1
BNCCORP, INC. Annual Report 20162016ANNUAL REPORT CORPORATE DATA
Investor Relations
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
Daniel Collins
Chief Financial Offi cer
612-305-2210
Timothy J. Franz
President/CEO
612-305-2213
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,
2016(1)
2015(1)
High
Low High
Low
First Quarter
$16.40 $14.26 $17.10 $15.30
Second Quarter $15.50 $14.80 $17.20 $15.09
Third Quarter $21.00 $15.25 $17.35 $16.00
Fourth Quarter $26.35 $20.10 $16.85 $15.95
(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, LLC
Directors, BNCCORP, INC.
Tracy Scott
Chairman of the Board and
Retired Co-Founder of BNCCORP, INC.
Timothy J. Franz
President and
Chief Executive Offi cer 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.
Michael O’Rourke
Attorney / Author
Directors, BNC National Bank
Annual Meeting
The 2017 annual meeting of stockholders will be
(800) 937-5449
6201 15th Avenue
Brooklyn, NY 11219
held on Wednesday, June 21, 2017 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
Corporate Broker
D. A. Davidson Community Banking and
Wealth Management Group
1-800-288-2811
cbwm@dadco.com
Doug Brendel
Shawn Cleveland
Daniel J. Collins
Timothy J. Franz
Dave Hoekstra
Mark E. Peiler
Scott Spillman
Cheryl A. Stanton
KPMG LLP
233 South 13th Street
Suite 1600
Lincoln, NE 68508
Bank Branches – North Dakota:
Bismarck Main(2)
322 East Main Avenue
Bismarck, ND 58501
Bismarck South
219 South 3rd Street
Bismarck, ND 58504
Bismarck North(2)
801 East Century Avenue
Bismarck, ND 58503
Bismarck Sunrise(2)
3000 Yorktown Drive
Bismarck, ND 58503
Primrose Assisted Living Apartments
1144 College Drive
Bismarck, ND 58501
Touchmark on West Century
1000 West Century Avenue
Bismarck, ND 58503
Crosby
206 South 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(2)
2711 Sunset Drive NW
Mandan, ND 58554
Bank Branches – Arizona
Glendale – Charter Address
20175 North 67th Avenue
Glendale, AZ 85308
Perimeter
17550 North Perimeter Drive
Scottsdale, AZ 85255
Bank Branches – Minnesota
Golden Valley(2)
650 North Douglas Drive
Golden Valley, MN 55422
Mortgage Banking Offi ces:
Glendale
6685 W. Beardsley
Glendale, AZ 85383
Bloomington
7201 West 78th Street
Bloomington, MN 55439
Wichita
2868 North Ridge Road
Wichita, KS 67205
Wichita
12031 East 13th Street
Wichita, KS 67206
McPherson
1345 N Main Street
McPherson, KS 67460
Overland Park
7007 College Boulevard
Overland Park, KS 66211
Moline
800 36th Avenue
Moline, IL 61265
Lee’s Summit
600 SW Jefferson
Lee’s Summit, Missouri 64063
Lebanon
1403 West Elm Street
Lebanon, Missouri 65336
(2) Bank branches offering mortgage banking
services.
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 17 locations. BNC also
conducts mortgage banking from 14 locations in Arizona, Minnesota,
North Dakota, Illinois, Kansas, and Missouri.
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BNCCORP, INC. Annual Report 2016
BNC was established in
the belief that business
relationships must be built
on a foundation of trust
and ethical practices.
BNC: EXCELLENCE IN
COMMUNITY BANKING
From the beginning, BNCCORP, INC. (“BNC”) has been defined – and
driven – by a deep commitment to serving our clients and communities.
In launching the Company and its BNC National Bank subsidiary over
25 years ago, we envisioned a bank that would focus on the needs of
businesses, as well as their owners and employees, that were not being met
by larger national and regional banks. To turn that vision into a reality,
we created a business model that is differentiated by a relationship-first
approach, enabling us to deliver value-added financial solutions and high
touch customer service. We encourage our people to understand our clients’
businesses, to work collaboratively as one businessperson to another, and to
align our clients’ needs with the right set of products and services.
In the process, we have grown from our roots and we now deliver
community banking and wealth management services in North Dakota,
Arizona and Minnesota. BNC also offers mortgage banking through a
consumer-direct channel, complemented by retail channels, from locations in
Arizona, Minnesota, North Dakota, Illinois, Kansas and Missouri.
Ethical, Entrepreneurial and Evolving
Even as we have expanded our reach and enhanced our services, our strategy
remains the same as on day one: deliver solutions to help businesses in our
community to thrive – and do it in an ethical and entrepreneurial way. Our
founders, Greg Cleveland and Tracy Scott, approached banking from a
business perspective and the fundamental belief that business relationships
must be built on a foundation of trust and ethical practices. This principle
still guides our decision-making today.
Our commercial banking clients are very entrepreneurial. We are, too. This is
an important part of who and what we are. We leverage our entrepreneurial
energy to stay in step with our clients’ changing needs and the ever evolving
marketplace in which we operate and compete. Responding to clients’ needs
and market forces, we have expanded our offerings beyond core banking
products. We now offer wealth management services, including employee
benefit plan administration and tax services. By employing innovative
technologies, such as internet mortgage applications and remote and mobile
banking, we are able to provide convenient, effective and secure access to
services for clients who wish to conduct business digitally.
