2
0
1
3
A
n
n
u
a
l
R
e
p
o
r
t
2013
Annual Report
CORPORATE DATA
Investor Relations
Timothy J. Franz
President/CEO
602-852-3526
Daniel Collins
Chief Financial Officer
612-305-2210
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 2014 annual meeting of stockholders will be
held on Wednesday, June 18, 2014 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
OTCQB Markets under the symbol: “BNCC.”
COMMON STOCK PRICES
For the Years Ended December 31,
Low
Low
2012(1)
High
2013(1)
High
First Quarter
$12.89 $10.05 $6.77 $2.02
Second Quarter $12.10 $10.40 $2.50 $2.00
$14.40 $11.70 $6.50 $2.11
Third Quarter
Fourth Quarter
$14.00 $12.11 $10.55 $6.10
(1) The quotes represent the high and low closing
sales prices as reported by OTCQB Markets.
BNCCORP, INC. (BNCCORP or the Company) is a bank holding
company registered under the Bank Holding Company Act of 1956
headquartered in Bismarck, North Dakota. It is the parent company
of BNC National Bank (the Bank). The Company operates
community banking and wealth management businesses in Arizona,
Minnesota and North Dakota from 14 locations. BNC also conducts
mortgage banking from 10 locations in Arizona, Minnesota, North
Dakota, Illinois, Kansas, Nebraska and Missouri.
Stock Transfer Agent and Registrar
American Stock Transfer & Trust Company
59 Maiden Lane, Plaza Level
New York, NY 10038
(800) 937-5449
Directors, BNCCORP, INC.
Tracy Scott
Chairman of the Board and Retired Co-Founder of
BNCCORP, INC.
Timothy J. Franz
President and Chief Executive Officer of BNCCORP, INC.
Gaylen Ghylin,
EVP, Secretary and CFO of 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 of
Johnsen Trailer Sales, Inc.
Michael O’Rourke
Attorney / Author
Directors, BNC National Bank
Doug Brendel
Shawn Cleveland
Timothy J. Franz
Dave Hoekstra
Mark E. Peiler
Scott Spillman
Cheryl A. Stanton
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
Golden Valley
650 North Douglas Drive
Golden Valley, MN 55422
Perimeter
17550 North Perimeter Drive
Scottsdale, AZ 85255
Mortgage Banking Branches:
Glendale
6685 W. Beardsley Road
Glendale, AZ 85383
Scottsdale
17550 North Perimeter Dr., Ste 140
Scottsdale, AZ 85255
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
20101 E. Jackson Drive
Independence, MO 64055
Lincoln
6120 Apples Way
Lincoln, NE 68516
Omaha
12103 Anne Street
Omaha, NE 68137
BNC also provides mortgage banking services
within the following bank branches:
Bismarck Main
322 East Main Avenue
Bismarck, ND 58501
Bismarck North
801 East Century Avenue
Bismarck, ND 58503
Golden Valley
650 North Douglas Drive
Golden Valley, MN 55422
BNCCORP, INC. Annual Report 2013
89
Timothy J. Franz
President and CEO
TO OUR SHAREHOLDERS, CUSTOMERS,
EMPLOYEES AND COMMUNITY:
This is my first Annual Report letter to BNC’s constituents and it rightfully begins by recognizing Mr.
Gregory Cleveland, whose untimely passing occurred in 2013. Greg co-founded BNCCORP, INC. and
infused integrity, ingenuity, passion and demanding standards into every facet of BNC. I am grateful for
the opportunity to have worked closely with Greg, as he represented the best in American business. We
honor him by continuing to deliver on his vision for the Company.
BNC’s performance in 2013 was highlighted by solid earnings performance, despite a decrease in
mortgage banking revenue due to rising interest rates, as well as continued improvement in asset quality
and a sound capital base to support future growth. As we enter 2014, we continue to work hard at
building our core bank to achieve long term results for our shareholders and the communities we serve.
Solid Financial Performance
In 2013 BNC’s net income was $8.6 million (before preferred stock costs), resulting in diluted earnings
per common share of $2.11. These results generated a return on average assets of 1.07% and a return
on average common equity of 15.15%. When compared to community banking peers, returns of this
magnitude are considered very healthy. Our shareholders are being rewarded and employees can be
proud of BNC’s accomplishments.
We generated these results by increasing net interest income, capturing mortgage banking revenues early
in 2013 and reducing operating costs.
Net interest income increased to $19.8 million in 2013, or 7.4%. This improvement is significant as
low interest rates and a flat yield curve have been major impediments for our industry. We were able
to overcome these obstacles by growing our balance sheet by $72.3 million, or 9.4%, during 2013.
Continuing to improve net interest income will be integral to our future success.
Non-interest income was $28.2 million in 2013, excluding life insurance benefits, a substantial decrease
compared to 2012 as interest rates spiked in the second quarter resulting in lower residential housing
re-finance activity and revenues throughout the mortgage banking industry. Fortunately, we captured
mortgage banking revenues when they were available early in the year. While it will be harder to
generate mortgage banking revenues in the current environment, housing finance is a durable business,
we are committed to it and have a solid foundation to build upon. Look for us to improve originations
related to home purchases by adding producers in 2014, while many of our peers exit the business due to
increasing complex regulation.
Non-interest expenses declined significantly last year, after excluding non-recurring charges for
impairment aggregating $1.5 million in 2013 and legal matters aggregating $2.5 million in 2012. When
these costs are excluded, non-interest expenses decreased by $3.0 million, or 8.0%, in 2013. We reduced
costs by downsizing back office mortgage operations and being disciplined overall about the way we
spend money. While the cost of complying with increasing complex banking regulations is rising and
represents a significant challenge to many community banks, BNC has compliance competency at our
core and we are well suited to address these challenges.
Moving Forward from a Position of Strength
Largely due to strong financial performances in the past two years, we enter 2014 from a position of
strength. Our regulatory capital ratios are very strong. Our balance sheet is clean and conservative, as
demonstrated by our relatively low level of non-performing assets which were down to $6.7 million,
or 0.79% of total assets, at the end of 2013. We remain vigilant with respect to credit quality and will
long remember the sources of credit problems that plagued community banking in the recent “Great
Recession”.
1
BNCCORP, INC. Annual Report 2013 The investing marketplace appears to agree that BNC’s financial condition is strong; the U.S. Treasury auctioned its
investment in our preferred stock in March of 2014 and private investors paid a full price for our shares. On behalf of
American taxpayers, we are pleased to note the Treasury made money on its investment in BNC. The new owners of
our preferred stock are sophisticated investors with significant involvement in community banking. Their willingness
to pay a full price can be viewed as a vote of confidence in our financial condition and prospects.
We view our solid financial condition not as an end in itself, but as a starting point and a sturdy platform to build
upon. Our assets grew by more than $72 million to $843 million at the end of 2013 and one of our key strategic
objectives is to continue growing our core banking operations. Our strategy to grow core banking is key priority now,
to reverse the planned shrinking of the balance sheet that enabled us to weather the hardships of a few years ago.
While this was a successful strategy, our current banking assets have not rebounded to pre-recession levels. We aim to
increase our ratio of loans held for investment to core deposits, which is 44.0%, to a more satisfactory level that can
drive higher income.
Our loans held for investment grew by $28.5 million, or 9.8% in 2013 after shrinking for several years and we plan
to continue this growth in 2014. Realistically, growing loans is a challenge for virtually all community banks and will
not be quickly or easily done. However, BNC is well positioned to accomplish this critical strategic objective. Our
business banking operations in North Dakota are in the midst of the most robust local economy in the U.S. Our 2013
originations of SBA loans in the Phoenix area ranked as the fourth highest in this market. We expect our business
bankers in both of these regions to originate more loans in 2014 than in 2013 and proudly boast about the quality of
our business bankers. The talent level of these professionals is exceptional and we are seeking to add comparable
talent.
Growing cost-effective deposits is the most critical element of community banking. Banks that are proficient at
growing deposits generate significant value. In recent years, we have done this exceedingly well, as demonstrated by
the $73.6 million, or 11.3%, growth in deposits during 2013. It is noteworthy that our deposits have grown by almost
$147 million from the end of 2011 to the end of 2013. We continue to emphasize deposit growth and will be relentless
and entrepreneurial in continued pursuit of deposits.
More than Just Typical Banking
The quality of the BNC banking experience is a strong competitive advantage. In recent years we have sponsored
impressive (and free) wealth management seminars. These seminars have featured nationally recognized financial
speakers including John Mauldin and Dr. Lacy Hunt. Participants in the conference held in the summer of 2013
session could easily have profited from Dr. Hunt’s assessment of the U.S. economy. We are well into planning efforts
for our 2014 conference which is currently scheduled for September 25, 2014. You are invited to attend.
We continue to make investments in technology to make banking with us more convenient and accessible for our
customers. We have mobile phone banking, remote deposit services and have long offered internet banking products
for banking and mortgage banking customers. It may surprise you to learn that our internet mortgage banking group
originated more than $679 million of loans in 2013 and is able to serve the housing industry from “border to border
and shore to shore”. If you are a little old fashioned, like me, please visit a branch. I am confident our people will treat
you well.
Creating Value
Value is created by working hard, nurturing lasting relationships, being innovative, and by properly distinguishing
between good ideas and bad ideas.
In banking, we measure value created with a variety of financial metrics. According to most of these measures BNC
has excelled in recent periods. However, one should know and never forget, the process of creating value begins and
ends with quality people.
Our people are dedicated to high standards, hard work, serving clients and improving the communities where they live
and work. In a year when it would have been easy for BNC’s employees to lose focus, they stayed on track. I know
firsthand the good things they do for our clients. It is a genuine honor to be associated with the employees of BNC.
We appreciate the trust placed in BNC by our customers, the confidence of our shareholders, and the sound guidance
of our Board of Directors, and look forward to delivering strong results in 2014 and beyond.
Sincerely,
Timothy J. Franz
President and Chief Executive Officer
2
BNCCORP, INC. Annual Report 2013 BNCCORP, INC.
INDEX TO YEAR END FINANCIAL REPORT
December 31, 2013
TABLE OF CONTENTS
Selected Financial Data ......................................................................................................
Business .............................................................................................................................
Management’s Discussion and Analysis of Financial Condition and Results
of Operations ......................................................................................................................
Quantitative and Qualitative Disclosures about Market Risk ............................................
Consolidated Financial Statements ....................................................................................
5
2
8
5
9
6
30
27
35
31
1
3
BNCCORP, INC. Annual Report 2013
This page was intentionally left blank
4
BNCCORP, INC. Annual Report 2013 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):
Income Statement Data from Continuing Operations:
Total interest income
Total interest expense
Net interest income
Provision for credit losses
Non-interest income
Fraud loss on assets serviced by others
Non-interest expense, excluding fraud loss on assets serviced by others
Income tax expense (benefit)
Net income (loss)
Preferred stock costs
Net income (loss) available to common shareholders
Balance Sheet Data: (at end of period)
Total assets
Investments 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, net of unearned income
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
Book value per common share outstanding
Book value per common share outstanding, excluding accumulated other
comprehensive income
Tangible book value
Earnings Performance / Share Data from Continuing Operations:
Return (loss) on average total assets
Return (loss) on average common stockholders’ equity
Efficiency ratio
Net interest margin
Net interest spread
Basic earnings (loss) per common share
Diluted earnings (loss) per common share
Average common shares outstanding
Average common and common equivalent shares
Shares outstanding at year end
Other Key Ratios
Nonperforming assets to total assets
Nonperforming loans to total assets
Nonperforming loans to loans and leases held for investment
For the Years Ended December 31,
2013
2012
2011
2010
2009
$
23,706
$
23,992
$ 25,749 $ 33,510 $
44,588
3,861
19,845
5,521
6,272
10,238
18,471
19,477
23,272
700
100
1,625
5,750
29,285
42,938
20,237
23,973
-
-
-
26,231
14,899
29,689
27,000
16,013
-
35,981
3,822
39,965
33,859
37,257
39,103
(5,280)
22
72
(1,625)
8,627
$
26,624
$ 4,208 $ (22,065)
$ (18,776)
(1,320)
(1,462)
(1,394)
(1,333)
(1,254)
7,307
$ 25,162
$
2,814 $
(23,398)
$
(20,030)
$
$
$
843,123
$
770,776
$
665,158 $
747,069
$
242,630
137,032
435,719
2,729
32,870
317,928
-
300,549
2,601
95,095
289,469
-
2,750
68,622
293,211
-
2,862
29,116
350,501
70,501
(14,765)
107,446
661,111
594,152
16,329
-
24,134
20,486
16,835
5.09
4.44
5.09
(2.79)%
(97.12)%
134.38%
3.20%
2.95%
(7.13)
(7.13)
$
$
$
$
$
868,083
212,661
3,048
24,130
517,108
-
(18,047)
-
755,963
640,169
10,190
15,000
22,890
20,285
36,980
11.24
11.53
11.24
(2.09)%
(37.20)%
85.56%
3.58%
3.37%
(6.14)
(6.14)
3,261,831
3,273,722
3,290,219
4.97%
4.13%
6.94%
(9,847)
(10,091)
(10,630)
-
723,229
658,704
19,967
-
22,432
21,098
48,767
14.45
14.89
14.45
1.07%
15.15%
73.24%
2.65%
2.54%
$
$
$
-
649,604
584,604
11,700
-
22,430
20,888
47,842
14.49
12.99
14.49
3.74%
90.04%
65.08%
2.85%
2.63%
-
576,255
516,436
8,635
-
22,427
20,687
21,180
$
$
$
6.42 $
5.35 $
6.42 $
0.61%
17.32%
85.26%
3.11%
2.89%
2.22
2.11
$
$
7.64
7.52
$
$
0.86 $
0.86 $
$
$
$
$
$
3,297,235
3,468,390
3,374,601
3,294,562
3,344,280
3,300,652
3,282,182
3,281,719
3,282,182
3,281,719
3,301,007
3,304,339
0.79%
0.67%
1.77%
2.03%
1.36%
3.63%
2.45%
0.93%
2.10%
4.09%
2.39%
5.10%
Net loan charge-offs to average loans and leases held for investment
(0.332)%
(0.225)%
(1.780)%
(1.530)%
(3.235)%
Allowance for credit losses to total loans
Allowance for credit losses to total nonperforming loans
2.81%
175%
2.62%
96%
2.94%
172%
3.84%
83%
3.11%
50%
2
5
BNCCORP, INC. Annual Report 2013
Quarterly Financial Data
Interest income
Interest expense
Net interest income
Provision for credit losses
Net interest income after provision for
credit losses
Non-interest income
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
2013
Third
Quarter
Fourth
Quarter
YTD
$
5,649 $
5,560
$
5,560
$
6,937
$
1,016
4,633
700
3,933
11,324
9,397
5,860
2,075
977
4,583
-
4,583
8,352
9,059
3,876
1,400
944
4,616
-
4,616
5,001
9,451
166
(321)
924
6,013
-
6,013
4,608
8,074
2,547
668
$
3,785 $
2,476
$
487
$
1,879
$
(324)
(327)
(330)
(339)
23,706
3,861
19,845
700
19,145
29,285
35,981
12,449
3,822
8,627
(1,320)
$
3,461 $
2,149
$
157
$
1,540
$
7,307
Basic earnings per common share
Diluted earnings per common share
$
$
1.05
1.00
$
$
0.65
0.62
$
$
0.05
0.05
$
$
0.46
0.44
$
$
2.22
2.11
Average common shares:
Basic
Diluted
3,297,352
3,297,352
3,297,004
3,314,807
3,466,884
3,467,749
3,475,269
3,481,232
3,297,235
3,468,390
6
3
BNCCORP, INC. Annual Report 2013
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
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
100
-
-
-
100
4,545
4,399
4,767
4,660
18,371
5,697
8,672
10,753
10,021
16,826
12,303
9,662
8,969
42,938
39,965
1,570
5,131
9,290
5,353
21,344
2
101
(5,755)
372
(5,280)
NET INCOME
$ 1,568 $ 5,030
$ 15,045 $ 4,981
$ 26,624
Preferred stock costs
Net income available to common
shareholders
(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
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
4
7
BNCCORP, INC. Annual Report 2013
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). As of December 31, 2013, 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 10 locations in Arizona, Minnesota, Illinois,
Kansas, Nebraska and Missouri.
