CORPORATE DATA
Investor Relations
Daniel Collins
Chief Financial Officer
612-305-2210
Timothy J. Franz
President/CEO
612-305-2213
E-mail Inquiries:
corp@bncbank.com
General Inquiries:
BNCCORP, INC.
322 East Main Avenue
Bismarck, North Dakota 58501
Telephone (701) 250-3040
Facsimile (701) 222-3653
Annual Meeting
The 2015 annual meeting of stockholders will be
held on Wednesday, June 17, 2015 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
OTCQX Markets under the symbol: “BNCC.”
COMMON STOCK PRICES
For the Years Ended December 31,
Low
2013(1)
High Low
2014(1)
High
First Quarter
$13.79 $12.03 $12.89 $10.05
Second Quarter $18.00 $13.24 $12.10 $10.40
$18.40 $17.55 $14.40 $11.70
Third Quarter
$18.22 $16.60 $14.00 $12.11
Fourth Quarter
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 North Dakota, Arizona and Minnesota from 15 locations. BNC
also conducts mortgage banking from 14 locations in Arizona,
Minnesota, North Dakota, Illinois, Kansas and Nebraska.
(1) The quotes represent the high and low closing
sales prices as reported by OTCQX Markets.
Stock Transfer Agent and Registrar
American Stock Transfer & Trust Company
59 Maiden Lane, Plaza Level
New York, NY 10038
(800) 937-5449
Directors, BNCCORP, INC.
Tracy Scott
Chairman of the Board and
Retired Co-Founder of BNCCORP, INC.
Timothy J. Franz
President and
Chief Executive Officer of BNCCORP, INC.
Nathan P. Brenna,
Owner, Brenna Farm and Ranch
Former Attorney
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 E Century Avenue
Bismarck, ND 58503
Primrose Assisted Living Apartments
1144 College Drive
Bismarck, ND 58501
Touchmark on West Century
1000 W 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
Mandan
2711 Sunset Drive NW
Mandan, ND 58554
Golden Valley
650 North Douglas Drive
Golden Valley, MN 55422
Perimeter
17550 N Perimeter Drive
Scottsdale, AZ 85255
Mortgage Banking Branches:
Glendale
6685 W. Beardsley Road
Glendale, AZ 85383
Scottsdale
17550 North Perimeter Dr., Ste 260
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
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
Mandan
2711 Sunset Drive NW
Mandan, ND 58554
Golden Valley
650 North Douglas Drive
Golden Valley, MN 55422
BNCCORP, INC. Annual Report 2014
89
Timothy J. Franz
President and CEO
TO OUR SHAREHOLDERS, CUSTOMERS,
EMPLOYEES AND COMMUNITY:
2014 was a good, solid year for BNC. We focused on building our core banking operations, avoided
the event-driven distractions of the recent past and significantly increased the value of BNC for our
shareholders. With our expanded and strengthened core banking foundation, we commence 2015 better
positioned to deliver reliable, higher earnings.
Results Driven
BNC is characterized by energetic, motivated people driven to produce results. Their hard work and
commitment directly resulted in significant growth during 2014.
We grew assets by 10.8%, deposits by 12.2% and loans held for investment by 13.5%. These gains
resulted in a significantly improved net interest income that was 30.8% higher in 2014. This increase
is impressive and few community banks delivered a similar increase in the prevailing interest rate
environment.
Net income in 2014 was $8.4 million, compared to $8.6 million in 2013. Diluted earnings per share were
$1.91, down from 2013’s $2.11 per diluted share, primarily due to a decline in mortgage banking income
and higher preferred stock costs. Nonetheless, our return on common equity and return on assets were
quite healthy, at 12.37% and 0.94%, respectively.
Nonperforming assets decreased significantly in 2014. We only had $314 thousand of nonperforming
assets at the end of the year, which is a low 0.03% of total assets. This improvement allowed us to
reverse $800 thousand previously reserved for credit losses as we demonstrated the ability to focus on
credit quality and concurrently grow loans held for investment.
In September we conducted our third annual wealth management conference. Each year we import
nationally recognized experts to participate. Our event consistently draws an enthusiastic audience
and demonstrates how our wealth management operations differ from the competition. This division is
generating results as our wealth management revenues increased by approximately 10% in 2014 and
assets under supervision continued to increase in early 2015. Please reserve October 29 on your calendar
for the 2015 event. In addition to the valuable money management insights, the vista overlooking the
Missouri River and the North Dakota landscape makes for a spectacular afternoon.
In response to the threat of higher interest rates in early 2014, our mortgage banking operations
successfully concentrated on purchase loan originations. By mid-year purchase originations outnumbered
re-finance originations by almost two to one. Our mortgage banking group remained nimble and when
interest rates dropped, they were able to capture re-finance opportunities in late 2014 and early 2015. The
positive operating leverage of our mortgage banking business is evident, as the profitably of this group
surges when volume spikes.
After the successful transfer of our preferred stock from the U.S. Treasury to private ownership in 2014
(see a discussion in our prior year shareholder letter), we now have greater freedom to rationalize our
capital structure. In mid-year we utilized this new flexibility and paid off $7.5 million of debt costing
12.05% per annum. This redemption will reduce interest expense by $900 thousand annually.
Our performance in 2014 drove shareholder value as our book value per share increased in 2014 by
approximately 26.5% and our share price increased from $12.20 at the beginning of the year to $17.10 at
the end of 2014, or an increase of 40.2%.
Oil Prices, Risk and the Current Economic Environment
The price of oil roughly halved in recent months, dropping from over $100 per barrel to less than $50
per barrel. The volatility of energy prices is a newer risk for our North Dakota operations. The decrease
in oil prices is expected to have a dampening effect in this region. At this writing, the impact of lower
1
BNCCORP, INC. Annual Report 2014 energy prices on economic activity in North Dakota has not fully revealed itself and it may be well into the summer, or beyond, before
the impact is known. However, we have assessed credit risk reasonably related to energy, and thus far the decrease in oil prices does
not appear to have significantly impacted our portfolio. Over the longer term, we steadfastly believe energy resources will be very
beneficial to North Dakota and it will be a good place to conduct banking business.
Of course, the volatility of energy prices is only one of the risks we face. Risk is inherent to the banking business and it can take many
forms: credit risk, interest rate risk, regulatory risk, technology risks (including cyber attacks and obsolescence). In the competitive
capitalistic marketplace, economic reward will inevitably transfer to those who successfully identify and assume risk. Those who
forego risk too often are likely to experience lower returns as reward will transfer to others. Those who take on too much risk will
likely suffer loss. At BNC, we manage risk every day and strive to carefully assume the level of risk inherent in banking and necessary
to generate acceptable returns for our shareholders. Our challenge is to get the correct balance.
A challenging aspect of risk is that it cannot always be controlled or contained. The Great Recession of 2008-2009 and later caused
economic damage to many, including those that did not purposely and knowingly take on risk. I am not convinced the United
States, or the global economy, has left the effects of the Great Recession entirely in the rear view mirror. Recent reports note that
approximately $1.75 trillion of global debt has traded to yield negative interest rates. What this means is uncertain. However, it is
logical to conclude these abnormal interest rates may indicate there is unusual risk somewhere.
Creating Value in 2015 and Beyond
We know value is created by working hard, nurturing lasting relationships, being innovative and distinguishing between good ideas
and bad ideas. While we made significant headway building an organization the created sustainably increasing shareholder value in
2014, more work remains.
We are fortunate to have multiple paths available to create value and the availability of options is very positive for us.
In recent years we have grown considerably -- particularly low cost core deposits -- and that has created value. While the intrinsic
value of deposits is not reflected in financial statements prepared in accordance with accounting standards, growing low cost deposits
drives value creation in community banking and core deposits become more valuable when interest rates rise. Should energy prices
rebound quickly, we can anticipate the North Dakota economy will be recharged and we plan to capture our share of the growth and
profits in this region.
However, it is possible economic events (e.g. low oil or agricultural prices) will not be conducive to the growth rates we have recently
experienced. Should such conditions offer low interest rates, we can create value via our mortgage banking operations. Recall our
elevated profits in 2012 and early 2013 when refinance activity propelled our mortgage banking operations. While repeating the profit
level of 2012 is unlikely, the profitability of mortgage banking operations increased in late 2014 and early 2015.
Mortgage banking is not our only option to create value in a low growth environment. De-levering our balance sheet may be an
option. While our preferred stock is at, or near, a market rate, particularly because of its favorable regulatory capital treatment, it costs
9%. We intend to evaluate whether there is an opportunity to de-lever as the present value of 9% discounted in perpetuity could be
quite valuable to our common shareholders. However, we must recognize capital spent to de-lever is capital not available to buttress
unforeseen losses or support future growth.
Regardless of which of the above options we exercise, our current loan to deposit ratio is low. Improving this ratio will not be easy,
as the banking industry on the whole is searching for loans and our North Dakota customers have a propensity to prepay loans faster
than other regions. Nonetheless, we are working to improve our loan to deposit ratio. If we are successful in deploying deposits into
attractively priced loans, our net interest margin can continue to improve and higher profits should follow.
Optionality is valuable and I like our options.
It’s All About People
Every day our most valuable assets – our employees – walk through the door. People who work at BNC are dedicated to high
standards, hard work, serving clients and improving the communities where they live. I am blessed to be surrounded by an exceptional
group. It is a genuine honor to publically say thank you to each and all.
Our clients are equally valuable assets. Each of us at BNC truly enjoys engaging with you, and we’re committed to delivering a great
banking experience. Let us know how we can make it even better.
Shareholders should know that our people and our clients are the real BNC value proposition.
We are proud of our recent accomplishments, driven to achieve more, and we look forward to delivering strong results in 2015 and
beyond.
Sincerely,
Timothy J. Franz
President and Chief Executive Officer
2
BNCCORP, INC. Annual Report 2014 ____________________________
Year End Financial Report
____________________________
For the Year Ended December 31, 2014
BNCCORP, INC.
(OTCQX: BNCC)
322 East Main
Bismarck, North Dakota 58501
(701) 250-3040
3
BNCCORP, INC. Annual Report 2014 BNCCORP, INC.