Twenty-five years on, BNC remains dedicated to our core ethical and
entrepreneurial principles – while evolving to meet the changing needs of
our clients. In doing so, we help create value and opportunity for businesses,
our own team members, our shareholders and the communities we serve.
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BNCCORP, INC. Annual Report 2016
CORPORATE PROFILE: THE BUSINESS OF BNC
BNC is a diversified community bank with three primary areas of focus: commercial
banking, retail and mortgage banking, and wealth management.
Commercial Banking. We meet the needs of small to middle-market businesses
with a range of commercial banking services, including: business financing, commercial real
estate lending, SBA loans, business checking, cash management, corporate credit cards and
merchant services. The core of our commercial banking relationships are in North Dakota,
mainly in the capital region of Bismarck/Mandan. From Bismarck, and locations to the
north and west, we serve communities in North Dakota that are economically influenced by
oil and energy, and to a lesser extent, the agricultural communities of central North Dakota.
We also have a commercial banking presence in Phoenix, Arizona and Minnesota, which
serves to create further opportunities for growth while diversifying our credit exposure.
Retail and Mortgage Banking. BNC’s services to consumers include retail
banking, provided through a network of locations in North Dakota, Arizona and Minnesota.
Among our broad array of retail banking services are personal checking and savings
products, health savings accounts, personal loans and card services. Our branch network is
concentrated in North Dakota, where we are responsive to the preference of our customers
for convenient face-to-face transactional banking. BNC has been rewarded with our
customers’ loyalty as our deposit growth and retention has been remarkable.
Our mortgage banking operations generate residential loans through a consumer direct
channel, as well as a retail channel with locations in Arizona, Minnesota, North Dakota,
Illinois, Kansas and Missouri. The consumer direct model emphasizes the use of technology,
including internet-generated leads and a call center, to originate loans throughout the U.S.
The retail model is more traditional and emphasizes relationships to originate loans near our
branch network.
Wealth Management. A trusted partner for our clients as they plan for retirement
and manage their investments, BNC’s wealth management solutions include: 401(k) and other
retirement plans, trust services, personal wealth advisory, and professional services such
as tax, accounting, payroll and business planning. Many of our wealth management clients
are derived from commercial banking relationships. For example, we administer retirement
savings plans for the employees of our business clients. We are well positioned to help
clients manage wealth and transfer assets in a manner that enables them to accomplish their
financial goals.
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BNCCORP, INC. Annual Report 2016 TO OUR SHAREHOLDERS, CUSTOMERS,
EMPLOYEES AND COMMUNITY
Traditionally, our Annual Report has been more focused on BNC’s operating and financial
performance for the past year. This year, we thought we would share with you an expanded
discussion, including key elements of our entrepreneurial spirit; operating philosophy,
community involvement; and particularly how we strive to be long-term business partners
with our clients. We are expanding our discussion because community banks like BNC need
to balance the interests of multiple constituencies: clients, employees, regulators, and the
communities where we live and work, while creating value for our shareholders. We thought
it would be important to provide a perspective on how we balance the needs of all these
constituencies, because doing so is essential to good community banking and drives value for
our shareholders.
Increasing Shareholder Value
Shareholders, of course, are particularly concerned with how we create value. In 2016, we
delivered strong financial performance, with net income available to common shareholders
of $7.2 million, or $2.03 per diluted share. Our return on average common shareholder equity
was 10.35% in 2016, continuing a trend over the past several years of impressive returns on
shareholder equity. In the five-year period since the beginning of 2012, our book value per
common share has increased from $5.35 to $20.98, an increase of 292%. During this period,
the average return on average common equity was 28% and our longer-term shareholders have
been significantly rewarded. Summary information of BNC’s book value per share, net income
available to common shareholders, return on equity and earnings per share is shown below:
Timothy J. Franz
President and Chief Executive Officer
Performance Ratios Table
2011
For the Years Ended December 31,
2012
2015
2014
2013
Book Value Per Common Share (Excluding OCI)
$5.35
$12.99
$14.89
$16.72
$18.93
2016
$20.98
Net Income available to common shareholder
$2,814
$25,162
$7,307
$6,660
$7,550
$7,156
Return on average common stockholders’ equity
17.32% 90.04%
15.15% 12.37% 12.21% 10.35%
Basic earnings per common share
Diluted earnings per common share
$0.86
$0.86
$7.64
$7.52
$2.22
$2.11
$1.98
$1.91
$2.23
$2.16
$2.08
$2.03
Balancing Growth and Risk
We have generated these returns by nurturing our mortgage banking operations and growing
our core bank opportunistically and judiciously. Growing core deposits in a cost-effective
manner is a key value proposition in community banking. Our core deposits have increased
$240 million, or 46%, since the beginning of 2012. We believe that deposit rich franchises
provide enhanced value to shareholders. We achieved this growth by capturing wealth created
by the energy boom in western North Dakota and, more recently, by growing deposits in the
Phoenix market. Many people currently anticipate interest rates will continue to increase. If
they do, the value of core deposits should also increase, which also is positive for shareholder
value.
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BNCCORP, INC. Annual Report 2016
While the organic growth in deposits has been strong, we have also grown our loans held for investment by $121 million, or 41%,
since the beginning of 2012. Very importantly, we have maintained excellent credit quality metrics while growing loans. The charts
above show the recent growth of our loans and deposits.