Operating Strategy
We are a community bank that focuses on business banking. We 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:
• Providing individualized, high-level customer service. We provide a high level of customer service to
establish and maintain long-term relationships. We believe that many of our competitors emphasize retail
banking or focus on large companies, leaving the small and mid-sized business market underserved. Our
consistent focus on the needs of such small and mid-sized businesses allows us to compete effectively in this
market segment.
• Diversification of products and services. We offer a wide variety of banking, mortgage banking, and wealth
management products and services to meet the financial needs of our customers, establish new relationships
and expand our business opportunities. We seek to leverage our existing relationships by cross-selling our
products and services.
• Expand opportunistically. We emphasize organic growth within the markets that we serve and look to
opportunistically expand into new lines of business and attractive markets. Organic growth in North Dakota
is an emphasis as we believe the need for our services is particularly strong due to increased demand
generated by the energy and agricultural industries. In Arizona, our organic growth focuses on small
businesses and the SBA arena. In recent years, we have expanded our mortgage banking operations. The
mortgage banking business can be strategically counter cyclical to community banking and it has been a good
example of opportunistic expansion.
• 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.
• Emphasize deposit growth. Growing low-cost core deposits as a key strategy. Federal depository insurance
offers us a strategic advantage that permits us 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 have recently initiated
specialty deposit accounts service where we provide “lockbox” services for customers. This type of
depository product is capable of significant growth.
8
5
BNCCORP, INC. Annual Report 2013
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
$
2013
2012
23,706
3,861
19,845
700
29,285
35,981
12,449
3,822
8,627
(1,320)
$
23,992
5,521
18,471
100
42,938
39,965
21,344
(5,280)
26,624
(1,462)
Net income available to common shareholders
$
7,307
$
25,162
EARNINGS PER SHARE DATA
Basic earnings per common share
Diluted earnings per common share
The following is a brief overview of recent periods:
$
$
2.22
2.11
$
$
7.64
7.52
•
In 2013 the Company increased Net Interest Income over 2012 through a combination of loan and deposit
growth, disciplined product pricing and effective cash deployment.
• Mortgage related revenue declined in 2013 as interest rates rose in the second half of the year. The
Company also received a $1.1 million life insurance payments and SBIC partnership income of $1.587
million in 2013. Many of our sources of non-interest income, excluding mortgage banking revenue,
posted improvements in 2013. In 2012, the Company took advantage of low interest rates to earn
significant mortgage revenue as customers rushed to refinance mortgages. Non-recurring revenue related
to a legal settlement of $7.5 million in 2012 also bolstered earnings. For more information see discussion
of non- interest income that follows in the management discussion & analysis (MD&A).
• Credit quality continued to improve in 2013 from an already stabilized credit quality in 2012. At
December 31, 2013 our non-performing assets (NPA’s) were 0.79% of total assets. NPA’s decreased
from $15.6 million at December 31, 2012 to $6.7 million at December 31, 2013, and the ratio of the
allowance for loan losses to non-performing loans improved to 175% at December 31, 2013.
• Non-interest expense declined in 2013 partially in response to the decline in the mortgage production
volume as interest rates rose. Also, in 2013, we recorded an impairment charge of $1.5 million related to
the consolidation of our Minnesota operations. In 2012, professional fees included a $2.5 million fee paid
to our advisors when the insurance claim litigation was settled.
In 2013, we maintained a more normalized effective tax rate of 30.7%. In 2012, we recorded a significant
tax benefit when the valuation allowance related to deferred tax assets was reversed.
•
6
9
BNCCORP, INC. Annual Report 2013
General
Net income in 2013 was $8.627 million, or $2.11 per diluted share, compared to net income of $26.624 million, or
$7.52 per diluted share in 2012.
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,
2013
Interest Average
earned
or owed
Average
balance
yield or
cost
For the Year ended December 31,
2012
Interest
earned
or owed
Average
balance
Average
yield or
cost
For the Year ended December 31,
2011
Interest Average
yield or
earned
cost
or owed
Average
balance
Assets
Federal funds sold/interest-bearing due from
banks
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
$
$
$
54,726 $
315,722
46,086
-
56,779
284,344
(9,928)
747,729
10,337
49,483
807,549
341,128
19,857
125,641
81,196
567,822
18,948
-
-
22,431
609,201
118,783
727,984
9,093
737,077
70,472
144
5,948
1,496
-
1,890
14,228
-
23,706
0.26% $
1.88%
3.25%
0.00%
3.33%
5.00%
0.00%
3.17%
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%
0.00%
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%
0.00%
4.11%
11,155
51,597
711,178
$
8,997
53,360
689,268
$
576
15
0.17% $
0.08%
271,089
15,549
645
16
0.24% $
0.10%
253,054
12,655
940
13
0.37%
0.10%
1,535
534
2,660
41
-
-
1,160
3,861
-
1.22%
0.66%
0.47%
127,446
65,563
479,647
2,368
828
3,857
1.86%
1.26%
0.80%
139,254
71,432
476,395
2,812
1,008
4,773
0.22%
0.00%
0.00%
5.17%
0.63%
0.00%
13,329
203
-
22,428
515,607
125,367
640,974
16,636
657,610
53,568
70
1
-
1,593
5,521
-
0.53%
0.49%
0.00%
7.10%
1.07%
0.00%
132
15,583
-
11
-
-
23,437 1,367
6,272
515,426
-
124,208
639,634
11,201
650,835
38,433
2.02%
1.41%
1.00%
0.85%
0.00%
0.00%
5.83%
1.22%
0.00%
$
807,549
$
711,178
$
689,268
$
19,845
$ 18,471
$ 19,477
2.54%
2.65%
2.63%
2.85%
2.89%
3.11%
Ratio of average interest-earning assets
to average interest-bearing liabilities
122.74%
125.76%
121.63%
10
7
BNCCORP, INC. Annual Report 2013
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,
2013 Compared to 2012
2012 Compared to 2011
Change Due to
Change Due to
Volume
Rate
Total
Volume
Rate
Total
Interest Earned on Interest-
Earning Assets
Federal funds sold/interest-
bearing due from banks
$
Taxable investments
Tax-exempt investments
Participating interests in
mortgage loans
Loans held for sale- mortgage
banking
Loans held for investment
Total increase (decrease) in
interest income
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
50
1,622
485
-
(318)
(8)
$
$
14
(1,869)
44
-
(55)
(251)
1,831
(2,117)
$
(66)
1,233
690
(23)
1,153
(2,208)
$
$
(15)
(2,644)
(54)
(23)
(232)
432
(81)
(1,411)
636
(46)
921
(1,776)
779
(2,536)
(1,757)
(213)
(5)
(800)
(460)
(51)
(1)
-
(433)
144
4
(33)
166
22
-
-
-
303
63
3
(229)
(79)
(17)
-
-
-
(358)
-
(215)
(101)
(45)
1
-
226
(295)
3
(444)
(180)
(62)
1
-
226
(751)
64
(247)
529
-
(373)
(259)
(286)
(69)
(1)
(833)
(294)
(29)
(1)
-
(433)
(1,963)
(1,660)
(259)
(492)
income
$
1,528
$
(154)
$
1,374 $
1,038
$ (2,044)
$
(1,006)
Net interest income was $19.845 million in 2013 compared to $18.471 million in 2012, an increase of $1.374
million or 7.4%. The net interest margin decreased to 2.65% for the year ended December 31, 2013 from 2.85%
in 2012. In 2013, net interest income was higher as the impact of lower interest rates was offset by the impact of
higher balances of assets and liabilities. Our ability to lower our cost of funds in the future may be limited because
interest rates are currently historically low. In 2013, earning assets increased as loans held for investment and
investments available for sale increased as we deployed funds from new deposits and liquidity built in prior
periods. As 2013 progressed, we continued to increase commercial lending, particularly in North Dakota.
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. In
2012, earning assets increased as loans held for sale in mortgage banking operations and investments available for
8
11
BNCCORP, INC. Annual Report 2013
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.
Non-interest Income
The following table presents the major categories of our non-interest income (dollars are in thousands):
For the Years Ended December 31,
Increase ( Decrease)
2013 – 2012
2013
2012
$
%
Bank charges and service fees
Wealth management revenues
Mortgage banking revenues
Gains on sales of loans, net
Gains on sales of securities, net
Other
Subtotal non-interest income
Insurance claim settlement
Life insurance benefits received
Total non-interest income
$
$
2,675
1,260
19,344
1,632
1,247
2,072
28,230
-
1,055
29,285
$
$
$
2,492
1,204
29,658
1,110
279
695
183
56
(10,314)
522
968
1,377
(7,208)
(7,500)
1,055
42,938 $ (13,653)
35,438
7,500
-
7 % (a)
5 %
(35) % (b)
47 % (c)
347 % (d)
198 % (e)
(20) %
(100) % (f)
100 % (f)
(32) %
(a) These fees are growing as we continue to grow deposits and open new accounts.
(b) Mortgage banking revenues were significantly impacted in 2013 by the increase in interest rates. Revenues began to
decline mid-year as rates rose. In addition, margins were unusually high in the second quarter of 2012.
(c) Gains and losses on sales will vary significantly from period to period. The secondary market for SBA loans is
currently acquisitive and loans can be sold at attractive prices.
(d) Gains and losses on sales of securities will vary significantly from period to period.
(e) In 2013 the Company recorded revenue of $1.587 million from SBIC investments.
(f)
In the third quarter of 2013 the Company recognized life insurance benefits of $1.055 million while an insurance
settlement of $7.5 million was recognized in the third quarter of 2012.
12
9
BNCCORP, INC. Annual Report 2013
Non-interest Expense
The following table presents the major categories of our non-interest expense (dollars are in thousands):
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
Subtotal non-interest expense
Insurance settlement legal fees
Impairment charge
Total non-interest expense
Efficiency ratio
For the Years Ended December 31,
2013
2012
Increase (Decrease)
2013– 2012
$
%
$
$
16,668
3,610
3,070
2,708
2,394
830
1,232
613
126
3,230
34,481
-
1,500
35,981
73.24%
$
$
17,040
4,665
2,859
2,089
1,935
1,213
1,120
684
2,038
3,822
37,465
2,500
-
39,965
65.08%
$
$
(2) % (a)
(23) % (b)
7 %
30 % (c)
24 % (d)
(32) % (e)
10 %
(10) %
(94) % (f)
(15) %
(8) %
(100) % (g)
100 % (h)
(10) %
(372)
(1,055)
211
619
459
(383)
112
(71)
(1,912)
(592)
(2,984)
(2,500)
1,500
(3,984)
8.16%
(a) Early in 2013 the Company recognized increased compensation costs relating to mortgage banking and incentive
accruals. In the third quarter of 2013 our compensation costs and incentive accruals abated in accordance with our
current business. As revenues decreased in response to rising interest rates, the Company reduced operations
personnel in mortgage banking in the third quarter of 2013.
(b) The reduction of professional services is primarily due to the decline in the mortgage production volume.
(c) Marketing costs have increased for the banking and mortgage banking operations to drive volume.
(d) Occupancy costs increased in conjunction with facility improvements and office relocations. We consolidated all
Minnesota operations in the third quarter of 2013 to one location to ultimately reduce operating costs.
(e) The decrease is due to lower regulatory assessments.