INDEX TO YEAR END FINANCIAL REPORT
December 31, 2014
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
5
8
9
6
31
28
35
32
4
1
BNCCORP, INC. Annual Report 2014 Selected Financial Data
The selected consolidated financial data presented below should be read in conjunction with our consolidated
financial statements and the notes thereto (dollars in thousands, except share and per share data):
For the Years Ended December 31,
2014
2013
2012
2011
2010
Income Statement Data from Continuing Operations:
Total interest income
Total interest expense
Net interest income
Provision (reduction) 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
Long-term borrowings
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
Tangible common equity ratio
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
Net loan charge-offs to average loans and leases held for investment
Allowance for credit losses to total loans
$
$
$
$
$
2
$
29,264
$
23,706
$
23,992
$
25,749
$
3,308
25,956
(800)
20,454
-
34,683
4,071
8,456
1,796
6,660
$
$
$
$
$
934,419
$
449,333
2,817
47,109
360,789
-
(8,601)
-
811,231
773,279
16,002
-
15,018
21,098
62,390
18.28
16.72
18.28
6.67%
0.94%
12.37%
74.73%
3.07%
2.97%
$
$
$
3,861
19,845
700
29,285
-
35,981
3,822
8,627
1,320
7,307
843,123
435,719
2,729
32,870
317,928
-
$
$
$
5,521
18,471
100
42,938
-
39,965
(5,280)
26,624
1,462
25,162
$
$
6,272
19,477
1,625
20,237
-
33,859
22
4,208
1,394
2,814
$
$
770,776
$
665,158
$
300,549
2,601
95,095
289,469
-
242,630
2,750
68,622
293,211
-
(9,847)
(10,091)
(10,630)
-
723,229
678,670
19,967
-
22,432
21,098
48,767
14.45
14.89
14.45
5.78%
1.07%
15.15%
73.24%
2.65%
2.54%
$
$
$
-
649,604
596,304
11,700
-
22,430
20,888
47,842
14.49
12.99
14.49
6.21%
3.74%
90.04%
65.08%
2.85%
2.63%
$
$
$
-
576,255
525,071
8,635
-
22,427
20,687
21,180
6.42
5.35
6.42
3.17%
0.61%
17.32%
85.26%
3.11%
2.89%
$
$
$
1.98
1.91
$
$
2.22
2.11
$
$
7.64
7.52
$
$
0.86
0.86
$
$
3,369,021
3,491,254
3,413,854
0.03%
0.01%
0.02%
(0.134)%
2.11%
3,297,235
3,468,390
3,374,601
3,294,562
3,344,280
3,300,652
3,282,182
3,282,182
3,301,007
0.79%
0.67%
1.77%
2.03%
1.36%
3.63%
2.45%
0.93%
2.10%
(0.332)%
(0.225)%
(1.780)%
2.81%
2.62%
2.94%
33,510
10,238
23,272
5,750
23,973
26,231
37,257
72
(22,065)
1,333
(23,398)
747,069
137,032
2,862
29,116
350,501
70,501
(14,765)
107,446
661,111
608,481
16,329
-
24,134
20,486
16,835
5.09
4.44
5.09
2.24%
(2.79)%
(97.12)%
134.38%
3.20%
2.95%
(7.13)
(7.13)
3,281,719
3,281,719
3,304,339
4.09%
2.39%
5.10%
(1.530)%
3.84%
5
BNCCORP, INC. Annual Report 2014 Quarterly Financial Data
Interest income
Interest expense
Net interest income
Provision (reduction) for credit losses
Net interest income after provision
(reduction) for credit losses
Non-interest income
Non-interest expense
Income before income taxes
Income tax expense
NET INCOME
Preferred stock costs
Net income available to common
shareholders
Basic earnings per common share
Diluted earnings per common share
Average common shares:
Basic
Diluted
First
Quarter
Second
Quarter
2014
Third
Quarter
Fourth
Quarter
YTD
$
7,104
$
7,271
$
7,540
$
7,349
$
899
6,205
(200)
6,405
4,284
8,090
2,599
807
948
6,323
(400)
6,723
5,361
8,887
3,197
990
791
6,749
(200)
6,949
4,814
8,765
2,998
1,017
670
6,679
-
6,679
5,995
8,941
3,733
1,257
1,792
$
2,207
$
1,981
$
2,476
$
372
475
474
475
29,264
3,308
25,956
(800)
26,756
20,454
34,683
12,527
4,071
8,456
1,796
1,420
$
1,732
$
1,507
$
2,001
$
6,660
0.42
0.41
$
$
0.51
0.50
$
$
0.44
0.43
$
$
0.59
0.57
$
$
1.98
1.91
3,349,588
3,364,235
3,386,187
3,386,187
3,477,459
3,491,255
3,502,444
3,503,972
3,369,021
3,491,254
$
$
$
$
6
3
BNCCORP, INC. Annual Report 2014 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
Basic earnings per common share
Diluted earnings per common share
Average common shares:
Basic
Diluted
$
$
$
$
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
1.05 $
1.00 $
0.65
0.62
$
$
0.05 $
0.05 $
0.46
0.44
$
$
2.22
2.11
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
4
7
BNCCORP, INC. Annual Report 2014 Business
General
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
the Bank). BNCCORP operates community banking and wealth management
Services, Inc., collectively,
businesses in North Dakota, Arizona and Minnesota from 15 locations. The Bank also conducts mortgage banking
from 14 locations in Arizona, Minnesota, North Dakota, Illinois, Kansas and Nebraska.
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 risk. Community banking is inherently faced with several forms of risk. We strive to manage risk
by balancing the potential costs of various risks and the various rewards of banking opportunities.
•
Emphasize deposit growth. Growing low-cost core deposits is a key strategy. Our platforms and technology
offers us a strategic opportunity to deliver high level deposit services to the businesses and professionals we
serve and permits us to attract funds at a low cost.
8
5
BNCCORP, INC. Annual Report 2014 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):
2014
2013
SELECTED INCOME STATEMENT DATA
Interest income
Interest expense
Net interest income
Provision (reduction) for credit losses
Non-interest income
Non-interest expense
Income before income taxes
Income tax expense
Net income
Preferred stock costs
Net income available to common shareholders
EARNINGS PER SHARE DATA
Basic earnings per common share
Diluted earnings per common share
The following is a brief overview of recent periods:
$
$
$
$
29,264
3,308
25,956
(800)
20,454
34,683
12,527
4,071
8,456
1,796
6,660
1.98
1.91
$
$
$
$
23,706
3,861
19,845
700
29,285
35,981
12,449
3,822
8,627
1,320
7,307
2.22
2.11
•
In 2014 the Company increased net interest income over 2013 through a combination of loan and deposit
growth, disciplined product pricing, and effective cash deployment.
• Excluding the impact of non-recurring insurance proceeds, aggregating $1.055 million in 2013, non-
interest income declined in 2014 due to reduced mortgage banking revenue and gains on the sale of
securities. Mortgage banking revenue declined in 2014 as interest rates rose in the second half of 2013
and remained elevated throughout most of 2014. Our bank charges and service fees, wealth management
revenue, and gain on sale of loans all posted double digit increases in 2014.
• Credit quality continued to improve in 2014. At December 31, 2014 our non-performing assets were
0.03% of total assets. Non-performing assets decreased from $6.6 million at December 31, 2013 to $317
thousand at December 31, 2014.
• Non-interest expense declined in 2014 by $1.3 million or 4%. Excluding the impact of a non-recurring
impairment charge and reductions in post-retirement benefits, 2014 expenses were flat to 2013. Salary
expense increased in response to higher loan and deposit production while professional expenses declined
with mortgage volume.
In 2014, the effective tax rate increased to 32.50% from 30.70% in 2013 as the prior year’s tax expense
benefited from non-taxable, non-recurring tax exempt insurance proceeds.
•
6
9
BNCCORP, INC. Annual Report 2014 General
Net income in 2014 was $8.456 million, or $1.91 per diluted share, compared to net income of $8.627 million, or
$2.11 per diluted share in 2013.
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,
2014
Interest Average
yield or
earned
cost
or owed
Average
balance
For the Year ended December 31,
2013
Interest
earned
or owed
Average
yield or
cost
Average
balance
For the Year ended December 31,
2012
Interest Average
yield or
earned
cost
or owed
Average
balance
Assets
Federal funds sold/interest-bearing due from
banks
$
41,896 $
$
$
381,253
68,097
30,513
331,982
(9,184)
844,557
10,994
43,858
899,409
409,519
24,249
113,769
77,812
625,349
20,575
425
899
19,693
666,941
147,884
814,825
7,589
822,414
76,995
Taxable investments
Tax-exempt investments
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
Long-term 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
98
9,311
2,241
1,143
16,471
-
29,264
0.23% $
2.44%
3.29%
3.75%
4.96%
3.47%
$
54,726 $
315,722
46,086
56,779
284,344
(9,928)
747,729
10,337
49,483
807,549
144
5,948
1,496
1,890
14,228
-
23,706
0.26% $
1.88%
3.25%
3.33%
5.00%
3.17%
$
35,172 $
241,923
31,096
66,288
284,507
(10,560)
648,426
11,155
51,597
711,178
80
6,195
967
2,263
14,487
-
23,992
0.23%
2.56%
3.11%
3.41%
5.09%
3.70%
541
9
0.13% $
0.04%
341,128
19,857
576
15
0.17% $
0.08%
271,089
15,549
645
16
0.24%
0.10%
1,442
421
2,413
36
1
36
822
3,308
-
1.27%
0.54%
0.39%
0.17%
0.24%
4.00%
4.17%
0.50%
0.00%
125,641
81,196
567,822
18,948
-
-
22,431
609,201
118,783
727,984
9,093
737,077
70,472
1,535
534
2,660
41
-
-
1,160
3,861
-
1.22%
0.66%
0.47%
0.22%
0.00%
0.00%
5.17%
0.63%
0.00%
127,446
65,563
479,647
13,329
203
-
22,428
515,607
125,367
640,974
16,636
657,610
53,568
2,368
828
3,857
70
1
-
1,593
5,521
-
1.86%
1.26%
0.80%
0.53%
0.49%
0.00%
7.10%
1.07%
0.00%
$
899,409
$
807,549
$
711,178
$
25,956
$
19,845
$
18,471
2.97%
3.07%
2.54%
2.65%
2.63%
2.85%
Ratio of average interest-earning assets
to average interest-bearing liabilities
126.63%
122.74%
125.76%
10
7
BNCCORP, INC. Annual Report 2014 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,
2014 Compared to 2013
For the Years Ended December 31,
2013 Compared to 2012
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
Long-term borrowings
Subordinated debentures
Total increase (decrease) in
interest expense
Increase (decrease) in net interest
(31)
1,385
724
-
(961)
2,364
3,481
103
3
(149)
(22)
3
1
36
(189)
(214)
$
$
(15)
1,978
21
-
214
(121)
$
(46)
3,363
745
-
(747)
2,243
50
1,622
485
-
(318)
(8)
$
$
14
(1,869)
44
(55)
(251)
2,077
5,558
1,831
(2,117)
(138)
(9)
56
(91)
(8)
-
-
(149)
(35)
(6)
(93)
(113)
(5)
1
36
(338)
144
4
(33)
166
22
-
-
-
(213)
(5)
(800)
(460)
(51)
(1)
-
(433)
64
(247)
529
-
(373)
(259)
(286)
(69)
(1)
(833)
(294)
(29)
(1)
-
(433)
(339)
(553)
303
(1,963)
(1,660)
income
$
3,695
$
2,416
$
6,111
$
1,528
$
(154)
$
1,374
Net interest income was $25.956 million in 2014 compared to $19.845 million in 2013, an increase of $6.111
million or 30.8%. The net interest margin increased to 3.07% for the year ended December 31, 2014 from 2.65%
in 2013. In 2014, 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 2014, 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 2014 progressed, we continued to increase loans held for investment.
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. In 2013, we increased the loans held for investment, particularly in North Dakota.
8
11
BNCCORP, INC. Annual Report 2014 Non-interest Income
The following table presents the major categories of our non-interest income (dollars are in thousands):
Bank charges and service fees
Wealth management revenues
Mortgage banking revenues
Gains on sales of loans, net
Gains on sales of securities, net
Other
Subtotal non-interest income
Life insurance benefits received
Total non-interest income
For the Years Ended December 31,
Increase ( Decrease)
2014 – 2013
2014
2013
$
%
$
$
2,962
1,384
11,818
1,915
53
2,322
20,454
-
20,454
$
$
2,675
1,260
19,344
1,632
1,247
2,072
28,230
1,055
29,285
$
$
287
124
(7,526)
283
(1,194)
250
(7,776)
(1,055)
(8,831)
11 % (a)
10 %
(39) % (b)
17 % (c)
(96) % (d)
12 % (e)
(28) %
(100) % (f)
(30) %
(a) These fees are growing as we continue to grow deposits, and open new accounts.
(b) Mortgage banking revenues were significantly impacted in 2014 by the increase in interest rates. Revenues began to
decline mid-year 2013 as interest rates rose and loan production remained subdued through the first three quarters of
2014.
(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 2014, the Company recorded revenue of $1.718 million from SBIC investments compared with $1.587 million in
2013.While it is difficult to predict the timing, or amount of distributions, we currently anticipate further distributions
in future periods.
In the third quarter of 2013 the Company recognized life insurance benefits of $1.055 million.
(f)
12
9
BNCCORP, INC. Annual Report 2014 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
Impairment charge
Post retirement benefits reduction
Total non-interest expense
Efficiency ratio
For the Years Ended December 31,
2014
2013
Increase (Decrease)
2014– 2013
$
%
$
$
17,783
3,032
2,932
2,974
2,064
640
1,268
687
72
3,231
34,683
-
-
34,683
74.73%
$
$
16,842
3,610
3,070
2,708
2,394
830
1,232
613
126
3,230
34,481
1,500
(174)
35,981
73.24%
$
$
941
(578)
(138)
266
(330)
(190)
36
74
(54)
1
28
(1,500)
174
(1,298)
1.49%
6 % (a)
(16) % (b)
(4) %
10 % (c)
(14) % (d)
(23) % (e)
3 %
12 %
(43) % (f)
0 %
0 %
(100) % (g)
100 %
(4) %
(a) Salary expense increased in response to higher loan and deposit production and the addition of talent to support the
company’s growth.