The gap between our total deposits and total loans in the table above represents an opportunity to improve earnings. As we grow into
our deposit base, our earnings can improve because the yield on our earning assets should increase. We will continue to work hard at
this profit improving opportunity, but we will also balance our desire to improve earnings with maintaining strong risk management
practices.
Investing in BNC’s Future
Interest rates have been at historic lows in recent periods and mortgage banking is a very good way of creating value in a low interest
rate environment. We have been both opportunistic and entrepreneurial with regard to our mortgage banking operations during this
period. We generated significant revenues from these operations and used the profits to build capital and pay off debt to fortify BNC’s
balance sheet and benefit common shareholders. During this period we also invested in our mortgage banking operations to build
a consumer direct model driven by technology to complement our traditional retail channel. In 2016, the consumer direct channel
represented 79% of the total dollar volume of our mortgage loan originations. Recent results prove this model captures value in a
refinance market. We are seeing early signs that a significant number of people are willing to use this channel to finance the purchase
of homes and the housing market remains very strong as we move into early 2017.
Putting it All Together
At BNC, we are pleased to have delivered strong performance in 2016 and recent years. We believe BNC has fulfilled the promise of
the community banking model: we are meeting the needs of our customers and communities and growing value for shareholders. We
have also balanced generating current profits while investing in activities and people that will drive future revenue.
I would like to personally thank the people working at BNC, as well as our clients, shareholders and communities. Every day, I am
more grateful to be associated with you. I am confident that, together, we have a strong foundation and the ingenuity to deliver more
success in the years to come.
Timothy J. Franz
President and Chief Executive Officer
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BNCCORP, INC. Annual Report 2016
GROWING WITH OUR BUSINESS CLIENTS
At BNC, we are honored that our customers, particularly our commercial banking
relationships, view us as long-term business partners. We enjoy relationships with thousands
of business customers today. The core of our customer base continues to be Commercial
and Industrial and Commercial Real Estate businesses, a high proportion of whom have
been with us for more than a decade. Our team is proven and highly capable of serving a
wide base of industries. The length of these relationships is important to BNC, as it fosters
stability, results in loans and deposits with long lives and recurring revenues, and provides
the opportunity to grow along with our clients.
We have helped customers launch, grow, transform and transition their businesses for over
25 years. We work hard to help them achieve their strategic goals by employing exceptional
people, encouraging an entrepreneurial approach to providing quality individualized service,
and adapting products and services to our customers’ changing needs. We want to partner
with customers in all phases of their business life cycle and BNC offers products suited for
each phase. For example, we offer our start-up business customers flexible small business
financing options, cash management solutions and tax preparation services. As a relationship
bank, we work with customers as their needs grow and change, providing financing to
expand a facility or support a higher level of business activity. Our Wealth Management
team is a trusted partner to our clients as they plan for retirement, manage their personal
investments, or consider ways to help their employees save for retirement.
Each customer is offered a primary point of contact, responsible for managing the
relationship and “delivering the bank” in terms of accessing our full range of services. We
surround and support our primary contacts with professionals who have the specialized
skills required to deliver on our high level of customer care promise. At the heart of all of
our relationships is the open and candid dialogue we maintain with customers. We listen and
learn their needs, and strive to provide the right solution at the right time. More than once,
a client has told us, “You know me better than my previous bank.” Nothing makes us more
proud than the thought that our people help customers create opportunity every day.
INNOVATION
To satisfy the changing needs of our clients, BNC is committed to innovations that enable
us to deliver services in the most convenient, agile and effective way possible. As advances
in technology offer opportunities for our customers to redefine how, when and where
they want products and services delivered, BNC is regularly adding innovative technology
enhancements to augment traditional service delivery models. In recent years, this has meant
introducing mobile banking applications, remote and mobile deposit capture, person-to-
person payments, interbank transfers and mobile wallet, to allow customers to manage their
business without visiting a branch.
Our approach to mortgage banking provides a great example of how we bring innovation
to traditional banking services. While many homeowners still prefer the relationship-based
service our retail mortgage-banking channel provides, increasingly this industry is moving
toward technology-based solutions to facilitate loan originations. To participate and compete
in this changing marketplace, we built our consumer direct mortgage banking channel. We
use internet-generated leads and a call-in center to serve consumers who are comfortable
using technology to source financial products. The consumer direct channel expands our
presence in the loan origination marketplace, allowing us to monetize quickly in a refinance
market, and can shift readily to purchase originations in a market where homebuyers are
more prevalent.
We will continue to add innovative solutions that our customers value. In all that we do,
we consider the protection of our customers’ information a fundamental element of
our customer promise and are vigilant in maintaining rigorous security standards – as we
combine high-touch personalized service with high-tech convenience and efficiency.
Nothing makes us
more proud than the
thought that our people
help customers create
opportunity every day.
BNC has fulfilled
the promise of the
community banking
model: meeting the needs
of our customers and
communities and growing
value for shareholders.
We will continue to
combine high-touch
personalized service with
high-tech convenience and
efficiency.
5
BNCCORP, INC. Annual Report 2016 The people of BNC
value begin part of
an organization the
respects their abilities,
commitment and drive.
VALUING OUR PEOPLE
The importance of having a dedicated team of talented and experienced people cannot be
over-emphasized. BNC’s people are our most important assets across every aspect of our
operations. Approximately 30% of our banking operations employees have been with the
bank for 10 years or more and almost 50% have been with us for over 5 years. We believe
we have one of the most experienced banking teams in our core market area.