(f) Other real estate costs will vary from period to period depending on valuation adjustments on our foreclosed
properties– see Note 8. In 2013, costs related to valuation allowances decreased as values of foreclosed properties
stabilized coupled with the decrease in other real estate.
(g) In the prior year we incurred $2.5 million of legal expenses associated with the insurance settlement that we received
in that period.
(h) In the third quarter we consolidated all Minnesota operations to one location to reduce operating costs and decided to
sell a branch building which was underutilized. This resulted in an impairment charge of $1.5 million to reflect the fair
market value of the property.
Income Tax Expense (Benefit)
During 2013, we recorded tax expense of $3.822 million which resulted in an effective tax rate of 30.70%. The
Company is able to carry forward state tax net operating losses aggregating $6.7 million as of December 31, 2013.
The state net operating losses expire between 2014 and 2032.
The Company 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.
10
13
BNCCORP, INC. Annual Report 2013
Financial Condition
Assets
The following table presents our assets by category (dollars are in thousands):
As of December 31,
2013
2012
Increase (Decrease)
2013 – 2012
$
%
Cash and cash equivalents
$
18,871
$
40,790
$
(21,919)
(54) % (a)
Investment securities available for sale
435,719
300,549
135,170
45 % (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
2,729
32,870
308,081
1,056
14,870
3,554
25,373
2,601
95,095
279,378
5,131
15,932
2,590
28,710
128
5 %
(62,225)
(65) % (c)
28,703
(4,075)
(1,062)
964
10 % (d)
(79) % (e)
(7) % (f)
37 %
(3,337)
(12) % (g)
$
843,123
$
770,776
$
72,347
9 %
(a) Cash balances can fluctuate significantly, but we generally emphasize liquidity.
(b) The increase in investments has primarily been funded by deposit growth.
(c) Loans held for sale declined as production was reduced by the recent increase in interest rates.
(d) Between 2009 and 2012 we reduced our exposure to credit risk. In 2013, with stable credit quality, we implemented
measures to increase our loan portfolio and the end of the period balances exceeded earlier levels.
(e) Decrease is due to sales of foreclosed assets.
(f) Premises and equipment decreased due to the transfer of underutilized property to OREO as part of the consolidation
in Minnesota.
(g) Other assets decreased primarily due to reduction in the cash value of insurance policies relating to the life insurance
benefits received and a decrease in the fair value of mortgage banking derivatives.
14
11
BNCCORP, INC. Annual Report 2013
Investment Securities Available for Sale
The following table presents the composition of the available-for-sale investment portfolio (in thousands):
December 31,
2013
2012
Amortized
cost
Estimated
fair market
value
Amortized
cost
Estimated
fair market
value
$
74,247
$
73,466
$
60,673
$
63,587
32,065
31,678
20,727
20,608
47,882
47,824
13,498
13,554
141,552
140,557
122,404
123,015
77,286
76,629
1,746
64,733
1,794
63,771
36,167
4,656
35,944
36,411
4,803
38,571
U.S. government agency
mortgage-backed securities
guaranteed by GNMA
U.S. government agency
mortgage-backed securities
issued by FNMA or FHLMC
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
$
439,511 $
435,719
$
294,069
$
300,549
There were no securities that management concluded were other-than-temporarily impaired during 2013 or 2012.
See Note 4 of our Consolidated Financial Statements.
12
15
BNCCORP, INC. Annual Report 2013
The following table presents contractual maturities for securities available for sale and yields thereon at December
31, 2013 (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 or
FHLMC(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%
$
136
7.20% $
-
-
0.00% $
74,111
2.31% $
74,247
2.32%
0.00%
32,065
1.51%
32,065
1.51%
0.00%
-
0.00%
-
0.00%
-
0.00%
-
-
-
0.00%
0.00%
0.00%
-
-
-
-
-
-
0.00%
2,128
1.52%
45,754
1.00%
47,882
1.02%
0.00%
7,596
1.89%
133,956
2.41%
141,552
2.38%
0.00%
396
6.46%
76,890
2.58%
77,286
2.60%
0.00%
-
0.00%
1,746
5.52%
1,746
5.52%
0.00%
2,214
8.05%
62,519
5.14%
64,733
5.24%
securities
$
-
0.00% $
136
7.20% $ 12,334
3.08% $ 427,041
2.62%
439,511
2.63%
Unrealized gain (loss) on
securities available for sale
Total investment in securities
available for sale
(3,792)
$ 435,719
2.65%
(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, 2013, we had $435.7 million of available-for-sale securities in the investment portfolio
compared to $300.5 million at December 31, 2012.
In 2013, available-for-sale investment securities increased as we have deployed cash and funds from new
deposits. The net unrealized gain (loss) of investment securities decreased as of December 31, 2013 as compared
to December 31, 202 due to the general increase in interest rates and steepening of the yield curve since the
middle of the second quarter 2013.
In 2012, investment securities increased as we have deployed funds from new deposits. 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.
At December 31, 2013, 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 4 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, 2013
and 2012, and $922 thousand and $795 thousand of FHLB of Des Moines stock as of December 31, 2013 and
2012, respectively.
16
13
BNCCORP, INC. Annual Report 2013
Loans
The following table presents our loan portfolio (dollars are in thousands):
2013
2012
2011
2010
2009
Amount
%
Amount
%
Amount
%
Amount
%
Amount
%
Loans held for sale-
mortgage banking $ 32,870 100.0 $
95,095
100.0
$
68,622
100.0
$
29,116
29.2 $
24,130
100.0
Other loans held for
sale
Loans held for
sale, net
Commercial and
industrial
Commercial real
estate
SBA
Consumer
Land and land
development
-
-
-
-
-
-
70,501
70.8
-
-
32,870 100.0
95,095
100.0
68,622
100.0
99,617 100.0
24,130
100.0
132,983 41.8
116,891
40.4
109,746
37.4
120,620
34.4 225,470
43.6
93,330 29.3
18,215
5.7
32,612 10.3
27,582
8.7
4.2
87,258
15,823
26,614
31,065
11,814
30.1
5.5
9.2
10.7
4.1
115,704
39.4
152,287
43.4
152,194
29.4
9,958
3.4
11,064
3.2
9,260
1.8
23,038
7.9
25,841
7.4
34,439
6.7
29,350
5,545
10.0
1.9
37,761
10.8
3,225
0.9
73,530
22,797
14.2
4.4
Construction
13,286
Unearned income
and net
unamortized
deferred (fees)
and costs
Loans, net of
unearned
income and
unamortized
fees and costs
318,008 100.0
289,465
100.0
293,341
100.0
350,798 100.1
517,690
100.1
(80)
-
4
-
(130)
-
(297)
(0.1)
(582)
(0.1)
$ 317,928 100.0 $ 289,469
100.0
$
293,211
100.0
$ 350,501
100.0
$ 517,108
100.0
The following table presents the change in our loan portfolio (dollars are in thousands):
Increase (Decrease)
December 31,
2013 – 2012
2013
2012
$
%
Loans held for sale-mortgage banking
$
32,870
$
95,095
$
(62,225)
(65.4) %
(a)
Commercial and industrial
132,983
116,891
16,092
13.8 %
(b)
Commercial real estate
SBA
Consumer
Land and land development
Construction
93,330
18,215
32,612
27,582
13,286
87,258
15,823
26,614
31,065
11,814
318,008
289,465
6,072
2,392
5,998
(3,483)
1,472
28,543
7.0 %
(b)
15.1 %
(b)
22.5 %
(b)
(11.2) %
(b)
12.5 %
9.9 %
Unearned income and net unamortized
deferred fees and costs
Loans, net of unearned income and
unamortized fees and costs
(80)
4
(84)
(2,100.0) %
$ 317,928
$ 289,469
$
28,459
9.8 %
(a) Loans held for sale declined as production was reduced by the recent increase in interest rates.
(b) Between 2009 and 2012 we reduced our exposure to credit risk. In 2013 we implemented measures to increase our loan
portfolio.
14
17
BNCCORP, INC. Annual Report 2013
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):
2013
2012
2011
2010
2009
$
222,765
218,068
220,177
259,939
330,204
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
2013
2012
$
206,315
65 %
$
176,653
61 %
32,198
34,043
45,452
10
11
14
38,188
29,238
45,386
13
10
16
held for investment $
318,008
100 %
$
289,465
100 %
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):
North Dakota
Arizona
California
Minnesota
Colorado
Wisconsin
Other
Total gross loans held
for investment
2013
2012
$
211,789
67%
$
168,198
58%
43,750
18,314
16,372
9,164
5,787
12,832
14
6
5
3
2
3
40,215
22,088
17,561
7,686
6,489
27,228
14
8
6
3
2
9
$
318,008
100 %
$
289,465
100 %
18
15
BNCCORP, INC. Annual Report 2013
The following table presents loans by type within our three primary states as of December 31 (in thousands):
2013
Total Loans
and Leases
Held for
Investment
2012
Total Loans
and Leases
Held for
Investment
North Dakota
Commercial and industrial
$
73,277
$
Construction
Agricultural
Land and land development
Owner-occupied commercial real estate
Commercial real estate
Small business administration
Consumer
Subtotal
Arizona
Commercial and industrial
Construction
Agricultural
Land and land development
Owner-occupied commercial real estate
Commercial real estate
Small business administration
Consumer
Subtotal
Minnesota
Commercial and industrial
Construction
Agricultural
Land and land development
Owner-occupied commercial real estate
Commercial real estate
Small business administration
Consumer
Subtotal
$
$
$
$
13,082
16,847
10,611
28,435
35,654
2,188
31,695
211,789
3,021
-
-
5,102
1,571
16,306
15,502
2,248
43,750
794
-
21
578
-
15,589
91
1,241
$
$
$
$
65,793
10,824
15,047
12,240
24,107
12,644
2,428
25,115
168,198
1,421
-
-
5,663
667
16,699
12,881
2,884
40,215
1,154
-
24
1,145
-
14,767
62
409
$
18,314
$
17,561
16
19
BNCCORP, INC. Annual Report 2013
Loan Maturities(1)
The following table sets forth the remaining maturities of loans in our portfolio as of December 31, 2013 (in
thousands):
Over 1 year
through 5 years
One year
or less
Fixed
rate
Floating
rate
Over 5 years
Fixed
rate
Floating
rate
Commercial and industrial
$
50,807
$
36,885
$
17,434
$
18,107
$
9,750
Commercial real estate
SBA
Consumer
Land and land development
Construction
13,225
1,087
3,579
9,321
2,544
10,266
185
18,733
5,037
-
13,031
1,332
3,573
9,332
266
14,452
1,257
6,234
3,892
3,056
42,356
14,354
493
-
7,420
Total Loans
and Leases
Held for
Investment
132,983
$
93,330
18,215
32,612
27,582
13,286
Total principal amount of loans
$
80,563
$
71,106
$
44,968
$
46,998
$ 74,373
$
318,008
(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, 2013 was $700 thousand as compared to $100 thousand in 2012. The provision for credit
losses continues to remain low due to credit quality stabilization.
Allowance for Credit Losses
See Notes 1 and 7 of our Consolidated Financial Statements and “Critical Accounting Policies” for further
information concerning accounting policies associated with the allowance for credit losses.
20
17
BNCCORP, INC. Annual Report 2013
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
Provision for credit losses charged to operations
2013
2012
2011
2010
2009
For the Years ended December 31,
$
10,091
$
10,630
$
14,765
$
18,047
$
8,751
(916)
(87)
-
(106)
-
-
(1,109)
69
8
2
15
71
-
165
(944)
700
9,847
(70)
(767)
(10)
(58)
-
-
(905)
11
38
12
18
187
-
266
(639)
100
10,091
(83)
(4,549)
(105)
(1,049)
(731)
-
(6,517)
49
506
21
34
67
-
677
(5,840)
1,625
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
Transferred (to) from other loans held for sale
Balance of allowance for credit losses, end of
-
-
80
(1,711)
-
period
$
9,847
$
10,091
$
10,630
$
14,765
$
18,047
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
(0.277)%
(0.182)%
(1.611)%
(1.387)%
(2.948)%
(0.332)%
(0.225)%
(1.780)%
(1.530)%
(3.235)%
investment
$
284,344
$
284,507
$
328,091
$
478,492
$
547,336
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
3.10%
175%
2.81%
0.67%
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%
In 2013, the level of nonperforming loans stabilized at $5.6 million, compared to $10.5 million at December 31,
2012. At December 31, 2012, nonperforming loans included a lending relationship with a balance of
approximately $5.8 million that is involved with bankruptcy proceedings. In the fourth quarter of 2013 the same
lending relationship transferred back to performing status.
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).
18
21
BNCCORP, INC. Annual Report 2013
Allocation of the Allowance for Loan Losses
2013
2012
2011
2010
2009
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
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
Total Loans
and Leases
Held for
Investment
Allowance
Commercial and
industrial
Commercial real
estate
SBA
Consumer
Land and land
development
Construction
$ 2,215
42% $ 2,546
40% $
1,639
37% $
1,362
34% $
7,440
4,041
579
478
2,371
163
29%
4,790
30%
5,518
40%
9,818
44%
4,494
6%
616
6%
436
3%
407
3%
260
10%
382
9%
448
8%
1,182
7%
1,162
9%
4%
1,609
148
11%
2,532
10%
1,939
11%
3,849
4%
57
2%
57
1%
842
44%
29%
2%
7%
14%
4%
Total
$
9,847
100% $
10,091
100% $
10,630
100% $
14,765
100% $
18,047
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, 2013 and December 31, 2012. 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.