(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 and support the
opening of a new branch in North Dakota.
(d) Occupancy costs decreased in 2014 after investing in facility improvements and office relocations in 2013.
(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
(g)
properties– see Note 8. At December 31, 2014 the Company held only one remaining property in other real estate.
In the third quarter 2013 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, which was sold in the fourth quarter of 2014.
Income Tax Expense
During 2014, we recorded tax expense of $4.071 million which resulted in an effective tax rate of 32.50%. The
Company is able to carry forward state tax net operating losses aggregating $1.9 million as of December 31, 2014.
The state net operating losses expire between 2015 and 2032.
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.
10
13
BNCCORP, INC. Annual Report 2014 Financial Condition
Assets
The following table presents our assets by category (dollars are in thousands):
As of December 31,
2014
2013
Increase (Decrease)
2014 – 2013
$
%
Cash and cash equivalents
$
41,124
$
18,871
$
Investment securities available for sale
449,333
435,719
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
2,817
47,109
352,188
256
16,228
3,931
21,433
2,729
32,870
308,081
1,056
14,870
3,554
25,373
$
934,419
$
843,123
$
22,253
13,614
88
14,239
44,107
(800)
1,358
377
(3,940)
91,296
118 % (a)
3 % (b)
3 %
43 % (c)
14 % (d)
(76) % (e)
9 % (f)
11 %
(16) % (g)
11 %
(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 increased as production increased late in 2014 as rates declined.
(d)
In 2013, with stable credit quality, we implemented measures to increase our loan portfolio and enjoyed double-digit
loan growth in 2013 and 2014.
(e) Decrease is due to the sale of a bank owned property in the fourth quarter of 2014.
(f) Premises and equipment increased largely due to the construction of a new bank branch in Mandan, ND.
(g) Other assets decreased primarily due to reduction in net deferred tax assets as an OREO property was sold and the
available for sale investment portfolio migrated from an unrealized loss to an unrealized gain in 2014.
14
11
BNCCORP, INC. Annual Report 2014 Investment Securities Available for Sale
The following table presents the composition of the available-for-sale investment portfolio (in thousands):
December 31,
2014
2013
Amortized
cost
Estimated
fair market
value
Amortized
cost
Estimated
fair market
value
$
19,861
$
19,921
$
-
$
-
101,833
101,637
74,247
73,466
-
-
32,065
31,678
83,990
84,379
47,882
47,824
96,988
98,188
141,552
140,557
U.S. Treasury securities
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
62,638
63,334
77,286
State and municipal bonds
76,958
81,874
-
-
1,746
64,733
76,629
1,794
63,771
Total investments
$
442,268
$
449,333
$
439,511
$
435,719
There were no securities that management concluded were other-than-temporarily impaired during 2014 or 2013.
See Note 3 of our Consolidated Financial Statements.
12
15
BNCCORP, INC. Annual Report 2014 The following table presents contractual maturities for securities available for sale and yields thereon at December
31, 2014 (dollars are in thousands):
After 1 but
within 5 years
Amount Yield (1) Amount Yield (1) Amount Yield (1)
After 5 but
within 10 years
Within 1 year
After 10 years
Total
Amount
Yield (1)
Amount
Yield (1)
$
U.S. Treasury securities(2)
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(1) (2)
Total book value of investment
securities
$
Net unrealized gain on securities
available for sale
Total investment in securities
available for sale
-
-
-
-
-
-
-
-
-
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
-
-
-
-
-
-
-
0.00% $ 19,861
1.66% $
-
-
-
0.00% $
-
0.00% $
19,861
1.66%
0.00%
101,833
1.88%
101,833
1.88%
0.00%
-
0.00%
-
0.00%
0.00%
0.00%
0.00% 24,106
2.68%
59,884
1.40%
83,990
1.77%
0.00%
2,038
1.90%
94,950
2.83%
96,988
2.81%
0.00%
0.00%
0.00%
-
-
-
0.00%
62,638
2.48%
62,638
2.48%
0.00%
0.00%
-
76,958
0.00%
5.34%
-
0.00%
76,958
5.34%
0.00% $ 19,861
1.66% $ 26,144
2.62% $ 396,263
2.80%
442,268
2.74%
7,065
$ 449,333
2.70%
(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, 2014, we had $449.3 million of available-for-sale securities in the investment portfolio
compared to $435.7 million at December 31, 2013.
In 2014, available-for-sale investment securities increased as we have deployed cash and funds from new
deposits. The net unrealized gain of investment securities increased as of December 31, 2014 as compared to
December 31, 2013 due to the general decrease in interest rates and flattening of the yield curve over the course of
2014.
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, 2012 due to the general increase in interest rates and steepening of the yield curve since the
middle of the second quarter 2013.
At December 31, 2014, we held no securities, other than U.S. Treasury securities, U.S. Government Agency
mortgage-backed securities, U.S. Government agency small business administration pools, and U.S. Government
Agency collateralized mortgage obligations that exceeded 10% of stockholders’ equity. A portion of our
investment securities portfolio was pledged as collateral.
See Note 3 of our Consolidated Financial Statements for more information about investment securities.
16
13
BNCCORP, INC. Annual Report 2014 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, 2014
and 2013, and $1.0 million and $922 thousand of FHLB of Des Moines stock as of December 31, 2014 and 2013,
respectively.
14
17
BNCCORP, INC. Annual Report 2014 Loans
The following table presents our loan portfolio (dollars are in thousands):
2014
2013
2012
2011
2010
Amount
%
Amount
%
Amount
%
Amount
%
Amount
%
$
47,109
100.0
$
32,870
100.0
$
95,095
100.0
$
68,622
100.0
$
29,116
29.2
-
-
-
-
-
-
-
-
70,501
70.8
47,109
100.0
32,870
100.0
95,095
100.0
68,622
100.0
99,617
100.0
132,229
36.6
132,983
108,122
26,972
40,470
28,220
24,916
30.0
7.5
11.2
7.8
6.9
93,330
18,215
32,612
27,582
13,286
41.8
29.3
5.7
10.3
8.7
4.2
116,891
40.4
109,746
37.4
120,620
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
9,958
23,038
29,350
5,545
3.4
7.9
10.0
1.9
11,064
25,841
37,761
3,225
34.4
43.4
3.2
7.4
10.8
0.9
360,929
100.0
318,008
100.0
289,465
100.0
293,341
100.0
350,798
100.1
(140)
-
(80)
-
4
-
(130)
-
(297)
(0.1)
$ 360,789
100.0
$
317,928
100.0
$
289,469
100.0
$
293,211
100.0 $ 350,501
100.0
Loans held for sale-
mortgage banking
Other loans held for
sale
Loans held for
sale, net
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
The following table presents the change in our loan portfolio (dollars are in thousands):
Increase (Decrease)
December 31,
2014 – 2013
2014
2013
$
%
Loans held for sale-mortgage banking
$
47,109
$
32,870
$
14,239
43.3 % (a)
Commercial and industrial
Commercial real estate
SBA
Consumer
Land and land development
Construction
132,229
108,122
26,972
40,470
28,220
24,916
132,983
93,330
18,215
32,612
27,582
13,286
360,929
318,008
(754)
14,792
8,757
7,858
638
11,630
42,921
(0.6) %
15.8 %
48.1 %
24.1 %
2.3 %
87.5 %
13.5 %
Unearned income and net unamortized
deferred fees and costs
Loans, net of unearned income and
unamortized fees and costs
(140)
(80)
(60)
75.0 %
$
360,789
$
317,928
$
42,861
13.5 % (b)
(a) Loans held for sale increased as production increased late in 2014 as interest rates declined.
(b)
In 2013 we implemented measures to increase our loan portfolio and have enjoyed double-digit loan growth in 2013 and
2014.
18
15
BNCCORP, INC. Annual Report 2014
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):
2014
2013
2012
2011
2010
$
180,192
222,765
218,068
220,177
259,939
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
2014
2013
$
228,145
63 %
$
206,315
65 %
34,029
52,679
46,076
9
15
13
32,198
34,043
45,452
10
11
14
held for investment
$
360,929
100 %
$
318,008
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
Ohio
Colorado
Wisconsin
Other
$
2014
232,533
63,463
15,609
11,045
9,000
8,922
5,391
14,966
2013
64 % $
211,789
18
4
3
3
3
2
3
43,750
18,314
16,372
-
9,164
5,787
12,832
67%
14
6
5
-
3
2
3
Total gross loans held
for investment
$
360,929
100 % $
318,008
100 %
16
19
BNCCORP, INC. Annual Report 2014 The following table presents loans by type within our three primary states as of December 31 (in thousands):
North Dakota
Commercial and industrial
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
20
2014
Total Loans
and Leases
Held for
Investment
2013
Total Loans
and Leases
Held for
Investment
$
$
$
$
$
$
73,277
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
18,314
$
$
$
$
$
$
56,681
20,894
16,732
10,468
38,035
55,349
1,247
33,127
232,533
11,798
2,242
-
3,778
2,581
14,396
25,586
3,082
63,463
121
-
18
708
-
8,861
104
1,233
11,045
17
BNCCORP, INC. Annual Report 2014 Loan Maturities(1)
The following table sets forth the remaining maturities of loans in our portfolio as of December 31, 2014 (in
thousands):
Over 1 year
through 5 years
Commercial and industrial
$
41,409
$
13,969
$
One year
or less
Fixed
rate
Floating
rate
14,113
$
Commercial real estate
SBA
Consumer
Land and land development
Construction
9,806
2,443
1,953
250
13,418
18,758
41
5,099
6,269
612
10,245
1,239
3,548
7,121
10,886
Over 5 years
Fixed
rate
36,448
9,911
2,317
22,566
6,932
-
Floating
rate
$ 26,290
59,402
20,932
7,304
7,648
-
Total Loans
and Leases
Held for
Investment
132,229
$
108,122
26,972
40,470
28,220
24,916
Total principal amount of loans
$
69,279
$
44,748
$
47,152
$
78,174
$ 121,576
$
360,929
(1) Maturities are based on contractual maturities. Floating rate loans include loans that would reprice prior to maturity if base rates
change.
Actual maturities may differ from the contractual maturities shown above as a result of renewals and
prepayments. Loan renewals are evaluated in substantially the same manner as new credit applications.
Provision for Credit Losses
We provide for credit losses to maintain our allowance for credit losses at a level adequate to cover estimated
probable losses inherent in the portfolio as of each balance sheet date. In 2014, we reversed previously recorded
provisions for credit losses aggregating $800 thousand as a result of improved credit quality. This compared to a
provision of $700 thousand in 2013, which was recorded in the first quarter of the year. The provision for credit
losses continues to remain low due to credit quality stabilization.
Allowance for Credit Losses
See Notes 1 and 6 of our Consolidated Financial Statements and “Accounting Policies” for further information
concerning accounting policies associated with the allowance for credit losses.
18
21
BNCCORP, INC. Annual Report 2014 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 (reduction) for credit losses charged to
operations
Transferred (to) from other loans held for sale
Balance of allowance for credit losses, end of
2014
2013
2012
2011
2010
For the Years ended December 31,
$
9,847
$
10,091
$
10,630
$
14,765
$
18,047
-
(439)
(109)
(42)
(190)
-
(780)
-
8
5
21
300
-
334
(446)
(800)
8,601
-
(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
80
(3,112)
(283)
(620)
(533)
(3,238)
-
(7,786)
14
-
5
319
127
-
465
(7,321)
5,750
16,476
(1,711)
period
$
8,601
$
9,847
$
10,091
$
10,630
$
14,765
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
(0.123)%
(0.277)%
(0.182)%
(1.611)%
(1.387)%
(0.134)%
(0.332)%
(0.225)%
(1.780)%
(1.530)%
investment
$
331,982
$
284,344
$
284,507
$
328,091
$
478,492
Ratio of allowance for credit losses to loans and
leases held for investment
Allowance for credit losses to total loans
Ratio of nonperforming loans to total assets
2.38%
2.11%
0.01%
3.10%
2.81%
0.67%
3.49%
2.62%
1.36%
3.63%
2.94%
0.93%
4.21%
3.84%
2.39%
In 2014, the level of nonperforming loans decreased to $61 thousand from $5.6 million at December 31, 2013.
