franz, CPA (Inactive)
Chief Financial Officer
Shawn Cleveland, CPA
Chief Operating Officer,
BNC National Bank
Dave Hoekstra, CPA (Inactive)
Chief Credit Officer and
President, BNC National Bank – North Dakota Market
Mark E. Peiler, CFA
Senior Vice President - Chief Investment Officer
BNCCORP, INC. Annual Report 2012
89
BNCCORP, INC. (BNCCORP or the Company) is a bank holding company
registered under the Bank Holding Company Act of 1956, headquartered
in Bismarck, North Dakota. It is the parent company of BNC National
Bank (the Bank). The Company operates community banking and wealth
management businesses in Arizona, Minnesota and North Dakota from
14 locations. BNC also conducts mortgage banking from 12 locations in
Arizona, Minnesota, North Dakota, Illinois, Kansas, Nebraska and Missouri.
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2012 Annual Report