22
19
BNCCORP, INC. Annual Report 2013
Nonperforming Loans and Assets
The following table sets forth nonperforming assets, the allowance for credit losses and certain related ratios
(dollars are in thousands):
2013
2012
As of December 31,
2011
2010
2009
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
961
4,656
5,617
1,056
6,673
9,847
1.60%
1.77%
0.79%
0.67%
$
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%
3.63%
2.03%
1.36%
2.10%
2.45%
0.93%
5.10%
4.09%
2.39%
6.94%
4.97%
4.13%
175%
96%
172%
83%
50%
Nonperforming Loans
The following table sets forth information concerning our nonperforming loans as of December 31 (in thousands):
2013
2012
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
$
$
10,512
2,231
(935)
(5,830)
(337)
(24)
5,617
$
$
6,169
5,880
(354)
(815)
(368)
-
10,512
At December 31, 2012, nonperforming loans include one lending relationship with a balance of approximately
$5.8 million that was involved with bankruptcy proceedings. In the fourth quarter of 2013 the same lending
relationship transferred back to performing status.
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
2013
2012
$
848
223
$
625
$
$
919
329
590
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.
20
23
BNCCORP, INC. Annual Report 2013
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
$
2013
2012
2011
2010
2009
$
8,544 $
12,368
12,848
34,264
14,337
4,356
7,871
7,270
18,482
1,291
4,188
4,497
5,578
15,782
13,046
See Note 7 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, and property transferred from premises and equipment. 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 8 of our Consolidated Financial Statements for information on other real estate owned.
Impaired loans
See Note 7 of our Consolidated Financial Statements for information on impaired loans.
Potential Problem Loans
In recent years, the macroeconomic environment has been very challenging and asset values were declining
throughout most of the country. In 2013, we have continued to assess our existing portfolio for 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 $176,000 and $5.2
million at December 31, 2013 and 2012, respectively. Also, we estimate there are loans risk rated “substandard”
which are not impaired aggregating $8.1 million and $3.1 million at December 31, 2013 and 2012, 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.
24
21
BNCCORP, INC. Annual Report 2013
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,
2013
2012
Increase (Decrease)
2013 – 2012
$
%
$
141,788
$
131,593
$
10,195
8 % (a)
378,355
123,058
80,028
19,967
22,432
771
6,307
552
773,258
69,865
313,051
128,150
76,810
11,700
22,430
5,045
10,144
3,123
702,046
68,730
65,304
(5,092)
3,218
8,267
2
(4,274)
(3,837)
(2,571)
71,212
1,135
21 % (a)
(4) % (a)
4 % (a)
71 % (b)
- %
(85) % (c)
(38) % (c)
(82) % (d)
10 %
2 % (e)
stockholders’ equity
$
843,123
$
770,776
$
72,347
9 %
(a) Total deposits have increased primarily due to growth in our North Dakota branches.
(b) Short term borrowings will vary depending on our customers need to use repurchase agreements.
(c) Accrued expenses and interest payable decreased due to payments made on interest and dividend obligations that were
deferred until the first quarter of 2013.
(d) Other liabilities decreased due to a reduction in the fair value of mortgage banking derivatives.
(e) 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
$1.7 million and $1.5 million at December 31, 2013 and 2012, 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. Repurchase risk is also evident
within the mortgage banking industry as continued disputes arise between lenders and investors. Such requests
for repurchase are commonly requested due to fraudulent or faulty representation and generally emerge at varied
timeframes subsequent to the original sale of the loan. 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.
See Note 18 of our Consolidated Financial Statements for a description of financial instruments with off-balance-
sheet risk.
22
25
BNCCORP, INC. Annual Report 2013
Deposits
The following table sets forth, for the periods indicated, the distribution of our average deposit account balances
and average cost of funds rates on each category of deposits (dollars are in thousands):
For the Years Ended December 31,
2013
Percent
of
deposits
Wgtd.
avg.
rate
Average
balance
2012
Percent
of
deposits
Average
balance
2011
Wgtd.
avg.
rate
Average
balance
Percent Wgtd.
avg.
rate
of
deposits
$ 341,128
19,857
49.68%
2.89%
0.17% $
0.08%
271,089
15,549
44.81%
2.57%
0.24%
0.10%
$ 253,054
12,655
42.13% 0.37%
2.11% 0.10%
125,641
81,196
206,837
18.30%
11.83%
30.12%
1.22%
0.66%
127,446
65,563
1.39%
193,009
21.06%
10.84%
31.90%
1.86%
1.26%
139,254
71,432
23.19% 2.02%
11.89% 1.41%
1.66%
210,686
35.08% 1.81%
567,822
82.70%
0.47%
479,647
79.28%
0.80%
476,395
79.32% 1.00%
118,783
17.30%
-
125,367
20.72%
-
124,208
20.68%
-
Interest checking and
MMDAs
Savings deposits
Time deposits (CDs):
CDs under $100,000
CDs $100,000 and over
Total time deposits
Total interest-bearing
deposits
Non-interest-bearing
demand deposits
Total deposits
$ 686,605
100.00%
0.39% $
605,014
100.00%
0.64%
$ 600,603
100.00% 0.79%
Since the middle of 2011, we have returned to growing deposits and throughout 2012 and 2013 we have grown
deposits, primarily by capitalizing on economic growth in North Dakota.
Time deposits, in denominations of $100,000 and over, totaled $80.0 million at December 31, 2013 as compared
to $76.8 million at December 31, 2012. The following table sets forth the amount and maturities of time deposits
of $100,000 and over as of December 31, 2013 (in thousands):
Maturing in:
3 months or less
Over 3 months through 6 months
Over 6 months through 12 months
Over 12 months
$
$
27,096
14,026
29,780
9,126
80,028
Borrowed Funds
The following table provides a summary of our short-term borrowings and related cost information as of, or for
the years ended, December 31 (dollars are in thousands):
Short-term borrowings 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
2013
$ 19,967
0.17%
$ 27,071
$ 18,948
0.22%
2012
$ 11,700
0.38%
$ 16,949
$ 13,329
0.53%
2011
$
8,635
0.92%
$ 21,165
$ 15,583
0.85%
Note 11 of our Consolidated Financial Statements summarizes the general terms of our short-term borrowings
outstanding at December 31, 2013 and 2012.
FHLB advances totaled $0 at December 31, 2013 and 2012, respectively.
26
23
BNCCORP, INC. Annual Report 2013
Notes 12 and 13 of our Consolidated Financial Statements summarize the general terms of our FHLB advances
and other borrowings at December 31, 2013 and 2012.
Guaranteed Preferred Beneficial Interests in Company’s Subordinated Debentures
See Note 14 of our Consolidated Financial Statements for a description of the subordinated debentures.
Capital Resources
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)
2012
2009
2010
2011
2013
6.17% 8.58%
10.94% 11.17%
7.59%
21.67% 20.49% 13.71%
9.46% 12.32%
23.15% 22.43% 17.56% 12.89% 14.15%
2.24% 4.23%
3.17%
5.79%
6.21%
10.06% 10.68%
7.53% 8.54%
9.41%
20.13% 19.80% 16.95% 11.53% 12.25%
21.40% 21.06% 18.22% 12.80% 13.52%
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.
In July of 2013, the Federal Reserve issued new regulatory capital standards for community banks which
incorporate some of the capital requirements addressed in the Basel III framework and begin to be effective
January 1, 2015. Although we believe we are compliant with the fully phased in standards, we have not completed
our assessment of the proposed standards. The Company routinely evaluates the need to raise capital to comply
with regulatory capital standards and for other corporate purposes.
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 18 and 19 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 18 of our Consolidated Financial Statements.
24
27
BNCCORP, INC. Annual Report 2013
At December 31, 2013, the aggregate contractual obligations (excluding bank deposits) and commitments
were as follows (in thousands):
Contractual Obligations:
year
1 to 3 years
3 to 5 years
After 5 years
Total
Payments due by period
Less than 1
Total borrowings
Commitments to sell loans
Annual rental commitments under
non-cancelable operating leases
Total
$
$
19,967
32,203
790
52,960
$
$
-
-
1,164
1,164
$
$
-
-
$
22,432 $
-
577
577
$
1,370
23,802 $
42,399
32,203
3,901
78,503
Other Commitments:
Less than 1
year
1 to 3 years
3 to 5 years
After 5 years
Total
Amount of Commitment - Expiration by Period
Commitments to lend
Standby and commercial letters of
credit
Total
$ 118,673
1,438
$ 120,111
$
$
9,470
-
9,470
$
$
5,698
-
5,698
$
$
500 $
134,341
-
500 $
1,438
135,779
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 ($243.6
million as of December 31, 2013);
2. Borrowing capacity from the FHLB ($58.1 million as of December 31, 2013); and
3. Capacity to issue brokered deposits with maturities of less than 12 months ($118.5 million as of
December 31, 2013).
28
25
BNCCORP, INC. Annual Report 2013
On an on-going basis, we use a variety of factors to assess our liquidity position including, but not limited to, the
following items:
• Stability of our deposit base,
• Amount of pledged investments,
• Amount of unpledged investments,
• 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.
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.
26
29
BNCCORP, INC. Annual Report 2013
Forward-Looking Statements
Statements included in “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” which are not historical in nature are intended to be, and are hereby identified as “forward-looking
statements” for purposes of the safe harbor provided by Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934. We caution readers that these forward-looking statements, including
without limitation, those relating to our future business prospects, revenues, working capital, liquidity, capital
needs, interest costs, income and expenses, are subject to certain risks and uncertainties that could cause actual
results to differ materially from those indicated in the forward-looking statements due to several important
factors. These factors include, but are not limited to: risks of loans and investments, including dependence on
local and regional economic conditions; competition for our customers from other providers of financial services;
possible adverse effects of changes in interest rates including the effects of such changes on derivative contracts
and associated accounting consequences; risks associated with our acquisition and growth strategies; and other
risks which are difficult to predict and many of which are beyond our control.
Recently Issued and Adopted Accounting Pronouncements
Note 1 of our Consolidated Financial Statements includes a summary of recently issued and adopted accounting
pronouncements and their related or anticipated impact on the Company.
Critical Accounting Policies
Note 1 of our Consolidated Financial Statements includes a summary of our critical accounting policies and their
related impact on the Company.
Quantitative and Qualitative Disclosures About Market Risk
Market risk 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.
30
27
BNCCORP, INC. Annual Report 2013
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, 2013 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, 2013 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, 2013, 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 2014 is shown
below:
Net Interest Income Simulation
Movement in interest rates
-100bp
Unchanged
+100bp
+200bp
+300bp
+400bp
Projected 12-month net
interest income
Dollar change from
unchanged scenario
Percentage change from
unchanged scenario
$
23,046
$
23,997
$
23,845
$
23,609
$
23,320 $
22,921
$
(951)
-
$
(152)
$
(388)
$
(677) $
(1,076)
(3.96)%
-
(0.63)%
(1.62)%
(2.82)%
(4.48)%
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, 2013 (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, 2013. Assets and liabilities are classified by the earliest
possible repricing date or maturity, whichever occurs first.
28
31
BNCCORP, INC. Annual Report 2013
Interest Sensitivity Gap Analysis
Estimated maturity or repricing at December 31, 2013
0–3
4–12
months
months
1–5
years
Over
5 years
Total
Interest-earning assets:
Interest-bearing deposits with banks
$
18,871
$
-
$
- $
-
$
18,871
Investment securities (a)
FRB and FHLB stock
Fed Funds Sold
Loans held for sale-mortgage banking, fixed
rate
Loans held for sale-mortgage banking, floating
rate
52,465
2,729
-
-
-
Loans held for investment, fixed rate
Loans held for investment, floating rate
19,622
104,567
39,940
137,652
183,252
413,309
-
-
32,870
-
41,717
6,460
-
-
-
-
-
-
-
-
61,529
42,072
29,068
12,893
2,729
-
32,870
-
151,936
165,992
Total interest-earning assets
$
198,254
$
120,987
$
241,253 $
225,213
$
785,707
Interest-bearing liabilities:
Interest checking and money market accounts
$
356,286
$
Savings
Time deposits under $100,000
Time deposits $100,000 and over
Short-term borrowings
FHLB advances
Other borrowings
Subordinated debentures
Total interest-bearing liabilities
Interest rate gap
Cumulative interest rate gap at December 31, 2013
Cumulative interest rate gap to total assets
22,069
12,814
27,096
19,967
-
-
$
$
$
15,000
453,232
(254,978)
(254,978)
(30.24)%
$
-
-
- $
-
-
-
31,305
43,806
-
-
-
-
49,067
29,872
9,126
-
-
-
-
-
-
-
-
7,432
$
$
$
$
$
$
75,111
45,876
(209,102)
(24.80)%
58,193 $
37,304
183,060 $
187,909
(26,042) $
161,867
(3.09)%
19.20%
$
356,286
22,069
123,058
80,028
19,967
-
-
22,432
623,840
161,867
$
$
(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.
32
29
BNCCORP, INC. Annual Report 2013
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, 2013 and do not contemplate any actions we might undertake in response to changes in
market interest rates.
30
33
BNCCORP, INC. Annual Report 2013
This page was intentionally left blank
34
BNCCORP, INC. Annual Report 2013 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors’ Report
Consolidated Balance Sheets as of December 31, 2013 and 2012
Consolidated Statements of Operations for the Years Ended December 31, 2013 and 2012
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2013
and 2012
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2013 and
2012
Consolidated Statements of Cash Flows for the Years Ended December 31, 2013 and 2012
Notes to Consolidated Financial Statements
Page
32
36
34
38
39
35
40
36
41
37
42
38
44
40
31
35
BNCCORP, INC. Annual Report 2013
Independent Auditors’ Report
The Board of Directors
BNCCORP, INC.:
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, 2013 and
2012, 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 audit 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 2013 KPMG LLP Suite 300 1212 N. 96th Street Omaha, NE 68114-2274 Suite 1600 233 South 13th Street Lincoln, NE 68508-2041 KPMG LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative (“KPMG International”), a Swiss entity.
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, 2013 and 2012,
and the results of their operations and their cash flows for the years then ended, in accordance with
U.S. generally accepted accounting principles.