We strive to create an environment based on shared values, mutual respect, collegiality and
fairness. Team members know what is expected of them and are given the opportunity for
learning, personal development and growth, and a rewarding professional career.
Our relationship-first model attracts customers that value bankers who are willing to make
the effort to learn their business, offer solutions to their challenges and help them capitalize
on new opportunities. In return, our people value being part of an organization that respects
their abilities, commitment and drive – leading to a strong, stable employee base. Our
people demonstrate how much they value our company, its culture, the communities we
serve and our customers by bringing their energy and passion to work each and every day.
CONTRIBUTING TO OUR COMMUNITIES
BNC is built on the principle that community banking is an essential part of the fabric of a
vibrant community. Community banks occupy a unique space in the matrix of the American
economy. Our position as a supporter for consumer and business assets to local economies
is relatively obvious. Less obvious to some people is the degree to which good community
banks are interwoven into the social fabric of their communities.
When community banking is done well, we become more than a commoditized source of
loans and deposits. We actively participate in improving the quality of life in the communities
we serve. BNC enthusiastically participates in the arts, education, business development and
youth programs that bring vitality to our communities. Our people embrace this vision and
devote their time and talent to community activities of all varieties.
BNC employees understand and embrace the connection between community banking and
the vibrancy of their neighborhoods.
Forward-Looking Statements
Statements included in this cover letter to our Annual Report 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. Important factors that could cause our actual results
and financial condition to differ materially from those indicated in the forward-looking statements include, but are not limited to: the impact of current and
future regulation; the risks of loans and investments, including dependence on local and regional economic conditions; competition for our customers from other
providers of financial services; possible adverse effects of changes in interest rates, including the effects of such changes on mortgage banking revenues and
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. All statements in this news release, including forward-looking statements, speak only of the date they are
made, and the Company undertakes no obligation to update any statement in light of new information or future events. In addition, we encourage readers
to review the financial information included in this cover letter in conjunction with the Consolidated Financial Statements of BNCCORP, INC. and
Subsidiaries included in the accompanying Annual Report.
6
BNCCORP, INC. Annual Report 2016 ____________________________
Year End Financial Report
____________________________
For the Year Ended December 31, 2016
BNCCORP, INC.
(OTCQX: BNCC)
322 East Main
Bismarck, North Dakota 58501
(701) 250-3040
7
BNCCORP, INC. Annual Report 2016
BNCCORP, INC.
INDEX TO YEAR END FINANCIAL REPORT
December 31, 2016
TABLE OF CONTENTS
Selected Financial Data
Operating Strategy
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Consolidated Financial Statements
Page
9
12
13
32
35
8
BNCCORP, INC. Annual Report 2016 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,
2016
2015
2014
2013
2012
Income Statement Data:
Total interest income
Total interest expense
Net interest income
Provision (reduction) for credit losses
Non-interest income
Non-interest expense
Income tax expense (benefit)
Net income
Preferred stock costs
Net income available to common shareholders
Balance Sheet Data: (at end of period)
Total assets
Investments securities available for sale
Loans held for sale-mortgage banking
Loans and leases held for investment, net of unearned income
Allowance for credit losses
Total deposits
Core deposits
Short-term borrowings
Federal Home Loan Bank advances
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:
Return on average total assets
Return on average common stockholders’ equity
Efficiency ratio
Net interest margin
Net interest spread
Basic earnings per common share
Diluted earnings 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) recovery to average loans and leases held for
investment
Allowance for credit losses to total loans
$
29,346
$
27,915 $
29,264
$
23,706
$
3,343
26,003
800
25,777
41,193
2,631
2,570
25,345
(400)
24,950
37,544
3,945
3,308
25,956
(800)
20,454
34,683
4,071
3,861
19,845
700
29,285
35,981
3,822
7,156
$
9,206 $
8,456
$
8,627
$
-
1,656
1,796
1,320
23,992
5,521
18,471
100
42,938
39,965
(5,280)
26,624
1,462
7,156
$
7,550
$
6,660
$
7,307
$
25,162
$
$
$
910,400
$
904,246
$
934,419
$
843,123
$
770,776
400,136
39,641
414,673
(8,285)
752,627
765,138
12,510
38,000
10,000
419,346
50,445
379,903
(8,611)
780,449
760,937
13,851
7,300
10,000
15,013
15,015
-
-
74,195
68,988
449,333
47,109
360,789
(8,601)
811,231
773,279
16,002
-
-
15,018
21,098
62,390
435,719
32,870