The decrease in nonperforming primarily relates to one significant relationship returning 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).
22
19
BNCCORP, INC. Annual Report 2014 Allocation of the Allowance for Loan Losses
2014
2013
2012
2011
2010
Loans in
Category as a
Percentage of
Total Gross
Loans and
Leases Held
for Investment
Total Loans
and Leases
Held for
Investment
Allowance
Total Loans
and Leases
Held for
Investment
Allowance
Loans 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
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
$
2,686
37% $ 2,215
42% $ 2,546
40% $
1,639
37% $
1,362
2,496
1,190
516
1,436
277
30% 4,041
29% 4,790
30%
5,518
40%
9,818
7% 579
6% 616
11% 478
10% 382
8% 2,371
7% 163
9%
4%
1,609
148
6%
9%
11%
4%
436
448
2,532
57
3%
8%
10%
2%
407
1,182
1,939
57
34%
44%
3%
7%
11%
1%
Total
$
8,601
100% $
9,847
100% $
10,091
100% $
10,630
100% $
14,765
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, 2014 and December 31, 2013. 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.
20
23
BNCCORP, INC. Annual Report 2014 Nonperforming Loans and Assets
The following table sets forth nonperforming assets, the allowance for credit losses and certain related ratios
(dollars are in thousands):
Nonperforming loans:
$
$
$
Loans 90 days or more delinquent and still
accruing interest
Non-accrual loans
Total nonperforming loans
Other real estate, net
Total nonperforming assets
Allowance for credit losses
Ratio of total nonperforming loans to total loans
Ratio of total nonperforming loans to loans and
leases held for investment
Ratio of total nonperforming assets to total assets
Ratio of nonperforming loans to total assets
Ratio of allowance for credit losses to total
nonperforming loans
2014
2013
As of December 31,
2012
2011
2010
$
5
56
61
256
317
8,601
0.01%
0.02%
0.03%
0.01%
$
$
$
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%
3.63%
2.03%
1.36%
$
$
$
-
6,169
6,169
10,145
16,314
10,630
1.70%
2.10%
2.45%
0.93%
$
$
$
-
17,862
17,862
12,706
30,568
14,765
3.93%
5.10%
4.09%
2.39%
14,100%
175%
96%
172%
83%
Nonperforming Loans
The following table sets forth information concerning our nonperforming loans as of December 31 (in thousands):
Balance, beginning of period
Additions to nonperforming
Charge-offs
Reclassified back to performing
Principal payments received
Transferred to repossessed assets
Transferred to other real estate
Balance, end of period
$
$
2014
2013
5,617
203
(692)
(3,235)
(1,135)
-
(697)
61
$
$
10,512
2,231
(935)
(5,830)
(337)
(24)
-
5,617
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
2014
2013
$
$
483
145
338
$
$
848
223
625
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.
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
24
21
BNCCORP, INC. Annual Report 2014
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
$
2014
2013
2012
2011
2010
$
$
5,105
8,544
12,368
12,848
34,264
5,105
4,356
7,871
7,270
18,482
-
4,188
4,497
5,578
15,782
See Note 6 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 7 of our Consolidated Financial Statements for information on other real estate owned.
Impaired loans
See Note 6 of our Consolidated Financial Statements for information on impaired loans.
Potential Problem Loans
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 $473,000 and $176,000 at December 31, 2014 and 2013,
respectively. Also, we estimate there are loans risk rated “substandard” which are not impaired aggregating $9.1
million and $8.1 million at December 31, 2014 and 2013, 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.
22
25
BNCCORP, INC. Annual Report 2014 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
Long-term borrowings
Guaranteed preferred beneficial
interests in Company's subordinated
debentures
Accrued interest payable
Accrued expenses
Other liabilities
Total liabilities
Stockholders' equity
Total liabilities and
As of December 31,
2014
2013
Increase (Decrease)
2014 – 2013
$
%
$
187,400
$
141,788
$
45,612
32 % (a)
455,282
107,668
60,881
16,002
-
15,018
338
7,279
1,063
850,931
83,488
378,355
123,058
80,028
19,967
-
22,432
771
6,307
552
773,258
69,865
76,927
(15,390)
(19,147)
(3,965)
-
(7,414)
(433)
972
511
77,673
13,623
20 % (a)
(13) % (a)
(24) % (a)
(20) % (b)
- %
(33) % (c)
(56) % (c)
15 % (d)
93 % (e)
10 %
19 % (f)
stockholders’ equity
$
934,419
$
843,123
$
91,296
11 %
(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) The Company redeemed $7.5 million of subordinate debentures in the third quarter of 2014.
(d)
Increased due to higher incentive compensation accruals and mortgage banking reserve.
(e) Other liabilities increased due to mortgage banking derivatives.
(f) The increase in stockholder equity relates primarily to earnings as well as the increase in the fair value of the available for sale
investment portfolio. Managing capital has been a focus of management in recent periods and this will continue in the future.
Mortgage Banking Obligations
Included in accrued expenses, is an estimate of mortgage banking reimbursement obligations which aggregated
$1.9 million and $1.7 million at December 31, 2014 and 2013, 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 17 of our Consolidated Financial Statements for a description of financial instruments with off-balance-
sheet risk.
26
23
BNCCORP, INC. Annual Report 2014 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,
2014
Percent
of
deposits
Average
balance
Wgtd.
avg.
rate
Average
balance
2013
Percent
of
deposits
Wgtd.
avg.
rate
Average
balance
2012
Percent
of
deposits
Wgtd.
avg.
rate
$ 409,519
24,249
52.96%
3.14%
0.13% $
0.04%
341,128
19,857
49.68%
2.89%
0.17% $
0.08%
271,089
15,549
44.81% 0.24%
2.57% 0.10%
113,769
77,812
191,581
14.71%
10.06%
24.78%
1.27%
0.54%
0.97%
125,641
81,196
206,837
18.30%
11.83%
30.12%
1.22%
0.66%
1.39%
127,446
65,563
193,009
21.06% 1.86%
10.84% 1.26%
31.90% 1.66%
625,349
80.87%
0.39%
567,822
82.70%
0.47%
479,647
79.28% 0.80%
147,884
19.13%
0.00%
118,783
17.30%
-
125,367
20.72%
-
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 (1)
$ 773,233
100.00%
0.31% $
686,605
100.00%
0.39% $
605,014
100.00% 0.64%
(1)
Included in average total deposits are $57.0 million, $65.0 million, and $64.0 million of brokered deposits for years ending 2014, 2013, and 2012,
respectively. The brokered deposits are callable at the Company’s discretion and are maintained as a hedge against rising interest rates.
Excluding brokered deposits our weighted average rate of total deposits would be 0.23%, 0.27%, and 0.36% for 2014, 2013, and 2012,
respectively.
In recent years we have grown deposits, primarily by capitalizing on strong relationships built over time in North
Dakota.
Time deposits, in denominations of $100,000 and over, totaled $60.9 million at December 31, 2014 as compared
to $80.0 million at December 31, 2013. The following table sets forth the amount and maturities of time deposits
of $100,000 and over as of December 31, 2014 (in thousands):
Maturing in:
3 months or less
Over 3 months through 6 months
Over 6 months through 12 months
Over 12 months
$
$
14,542
18,714
14,708
12,917
60,881
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
$
$
$
2014
16,002
0.15%
24,833
20,575
0.17%
$
$
$
2013
19,967
0.17%
27,071
18,948
0.22%
$
$
$
2012
11,700
0.38%
16,949
13,329
0.53%
Note 10 of our Consolidated Financial Statements summarizes the general terms of our short-term borrowings
outstanding at December 31, 2014 and 2013.
24
27
BNCCORP, INC. Annual Report 2014 FHLB advances totaled $0 at December 31, 2014 and 2013, respectively.
Notes 11 and 12 of our Consolidated Financial Statements summarize the general terms of our FHLB advances
and other borrowings at December 31, 2014 and 2013.
Guaranteed Preferred Beneficial Interests in Company’s Subordinated Debentures
See Note 13 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)
2014
2012
2013
9.94% 10.94% 11.17%
2010
2011
6.17%
7.59%
19.85% 21.67% 20.49% 13.71%
9.46%
21.10% 23.15% 22.43% 17.56% 12.89%
2.24%
6.67%
6.21%
5.79%
7.53%
9.13% 10.06% 10.68%
18.48% 20.13% 19.80% 16.95% 11.53%
19.73% 21.40% 21.06% 18.22% 12.80%
3.17%
9.41%
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. We have reviewed estimates of our regulatory capital ratios under the new Basel III framework
and expect to be in compliance with these 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 17 and 18 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 17 of our Consolidated Financial Statements.
28
25
BNCCORP, INC. Annual Report 2014 At December 31, 2014, the aggregate contractual obligations (excluding bank deposits) and commitments
were as follows (in thousands):
Contractual Obligations:
year
1 to 3 years
3 to 5 years
After 5 years
Total
Payments due by period
Less than 1
Total borrowings
Commitments to sell loans
Annual rental commitments under
non-cancelable operating leases
Total
$
$
16,002
45,705
885
62,592
$
$
-
-
1,069
1,069
$
$
-
-
351
351
$
$
15,018
-
1,297
16,315
$
$
31,020
45,705
3,602
80,327
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
$ 102,023
1,322
$ 103,345
$
$
21,853
-
21,853
$
$
3,648
13
3,661
$
$
105
-
105
$
$
127,629
1,335
128,964
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 ($266.2
million as of December 31, 2014);
2. Borrowing capacity from the FHLB ($77.6 million as of December 31, 2014); and
3. Capacity to issue brokered deposits with maturities of less than 12 months ($132.8 million as of
December 31, 2014).
26
29
BNCCORP, INC. Annual Report 2014 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.
30
27
BNCCORP, INC. Annual Report 2014 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, including the impact of lower oil prices in our major market; 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.
Accounting Policies
Note 1 of our Consolidated Financial Statements includes a summary of our 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.
28
31
BNCCORP, INC. Annual Report 2014 Interest rate caps and floors are included to the extent that they are exercised in the 12-month simulation period.
Additionally, changes in prepayment behavior of the residential mortgage, CMOs, and mortgage-backed
securities portfolios in each rate environment are captured using industry estimates of prepayment speeds for
various coupon segments of the portfolio. For purposes of this simulation, projected month end balances of the
various balance sheet accounts are held constant at their December 31, 2014 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, 2014 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, 2014, 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 2015 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
$
$
25,549
$
26,522
(973)
(3.67)%
-
-
$
$
26,528
6
$
$
26,522
-
$
$
26,467
(55)
$
$
26,366
(156)
0.02%
0.00%
(0.21)%
(0.59)%
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, 2014 (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, 2014. Assets and liabilities are classified by the earliest
possible repricing date or maturity, whichever occurs first.
32
29
BNCCORP, INC. Annual Report 2014
Interest Sensitivity Gap Analysis
Estimated maturity or repricing at December 31, 2014
0–3
months
4–12
months
1–5
years
Over
5 years
Total
Interest-earning assets:
Interest-bearing deposits with banks
$
41,124
$
-
$
-
$
-
$
41,124
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
Loans held for investment, fixed rate
Loans held for investment, floating rate
66,553
2,817
-
-
-
20,379
117,325
30,872
173,412
149,423
420,260
-
-
47,109
-
29,684
8,248
-
-
-
-
-
-
-
-
64,442
87,231
26,625
6,855
2,817
-
47,109
-
141,130
219,659
Total interest-earning assets
$
248,198
$
115,913
$
325,085
$
182,903
$
872,099
Interest-bearing liabilities:
Interest checking and money market accounts
$
429,824
$
Savings
Time deposits under $100,000
Time deposits $100,000 and over
Short-term borrowings
FHLB advances
Long-term borrowings
Subordinated debentures
Total interest-bearing liabilities
Interest rate gap
Cumulative interest rate gap at December 31, 2014
Cumulative interest rate gap to total assets
25,458
9,135
14,542
16,002
-
-
$
$
$
15,000
509,961
(261,763)
(261,763)
(28.01)%
$
-
-
$
-
-
26,562
33,421
42,696
12,614
-
-
-
-
-
-
-
-
-
-
29,275
304
-
-
-
18
$
$
$
$
$
$
59,983
55,930
(205,833)
(22.03)%
$
$
$
55,310
269,775
63,942
6.84%
29,597
153,306
217,248
23.25%
$
429,824
25,458
107,668
60,881
16,002
-
-
15,018
654,851
217,248
$
$
(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.