/s/ KPMG LLP
Omaha, Nebraska
March 18, 2014
2
37
BNCCORP, INC. Annual Report 2013
FINANCIAL INFORMATION
Financial Statements
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31
(In thousands, except share data)
ASSETS
2013
2012
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; 3,374,601 and
3,300,652 shares issued and outstanding
Capital surplus – common stock
Retained earnings
Treasury stock (294,052 and 368,001 shares, respectively)
Accumulated other comprehensive income (loss), net
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
$
$
$
18,871
435,719
2,729
32,870
317,928
(9,847)
308,081
1,056
14,870
3,554
25,373
843,123
$
$
40,790
300,549
2,601
95,095
289,469
(10,091)
279,378
5,131
15,932
2,590
28,710
770,776
141,788
$
131,593
378,355
123,058
80,028
723,229
19,967
22,432
771
6,307
552
773,258
20,093
1,005
34
26,133
27,962
(3,894)
(1,468)
69,865
843,123
313,051
128,150
76,810
649,604
11,700
22,430
5,045
10,144
3,123
702,046
19,859
1,029
33
27,257
20,655
(5,064)
4,961
68,730
770,776
$
See accompanying notes to consolidated financial statements.
38
34
BNCCORP, INC. Annual Report 2013
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended December 31
(In thousands, except per share data)
2013
2012
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
Gains on sales of securities, net
Other
Insurance claim settlement
Life insurance benefit received
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
Insurance settlement legal fees
Impairment charge
Total non-interest expense
Income before income taxes
Income tax expense (benefit)
Net income
Preferred stock costs
Net income available to common shareholders
Basic income per common share
Diluted income per common share
$
16,118
$
5,979
1,496
113
23,706
2,660
41
1,160
3,861
19,845
700
19,145
2,675
1,260
19,344
1,632
1,247
2,072
-
1,055
29,285
16,668
3,610
3,070
2,708
2,394
830
1,232
613
126
3,230
-
1,500
35,981
12,449
3,822
8,627
(1,320)
7,307
2.22
2.11
$
$
$
$
$
$
$
$
See accompanying notes to consolidated financial statements.
16,750
6,162
967
113
23,992
3,857
71
1,593
5,521
18,471
100
18,371
2,492
1,204
29,658
1,110
279
695
7,500
-
42,938
17,040
4,665
2,859
2,089
1,935
1,213
1,120
684
2,038
3,822
2,500
-
39,965
21,344
(5,280)
26,624
(1,462)
25,162
7.64
7.52
35
39
BNCCORP, INC. Annual Report 2013
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the Years Ended December 31
(In thousands)
NET INCOME
Unrealized gain (loss) on securities
2013
2012
$
8,627
$
26,624
available for sale
$
(9,025)
$
2,614
Reclassification adjustment for gain
included in net income
Other comprehensive (loss) income,
before tax
Income tax benefit (expense) related to
items of other comprehensive income
Other comprehensive (loss) income
TOTAL COMPREHENSIVE INCOME
(1,247)
(10,272)
3,843
(6,429)
(6,429)
$
2,198
(279)
2,335
(888)
1,447
1,447
$
28,071
See accompanying notes to consolidated financial statements.
40
36
BNCCORP, INC. Annual Report 2013
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
For the Years Ended December 31
(In thousands, except share data)
Capital
Surplus
Retained
Accumulated
Other
Preferred Stock
Common Stock
Common
Earnings
Treasury Comprehensive
Shares
Amount
Shares
Amount
Stock
(Deficit)
Stock
Income (Loss)
Total
BALANCE, December 31, 2011
21,098 $
20,687
3,301,007 $
33 $
27,217 $
(4,508) $
(5,076) $
3,514 $
41,867
Net income
Other comprehensive income
Preferred stock amortization, net
Accrued dividend on preferred
stock
Impact of share-based
compensation
-
-
-
-
-
-
-
201
-
-
-
-
-
-
(355)
-
-
-
-
-
-
-
-
-
26,624
-
(201)
(1,260)
-
-
-
-
40
-
12
-
26,624
1,447
1,447
-
-
-
-
(1,260)
52
BALANCE, December 31, 2012
21,098 $
20,888
3,300,652 $
33 $
27,257 $
20,655 $
(5,064) $
4,961 $
68,730
Net income
Other comprehensive loss
Preferred stock amortization, net
Accrued dividend on preferred
stock
Impact of share-based
compensation
-
-
-
-
-
-
-
210
-
-
-
-
-
-
73,949
-
-
-
-
1
-
-
-
-
8,627
-
(210)
(1,110)
-
-
-
-
(1,124)
-
1,170
-
8,627
(6,429)
(6,429)
-
-
-
-
(1,110)
47
BALANCE, December 31, 2013
21,098 $
21,098
3,374,601 $
34 $
26,133 $
27,962 $
(3,894) $
(1,468) $
69,865
See accompanying notes to consolidated financial statements
37
41
BNCCORP, INC. Annual Report 2013
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31 (In thousands)
OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by (used
2013
2012
$
8,627 $ $
26,624
in) operating activities -
Provision for credit losses
(Recovery) 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
Benefit for deferred income taxes
Change in other liabilities, net
Gains on sales of loans, net
Change in fair value 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 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 increase in loans held for investment
Proceeds from sales of other real estate
Additions to bank premises and equipment
Proceeds from sales of bank premises and equipment
Net cash used in investing activities
700
(14)
1,232
8,259
47
(44)
118
(8)
(1,247)
(536)
(4,650)
(1,632)
3,519
16,132
(947,823)
1,007,926
2,122
92,728
(269,235)
58,109
61,135
(129)
1
(43,903)
4,898
(2,748)
14
(191,858)
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)
See accompanying notes to consolidated financial statements.
42
38
BNCCORP, INC. Annual Report 2013
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, continued
For the Years Ended December 31 (In thousands)
FINANCING ACTIVITIES:
Net increase in deposits
Net increase in short-term borrowings
Repayments of Federal Home Loan Bank advances
Proceeds from Federal Home Loan Bank advances
Dividends paid on preferred stock
Net cash provided by financing activities
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, beginning of year
CASH AND CASH EQUIVALENTS, end of year
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid
Income taxes paid
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Transfer of premises and equipment to other real estate owned
See accompanying notes to consolidated financial statements.
2013
2012
73,625
8,267
(20)
20
(4,681)
77,211
(21,919)
40,790
18,871 $
73,349
3,065
(10,810)
10,810
-
76,414
21,494
19,296
40,790
8,135 $
1,748 $
4,086
707
800 $
-
$
$
$
$
39
43
BNCCORP, INC. Annual Report 2013
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 North Dakota, Arizona and Minnesota from 14 locations. The Bank also conducts mortgage banking
from 10 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), fair value of investments,
impairments and income taxes. 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
40
BNCCORP, INC. Annual Report 2013
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 restructured 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 where allowed.
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.
41
45
BNCCORP, INC. Annual Report 2013
Other-Than-Temporary Impairment
Declines in the fair value of individual available-for-sale or held-to-maturity securities below amortized cost,
which are deemed other-than-temporary, could result in a charge to earnings and establishment of a new cost
basis. Write-downs for other-than-temporary impairment are recorded in non-interest income as realized losses.
The Company assesses available information about our securities to determine whether impairment is other-than-
temporary. The information we consider includes, but is not limited to, the following:
• Recent and expected performance of the securities;
• Financial condition of issuers or guarantors;
• Recent cash flows;
• Seniority of invested tranches and subordinated credit support;
• Vintage of origination;
• Location of collateral;
• Ratings of securities (ratings are not relied upon);
• Value of underlying collateral;
• Delinquency and foreclosure data;
• Historical losses and estimated severity of future losses;
• Credit surveillance data which summarize retrospective performance; and
• Anticipated future cash flows and prospective performance assessments.
Determining whether other-than-temporary impairment has occurred requires judgment of factors that may
indicate an impairment loss has incurred. The Company follows the guidance on other-than-temporary
impairments Accounting Standards Codification (ASC) 320, Investments-Debt and Equity Securities. 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 4 to these consolidated financial statements includes a summary of investment securities in a loss position at
December 31, 2013 and 2012.
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.
46
42
BNCCORP, INC. Annual Report 2013
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, 2013 and 2012, 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, 2013 or 2012.
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.
43
47
BNCCORP, INC. Annual Report 2013
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 recorded at 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 impairment charges of $1.5 million and $0 in 2013 and 2012, respectively.
48
44
BNCCORP, INC. Annual Report 2013
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.
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.
45
49
BNCCORP, INC. Annual Report 2013
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 22 to these consolidated financial statements includes disclosure of the Company’s EPS calculations.
Comprehensive Income (Loss)
Comprehensive income (loss) is the total of net income and accumulated other comprehensive income (loss),
which for the Company, is generally comprised of unrealized gains and losses on securities available for sale and
unrealized gains and losses on hedging instruments qualifying for cash flow hedge accounting treatment pursuant
to FASB ASC 815.
Cash and Cash Equivalents
For purposes of the Consolidated Statements of Cash Flows, cash and cash equivalents include cash on hand, cash
due from banks and federal funds sold.
Share-Based Compensation
FASB ASC 718 requires the Company to measure the cost of employee services received in exchange for an
award of equity instruments based on the fair value of the award on the grant date.
At December 31, 2013, the Company had four stock-based employee compensation plans, which are described
more fully in Note 25 to these consolidated financial statements.
RECENTLY ISSUED OR ADOPTED ACCOUNTING PRONOUNCEMENTS
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 identifying 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,
50
46
BNCCORP, INC. Annual Report 2013
including interim periods within those annual periods. Information related to this ASU and the related disclosures
are included in Note 7 in the Company’s notes to the 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 changed 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 the Company, this ASU was 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. The adoption of this ASU in 2013 did not have a material impact on the Company’s consolidated
financial statements.
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 were asked to review and provide comments to the FASB on the proposal by May 31, 2013.
In February 2013, the FASB issued ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other
Comprehensive Income. This update requires entities to provide information about the amounts reclassified out of
accumulated other comprehensive income by component. In addition, entities are required to present, either on the
face of the statement where net income is presented or in the notes, significant amounts reclassified out of
accumulated other comprehensive income by the respective line items of net income. This ASU is effective for
fiscal years and interim periods beginning after December 15, 2013 for non-public companies. The adoption of
this ASU in 2014 is not anticipated to have a material impact on the Company’s consolidated financial statements.
In July 2013, the FASB issued ASU No. 2013-10, Inclusion of the Fed Funds Effective Swap Rate (or Overnight
Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes (a consensus of the FASB
Emerging Issues Task Force), which permits the use of the Fed Funds Effective Swap Rate (also referred to as the
Overnight Index Swap Rate), in addition to the U.S. government rate (UST) and London Interbank Offered Rate
(LIBOR), as a U.S. benchmark interest rate for hedge accounting purposes under FASB ASC Topic 815,
Derivatives and Hedging. Entities should apply the ASU prospectively for qualifying new or redesignated
hedging relationships entered into on or after July 17, 2013. The adoption of this ASU did not have a material
impact on the Company’s consolidated financial statements.
In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net
Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the
FASB Emerging Issues Task Force), which requires an entity to present an unrecognized tax benefit as a
reduction of a deferred tax asset for an net operating loss (NOL) carryforward, or similar tax loss or tax credit
carryforward, rather than as a liability when (1) the uncertain tax position would reduce the NOL or other
carryforward under the tax law of the applicable jurisdiction and (2) the entity intends to use the deferred tax asset
for that purpose. The ASU does not require new recurring disclosures. It is effective prospectively for fiscal years,
and interim periods within those years, beginning after December 15, 2013 and December 15, 2014, for public
and nonpublic entities, respectively. Early adoption and retrospective application are permitted. The adoption of
this ASU in 2014 is not anticipated to have a material impact on the Company’s consolidated financial statements.
In December 2011, the FASB issued ASU 2011-11, Disclosures about Offsetting Assets and Liabilities. The ASU
is a joint requirement by the FASB and International Accounting Standards Board to enhance current disclosures
and increase comparability of GAAP and International Financial Reporting Standards financial statements. Under
47
51
BNCCORP, INC. Annual Report 2013
the ASU, an entity will be required to disclose both gross and net information about instruments and transactions
eligible for offset in the balance sheet, as well as instruments and transactions subject to an agreement similar to a
master netting agreement. The scope of the ASU includes derivatives, sale and repurchase agreements, reverse
sale and repurchase agreements, and securities borrowing and securities lending arrangements. The ASU was
effective for annual and interim periods beginning January 1, 2013. Adoption of the ASU did not have a material
effect on the Company’s consolidated financial statements.
RECLASSIFICATIONS
Certain amounts in the consolidated financial statements for the prior year have been reclassified to conform to
the current year’s presentation. These reclassifications had no effect on net income or stockholders’ equity.
52
48
BNCCORP, INC. Annual Report 2013
NOTE 2. Regulatory Capital and Current Operating Environment
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
BNCCORP and the Bank are subject to various regulatory capital requirements administered by the Federal
discretionary actions by regulators. Such actions, if undertaken, could have a direct material adverse effect on the
banking agencies. Failure to meet capital requirements mandated by regulators can initiate certain mandatory and
Company’s financial condition and results of operations. Under capital adequacy guidelines and the regulatory
discretionary actions by regulators. Such actions, if undertaken, could have a direct material adverse effect on the
framework for prompt corrective action, BNCCORP and the Bank must meet specific capital guidelines that
Company’s financial condition and results of operations. Under capital adequacy guidelines and the regulatory
involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under
framework for prompt corrective action, BNCCORP and the Bank must meet specific capital guidelines that
regulatory accounting practices. With increasing frequency, regulators are imposing capital requirements that are
involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under
specific to individual institutions. The requirements are generally above the statutory ratios.