317,928
(9,847)
723,229
678,670
19,967
-
-
22,432
21,098
48,767
$
$
$
21.47
$
20.12
$
18.28
$
14.45
$
$
$
20.98
21.47
8.13%
$
$
18.93
20.12
7.62%
$
$
16.72
18.28
6.67%
$
$
14.89
14.45
5.78%
0.78%
10.35%
79.55%
3.03%
2.93%
1.01%
12.21%
74.65%
2.96%
2.86%
0.94%
12.37%
74.73%
3.07%
2.97%
1.07%
15.15%
73.24%
2.65%
2.54%
$
$
2.08
2.03
$
$
2.23
2.16
$
$
1.98
1.91
$
$
2.22
2.11
$
$
300,549
95,095
289,469
(10,091)
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%
7.64
7.52
3,447,635
3,520,818
3,456,008
3,386,600
3,497,740
3,428,416
3,369,021
3,491,254
3,413,854
3,297,235
3,468,390
3,374,601
3,294,562
3,344,280
3,300,652
0.29%
0.27%
0.59%
(0.282)%
1.82%
0.09%
0.06%
0.15%
0.117%
2.00%
0.03%
0.01%
0.02%
0.79%
0.67%
1.77%
2.03%
1.36%
3.63%
(0.134)%
(0.332)%
(0.225)%
2.11%
2.81%
2.62%
9
BNCCORP, INC. Annual Report 2016 Quarterly Financial Data
Interest income
Interest expense
Net interest income
Provision for credit losses
Net interest income after provision for credit
losses
Non-interest income
Non-interest expense
Income before income taxes
Income tax expense
Net Income
Preferred stock costs
First
Quarter
Second
Quarter
2016
Third
Quarter
Fourth
Quarter
YTD
$
7,175
$
7,346 $
7,408 $
7,417 $
29,346
899
6,276
-
6,276
5,651
9,846
2,081
666
864
6,482
400
6,082
7,495
776
6,632
400
6,232
7,759
10,628
10,718
2,949
914
3,273
1,014
804
6,613
-
6,613
4,872
10,001
1,484
37
$
1,415
$
2,035 $
2,259 $
1,447 $
-
-
-
-
3,343
26,003
800
25,203
25,777
41,193
9,787
2,631
7,156
-
Net income available to common shareholders $
1,415
$
2,035 $
2,259 $
1,447 $
7,156
Basic earnings per common share
Diluted earnings per common share
$
$
0.41
$
0.59 $
0.65 $
0.42 $
0.40
$
0.58 $
0.64 $
0.41 $
2.08
2.03
Average common shares:
Basic
Diluted
3,444,797
3,447,687
3,453,949
3,459,033
3,447,635
3,519,855
3,522,033
3,529,279
3,527,030
3,520,818
10
BNCCORP, INC. Annual Report 2016 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
First
Quarter
Second
Quarter
2015
Third
Quarter
Fourth
Quarter
YTD
$
7,218
$
7,112 $
6,662 $
6,923 $
27,915
611
6,607
-
6,607
7,651
9,666
4,592
1,378
696
6,416
-
6,416
6,740
9,658
3,498
1,211
557
6,105
(400)
6,505
5,232
8,980
2,757
882
706
6,217
-
6,217
5,327
9,240
2,304
474
$
3,214
$
2,287 $
1,875 $
1,830 $
475
474
475
232
2,570
25,345
(400)
25,745
24,950
37,544
13,151
3,945
9,206
1,656
Net income available to common shareholders $
2,739
$
1,813 $
1,400 $
1,598 $
7,550
Basic earnings per common share
Diluted earnings per common share
$
$
0.81
$
0.53 $
0.41 $
0.47 $
0.78
$
0.52 $
0.40 $
0.46 $
2.23
2.16
Average common shares:
Basic
Diluted
3,386,175
3,387,718
3,388,706
3,390,864
3,386,600
3,500,273
3,500,089
3,501,322
3,496,340
3,497,740
11
BNCCORP, INC. Annual Report 2016 Creating Value through a Sharp Strategic Focus
BNC is a community bank that focuses on business banking, mortgage banking, and wealth management. 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 in the viability of the energy and agricultural industries over the long term. In
Arizona, our organic loan growth focuses on small businesses and the SBA arena. We are also willing to
opportunistically grow through acquisitions.
• Managing risk. Community banking is faced with several forms of inherent 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.
12
BNCCORP, INC. Annual Report 2016 Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Overview
The following table summarizes selected income statement data and earnings per share data (in thousands, except
per share data):
SELECTED INCOME STATEMENT DATA
Interest income
Interest expense
Net interest income
Provision (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:
2016
2015
$
$
$
$
29,346
3,343
26,003
800
25,777
41,193
9,787
2,631
7,156
-
7,156
2.08
2.03
$
$
$
$
27,915
2,570
25,345
(400)
24,950
37,544
13,151
3,945
9,206
1,656
7,550
2.23
2.16
•
In 2016, net interest income increased 3% from 2015 due primarily to higher loans held for investment
balances.
• Non-interest income increased $827 thousand or 2% in 2016 compared to 2015. The increase primarily
relates to a $3.2 million, or 20%, increase in mortgage banking revenue, which was partially offset by a
decrease in gains on sales of assets of $1.8 million. During 2016, we recorded a net gain on sales of loans
and investments aggregating $963 thousand, compared to a $2.8 million net gain on sale of such assets in
the same period of 2015.
• Credit quality remained steady in 2016. At December 31, 2016 our non-performing assets were 0.29% of
total assets, compared to 0.09% at December 31, 2015.
• Non-interest expense increased by $3.7 million, or 10%, in 2016. Compensation expense increased due to
mortgage banking activity and producer incentive payments. Professional and marketing expense increased
in response to significantly higher mortgage loan production and higher legal expenses.
In 2016, the effective tax rate decreased to 26.9% from 30.0% in 2015 primarily due to a decrease in pre-
tax book income, which resulted in tax-exempt income having a greater percentage effect of the effective
tax rate.
•
13
BNCCORP, INC. Annual Report 2016 General
Net income in 2016 was $7.156 million compared to net income of $9.206 million in 2015. Earnings per diluted
share was $2.03 in 2016 and $2.16 in 2015.