30
33
BNCCORP, INC. Annual Report 2014 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, 2014 and do not contemplate any actions we might undertake in response to changes in
market interest rates.
34
31
BNCCORP, INC. Annual Report 2014 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors’ Report
Consolidated Balance Sheets as of December 31, 2014 and 2013
Consolidated Statements of Operations for the Years Ended December 31, 2014 and 2013
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2014
and 2013
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2014 and
2013
Consolidated Statements of Cash Flows for the Years Ended December 31, 2014 and 2013
Notes to Consolidated Financial Statements
Page
33
36
35
38
36
39
40
37
41
38
42
39
41
44
32
35
BNCCORP, INC. Annual Report 2014
Independent Auditors’ Report
The Board of Directors
BNCCORP, INC.
Report on the Financial Statements
We have audited the accompanying consolidated financial statements of BNCCORP, INC., and its
subsidiaries, which comprise the consolidated balance sheets as of December 31, 2014 and 2013, 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
33
BNCCORP, INC. Annual Report 2014KPMG LLPSuite 3001212 N. 96th StreetOmaha, NE 68114-2274Suite 1600233 South 13th StreetLincoln, NE 68508-2041KPMG LLPis aDelaware 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, 2014 and 2013, and the
results of their operations and their cash flows for the years then ended, in accordance with U.S. generally
accepted accounting principles.
Omaha, Nebraska
March 25, 2015
/s/ KPMG LLP
34
37
BNCCORP, INC. Annual Report 2014 FINANCIAL INFORMATION
Financial Statements
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31
(In thousands, except share data)
ASSETS
2014
2013
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
LONG-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 - 9% 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; 3,413,854 and
3,374,601 shares issued and outstanding
Capital surplus – common stock
Retained earnings
Treasury stock (254,799 and 294,052 shares, respectively)
Accumulated other comprehensive income (loss), net
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
$
$
$
41,124
449,333
2,817
47,109
360,789
(8,601)
352,188
256
16,228
3,931
21,433
934,419
187,400
455,282
107,668
60,881
811,231
16,002
-
15,018
338
7,279
1,063
850,931
20,093
1,005
34
25,831
34,622
(3,421)
5,324
83,488
934,419
$
$
$
$
18,871
435,719
2,729
32,870
317,928
(9,847)
308,081
1,056
14,870
3,554
25,373
843,123
141,788
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
See accompanying notes to consolidated financial statements.
38
35
BNCCORP, INC. Annual Report 2014 BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended December 31
(In thousands, except per share data)
INTEREST INCOME:
Interest and fees on loans
Interest and dividends on investments
Taxable
Tax-exempt
Dividends
Total interest income
INTEREST EXPENSE:
Deposits
Short-term borrowings
Long-term borrowings
Subordinated debentures
Total interest expense
Net interest income
PROVISION (REDUCTION) FOR CREDIT LOSSES
NET INTEREST INCOME AFTER PROVISION (REDUCTION) 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
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
Impairment charge
Total non-interest expense
Income before income taxes
Income tax expense
Net income
Preferred stock costs
Net income available to common shareholders
Basic income per common share
Diluted income per common share
2014
2013
$
17,614
$
9,295
2,241
114
29,264
2,413
37
36
822
3,308
25,956
(800)
26,756
2,962
1,384
11,818
1,915
53
2,322
-
20,454
17,783
3,032
2,932
2,974
2,064
640
1,268
687
72
3,231
-
34,683
12,527
4,071
8,456
1,796
6,660
1.98
1.91
$
$
$
$
$
$
$
$
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.
36
39
BNCCORP, INC. Annual Report 2014 BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the Years Ended December 31
(In thousands)
NET INCOME
Unrealized gain (loss) on securities
available for sale
Reclassification adjustment for gain
included in net income
Other comprehensive income (loss),
before tax
Income tax (expense) benefit related to
items of other comprehensive income
(loss)
Other comprehensive income (loss)
TOTAL COMPREHENSIVE INCOME
2014
2013
$
8,456
$
8,627
$
10,910
$ (9,025)
(53)
10,857
(4,065)
6,792
6,792
$
15,248
(1,247)
(10,272)
3,843
(6,429)
(6,429)
$
2,198
See accompanying notes to consolidated financial statements.
40
37
BNCCORP, INC. Annual Report 2014 BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
For the Years Ended December 31
(In thousands, except share data)
Capital
Surplus
Accumulated
Other
Preferred Stock
Common Stock
Common
Retained
Treasury Comprehensive
Shares
Amount
Shares
Amount
Stock
Earnings
Stock
Income (Loss)
Total
BALANCE, December 31, 2012
21,098 $
20,888
3,300,652 $
33 $
27,257 $
20,655 $
(5,064) $
4,961 $
68,730
Net income
Other comprehensive income (loss)
Preferred stock amortization, net
Accrued dividends 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
Net income
Other comprehensive income
Preferred stock amortization, net
Accrued dividends on preferred
stock
Impact of share-based
compensation
-
-
-
-
-
-
-
-
-
-
-
-
-
-
39,253
-
-
-
-
-
-
-
-
-
8,456
-
-
(1,796)
-
-
-
-
(302)
-
473
-
6,792
-
-
-
8,456
6,792
-
(1,796)
171
BALANCE, December 31, 2014
21,098 $
21,098
3,413,854 $
34 $
25,831 $
34,622 $
(3,421) $
5,324 $
83,488
See accompanying notes to consolidated financial statements
38
41
BNCCORP, INC. Annual Report 2014 BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31 (In thousands)
OPERATING ACTIVITIES:
Net income
2014
2013
$
8,456
$
8,627
Adjustments to reconcile net income to net cash provided by
operating activities -
Provision (reduction) for credit losses
Provision (reduction) for other real estate losses
Depreciation and amortization
Net amortization of premiums and (discounts) on investment
securities and subordinated debentures
Share-based compensation
Impairment charge
Change in interest receivable and other assets, net
Gains on sale of other real estate
Loss on sale of bank premises and equipment
Net realized gain on sales of investment securities
Decrease in deferred taxes
Change in other liabilities, net
Funding of loans held for sale, mortgage banking
Proceeds from sales of loans held for sale, mortgage banking
Fair value adjustment for loans held for sale, mortgage banking
Fair value adjustment on mortgage banking derivatives
Proceeds from sales of loans
Gains on sales of loans, net
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
Proceeds from sales of bank premises and equipment
Additions to bank premises and equipment
Net cash provided by (used in) investing activities
(800)
-
1,268
6,023
171
-
5,093
(90)
4
(53)
1,606
(2,598)
(651,310)
637,669
(598)
(882)
17,321
(1,915)
19,365
(164,844)
100,066
53,367
(1,284)
1,196
(59,410)
1,587
788
(3,418)
(71,952)
See accompanying notes to consolidated financial statements.
700
(14)
1,232
8,259
47
1,500
(4,005)
(8)
118
(1,247)
1,925
(4,650)
(947,823)
1,007,926
2,122
3,519
16,132
(1,632)
92,728
(269,235)
58,109
61,135
(129)
1
(43,903)
4,898
14
(2,748)
(191,858)
42
39
BNCCORP, INC. Annual Report 2014 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 (decrease) increase in short-term borrowings
Decrease in subordinate debentures
Increase in long-term borrowings
Decrease in long-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:
Additions to other real estate in settlement of loans and transfers of premises and
equipment
See accompanying notes to consolidated financial statements.
2014
2013
88,003
(3,965)
(7,500)
2,700
(2,700)
(29,900)
29,900
(1,698)
74,840
22,253
18,871
41,124 $
73,625
8,267
-
-
-
(20)
20
(4,681)
77,211
(21,919)
40,790
18,871
3,742 $
2,493 $
8,135
1,748
697 $
800
$
$
$
$
40
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BNCCORP, INC. Annual Report 2014 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 15 locations. The Bank also conducts mortgage banking
from 14 locations in Arizona, Minnesota, North Dakota, Illinois, Kansas and Nebraska.
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.
ACCOUNTING POLICIES
Accounting policies are significantly dependent on subjective assessments or estimates that may be susceptible to
significant change. The following items have been identified as “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:
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BNCCORP, INC. Annual Report 2014 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.
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BNCCORP, INC. Annual Report 2014
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. 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 3 to these consolidated financial statements includes a summary of investment securities in a loss position at
December 31, 2014 and 2013.
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.
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BNCCORP, INC. Annual Report 2014 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, 2014 and 2013, 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, 2014 or 2013.
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.
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BNCCORP, INC. Annual Report 2014 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 $0 and $1.5 million in 2014 and 2013, respectively.
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BNCCORP, INC. Annual Report 2014 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.
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BNCCORP, INC. Annual Report 2014 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 21 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, 2014, the Company had four stock-based employee compensation plans, which are described
more fully in Note 24 to these consolidated financial statements.
RECENTLY ISSUED OR ADOPTED ACCOUNTING PRONOUNCEMENTS
ASU 2014-14, Receivables - Troubled Debt Restructuring by Creditors (Subtopic 310-40) – Classification of
Certain Government-Guaranteed Mortgage Loans upon Foreclosure, will require creditors to derecognize certain
foreclosed government-guaranteed mortgage loans and to recognize a separate other receivable that is measured at
the amount the creditor expects to recover from the guarantor, and to treat the guarantee and the receivable as a
single unit of account. ASU 2014-14 is effective for entities other than public business entities, for annual periods
ending after December 15, 2015, and interim periods beginning after December 15, 2015. An entity can elect a
prospective or a modified retrospective transition method, but must use the same transition method that it elected
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BNCCORP, INC. Annual Report 2014 under FASB ASU No. 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage
Loans upon Foreclosure. Early adoption, including adoption in an interim period, is permitted if the entity already
adopted ASU 2014-04. The Company does not expect the application of this guidance to have a material impact
on the Company's consolidated financial statements.
ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize the
amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers.
The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. The new
standard is effective for the Company for annual periods beginning after December 15, 2017 and interim periods
within annual periods beginning after December 15, 2017. The standard permits the use of either the retrospective
or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its
consolidated financial statements and related disclosures.
ASU No. 2014-04, Receivables – Troubled Debt Restructuring by Creditors (Subtopic 310-40): Reclassification
of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure, was issued to clarify that
when an in substance repossession or foreclosure occurs, a creditor is considered to have received physical
possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor
obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower
conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion
of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require
interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the
creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate
property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. ASU
2014-04 is effective for annual reporting periods beginning after December 15, 2014. The Company does not
expect the application of this guidance to have a material impact on the Company's consolidated financial
statements.
FASB ASU 2011-02, Receivables (Topic 310), A Creditor’s Determination of Whether a Restructuring is a
Troubled Debt Restructuring, clarifies when the restructuring of a receivable should be considered a troubled debt
restructuring (TDR). FASB issued the guidance in response to constituents’ concerns that creditors were
inconsistently applying the guidance for 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,
including interim periods within those annual periods. Information related to this ASU and the related disclosures
are included in Note 6 in the Company’s notes to the consolidated financial statements.
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. The
FASB has not yet established a proposed effective date, but a final standard is expected to be issued in the second
half of 2015.
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
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BNCCORP, INC. Annual Report 2014 fiscal years and interim periods beginning after December 15, 2013 for non-public companies. 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. 2013-10, 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 2015 is not expected 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
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.
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BNCCORP, INC. Annual Report 2014 NOTE 2. Regulatory Capital and Current Operating Environment
BNCCORP and the Bank are subject to various regulatory capital requirements administered by the Federal
banking agencies. Failure to meet capital requirements mandated by regulators can initiate certain mandatory and
discretionary actions by regulators. Such actions, if undertaken, could have a direct material adverse effect on the
Company’s financial condition and results of operations. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, BNCCORP and the Bank must meet specific capital guidelines that
involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under
regulatory accounting practices. With increasing frequency, regulators are imposing capital requirements that are
specific to individual institutions. The requirements are generally above the statutory ratios.