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 capital amounts and ratios of BNCCORP and the Bank as of December 31 are presented in the tables
below (dollars in thousands):
Actual
Amount
Amount
Actual
Ratio
Ratio
For Capital Adequacy
Purposes
For Capital Adequacy
Purposes
Amount
Amount
Ratio
Ratio
To be Well Capitalized
To be Well Capitalized
Amount
Ratio
Amount
Ratio
Amount in Excess of
Well Capitalized
Amount in Excess of
Amount
Well Capitalized
Ratio
Amount
Ratio
2013
Total Capital (to risk-weighted assets):
Consolidated
2013
Total Capital (to risk-weighted assets):
Consolidated
BNC National Bank
BNC National Bank
Tier 1 Capital (to risk-weighted
Tier 1 Capital (to risk-weighted
assets):
Consolidated
assets):
Consolidated
BNC National Bank
BNC National Bank
Tier 1 Capital (to average assets):
Consolidated
Tier 1 Capital (to average assets):
Consolidated
BNC National Bank
BNC National Bank
Tangible Equity (to total assets):
Consolidated tangible equity
Tangible Equity (to total assets):
Consolidated tangible equity
BNC National Bank
BNC National Bank
Tangible Common Equity (to total
Tangible Common Equity (to total
assets):
assets):
Consolidated tangible common
Consolidated tangible common
equity
equity
2012
Total Capital (to risk-weighted assets):
Consolidated
BNC National Bank
Tier 1 Capital (to risk-weighted
2012
Total Capital (to risk-weighted assets):
Consolidated
BNC National Bank
Tier 1 Capital (to risk-weighted
assets):
assets):
Consolidated
Consolidated
BNC National Bank
BNC National Bank
Tier 1 Capital (to average assets):
Tier 1 Capital (to average assets):
Consolidated
Consolidated
BNC National Bank
BNC National Bank
Tangible Equity (to total assets):
Tangible Equity (to total assets):
Consolidated tangible equity
Consolidated tangible equity
BNC National Bank
Tangible Common Equity (to total
BNC National Bank
Tangible Common Equity (to total
assets):
Consolidated tangible common
assets):
equity
Consolidated tangible common
equity
$ 97,354
$ 97,354
88,922
88,922
91,150
91,150
83,670
83,670
91,150
91,150
83,670
83,670
69,800
69,800
82,592
82,592
23.15 %
23.15 %
21.40
21.40
$
$
33,644
33,644
33,245
33,245
≥8.0 %
≥8.0 %
≥8.0
≥8.0
$
$
N/A
N/A
41,556
41,556
N/A %
$
N/A %
10.0
10.0
$
N/A
N/A
47,366
47,366
N/A %
N/A %
11.40
11.40
21.67
21.67
20.13
20.13
10.94
10.94
10.06
10.06
8.30
8.30
9.82
9.82
16,822
16,822
16,622
16,622
33,316
33,316
33,271
33,271
N/A
N/A
N/A
N/A
≥4.0
≥4.0
≥4.0
≥4.0
≥4.0
≥4.0
≥4.0
≥4.0
N/A
N/A
N/A
N/A
N/A
N/A
24,934
24,934
N/A
6.0
N/A
6.0
N/A
N/A
58,736
N/A
N/A
14.13
58,736
14.13
N/A
N/A
41,589
41,589
N/A
N/A
N/A
N/A
N/A
N/A
5.0
5.0
N/A
N/A
N/A
N/A
N/A
N/A
42,081
42,081
N/A
5.06
N/A
5.06
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
48,702
48,702
5.79
5.79
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
$ 90,766
84,003
$ 90,766
84,003
22.43 %
22.43 %
21.06
21.06
$ 32,371
$ 32,371
31,905
31,905
≥8.0 %
≥8.0 %
≥8.0
≥8.0
$
$
N/A
39,881
N/A
39,881
$
N/A %
10.0
N/A %
10.0
$
N/A
44,122
N/A
44,122
N/A %
N/A %
11.06
11.06
82,908
78,954
82,908
78,954
82,908
78,954
82,908
78,954
68,690
84,330
68,690
84,330
20.49
20.49
19.80
19.80
11.17
11.17
10.68
10.68
8.92
8.92
10.97
10.97
47,801
47,801
6.21
6.21
≥4.0
≥4.0
≥4.0
≥4.0
≥4.0
≥4.0
≥4.0
≥4.0
N/A
N/A
N/A
N/A
N/A
N/A
16,185
16,185
15,953
15,953
29,679
29,679
29,579
29,579
N/A
N/A
N/A
N/A
N/A
N/A
49
49
N/A
23,929
N/A
23,929
N/A
36,973
N/A
36,973
N/A
N/A
N/A
N/A
N/A
6.0
N/A
6.0
N/A
5.0
N/A
5.0
N/A
N/A
N/A
N/A
N/A
55,025
N/A
55,025
N/A
13.80
N/A
13.80
N/A
41,981
N/A
41,981
N/A
5.68
N/A
5.68
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
53
BNCCORP, INC. Annual Report 2013
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 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 were $3.7 million and accrued interest payable on debt was $4.8 million at
December 31, 2012. On February 15, 2013, all accrued dividends and interest were paid and the Company is
current on these obligations.
NOTE 3. Fraud Loss on Assets Serviced by Others
In April of 2010, the Company discovered fraudulent activity by an external company that was servicing
residential mortgage loans for the Company.
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.
54
50
BNCCORP, INC. Annual Report 2013
NOTE 4. Investment Securities Available For Sale
Investment securities have been classified in the consolidated balance sheets according to management’s intent.
The Company had no securities designated as trading or held-to-maturity in its portfolio at December 31, 2013 or
2012. 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 or FHLMC
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
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
2013
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
$
74,247
$
591
$
(1,372)
$
73,466
32,065
47,882
141,552
77,286
1,746
64,733
210
111
968
514
48
521
(597)
31,678
(169)
47,824
(1,963)
140,557
(1,171)
76,629
-
(1,483)
1,794
63,771
$
439,511
$
2,963
$
(6,755)
$ 435,719
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
294,069
$
148
2,646
7,737
$
(1)
(19)
(1,257)
4,803
38,571
$ 300,549
$
51
55
BNCCORP, INC. Annual Report 2013
The amortized cost and estimated fair market value of available-for-sale securities classified according to their
contractual maturities at December 31, 2013, 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
$
$
-
136
12,334
427,041
439,511
$
$
-
136
12,688
422,895
435,719
For many types of investments, the actual payments will vary significantly from contractual maturities.
Securities carried at approximately $71.8 million and $59.0 million at December 31, 2013 and 2012, 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
Net realized gains
$
2013
58,109
1,759
(512)
1,247
$
2012
8,853
279
-
279
56
52
BNCCORP, INC. Annual Report 2013
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
2013
Description of
Securities
#
Fair
Value
Unrealized
Loss
#
Fair
Value
Unrealized
Loss
#
Total
Fair
Value
Unrealized
Loss
7
$
34,534 $
(889)
1
$
8,891 $
(483)
8
$
43,425 $
(1,372)
U.S. government agency
mortgage-backed securities
guaranteed by GNMA
U.S. government agency
mortgage-backed securities
issued by FNMA or
FHLMC
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 temporarily impaired
6
7
13
6
-
24
27,265
(597)
17,741
(169)
-
-
-
-
-
6
27,265
(597)
-
7
17,741
(169)
49,531
(1,478)
4
16,373
(485)
17
65,904
(1,963)
24,740
(529)
-
-
46,609
(1,483)
3
-
-
8
14,452
(642)
9
39,192
(1,171)
-
-
-
-
-
24
-
-
46,609
(1,483)
$
39,716
$
(1,610)
71
$
240,136 $
(6,755)
securities
63
$
200,420 $
(5,145)
Description of
Securities
#
Fair
Value
Unrealized
Loss
#
Fair
Value
Unrealized
Loss
#
Fair
Value
Unrealized
Loss
Less than 12 months
12 months or more
Total
2012
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 temporarily impaired
securities
2
$
9,238 $
(93)
-
$
-
$ - 2
$ 9,238
$ (93)
2
1
6
2
1
2
15,398
(304)
1
53
(3) 3
15,451
(307)
3,348
(31)
-
-
- 1
3,348
(31)
36,023
(329)
4
16,601
(379) 10
52,624
(708)
8,498
(98)
602
(1)
4,103
(19)
-
-
-
-
- 2
8,498
(98)
-
- 1
602
-
- 2
4,103
(1)
(19)
16
$
77,210 $
(875)
5
$
16,654 $ (382) 21
$ 93,864
$ (1,257)
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
53
57
BNCCORP, INC. Annual Report 2013
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 2013 or 2012.
NOTE 5. Federal Reserve Bank and Federal Home Loan Bank of Des Moines Stock
The carrying amounts of FRB and FHLB stock, which approximate their fair values, consisted of the following as
of December 31 (in thousands):
Federal Reserve Bank Stock, at cost
Federal Home Loan Bank of Des Moines Stock, at cost
Total
$
$
1,807
922
2,729
$
$
1,806
795
2,601
2013
2012
There is no contractual maturity on these investments; the investments are required by counterparties.
NOTE 6. Loans and Leases
The composition of loans and leases is as follows at December 31 (in thousands):
Loans held for sale-mortgage banking
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
2013
2012
32,870
$
95,095
132,983
$
116,891
$
$
93,330
18,215
32,612
27,582
13,286
318,008
87,258
15,823
26,614
31,065
11,814
289,465
(80)
4
317,928
(9,847)
289,469
(10,091)
investment
$
308,081
$
279,378
Loans to Related Parties
Note 20 to these consolidated financial statements includes information relating to loans to executive officers,
directors, principal shareholders and associates of such persons.
58
54
BNCCORP, INC. Annual Report 2013
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
2013
2012
$ 20,922
$
20,704
51,064
17,181
46,991
14,855
$ 89,167
$
82,550
55
59
BNCCORP, INC. Annual Report 2013
NOTE 7. Allowance for Credit Losses
Transactions in the allowance for credit losses were as follows for the years ended December 31 (in thousands):
Commercial
and
industrial
Commercial
real estate
Balance, beginning
2013
Land and
land
SBA
Consumer
development Construction
Total
of period
$
2,546 $
4,790 $
616
$
382
$
1,609 $
148
$ 10,091
Provision for credit
losses
Loans charged off
Loan recoveries
Balance, end of
516
(916)
69
(670)
(87)
8
(39)
-
2
187
(106)
15
691
-
71
15
-
-
700
(1,109)
165
period
$
2,215 $
4,041 $
579
$
478
$
2,371 $
163
$
9,847
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
period
966
(70)
11
1
(767)
38
178
(10)
12
(26)
(58)
18
(1,086)
-
187
67
-
-
100
(905)
266
$
2,546 $
4,790 $
616
$
382
$
1,609 $
148
$ 10,091
60
56
BNCCORP, INC. Annual Report 2013
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 Accruing
Total
Performing
Non-accrual
Total
2013
Commercial and industrial:
Business loans
$
78,137 $
88
$
Agriculture
Owner-occupied
commercial real estate
Commercial real estate
SBA
Consumer:
Automobile
Home equity
1st mortgage
Other
Land and land development
Construction
Total loans held for
investment
17,499
36,829
89,142
18,215
6,634
4,292
11,612
10,012
26,621
13,286
312,279
Loans held for sale
32,870
-
-
-
-
17
-
-
7
-
-
112
-
-
-
-
-
-
-
-
-
-
961
-
961
-
$
78,225 $
17,499
36,829
89,142
18,215
6,651
4,292
11,612
10,019
27,582
13,286
$
-
-
430
4,188
-
38
-
-
-
-
-
78,225
17,499
37,259
93,330
18,215
6,689
4,292
11,612
10,019
27,582
13,286
313,352
4,656
318,008
32,870
-
32,870
Total gross loans
$
345,149 $
112
$
961
$
346,222 $
4,656
$
350,878
57
61
BNCCORP, INC. Annual Report 2013
31-89 Days
Past Due
90 Days or
More Past Due
and Accruing
Total
Performing
Current
Non-accrual
Total
2012
Commercial and industrial:
Business loans
Agriculture
Owner-occupied
commercial real estate
Commercial real estate
SBA
Consumer:
Automobile
Home equity
1st mortgage
Other
$
64,390 $ 3 $
-
$ 64,393 $ 3,211
$
67,604
16,319
-
-
16,319
-
16,319
32,968
82,761
-
-
15,823
-
-
-
32,968
82,761
-
4,497
-
15,823
-
5,762
58
3,779
-
9,462
-
-
-
-
5,820
-
3,779
-
9,462
-
7,534
8
11
7,553
-
32,968
87,258
15,823
5,820
3,779
9,462
7,553
Land and land development
28,273
-
11,814
-
-
-
28,273
2,792
31,065
11,814 -
11,814
278,885
69
11
278,965 10,500
289,465
Construction
Total loans held for
investment
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
2013
2012
$
$
265
-
265
$
228
-
$
228
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, 2013 and 2012 (in thousands):
58
62
BNCCORP, INC. Annual Report 2013
2013
Unpaid
Principal
Recorded
Investment
Related
Allowance
Average
Recorded
Balance
Interest
Income
Recognized
Impaired loans with an allowance recorded:
Commercial and industrial:
Business loans
Agriculture
$
$
-
-
$
-
-
- $
-
$
-
-
Owner-occupied commercial real estate
Commercial real estate
514
6,857
430
4,188
30
1,030
430
4,347
SBA
Consumer:
Automobile
Home equity
1st mortgage
Other
Land and land development
Construction
Loans held for sale
Total impaired loans with an allowance
recorded
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
7,371
$
4,618
$
1,060 $
4,777
$
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
$
-
-
-
-
-
-
-
-
-
-
64
38
-
-
-
-
-
-
-
-
-
-
-
-
$
- $
-
-
-
-
-
-
-
-
-
-
-
$
-
-
-
-
-
44
-
-
-
-
-
-
$
$
64
7,435
$
$
38
4,656
$
$
- $
44
1,060 $
4,821
$
$
59
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
63
BNCCORP, INC. Annual Report 2013
2012
Unpaid
Principal
Recorded
Investment
Related
Allowance
Average
Recorded
Balance
Interest
Income
Recognized
$
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
3,220
-
-
6,857
-
-
-
-
-
661
-
-
$
3,201 $
-
-
4,497
-
-
-
-
-
661
-
-
601 $
-
-
1,200
-
-
-
-
-
300
-
-
$
3,204
-
-
4,640
-
-
-
-
-
661
-
-
recorded
$
10,738
$
8,359 $
2,101
$
8,505
$
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
$
$
-
-
-
-
-
- $
-
-
-
-
-
-
-
-
2,130
-
-
-
-
-
-
2,130
-
-
- $
-
-
-
-
-
-
-
-
-
-
-
$
-
-
-
-
-
-
-
-
-
2,130
-
-
$
$
2,130
12,868
$
$
2,130 $
10,489 $
-
2,101
$
$
2,130
10,635
$
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
60
64
BNCCORP, INC. Annual Report 2013
Troubled Debt Restructuring (TDR)
Included in loans receivable, net, are certain loans that have been modified in order to maximize collection of loan
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
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
concession compared to the original terms and conditions of the loan, the modified loan is considered a troubled
debt restructuring.
debt restructuring.