Net Interest Income
The following table sets forth information relating to our average balance sheet, yields on interest-earning assets
and costs on interest-bearing liabilities (dollars are in thousands):
For the Year ended December 31, For the Year ended December 31, For the Year ended December 31,
2015
Interest
earned
or owed
Average
yield or Average
balance
Average
yield or Average
balance
2014
Interest
earned
or owed
2016
Interest
earned
or owed
Average
yield or
cost
Average
balance
cost
cost
Assets
Federal funds sold/interest-bearing due
from banks
$
1,937 $
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:
324,350
91,431
49,944
399,669
(8,562)
858,769
Cash and due from banks
Other
Total assets
8,774
46,474
$ 914,017
11
6,127
2,704
1,649
18,855
-
29,346
0.57% $
1.89%
2.96%
3.30%
4.72%
0.00%
3.42%
22,691 $
357,802
87,495
46,829
350,840
(8,670)
856,987
50
6,549
2,706
1,603
17,007
-
27,915
0.22% $
1.83%
3.09%
3.42%
4.85%
0.00%
3.26%
41,896 $
381,253
68,097
30,513
331,982
(9,184)
844,557
98
9,311
2,241
1,143
16,471
-
29,264
0.23%
2.44%
3.29%
3.75%
4.96%
0.00%
3.47%
9,150
43,214
$ 909,351
10,994
43,858
$ 899,409
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
Total deposits and interest-bearing
liabilities
Other non-interest-bearing liabilities
Total liabilities
Stockholders’ equity
Total liabilities and
$ 424,393 $
32,146
571
10
0.13% $ 430,838 $
0.03%
29,724
530
9
0.12% $ 409,519 $
0.03%
24,249
541
9
0.13%
0.04%
68,612
82,108
607,259
13,919
36,942
10,000
15,013
683,133
145,842
828,975
9,525
838,500
75,517
1,044
549
2,174
22
198
634
315
3,343
-
1.52%
0.67%
0.36%
0.16%
0.54%
6.34%
2.10%
1.54%
0.00%
93,169
59,999
613,730
16,299
3,357
2,016
15,016
650,418
163,755
814,173
9,428
823,601
85,750
1,313
296
2,148
26
10
128
258
2,570
-
1.41%
0.49%
0.35%
0.16%
0.30%
6.35%
1.72%
1.15%
0.00%
113,769
77,812
625,349
20,575
425
899
19,693
666,941
147,884
814,825
7,589
822,414
76,995
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%
stockholders’ equity
$ 914,017
$ 909,351
$ 899,409
Net interest income
Net interest spread
Net interest margin
$
26,003
$
25,345
$
25,956
2.93%
3.03%
2.86%
2.96%
2.97%
3.07%
Ratio of average interest-earning assets
to average interest-bearing liabilities
125.71%
131.76%
126.63%
14
BNCCORP, INC. Annual Report 2016
The following table allocates changes in our interest income and interest expense between the changes related to
volume and interest rates (in thousands):
For the Years Ended December 31,
2016 Compared to 2015
For the Years Ended December 31,
2015 Compared to 2014
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
$
(72) $
33 $
(39) $
(43) $
(5) $
Taxable investments
Tax-exempt investments
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
(627)
119
104
2,314
205
(121)
(58)
(466)
(422)
(2)
46
1,848
(544)
607
566
920
(2,218)
(142)
(106)
(384)
(48)
(2,762)
465
460
536
1,838
(407)
1,431
1,506
(2,855)
(1,349)
(8)
1
(367)
129
(4)
174
506
-
431
49
-
98
124
-
14
-
57
342
41
1
(269)
253
(4)
188
506
57
27
2
(279)
(90)
(7)
8
63
(162)
(38)
(2)
150
(35)
(3)
1
29
(402)
(11)
-
(129)
(125)
(10)
9
92
(564)
773
(438)
(300)
(738)
income
$
1,407 $
(749) $
658
$
1,944
$
(2,555)
$
(611)
Net interest income was $26.003 million in 2016 compared to $25.345 million in 2015, an increase of $658 thousand
or 2.6%. The net interest margin increased to 3.03% for the year ended December 31, 2016 from 2.96% in 2015.
Overall, yields on earning assets increased to 3.42% in 2016, compared to 3.26% in the same period of 2015.
Average loans held for investment increased $48.8 million in 2016 compared to 2015, while average loans held for
sale increased $3.1 million and average investments decreased $29.5 million. The cost of interest bearing deposits
remained mostly unchanged from 2015 at 0.35% in 2016. The cost of interest bearing liabilities increased to 0.49%
from 0.40% related to the issuance of $10 million of subordinated debt in the fourth quarter of 2015 that was used
to redeem preferred stock and increased utilization of short-term FHLB advances as flexible borrowings in periods
of higher mortgage lending volume.
Net interest income was $25.345 million in 2015 compared to $25.956 million in 2014, a decrease of $611 thousand
or 2.4%. The net interest margin decreased to 2.96% for the year ended December 31, 2015 from 3.07% in 2014.
In 2015, net interest income was lower as the impact of lower interest rates was not entirely offset by higher balances
of interest-earning assets. The cost of interest bearing deposits decreased to 0.35% in 2015 from 0.39% in 2014.
In 2015, average 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. While loan balances were impacted
during the year by significant loan repayments, we funded $36.2 million of new loans during the fourth quarter of
15
BNCCORP, INC. Annual Report 2016
2015. Due to strong mortgage loan production in 2015, loans held for sale contributed meaningfully to net interest
income in 2015.