Actual capital amounts and ratios of BNCCORP and the Bank as of December 31 are presented in the tables
below (dollars in thousands):
Actual
For Capital Adequacy
Purposes
To be Well Capitalized
Amount in Excess of
Well Capitalized
Amount
Ratio
Amount
Ratio
Amount
Ratio
Amount
Ratio
2014
Total Capital (to risk-weighted assets):
Consolidated
BNC National Bank
Tier 1 Capital (to risk-weighted
assets):
Consolidated
BNC National Bank
Tier 1 Capital (to average assets):
Consolidated
BNC National Bank
Tangible Equity (to total assets):
Consolidated tangible equity
BNC National Bank
Tangible Common Equity (to total
assets):
Consolidated tangible common
equity
2013
Total Capital (to risk-weighted assets):
Consolidated
BNC National Bank
Tier 1 Capital (to risk-weighted
assets):
Consolidated
BNC National Bank
Tier 1 Capital (to average assets):
Consolidated
BNC National Bank
Tangible Equity (to total assets):
Consolidated tangible equity
BNC National Bank
Tangible Common Equity (to total
assets):
Consolidated tangible common
equity
$ 99,085
21.10 %
$
37,562
≥8.0 %
$
N/A
N/A
$
N/A
N/A %
91,967
19.73
37,285
≥8.0
46,606
10.0 %
45,361
9.73
93,182
86,107
93,182
86,107
83,412
91,806
19.85
18.48
9.94
9.13
8.93
9.83
18,781
18,642
37,485
37,725
N/A
N/A
≥4.0
≥4.0
≥4.0
≥4.0
N/A
N/A
N/A
27,964
N/A
47,157
N/A
N/A
N/A
6.0
N/A
5.0
N/A
N/A
N/A
N/A
58,143
12.48
N/A
38,950
N/A
N/A
N/A
4.13
N/A
N/A
62,314
6.67
N/A
N/A
N/A
N/A
N/A
N/A
$ 97,354
88,922
23.15 %
21.40
$
33,644
33,245
≥8.0 %
≥8.0
$
N/A
41,556
N/A %
10.0
$
N/A
47,366
N/A %
11.40
91,150
83,670
91,150
83,670
69,800
82,592
21.67
20.13
10.94
10.06
8.30
9.82
16,822
16,622
33,316
33,271
N/A
N/A
≥4.0
≥4.0
≥4.0
≥4.0
N/A
N/A
N/A
24,934
N/A
41,589
N/A
N/A
N/A
6.0
N/A
5.0
N/A
N/A
N/A
58,736
N/A
14.13
N/A
42,081
N/A
N/A
N/A
5.06
N/A
N/A
48,702
5.79
N/A
N/A
N/A
N/A
N/A
N/A
In the current operating environment, management believes banking entities are regularly required to maintain
capital ratios in excess of the statutory amounts required to be considered well capitalized. We are managing
capital accordingly.
50
53
BNCCORP, INC. Annual Report 2014 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.
54
51
BNCCORP, INC. Annual Report 2014 NOTE 3. 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, 2014 or
2013. The carrying amount of available-for-sale securities and their approximate fair values were as follows as of
December 31 (in thousands):
U.S. Treasury securities
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. Treasury securities
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
2014
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
$
19,861
$
70
$
(10)
$
19,921
101,833
-
83,990
96,988
62,638
-
76,958
442,268
$
667
-
687
1,500
923
-
4,990
8,837
(863)
101,637
-
(298)
(300)
(227)
-
(74)
(1,772)
$
$
-
84,379
98,188
63,334
-
81,874
449,333
2013
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
-
$
-
$
-
$
-
591
210
111
968
514
48
521
2,963
$
$
(1,372)
73,466
(597)
31,678
(169)
(1,963)
(1,171)
-
(1,483)
(6,755)
47,824
140,557
76,629
1,794
63,771
435,719
$
74,247
32,065
47,882
141,552
77,286
1,746
64,733
439,511
52
55
$
$
$
BNCCORP, INC. Annual Report 2014 The amortized cost and estimated fair market value of available-for-sale securities classified according to their
contractual maturities at December 31, 2014, were as follows (in thousands):
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
$
$
Amortized
Cost
Estimated
Fair Value
-
19,861
26,144
396,263
442,268
$
$
-
19,921
26,540
402,872
449,333
For many types of investments, the actual payments will vary significantly from contractual maturities.
Securities carried at approximately $76.6 million and $71.8 million at December 31, 2014 and 2013, 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
2014
2013
$
$
100,066
911
(858)
53
$
$
58,109
1,759
(512)
1,247
56
53
BNCCORP, INC. Annual Report 2014 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
2014
12 months or more
Description of
Securities
#
Fair
Value
Unrealized
Loss
#
Fair
Value
Unrealized
Loss
#
Total
Fair
Value
Unrealized
Loss
U.S. Treasury securities
1
$
7,949
$
(10)
-
$
- $
-
1
$
7,949 $
(10)
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
securities
7
-
8
5
3
-
4
47,031
(275)
-
-
32,354
(241)
12,874
(99)
14,453
(149)
-
10,430
-
(74)
28
$
125,091
$
(848)
2
-
3
3
1
-
-
9
16,853
(588)
-
-
9
-
63,884
(863)
-
-
6,246
(57)
11
38,600
(298)
13,239
(201)
3,799
(78)
-
8
4
-
4
26,113
(300)
18,252
(227)
-
10,430
-
(74)
$
40,137 $
(924)
37
$
165,228 $
(1,772)
Less than 12 months
12 months or more
2013
Description of
Securities
U.S. Treasury securities
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
securities
#
-
7
6
7
13
6
-
24
63
Fair
Value
Unrealized
Loss
$
-
$
-
34,534
(889)
27,265
(597)
17,741
(169)
49,531
(1,478)
24,740
(529)
-
-
46,609
(1,483)
$
200,420
$
(5,145)
54
#
-
1
-
-
4
3
-
-
8
Fair
Value
Unrealized
Loss
$
-
$
-
8,891
(483)
-
-
-
-
Total
Fair
Value
Unrealized
Loss
$
-
$
-
43,425
(1,372)
27,265
(597)
17,741
(169)
#
-
8
6
7
16,373
(485)
17
65,904
(1,963)
14,452
(642)
-
-
-
-
9
-
24
39,192
(1,171)
-
-
46,609
(1,483)
$
39,716
$
(1,610)
71
$ 240,136
$ (6,755)
57
BNCCORP, INC. Annual Report 2014 Management regularly evaluates each security with unrealized losses to determine whether losses are other–than-
temporary. When determining whether a security is other-than-temporarily impaired, management assesses
whether it has the intent to sell the security or whether it is more likely than not that it will be required to sell the
security prior to its anticipated recovery. When evaluating a security, management considers several factors
including, but not limited to, the amount of the unrealized loss, the length of time the security has been in a loss
position, guarantees provided by third parties, ratings on the security, cash flow from the security, the level of
credit support provided by subordinate tranches, and the collateral underlying the security.
There were no securities that were other-than-temporarily impaired during 2014 or 2013.
NOTE 4. Federal Reserve Bank and Federal Home Loan Bank 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
2014
2013
1,807
1,010
2,817
$
$
1,807
922
2,729
$
$
There is no contractual maturity on these investments; the investments are required by counterparties.
NOTE 5. 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
investment
$
$
2014
47,109
132,229
108,122
26,972
40,470
28,220
24,916
360,929
(140)
360,789
(8,601)
$
$
2013
32,870
132,983
93,330
18,215
32,612
27,582
13,286
318,008
(80)
317,928
(9,847)
$
352,188
$
308,081
Loans to Related Parties
Note 19 to these consolidated financial statements includes information relating to loans to executive officers,
directors, principal shareholders and associates of such persons.
58
55
BNCCORP, INC. Annual Report 2014 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
Construction
2014
2013
$
27,004
$
20,922
64,938
20,185
1,099
51,064
17,181
-
$
113,226
$
89,167
NOTE 6. 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
2014
Land and
land
SBA
Consumer
development Construction
Total
Balance, beginning
of period
Provision
(reduction)
Loans charged off
Loan recoveries
Balance, end of
period
$
2,215 $
4,041 $
579
$
478
$
2,371 $
163
$
9,847
471
-
-
(1,114)
(439)
8
715
(109)
5
59
(42)
21
(1,045)
(190)
300
114
-
-
(800)
(780)
334
$
2,686 $
2,496 $
1,190
$
516
$
1,436 $
277
$
8,601
Commercial
and
industrial
Commercial
real estate
2013
Land and
land
SBA
Consumer
development Construction
Total
Balance, beginning
of period
Provision
(reduction)
Loans charged off
Loan recoveries
Balance, end of
period
$
2,546 $
4,790 $
616
$
382
$
1,609 $
148
$ 10,091
516
(916)
69
(670)
(87)
8
(39)
-
2
187
(106)
15
691
-
71
15
-
-
700
(1,109)
165
$
2,215 $
4,041 $
579
$
478
$
2,371 $
163
$
9,847
56
59
BNCCORP, INC. Annual Report 2014 The following table shows the balance in the allowance for credit losses at December 31, 2014, and December 31,
2013, and the related loan balances, segregated on the basis of impairment methodology (in thousands). Loans
evaluated under ASC 310-10-35 include loans on nonaccrual status and troubled debt restructurings, which are
individually evaluated for impairment, and other impaired loans deemed to have similar risk characteristics. All
other loans are collectively evaluated for impairment under ASC 450-20.
Allowance For Credit Losses
Gross Loans and Leases Held for Investment
Under
ASC 310-10-35
Under
ASC 450-20
Total
Evaluated for
Impairment
Under ASC
310-10-35
Evaluated for
Impairment
Under ASC
450-20
Total
$
$
$
$
$
$
18
574
-
-
-
-
592
30
1,030
-
-
-
-
$
1,060
$
2,668
1,922
1,190
516
1,436
277
8,009
2,185
3,011
579
478
2,371
163
8,787
$
$
$
$
2,686
2,496
1,190
516
1,436
277
8,601
2,215
4,041
579
478
2,371
163
9,847
$
$
$
90
$
4,741
-
330
-
-
5,161
430
4,188
-
38
-
-
$
$
$
$
$
132,139
103,381
26,972
40,140
28,220
24,916
355,768
132,553
89,142
18,215
32,574
27,582
13,286
132,229
108,122
26,972
40,470
28,220
24,916
360,929
132,983
93,330
18,215
32,612
27,582
13,286
$
4,656
$
313,352
$
318,008
December 31, 2014
Commercial and industrial
Commercial real estate
SBA
Consumer
Land and land development
Construction
Total
December 31, 2013
Commercial and industrial
Commercial real estate
SBA
Consumer
Land and land development
Construction
Total
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.
60
57
BNCCORP, INC. Annual Report 2014 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
2014
Commercial and industrial:
Business loans
$
67,335
$
161
$
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
17,478
47,218
108,122
26,972
6,343
9,798
9,790
14,470
28,220
24,916
360,662
Loans held for sale
47,109
-
-
-
-
25
-
-
20
-
-
206
-
-
-
-
-
-
-
-
-
5
-
-
5
-
$
67,496
$
37
$
17,478
47,218
108,122
26,972
6,368
9,798
9,790
14,495
28,220
24,916
360,873
47,109
-
-
-
-
19
-
-
-
-
-
56
-
67,533
17,478
47,218
108,122
26,972
6,387
9,798
9,790
14,495
28,220
24,916
360,929
47,109
Total gross loans
$
407,771
$
206
$
5
$
407,982
$
56
$
408,038
58
61
BNCCORP, INC. Annual Report 2014 31-89 Days
Past Due
90 Days or
More Past Due
and Accruing
Total
Performing
Current
Non-accrual
Total
2013
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
Total loans held for
investment
Loans held for sale
$
78,137
$
88 $
17,499
36,829
89,142
18,215
6,634
4,292
11,612
10,012
26,621
13,286
312,279
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
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
2014
2013
$
$
20
-
20
$
$
265
-
265
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.