During 2012, the Company adopted FASB ASU No. 2011-02, Receivables (Topic 310), A Creditor’s
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
Determination of Whether a Restructuring is a Troubled Debt Restructuring, which modified guidance for
identifying restructurings of receivables that constitute a TDR.
identifying restructurings of receivables that constitute a TDR.
The table below summarizes the amounts of restructured loans as of December 31 (in thousands):
The table below summarizes the amounts of restructured loans as of December 31 (in thousands):
Commercial and industrial:
Commercial and industrial:
Business loans
Business loans
Agriculture
Agriculture
Owner-occupied commercial real estate
Owner-occupied commercial real estate
Commercial real estate
Commercial real estate
SBA
SBA
Consumer:
Consumer:
Automobile
Automobile
Home equity
Home equity
1st mortgage
1st mortgage
Other
Other
Land and land development
Land and land development
Construction
Construction
Loans held for sale
Loans held for sale
Commercial and industrial:
Commercial and industrial:
Business loans
Business loans
Agriculture
Agriculture
Owner-occupied commercial real estate
Owner-occupied commercial real estate
Commercial real estate
Commercial real estate
SBA
SBA
Consumer:
Consumer:
Automobile
Automobile
Home equity
Home equity
1st mortgage
1st mortgage
Other
Other
Land and land development
Land and land development
Construction
Construction
Loans held for sale
Loans held for sale
Accrual
Accrual
2013
2013
Non-accrual
Non-accrual
Total
Total
Allowance
Allowance
$
$
$
$
$
$
$
$
93
93
-
-
-
-
3,770
3,770
-
-
-
-
-
-
493
493
-
-
-
-
-
-
-
-
4,356
4,356
$
$
$
$
-
-
-
-
-
-
4,188
4,188
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
4,188
4,188
$
$
$
$
2012
2012
93
93
-
-
-
-
7,958
7,958
-
-
-
-
-
-
493
493
-
-
-
-
-
-
-
-
8,544
8,544
$
$
$
$
14
14
-
-
-
-
1,124
1,124
-
-
-
-
-
-
12
12
-
-
-
-
-
-
-
-
1,150
1,150
Accrual
Accrual
Non-accrual
Non-accrual
Total
Total
Allowance
Allowance
$
$
$
$
-
-
-
-
-
-
4,497
4,497
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
4,497
4,497
$
$
$
$
101
101
-
-
-
-
8,307
8,307
-
-
-
-
-
-
799
799
-
-
3,161
3,161
-
-
-
-
12,368
12,368
$
$
$
$
101
101
-
-
-
-
3,810
3,810
-
-
-
-
-
-
799
799
-
-
3,161
3,161
-
-
-
-
7,871
7,871
61
61
2
2
-
-
-
-
1,276
1,276
-
-
-
-
-
-
16
16
-
-
63
63
-
-
-
-
1,357
1,357
65
BNCCORP, INC. Annual Report 2013
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. There were no new TDRs for the year ending December 31, 2013
and one new TDR with a pre-modification and post-modification outstanding amount of $202 thousand for the
year ending December 31, 2012.
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
2013
2012
$
$
583
223
360
$
$
691
329
362
The amount of additional funds committed to borrowers who are in TDR status was $232,000 at December 31,
2013 and $232,000 at December 31, 2012.
TDRs are evaluated separately in the Bank’s allowance methodology based on the expected cash flows or
collateral values for loans in this status.
As of December 31, 2013 and December 31, 2012, 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).
66
62
BNCCORP, INC. Annual Report 2013
NOTE 8. Other Real Estate
Other real estate (ORE) includes property acquired through foreclosure, property in judgment and in-substance
foreclosures, and property transferred from premises and equipment. 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
Transfers from premises and equipment
Real estate sold
Net gains (losses) on sale of assets
Provision
Balance, end of year
$
$
2013
2012
5,131
-
800
(4,897)
8
14
1,056
$
$
10,145
-
-
(3,206)
(108)
(1,700)
5,131
The following is a summary of ORE as of December 31 (in thousands):
Other real estate
Valuation allowance
Other real estate, net
2013
2012
$
$
3,250
(2,194)
1,056
$
$
8,146
(3,015)
5,131
NOTE 9. Premises and Equipment, net
Premises and equipment, net consisted of the following at December 31 (in thousands):
Land and improvements
Buildings and improvements
Leasehold improvements
Furniture, fixtures and equipment
Total cost
Less accumulated depreciation and amortization
Net premises and equipment
$
$
2013
5,083
10,768
491
9,391
25,733
(10,863)
$
14,870
$
2012
5,220
11,704
655
8,854
26,433
(10,501)
15,932
Depreciation and amortization expense totaled approximately $1.2 million and $1.1 million for the years ended
December 31, 2013 and 2012, respectively.
63
67
BNCCORP, INC. Annual Report 2013
NOTE 10. Deposits
The scheduled maturities of time deposits as of December 31, 2013 are as follows (in thousands):
2014
2015
2016
2017
2018
Thereafter
$
115,021
13,016
14,494
8,588
22,095
29,872
$
203,086
At December 31, 2013 and 2012, the Bank had $64.5 million and $65.0 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
2013
$
$
15
134
442
2,069
2,660
$
$
2012
15
197
449
3,196
3,857
Deposits Received from Related Parties
Note 20 to these consolidated financial statements includes information relating to deposits received from
executive officers, directors, principal shareholders and associates of such persons.
NOTE 11. 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 0.10% to 0.60% in 2013, and from 0.30% to 1.00% in 2012,
secured by government agency collateralized mortgage obligations and general
obligations of municipalities
2013
2012
$
-
$
-
19,967
11,700
$
19,967
$
11,700
The weighted average interest rate on short-term borrowings outstanding as of December 31, 2013 and 2012 was
0.17% and 0.38%, 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, 2013, $20.0 million of securities sold under repurchase agreements, with a weighted average
68
64
BNCCORP, INC. Annual Report 2013
interest rate of 0.17%, were collateralized by government agency collateralized mortgage obligations and general
obligations of municipalities having a market value of $30.3 million and unamortized principal balances of $31.3
million. 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 and
general obligations of municipalities having a market value of $22.6 million and unamortized principal balances
of $21.2 million.
NOTE 12. Federal Home Loan Bank Advances
As of December 31, 2013, the Bank had $0 of FHLB advances outstanding. At December 31, 2013, the Bank has
mortgage loans with unamortized principal balances of approximately $83.1 million and securities with
unamortized principal balances of approximately $2.3 million which were pledged as collateral to the FHLB. The
Bank has the ability to draw advances up to approximately $58.1 million based upon the mortgage loans and
securities that are currently pledged, subject to a requirement to purchase additional FHLB stock.
As of December 31, 2012, the Bank had $0 of FHLB advances outstanding. At December 31, 2012, the Bank had
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.
NOTE 13. Other Borrowings
The following table presents selected information regarding other borrowings at December 31 (in thousands):
Unsecured Borrowing Lines:
Bank of North Dakota
US Bank
Zions First National Bank
Total
Secured Borrowing Lines:
Bank of North Dakota
Total
2013
$
$
$
$
Line
5,000
10,000
12,000
27,000
Outstanding
-
$
-
-
-
$
Line
1,118
1,118
Outstanding
-
$
-
$
Available
5,000
10,000
12,000
27,000
Available
1,118
1,118
$
$
$
$
Collateral
Pledged
$
1,397
At December 31, 2013, the pledged collateral was comprised of collateralized mortgage obligations.
65
69
BNCCORP, INC. Annual Report 2013
Unsecured Borrowing Lines:
Bank of North Dakota
US Bank
Zions First National Bank
Total
Secured Borrowing Lines:
Bank of North Dakota
Total
2012
$
$
$
$
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 14. 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, 2013 and 2012
was 1.65% and 1.76%, respectively. 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 a fixed rate of 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.
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
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 was
included in interest payable. The Company brought these obligations current as of January 19, 2013 and we
continue to remain current on the obligations.
70
66
BNCCORP, INC. Annual Report 2013
NOTE 15. Stockholders’ Equity
On January 16, 2009, BNCCORP received net proceeds of approximately $20.1 million through the sale of shares
of non-voting senior preferred stock to the U.S. Department of the Treasury under the Capital Purchase Program
(CPP). The Treasury Department also received a warrant exercisable for shares of an additional class of
BNCCORP, INC. preferred stock, which has an aggregate liquidation preference of approximately $1.0 million.
The Treasury Department exercised this warrant on January 16, 2009.
As a result of participating in the CPP, the Company issued two series of preferred stock. Both series of stock are
perpetual and classified as non-voting.
The first series of stock pays dividends at 5%, of its liquidation preference, per annum until February 2014 and
thereafter pays a dividend of 9%. There were 20,093 shares of this series outstanding as of December 31, 2013
and 2012. 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, 2013 and 2012.
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 had recorded the accrued dividends aggregating $3.7 million which was
included in other liabilities in the consolidated financial statements. On February 15, 2013, all accrued dividends
and interest were paid and the Company is current on CPP obligations.
The U.S. Department of the Treasury successfully auctioned BNCCORP’s preferred stock and transferred
ownership to private investors effective March 17, 2014.
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.
67
71
BNCCORP, INC. Annual Report 2013
NOTE 16. 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, 2013
Twelve Months Ended
December 31, 2013
Total
Level 1
Level 2
Level 3
Total gains/(losses)
ASSETS
Securities available for sale
Loans held for sale
Commitments to originate mortgage
loans
Commitments to sell mortgage loans
Mortgage banking short positions
Total assets at fair value
$
LIABILITIES
$
435,719
32,870
$
706
107
274
469,676
$
Commitments to sell mortgage loans $
Mortgage banking short positions
Total liabilities at fair value
$
-
-
-
$
$
-
-
-
-
-
-
-
-
-
$
435,719
32,870
$
706
107
274
469,676
$
-
-
-
$
$
$
$
$
-
-
-
-
-
-
-
-
-
$
$
$
$
1,247
(2,032)
(4,153)
2,341
326
(2,271)
-
-
-
Carrying Value at December 31, 2012
Twelve Months Ended
December 31, 2012
Total
Level 1
Level 2
Level 3
Total gains/(losses)
ASSETS
Securities available for sale
Loans held for sale
Commitments to originate mortgage
loans
Total assets at fair value
$
$
300,549
95,095
4,499
400,143
$
$
LIABILITIES
Commitments to sell mortgage loans $
2,233
$
Mortgage banking short positions
Total liabilities at fair value
$
52
2,285
$
-
-
-
-
-
-
-
$
$
300,549
95,095
4,499
400,143
$
$
$
2,233
$
$
52
2,285
$
-
-
-
-
-
-
-
$
$
$
$
-
649
2,183
2,832
2,143
(52)
2,091
Historically, the Company has delivered loans on a best efforts delivery basis. In 2012, 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 and sell mortgage banking loans and our short positions are derivatives
and are recorded at fair value.
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):
72
68
BNCCORP, INC. Annual Report 2013
Impaired loans(1)
Other real estate(2)
Total
Impaired loans(1)
Other real estate(2)
Total
$
$
$
$
2013
Total
Level 1
Level 2
Level 3
(losses)
Total gains/
3,596
1,056
4,652
$
$
3,596
1,056
4,652
$
$
-
-
-
$
$
2012
Total
Level 1
Level 2
Level 3
8,394
5,131
13,525
$
$
-
-
-
$
$
8,394
5,131
13,525
$
$
-
-
-
-
-
-
$
$
140
22
162
Total gains/
(losses)
$
$
(1,431)
(1,808)
(3,239)
(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.
69
73
BNCCORP, INC. Annual Report 2013
NOTE 17. 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
Commitments to sell mortgage loans
Mortgage banking short positions
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
Net Fair Value of Financial
Instruments
Financial instruments with off-
balance-sheet risk:
Commitments to extend credit
Standby and commercial letters of
credit
Level in Fair
Value
Measurement
Hierarchy
2013
2012
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
Level 1
$
18,871
$
18,871
$
40,790
$
40,790
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
Level 2
Level 2
435,719
435,719
300,549
300,549
2,729
32,870
706
107
274
308,081
3,554
802,911
141,788
581,441
19,967
771
6,307
-
-
$
$
2,729
32,870
706
107
274
2,601
95,095
4,499
-
-
$
$
$
$
308,932
3,554
803,762
279,378
2,590
$ 725,502
141,788
583,626
19,967
771
6,307
-
-
$ 131,593
518,011
11,700
5,045
10,144
2,233
52
2,601
95,095
4,499
-
-
278,705
2,590
724,829
131,593
520,795
11,700
5,045
10,144
2,233
52
22,432
772,706
$
16,908
769,367
22,430
$ 701,208
$
14,849
696,411
$
$
34,395
$
28,418
Level 2
Level 2
$
$
-
-
$
$
254
$
14
$
-
-
$
$
94
14
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.