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
Total non-interest income
For the Years Ended
December 31,
2016
2015
Increase (Decrease)
%
$
$
$
2,731
1,532
19,465
234
729
1,086
25,777
$
$
2,901
1,476
16,214
1,138
1,655
1,566
24,950
$
$
(170)
56
3,251
(904)
(926)
(480)
827
(6) %
4 %
20 % (a)
(79) % (b)
(56) % (c)
(31) % (d)
3 %
(a) Mortgage banking revenues have increased due to the continued low interest rate environment, investments in loan
producers and our ability to capture loan volume through our existing platforms.
(b) Gains on sales of SBA loans have declined as the Company’s loan growth favored conventional loans in 2016. Gains
on sale of loans can vary significantly from period to period.
(c) Gains and losses on sales of securities may vary significantly from period to period.
(d) The Company recorded revenue from SBIC investments of $309 thousand and $929 thousand in 2016 and 2015, respectively.
While it is difficult to predict the timing, or amount of distributions, we currently anticipate distributions in future periods.
Non-interest Expense
The following table presents the major categories of our non-interest expense (dollars are in thousands):
For the Years Ended
December 31,
2016
2015
Increase (Decrease)
%
$
Salaries and employee benefits
Professional services
Data processing fees
Marketing and promotion
Occupancy
Regulatory costs
Depreciation and amortization
Office supplies and postage
Other real estate costs
Other
Total non-interest expense
Efficiency ratio
$
$
21,432
4,581
3,666
3,798
2,160
675
1,519
687
34
2,641
41,193
79.55%
$
$
19,692
3,923
3,059
3,523
1,981
696
1,415
648
18
2,589
37,544
74.65%
$
$
1,740
658
607
275
179
(21)
104
39
16
52
3,649
4.90%
(a)
(b)
(c)
(d)
(e)
9 %
17 %
20 %
8 %
9 %
(3) %
7 %
6 %
89 %
2 %
10 %
(a) Salaries and benefits reflect a new branch in North Dakota and investments in producers and functions supporting
growth.
(b) The increase of professional services is primarily due to an increase in legal costs in 2016.
(c) Data processing fees have increased due to continued investment in information technology.
(d) Occupancy increased due to higher maintenance costs on existing locations and an increase in locations and expansion
of existing space for our loan production offices.
(e) Other real estate costs will vary from period to period depending on valuation adjustments on our foreclosed
properties– see Note 6. At December 31, 2016, the Company held one property in other real estate.
16
BNCCORP, INC. Annual Report 2016 Income Tax Expense
During 2016, we recorded tax expense of $2.631 million which resulted in an effective tax rate of 26.9%. Subject
to certain statutory limitations, the Company is able to carry forward state tax net operating losses aggregating $483
thousand as of December 31, 2016. The state net operating losses expire between 2017 and 2031.
During 2015, we recorded tax expense of $3.945 million which resulted in an effective tax rate of 30.0%. Subject
to certain statutory limitations, the Company is able to carry forward state tax net operating losses aggregating $456
thousand as of December 31, 2015. The state net operating losses expire between 2017 and 2031.
The change in the effective tax rate from 2016 to 2015 is primarily due to a decrease in pre-tax book income, which
resulted in tax-exempt income having a greater percentage effect of the effective tax rate.
Financial Condition
Assets
The following table presents our assets by category (dollars are in thousands):
Cash and cash equivalents
Investment securities available for sale
Federal Reserve Bank and Federal Home
$
Loan Bank of Des Moines stock
Loans held for sale-mortgage banking
Loans and leases held for investment, net
Other real estate, net
Premises and equipment, net
Accrued interest receivable
Other assets
Total assets
$
As of December 31,
2016
2015
11,113
400,136
$
15,189
419,346
$
Increase (Decrease)
%
$
(4,076)
(19,210)
(27) % (a)
(5) % (b)
4,411
39,641
406,388
218
19,381
4,444
24,668
910,400
$
3,219
50,445
371,292
242
17,574
4,027
22,912
904,246
$
1,192
(10,804)
35,096
(24)
1,807
417
1,756
6,154
37 % (c)
(21) % (d)
9 % (e)
(10) % (f)
10 % (g)
10 %
8 %
1 %
(a) Cash balances can fluctuate significantly.
(b)
Investments decreased as we deployed proceeds from maturities and sales of securities toward other earning assets
and repayment of liabilities.
(c) The balance of FHLB stock varies in proportion to the level of FHLB advances outstanding.
(d) Loans held for sale decreased as loan originations decreased in the fourth quarter of 2016.
(e) Loans held for investment balances have risen in 2016 due to continued loan production in our core market areas.
(f) The decrease in other real estate, net is due to an increase in the other real estate owned reserve.
(g) Premises and equipment increased largely due to the completion of construction of a new bank branch in Bismarck,
ND.
17
BNCCORP, INC. Annual Report 2016 Investment Securities Available for Sale
The following table presents the composition of the available-for-sale investment portfolio (in thousands):
December 31,
2016
2015
Amortized
cost
Estimated
fair market
value
Amortized
cost
Estimated
fair market
value
$
24,967
$
24,715
$
32,925
$
32,649
46,003
45,270
105,407
104,431
122,519
122,863
105,150
105,678
85,462
84,220
61,418
61,893
U.S. Treasury securities
U.S. government agency mortgage-backed
securities guaranteed by GNMA
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
State and municipal bonds
Total investments
35,849
84,143
398,943
$
35,342
87,726
400,136
$
21,607
87,779
414,286
$
21,662
93,033
419,346
$
There were no securities that management concluded were other-than-temporarily impaired during 2016 or 2015.