59
62
BNCCORP, INC. Annual Report 2014 The following table summarizes impaired loans and related allowances as of and for the years ended December
31, 2014 and 2013 (in thousands):
Impaired loans with an allowance recorded:
Commercial and industrial:
Business loans
Agriculture
Owner-occupied commercial real estate
$
Commercial real estate
SBA
Consumer:
Automobile
Home equity
1st mortgage
Other
Land and land development
Construction
Loans held for sale
Total impaired loans with an allowance
recorded
Impaired loans without an allowance
recorded:
Commercial and industrial:
Business loans
Agriculture
Owner-occupied commercial real estate
Commercial real estate
$
SBA
Consumer:
Automobile
Home equity
1st mortgage
Other
Land and land development
Construction
Loans held for sale
Total impaired loans without an
allowance recorded
TOTAL IMPAIRED LOANS
2014
Unpaid
Principal
Recorded
Investment
Related
Allowance
Average
Recorded
Balance
Interest
Income
Recognized
90
-
-
8,642
-
-
-
1,878
-
-
-
-
$
$
90
-
-
4,741
-
-
-
311
-
-
-
-
$
18
-
-
574
-
-
-
-
-
-
-
-
$
93
-
-
5,077
-
-
-
395
-
-
-
-
4
-
-
136
-
-
-
16
-
-
-
-
$
10,610
$
5,142
$
592
$
5,565
$
156
$
-
-
-
-
-
$
-
-
-
-
-
35
19
-
-
-
-
-
-
-
-
-
-
-
-
$
$
35
10,645
$
$
19
5,161
$
$
60
-
-
-
-
-
-
-
-
-
-
-
-
-
592
$
$
-
-
-
-
-
23
-
-
-
-
-
-
$
$
23
5,588
$
$
-
-
-
-
-
-
-
-
-
-
-
-
-
156
63
BNCCORP, INC. Annual Report 2014 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
SBA
Consumer:
Automobile
Home equity
1st mortgage
Other
Land and land development
Construction
Loans held for sale
Total impaired loans with an allowance
recorded
Impaired loans without an allowance
recorded:
Commercial and industrial:
Business loans
Agriculture
Owner-occupied commercial real estate
Commercial real estate
SBA
Consumer:
Automobile
Home equity
1st mortgage
Other
Land and land development
Construction
Loans held for sale
Total impaired loans without an
allowance recorded
TOTAL IMPAIRED LOANS
$
$
$
$
-
-
514
6,857
-
- $
-
430
4,188
-
$
-
-
30
1,030
-
$
-
-
430
4,347
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
7,371
$
4,618 $
1,060
$
4,777
$
$
-
-
-
-
-
64
-
-
-
-
-
-
- $
-
-
-
-
38
-
-
-
-
-
-
$
-
-
-
-
-
-
-
-
-
-
-
-
$
-
-
-
-
-
44
-
-
-
-
-
-
$
$
64
7,435
$
$
38 $
4,656 $
-
1,060
$
$
44
4,821
$
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
64
61
BNCCORP, INC. Annual Report 2014 Troubled Debt Restructuring (TDR)
Included in loans receivable, net, are certain loans that have been modified in order to maximize collection of loan
balances. If the Company, for legal or economic reasons related to the borrower’s financial difficulties, grants a
concession compared to the original terms and conditions of the loan, the modified loan is considered a troubled
debt restructuring.
The Company follows FASB ASU No. 2011-02, Receivables (Topic 310), A Creditor’s Determination of Whether
a Restructuring is a Troubled Debt Restructuring, which modified guidance for identifying restructurings of
receivables that constitute a TDR.
The table below summarizes the amounts of restructured loans as of December 31 (in thousands):
Accrual
Non-accrual
Total
Allowance
2014
Commercial and industrial:
Business loans
Agriculture
Owner-occupied commercial real estate
Commercial real estate
SBA
Consumer:
Automobile
Home equity
1st mortgage
Other
Land and land development
Construction
Loans held for sale
Commercial and industrial:
Business loans
Agriculture
Owner-occupied commercial real estate
Commercial real estate
SBA
Consumer:
Automobile
Home equity
1st mortgage
Other
Land and land development
Construction
Loans held for sale
$
$
$
$
53
-
-
4,741
-
-
-
311
-
-
-
-
5,105
$
$
53
-
-
4,741
-
-
-
311
-
-
-
-
5,105
-
-
-
-
-
-
-
-
-
-
-
-
-
$
$
2013
Accrual
Non-accrual
Total
-
-
-
4,188
-
-
-
-
-
-
-
-
4,188
$
$
93
-
-
7,958
-
-
-
493
-
-
-
-
8,544
$
$
93
-
-
3,770
-
-
-
493
-
-
-
-
4,356
62
$
$
$
$
10
-
-
574
-
-
-
-
-
-
-
-
584
Allowance
14
-
-
1,124
-
-
-
12
-
-
-
-
1,150
65
BNCCORP, INC. Annual Report 2014 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, 2014
and December 31, 2013.
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
2014
2013
$
$
463
145
318
$
$
583
223
360
The amount of additional funds committed to borrowers who are in TDR status was $0 at December 31, 2014 and
$232,000 at December 31, 2013.
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, 2014 and December 31, 2013, 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
63
BNCCORP, INC. Annual Report 2014 NOTE 7. Other Real Estate, net
Other real estate (ORE), net 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 on sale of assets
Provision
Balance, end of year
2014
2013
1,056
697
-
(1,587)
90
-
256
$
$
5,131
-
800
(4,897)
8
14
1,056
$
$
The following is a summary of ORE as of December 31 (in thousands):
Other real estate
Valuation allowance
Other real estate, net
2014
2013
$
$
954
(698)
256
$
$
3,250
(2,194)
1,056
NOTE 8. 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
2014
2013
4,417
12,459
510
10,076
27,462
(11,234)
16,228
$
$
5,083
10,768
491
9,391
25,733
(10,863)
14,870
$
$
Depreciation and amortization expense totaled approximately $1.3 million and $1.2 million for the years ended
December 31, 2014 and 2013, respectively.
64
67
BNCCORP, INC. Annual Report 2014 NOTE 9. Deposits
The scheduled maturities of time deposits as of December 31, 2014 are as follows (in thousands):
$
2015
2016
2017
2018
2019
Thereafter
83,661
14,701
10,426
22,886
7,297
29,578
$
168,549
At December 31, 2014 and 2013, the Bank had $54.0 million and $64.5 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
2014
2013
$
$
9
75
467
1,862
2,413
$
$
15
134
442
2,069
2,660
Deposits Received from Related Parties
Note 19 to these consolidated financial statements includes information relating to deposits received from
executive officers, directors, principal shareholders and associates of such persons.
NOTE 10. 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 0.05% to 0.40% in 2014, and from 0.10% to 0.60% in 2013,
secured by government agency collateralized mortgage obligations and general
obligations of municipalities
2014
2013
-
$
-
16,002
16,002
19,967
19,967
$
$
$
The weighted average interest rate on short-term borrowings outstanding as of December 31, 2014 and 2013 was
0.15% and 0.17%, 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, 2014, $16.0 million of securities sold under repurchase agreements, with a weighted average
interest rate of 0.15%, were collateralized by government agency collateralized mortgage obligations and general
68
65
BNCCORP, INC. Annual Report 2014 obligations of municipalities having a market value of $30.3 million and unamortized principal balances of $31.3
million. At December 31, 2013, $20.0 million of securities sold under repurchase agreements, with a weighted
average 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.
NOTE 11. Federal Home Loan Bank Advances
As of December 31, 2014, the Bank had $0 of FHLB advances outstanding. At December 31, 2014, the Bank has
mortgage loans pledged as collateral to the FHLB with unamortized principal balances of approximately $109.6
million. The Bank has the ability to draw advances up to approximately $77.6 million based upon the mortgage
loans that are currently pledged, subject to a requirement to purchase additional FHLB stock.
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 had 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.
NOTE 12. Other Borrowings
The following table presents selected information regarding other borrowings at December 31 (in thousands):
Unsecured Borrowing Lines:
Bank of North Dakota (1)
US Bank (1)
Zions First National Bank (1)
Total
Secured Borrowing Lines:
Federal Borrower-In-Custody Line (1)
Bank of North Dakota (1)
Bank of North Dakota (2)
Total
(1) BNC National Bank Line
(2) BNCCORP, INC. Line
2014
Collateral
Pledged
$
$
2,113
311
91,882
94,306
Line
10,000
10,000
12,000
32,000
Line
1,241
249
10,000
11,490
$
$
$
$
$
$
$
$
Outstanding
Available
10,000
$
10,000
12,000
32,000
$
-
-
-
-
Outstanding
-
-
-
-
Available
1,241
$
249
10,000
11,490
$
At December 31, 2014, the pledged collateral for the BNC National Bank line was comprised of collateralized
mortgage obligations and the pledged collateral for the BNCCORP, INC. line is the common stock of BNC
National Bank.
66
69
BNCCORP, INC. Annual Report 2014 Unsecured Borrowing Lines:
Bank of North Dakota (1)
US Bank (1)
Zions First National Bank (1)
Total
Secured Borrowing Lines:
Federal Borrower-In-Custody Line (1)
Bank of North Dakota (1)
Total
(1) BNC National Bank Line
Collateral
Pledged
$
$
3,777
1,397
5,174
2013
$
$
$
$
Line
5,000
10,000
12,000
27,000
Outstanding
$
$
Line
Outstanding
2,247
1,118
3,365
$
$
Available
5,000
10,000
12,000
27,000
Available
2,247
1,118
3,365
$
$
$
$
-
-
-
-
-
-
-
At December 31, 2013, the pledged collateral was comprised of collateralized mortgage obligations.
NOTE 13. Guaranteed Preferred Beneficial Interest’s in Company’s Subordinated
Debentures
In July 2000, BNCCORP issued $7.5 million of subordinated debentures at a fixed rate of 12.05%. In the third
quarter of 2014, these subordinated debentures were redeemed and the corresponding debentures were prepaid.
The debentures were redeemed using available cash and the Bank of North Dakota line of credit. Redemption
costs totaling $356 thousand were recorded in the second quarter of 2014.
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, 2014 and
December 31, 2013 was 1.64% and 1.65%, 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.
70
67
BNCCORP, INC. Annual Report 2014 NOTE 14. 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 had an aggregate liquidation preference of approximately $1.0 million.
The Treasury Department exercised this warrant on January 16, 2009. The U.S. Department of the Treasury
successfully auctioned BNCCORP’s preferred stock and transferred ownership to private investors effective
March 17, 2014.
The Company has issued two series of preferred stock. Both series of preferred stock are perpetual and classified
as non-voting.
The first series of preferred stock paid 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, 2014 and 2013. Each share has a liquidation preference of $1,000 per share. This series of shares can not be
redeemed without prior approval from regulatory authorities.
The second series of preferred stock paid 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, 2014 and 2013.
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.
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.
68
71
BNCCORP, INC. Annual Report 2014 NOTE 15. 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, 2014
Twelve Months Ended
December 31, 2014
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
$ 449,333
47,109
$ 19,921
-
2,015
-
-
$ 498,457
-
-
-
$ 19,921
LIABILITIES
Commitments to sell mortgage loans
Mortgage banking short positions
Total liabilities at fair value
$
$
295
185
480
$
$
-
-
-
$
$
$
$
429,412
47,109
2,015
-
-
478,536
295
185
480
$
$
$
$
-
-
-
-
-
-
-
-
-
$
$
$
$
53
622
1,122
-
-
1,797
(403)
(459)
(862)
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
$ 435,719
32,870
706
107
274
$ 469,676
LIABILITIES
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)
-
-
-
Prior to 2012, 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
69
BNCCORP, INC. Annual Report 2014 2014
Total
Level 1
Level 2
Level 3
$
$
$
$
4,569
256
4,825
Total
3,596
1,056
4,652
$
$
$
$
Level 1
-
-
-
-
-
-
$
$
$
$
4,569
256
4,825
2013
Level 2
3,596
1,056
4,652
$
$
$
$
Level 3
Total gains/
(losses)
$
$
(75)
90
15
Total gains/
(losses)
$
$
140
22
162
-
-
-
-
-
-
Impaired loans(1)
Other real estate(2)
Total
Impaired loans(1)
Other real estate(2)
Total
(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.