74
70
BNCCORP, INC. Annual Report 2013
NOTE 18. 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, 2013, 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 16 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, 2013, 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):
2013
2012
Fixed
Rate
Variable
Rate
Fixed
Rate
Variable
Rate
Commitments to extend credit
$
18,723
$
57,815
$
17,738
$
37,378
Standby and commercial letters of credit
597
841
523
937
In addition to the amounts in the table above, our mortgage banking commitments to fund loans totaled $57.8
million at December 31, 2013 and $161.0 million at December 31, 2012. Also, our mortgage banking
commitments to sell loans totaled $90.0 million at December 31, 2013 and $253.2 million at December 31, 2012.
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):
71
75
BNCCORP, INC. Annual Report 2013
Balance, beginning of period
$
Provision
Write offs
Balance, end of period
$
2013
2012
1,500
745
(566)
1,679
$
$
800
849
(149)
1,500
NOTE 19. 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, 2013 and 2012, the Bank had outstanding $789 thousand and $942 thousand, respectively, of
performance standby letters of credit and $4.9 million and $4.7 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 in an event of 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 20. 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
$3.1 million and $2.6 million at December 31, 2013 and 2012, respectively. Originations in 2013 and 2012 totaled
$1.0 million and $1.5 million, respectively. Loan paydowns in 2013 and 2012 were $570,000 and $162,000,
respectively. The total amount of deposits received from these parties was $2.2 million and $2.3 million at
December 31, 2013 and 2012, 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, 2013, BNCCORP and its
affiliates were in compliance with these requirements.
76
72
BNCCORP, INC. Annual Report 2013
NOTE 21. Income Taxes
The expense (benefit) for income taxes on operations consists of the following for the years ended December 31 (in
thousands):
Current:
Federal
State
Deferred:
Federal
State
Valuation allowance
Total
2013
2012
$
$
1,719
166
1,885
1,356
574
7
1,937
3,822
$
343
7
350
6,106
1,523
(13,259)
(5,630)
(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
State taxes (net of Federal benefit)
Tax-exempt interest
Life insurance proceeds
Cash surrender values of bank-owned life
insurance
Other, net
Deferred tax valuation allowance
2013
2012
4,233
610
(470)
(359)
(170)
(29)
3,815
7
3,822
$
$
7,257
1,198
(287)
-
(178)
(11)
7,979
(13,259)
(5,280)
$
$
73
77
BNCCORP, INC. Annual Report 2013
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
Unrealized loss on securities available for sale
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
Premises and equipment
Other
Deferred tax liability
Valuation allowance
Net deferred tax asset
2013
2012
$
$
4,451
1,374
211
414
959
665
376
8,450
-
656
732
340
1,728
6,722
(14)
6,708
$
$
4,639
-
216
1,387
900
1,694
463
9,299
2,468
983
759
291
4,501
4,798
(7)
4,791
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 state tax net operating losses aggregating $6.7 million as of December 31,
2013. 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, 2010 through 2013 remain open to federal examination. Tax years ended December 31, 2009
through 2013 remain open to state examinations.
78
74
BNCCORP, INC. Annual Report 2013
NOTE 22. Earnings Per Share
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 23. Benefit Plans
2013
2012
3,297,235
171,155
3,468,390
3,291,660
52,620
3,344,280
$
$
$
$
8,627
(1,320)
7,307
2.22
2.11
$
$
$
$
26,624
(1,462)
25,162
7.64
7.52
BNCCORP has a qualified 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 2013 and 2012, 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 $476,000 and $464,000 for 2013 and 2012, 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, 2013, the assets in the plan totaled $17.4 million
and included $503,000 (41,000 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.
75
79
BNCCORP, INC. Annual Report 2013
NOTE 24. Commitments and Contingencies
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, 2013 and 2012 was $1.2 million and $908,000, respectively, for
facilities, and $21,000 and $37,000, respectively, for equipment and other items. At December 31, 2013, the total
minimum annual base lease payments for operating leases were as follows (in thousands):
$
2014
2015
2016
2017
2018
Thereafter
790
585
579
421
156
1,370
NOTE 25. 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 and total shares available as of December 31, 2013 are as follows:
Total Shares in Plan
Total Shares Available
1995
Stock
Incentive
Plan
250,000
48,751
2002
Stock
Incentive
Plan
125,000
-
2006
Stock
Incentive
Plan
200,000
15,850
2010
Stock
Incentive
Plan
250,000
250,000
Total
825,000
314,601
The Company recognized share-based compensation expense of $46,000 and $31,000 for the years ended
December 31, 2013 and 2012, respectively, related to restricted stock.
The tax benefits associated with share-based compensation was approximately $17,000 for the year ended
December 31, 2013 and would have been $14,000 for the year ended December 31, 2012, if the Company had not
been in a full valuation allowance.
At December 31, 2013, the Company had $254,000 of unamortized restricted stock compensation. At December
31, 2012, the Company had $3,000 of unamortized restricted stock compensation. Restricted shares of stock
granted generally have vesting and amortization periods of at least three years.
80
76
BNCCORP, INC. Annual Report 2013
Following is a summary of restricted stock activities for the years ended December 31:
2013
Number
Restricted
Stock
Shares
Weighted
Average
Grant Date
Fair Value
$
3,300
25,000
(3,300)
-
25,000
1.50
11.88
1.50
-
11.88
2012
Number
Restricted
Stock
Shares
9,100
-
(5,800)
-
3,300
Weighted
Average
Grant Date
Fair Value
$
4.47
-
6.16
-
1.50
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 had 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 $0 and $29,000 for the years ended December
31, 2013 and 2012, respectively, related to share options. At December 31, 2013, the Company had $0 of
unamortized compensation cost related to non-vested stock options.
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, 2013:
Number
Weighted-average exercise price
Weighted-average remaining contractual term
Stock Options
Outstanding
163,200
$3.00
6.21 years
Stock Options
Currently
Exercisable
163,200
$3.00
6.21 years
Stock Options
Vested and
Expected to Vest
163,200
$3.00
6.21 years
77
81
BNCCORP, INC. Annual Report 2013
Following is a summary of stock option transactions for the years ended December 31:
2013
Options to
Purchase
Shares
Weighted
Average
Exercise Price
Options to
Purchase
Shares
Outstanding, beginning of year
Granted
Exercised
Forfeited
Outstanding, end of year
Exercisable, end of year
Weighted average fair value of
Granted
Exercised
Forfeited
228,000
-
(64,800)
-
163,200
163,200
$
$
$
$
$
$
$
$
$
-
1.47
-
3.00
-
3.00
-
3.00
3.00
236,500
-
(8,500)
-
228,000
228,000
$
-
$ 3.76
$
-
Following is a summary of the status of options outstanding at December 31, 2013:
2012
Weighted
Average
Exercise Price
3.14
-
7.00
-
3.00
3.00
$
$
$
$
$
$
Outstanding Options
Weighted Average
Remaining
Number
Contractual Life
Weighted
Average
Exercise Price
Exercisable Options
Weighted
Average
Exercise Price
Number
Options with exercise
prices of:
$3.00 to $3.00
163,200
6.21 years
$
3.00
163,200
$
3.00
82
78
BNCCORP, INC. Annual Report 2013
NOTE 26. 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 in subsidiaries
Receivable from subsidiaries
Other
Total assets
Liabilities and stockholders’ equity:
Subordinated debentures
Payable to subsidiaries
Accrued expenses and other liabilities
Total liabilities
Preferred stock, $.01 par value. Authorized 2,000,000 shares:
Preferred Stock - 5% Series A 20,093 shares issued and outstanding;
Preferred Stock - 9% Series B 1,005 shares issued and outstanding;
Common stock, $.01 par value – Authorized 35,000,000 shares 3,374,601 and
3,300,652 shares issued and outstanding
Capital surplus – common stock
Retained earnings
Treasury stock (294,052 and 368,001 shares, respectively)
Accumulated other comprehensive loss, net of income taxes
Total stockholders’ equity
Total liabilities and stockholders’ equity
2013
2012
9,068
83,675
381
1,739
94,863
22,432
56
1,493
23,981
20,093
1,005
34
26,133
27,962
(3,894)
(451)
70,882
94,863
$
$
$
$
12,630
78,961
1,179
2,337
95,107
22,430
54
9,305
31,789
19,859
1,029
33
27,257
20,655
(5,064)
(451)
63,318
95,107
$
$
$
$
79
83
BNCCORP, INC. Annual Report 2013
Parent Company Only
Condensed Statements of Operations
For the Years Ended December 31
(In thousands)
2013
2012
$
1,835
$
1,652
11
38
1,884
1,197
836
799
1
824
3,657
(1,773)
684
(1,089)
9,716
$
8,627
$
8
38
1,698
1,631
856
618
1
887
3,993
(2,295)
3,089
794
25,830
26,624
Income:
Management fee income
Interest
Other
Total income
Expenses:
Interest
Salaries and benefits
Legal and other professional
Depreciation and amortization
Other
Total expenses
Loss before income tax benefit and equity in income (loss) of
subsidiaries
Income tax benefit
Income (loss) before equity in income of subsidiaries
Equity in earnings of subsidiaries
Net income
84
80
BNCCORP, INC. Annual Report 2013
Parent Company Only
Condensed Statements of Cash Flows
For the Years Ended December 31
(In thousands)
Operating activities:
Net income
Adjustments to reconcile net income to net cash provided by (used in)
$
8,627
$
26,624
2013
2012
operating activities -
Equity in undistributed income of subsidiaries
Depreciation and amortization
Share based compensation
Change in prepaid expenses and other receivables
Change in accrued expenses and other liabilities
Net cash used in operating activities
Investing activities:
Dividend paid by subsidiaries
Net cash provided by investing activities
Financing activities:
Payment of preferred stock dividends
Net cash 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
(9,716)
1
(1,123)
2,566
(4,237)
(3,882)
5,000
5,000
(4,680)
(4,680)
(3,562)
12,630
(25,830)
3
40
(3,109)
1,660
(612)
10,000
10,000
-
-
9,388
3,242
$
$
$
9,068
$
12,630
3,112
$
3,259
1,720
$
699
81
85
BNCCORP, INC. Annual Report 2013
NOTE 27. Subsequent Events
The Company has evaluated subsequent events from the balance sheet date through March 18, 2014, the date at
which the financial statements were available to be issued, and determined there are no other items to disclose.
86
82
BNCCORP, INC. Annual Report 2013
87
BNCCORP, INC. Annual Report 2013 This page was intentionally left blank
88
BNCCORP, INC. Annual Report 2013 CORPORATE DATA
Investor Relations
Timothy J. Franz
President/CEO
602-852-3526
Daniel Collins
Chief Financial Officer
612-305-2210
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 2014 annual meeting of stockholders will be
held on Wednesday, June 18, 2014 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
OTCQB Markets under the symbol: “BNCC.”
COMMON STOCK PRICES
For the Years Ended December 31,
Low
Low
2012(1)
High
2013(1)
High
First Quarter
$12.89 $10.05 $6.77 $2.02
Second Quarter $12.10 $10.40 $2.50 $2.00
$14.40 $11.70 $6.50 $2.11
Third Quarter
Fourth Quarter
$14.00 $12.11 $10.55 $6.10
(1) The quotes represent the high and low closing
sales prices as reported by OTCQB Markets.
BNCCORP, INC. (BNCCORP or the Company) is a bank holding
company registered under the Bank Holding Company Act of 1956
headquartered in Bismarck, North Dakota. It is the parent company
of BNC National Bank (the Bank). The Company operates
community banking and wealth management businesses in Arizona,
Minnesota and North Dakota from 14 locations. BNC also conducts
mortgage banking from 10 locations in Arizona, Minnesota, North
Dakota, Illinois, Kansas, Nebraska and Missouri.
Stock Transfer Agent and Registrar
American Stock Transfer & Trust Company
59 Maiden Lane, Plaza Level
New York, NY 10038
(800) 937-5449
Directors, BNCCORP, INC.
Tracy Scott
Chairman of the Board and Retired Co-Founder of
BNCCORP, INC.
Timothy J. Franz
President and Chief Executive Officer of BNCCORP, INC.
Gaylen Ghylin,
EVP, Secretary and CFO of 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 of
Johnsen Trailer Sales, Inc.
Michael O’Rourke
Attorney / Author
Directors, BNC National Bank
Doug Brendel
Shawn Cleveland
Timothy J. Franz
Dave Hoekstra
Mark E. Peiler
Scott Spillman
Cheryl A. Stanton
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
Golden Valley
650 North Douglas Drive
Golden Valley, MN 55422
Perimeter
17550 North Perimeter Drive
Scottsdale, AZ 85255
Mortgage Banking Branches:
Glendale
6685 W. Beardsley Road
Glendale, AZ 85383
Scottsdale
17550 North Perimeter Dr., Ste 140
Scottsdale, AZ 85255
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
20101 E. Jackson Drive
Independence, MO 64055
Lincoln
6120 Apples Way
Lincoln, NE 68516
Omaha
12103 Anne Street
Omaha, NE 68137
BNC also provides mortgage banking services
within the following bank branches:
Bismarck Main
322 East Main Avenue
Bismarck, ND 58501
Bismarck North
801 East Century Avenue
Bismarck, ND 58503
Golden Valley
650 North Douglas Drive
Golden Valley, MN 55422
BNCCORP, INC. Annual Report 2013
89
2
0
1
3
A
n
n
u
a
l
R
e
p
o
r
t
2013
Annual Report