70
73
BNCCORP, INC. Annual Report 2014 NOTE 16. 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
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
2014
2013
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
Level 1
$
41,124
$
41,124
$
18,871
$
18,871
Level 1
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
Level 2
Level 2
19,921
19,921
-
-
429,412
429,412
435,719
435,719
2,817
47,109
2,015
-
-
352,188
3,931
898,517
187,400
623,831
16,002
338
7,279
295
185
15,018
850,348
-
-
$
$
$
$
$
2,817
47,109
2,015
-
-
352,506
3,931
898,835
187,400
624,044
16,002
338
7,279
295
185
2,729
32,870
706
107
274
308,081
3,554
802,911
141,788
581,441
19,967
771
6,307
-
-
$
$
9,125
844,668
22,432
772,706
$
54,167
265
13
$
$
-
-
$
$
$
$
$
$
2,729
32,870
706
107
274
308,932
3,554
803,762
141,788
583,626
19,967
771
6,307
-
-
16,908
769,367
34,395
254
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
71
BNCCORP, INC. Annual Report 2014 NOTE 17. 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, 2014, 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 15 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, 2014, 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):
2014
2013
Fixed
Rate
Variable
Rate
Fixed
Rate
Variable
Rate
Commitments to extend credit
$
19,515
$
62,728
$
18,723
$
57,815
Standby and commercial letters of credit
604
731
597
841
In addition to the amounts in the table above, our mortgage banking commitments to fund loans totaled $91.1
million at December 31, 2014 and $57.8 million at December 31, 2013. Also, our mortgage banking commitments
to sell loans totaled $136.8 million at December 31, 2014 and $90.0 million at December 31, 2013.
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):
72
75
BNCCORP, INC. Annual Report 2014 Balance, beginning of period
Provision
Write offs
Balance, end of period
$
$
2014
2013
1,679
552
(352)
1,879
$
$
1,500
745
(566)
1,679
NOTE 18. 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, 2014 and 2013, the Bank had outstanding $190 thousand and $789 thousand, respectively, of
performance standby letters of credit and $5.9 million and $4.9 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 19. 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
$3.2 million and $3.1 million at December 31, 2014 and 2013, respectively. Advances of loans to related parties
in 2014 and 2013 totaled $503,000 and $1.0 million, respectively. Loan pay downs by related parties in 2014 and
2013 were $353,000 and $570,000, respectively. Commitments to extend credit to related parties increased to
$605,000 at December 31, 2014 from $229,000 at December 31, 2013. The total amount of deposits received
from these parties was $2.6 million and $2.2 million at December 31, 2014 and 2013, 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, 2014, BNCCORP and its
affiliates were in compliance with these requirements.
76
73
BNCCORP, INC. Annual Report 2014 NOTE 20. Income Taxes
The expense 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
2014
2013
$
$
2,113
353
2,466
1,174
431
-
1,605
4,071
$
$
1,719
166
1,885
1,356
574
7
1,937
3,822
The expense for federal income taxes on operations expected at the statutory rate differs from the actual expense
for the years ended December 31 (in thousands):
Tax expense 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
2014
2013
$
$
4,259
517
(727)
-
(149)
171
4,071
-
4,071
$
$
4,233
610
(470)
(359)
(170)
(29)
3,815
7
3,822
74
77
BNCCORP, INC. Annual Report 2014 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
2014
2013
$
$
3,968
-
204
111
179
95
454
5,011
2,691
221
816
232
3,960
1,051
(14)
1,037
$
$
4,451
1,374
211
414
959
665
376
8,450
-
656
732
340
1,728
6,722
(14)
6,708
The Company is able to carry forward state tax net operating losses aggregating $1.9 million as of December 31,
2014. The state net operating losses expire between 2015 and 2032.
The Company files consolidated federal and unitary state income tax returns where allowed. Tax years ended
December 31, 2011 through 2014 remain open to federal examination. Tax years ended December 31, 2010
through 2014 remain open to state examinations.
78
75
BNCCORP, INC. Annual Report 2014 NOTE 21. 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 22. Benefit Plans
2014
2013
3,369,021
122,233
3,491,254
3,297,235
171,155
3,468,390
$
$
$
$
8,456
(1,796)
6,660
1.98
1.91
$
$
$
$
8,627
(1,320)
7,307
2.22
2.11
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 2014 and 2013, 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 $466,000 and $476,000 for 2014 and 2013, 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, 2014, the assets in the plan totaled $18.3 million
and included $602,000 (35,000 shares) invested 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.
76
79
BNCCORP, INC. Annual Report 2014 NOTE 23. Commitments and Contingencies
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, 2014 and 2013 was $1.1 million and $1.2 million, respectively,
for facilities, and $26,000 and $21,000, respectively, for equipment and other items. At December 31, 2014, the
total minimum annual base lease payments for operating leases were as follows (in thousands):
$
2015
2016
2017
2018
2019
Thereafter
885
621
448
174
177
1,297
NOTE 24. 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, 2014 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
9,850
2010
Stock
Incentive
Plan
250,000
250,000
Total
825,000
308,601
The Company recognized share-based compensation expense of $119,000 and $46,000 for the years ended
December 31, 2014 and 2013, respectively, related to restricted stock.
The tax benefits associated with share-based compensation was approximately $17,000 for the year ended
December 31, 2014 and was approximately $17,000 for the year ended December 31, 2013.
At December 31, 2014, the Company had $215,000 of unamortized restricted stock compensation. At December
31, 2013, the Company had $254,000 of unamortized restricted stock compensation. Restricted shares of stock
granted generally have vesting and amortization periods of at least three years.
80
77
BNCCORP, INC. Annual Report 2014 Following is a summary of restricted stock activities for the years ended December 31:
Number
Restricted
Stock
Shares
25,000
6,000
(3,333)
-
27,667
2014
2013
Weighted
Average
Grant Date
Fair Value
Number
Restricted
Stock
Shares
Weighted
Average
Grant Date
Fair Value
$
11.88
13.19
10.83
-
12.29
$
3,300
25,000
(3,300)
-
25,000
1.50
11.88
1.50
-
11.88
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 stock 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 did not recognize share-based compensation expense for the years ended December 31, 2014 and
2013, respectively, related to stock options. At December 31, 2014, the Company had no 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, 2014:
Number
Weighted-average exercise price
Weighted-average remaining contractual term
Stock Options
Outstanding
125,800
$3.00
5.21 years
Stock Options
Currently
Exercisable
125,800
$3.00
5.21 years
Stock Options
Vested and
Expected to Vest
125,800
$3.00
5.21 years
78
81
BNCCORP, INC. Annual Report 2014
Following is a summary of stock option transactions for the years ended December 31:
2014
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
163,200
-
(37,400)
-
125,800
125,800
$
$
$
$
$
$
3.00
-
3.00
-
3.00
3.00
Granted
Exercised
Forfeited
$
$
$
-
1.47
-
228,000
-
(64,800)
-
163,200
163,200
$
$
$
-
1.47
-
Following is a summary of the status of options outstanding at December 31, 2014:
Weighted
Average
Exercise Price
$
3.00
-
3.00
-
3.00
3.00
$
$
$
$
$
Outstanding Options
Exercisable Options
Weighted Average
Remaining
Contractual Life
Weighted
Average
Exercise Price
Number
Weighted
Average
Exercise Price
Number
Options with exercise
prices of:
$3.00
125,800
5.21 years
$
3.00
125,800
$
3.00
82
79
BNCCORP, INC. Annual Report 2014 NOTE 25. 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 - 9% 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 3,413,854 and
3,374,601 shares issued and outstanding
Capital surplus – common stock
Retained earnings
Treasury stock (254,799 and 294,052 shares, respectively)
Accumulated other comprehensive loss, net of income taxes
Total stockholders’ equity
Total liabilities and stockholders’ equity
2014
2013
6,194
86,109
454
935
93,692
15,018
50
911
15,979
20,093
1,005
34
25,831
34,622
(3,421)
(451)
77,713
93,692
$
$
$
$
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
$
$
$
$
80
83
BNCCORP, INC. Annual Report 2014 Parent Company Only
Condensed Statements of Operations
For the Years Ended December 31
(In thousands)
2014
2013
$
1,448
$
1,835
8
26
1,482
884
1,197
490
-
1,075
3,646
(2,164)
686
(1,478)
9,934
8,456
11
38
1,884
1,197
836
799
1
824
3,657
(1,773)
684
(1,089)
9,716
8,627
$
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
81
BNCCORP, INC. Annual Report 2014 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)
$
8,456
$
8,627
2014
2013
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:
Dividends paid on preferred stock
Decrease in subordinate debentures
Increase in long-term borrowings
Decrease in long-term borrowings
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
(9,934)
-
(301)
1,204
(601)
(1,176)
7,500
7,500
(1,698)
(7,500)
2,700
(2,700)
(9,198)
(2,874)
9,068
6,194
468
2,218
$
$
$
(9,716)
1
(1,123)
2,566
(4,238)
(3,881)
5,000
5,000
(4,681)
-
-
-
(4,681)
(3,562)
12,630
9,068
3,112
1,720
$
$
$
82
85
BNCCORP, INC. Annual Report 2014 NOTE 26. Subsequent Events
The Company has evaluated subsequent events from the balance sheet date through March 25, 2015, the date at
which the financial statements were available to be issued, and determined there are no other items to disclose.
86
83
BNCCORP, INC. Annual Report 2014 87
BNCCORP, INC. Annual Report 2014 88
BNCCORP, INC. Annual Report 2014 CORPORATE DATA
Investor Relations
Daniel Collins
Chief Financial Officer
612-305-2210
Timothy J. Franz
President/CEO
612-305-2213
E-mail Inquiries:
corp@bncbank.com
General Inquiries:
BNCCORP, INC.
322 East Main Avenue
Bismarck, North Dakota 58501
Telephone (701) 250-3040
Facsimile (701) 222-3653
Annual Meeting
The 2015 annual meeting of stockholders will be
held on Wednesday, June 17, 2015 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
OTCQX Markets under the symbol: “BNCC.”
COMMON STOCK PRICES
For the Years Ended December 31,
Low
2013(1)
High Low
2014(1)
High
First Quarter
$13.79 $12.03 $12.89 $10.05
Second Quarter $18.00 $13.24 $12.10 $10.40
$18.40 $17.55 $14.40 $11.70
Third Quarter
$18.22 $16.60 $14.00 $12.11
Fourth Quarter
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 North Dakota, Arizona and Minnesota from 15 locations. BNC
also conducts mortgage banking from 14 locations in Arizona,
Minnesota, North Dakota, Illinois, Kansas and Nebraska.
(1) The quotes represent the high and low closing
sales prices as reported by OTCQX Markets.
Stock Transfer Agent and Registrar
American Stock Transfer & Trust Company
59 Maiden Lane, Plaza Level
New York, NY 10038
(800) 937-5449
Directors, BNCCORP, INC.
Tracy Scott
Chairman of the Board and
Retired Co-Founder of BNCCORP, INC.
Timothy J. Franz
President and
Chief Executive Officer of BNCCORP, INC.
Nathan P. Brenna,
Owner, Brenna Farm and Ranch
Former Attorney
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 E Century Avenue
Bismarck, ND 58503
Primrose Assisted Living Apartments
1144 College Drive
Bismarck, ND 58501
Touchmark on West Century
1000 W 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
Mandan
2711 Sunset Drive NW
Mandan, ND 58554
Golden Valley
650 North Douglas Drive
Golden Valley, MN 55422
Perimeter
17550 N Perimeter Drive
Scottsdale, AZ 85255
Mortgage Banking Branches:
Glendale
6685 W. Beardsley Road
Glendale, AZ 85383
Scottsdale
17550 North Perimeter Dr., Ste 260
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
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
Mandan
2711 Sunset Drive NW
Mandan, ND 58554
Golden Valley
650 North Douglas Drive
Golden Valley, MN 55422
BNCCORP, INC. Annual Report 2014
89