See Note 2 of our Consolidated Financial Statements.
The following table presents contractual maturities for securities available for sale and yields thereon at December
31, 2016 (dollars are in thousands):
Within 1 year
After 1 but
within 5 years
After 5 but
within 10 years
After 10 years
Total
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
$
-
0.00%
$
9,961
1.48%
$
15,006
1.87%
$
-
0.00%
$
24,967
1.71%
-
0.00%
-
0.00%
-
0.00%
46,003
2.47%
46,003
2.47%
U.S. Treasury securities(1)
U.S. government agency
mortgage-backed securities
guaranteed by GNMA(1) (2)
U.S. government agency small
business administration
pools guaranteed by SBA(1)
(2)
Collateralized mortgage
obligations guaranteed by
GNMA/VA(1) (2)
Collateralized mortgage
obligations issued by FNMA
or FHLMC(1) (2)
State and municipal bonds(2) (3)
Total book value of investment
securities
$
Net unrealized gain on
securities available for sale
Total investment in securities
available for sale
-
0.00%
1,095
1.82%
15,994
1.14%
105,430
1.70%
122,519
1.63%
-
0.00%
-
0.00%
-
0.00%
85,462
2.53%
85,462
2.53%
-
-
-
0.00%
0.00%
-
0.00%
-
0.00%
35,849
2.41%
35,849
2.41%
4,148
5.91%
9,603
5.52%
70,392
5.26%
84,143
5.33%
0.00% $
15,204 2.72% $
40,603 2.44% $
343,136 2.81%
398,943
2.77%
1,193
$
400,136
2.77%
(1) Based on amortized cost rather than fair value.
(2) 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.
(3) Yields include adjustment for tax exempt income.
18
BNCCORP, INC. Annual Report 2016
As of December 31, 2016, we had $400.1 million of available-for-sale securities in the investment portfolio
compared to $419.3 million at December 31, 2015.
In 2016, available-for-sale investment securities decreased as we deployed proceeds from maturities and sales of
securities toward other earning assets and redeemed $33.4 million of brokered certificates of deposit.
In 2015, available-for-sale investment securities decreased as we deployed proceeds from maturities and sales of
securities toward other earning assets, funded customer’s redeployment of deposited funds and redeemed $20.0
million of brokered certificates of deposit.
At December 31, 2016, 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 2 of our Consolidated Financial Statements for more information about investment securities.
Federal Reserve Bank and Federal Home Loan Bank of Des Moines Stock
Our equity securities consisted of $1.8 million of Federal Reserve Bank (“FRB”) stock as of December 31, 2016
and December 31, 2015, and $2.6 million and $1.4 million of FHLB of Des Moines stock as of December 31, 2016
and 2015, respectively.
Loans
The following table presents our loan portfolio as of December 31 (dollars are in thousands):
2016
2015
2014
2013
2012
Amount
%
Amount
%
Amount
%
Amount
%
Amount
%
Loans held for sale-
mortgage banking
$
39,641
100.0 $
50,445
100.0 $
47,109
100.0 $
32,870
100.0 $
95,095
100.0
Loans Held for Investment:
Commercial and industrial
123,604
Commercial real estate
171,972
SBA
Consumer
Land and land development
Construction
31,518
59,183
15,982
12,215
29.8
41.5
7.6
14.3
3.9
2.9
125,009
149,099
25,860
47,073
17,627
15,187
32.9
39.3
6.8
12.4
4.6
4.0
132,229
108,122
26,972
40,470
28,220
24,916
36.6
30.0
7.5
11.2
7.8
6.9
132,983
93,330
18,215
32,612
27,582
13,286
41.8
29.3
5.7
10.3
8.7
4.2
116,891
87,258
15,823
26,614
31,065
11,814
40.4
30.1
5.5
9.2
10.7
4.1
414,474
100.0
379,855
100.0
360,929
100.0
318,008
100.0
289,465
100.0
Unearned income and
net unamortized
deferred fees and costs
Loans, net of unearned
income and
unamortized fees and
costs
199
-
48
-
(140)
-
(80)
-
4
-
$ 414,673
100.0 $ 379,903
100.0 $ 360,789
100.0 $ 317,928
100.0 $ 289,469
100.0
19
BNCCORP, INC. Annual Report 2016 The following table presents the change in our loan portfolio (dollars are in thousands):
Loans held for sale-mortgage banking
$
39,641
$
50,445
$
(10,804)
(21.4) % (a)
December 31,
Increase (Decrease)
2016
2015
$
%
Loans Held for Investment:
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
123,604
171,972
31,518
59,183
15,982
12,215
414,474
125,009
149,099
25,860
47,073
17,627
15,187
379,855
(1,405)
22,873
5,658
12,110
(1,645)
(2,972)
34,619
(1.1) %
15.3 %
21.9 %
25.7 %
(9.3) %
(19.6) %
9.1 %
199
48
151
314.6 %
unamortized fees and costs
$
414,673
$
379,903
$
34,770
9.2 % (b)
(a) Loans held for sale decreased in 2016 as rising interest rates impacted loan production in the fourth quarter of 2016.
(b) Loans held for investment increased due to continued loan production in our core markets.
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):
2016
2015
2014
2013
2012
$
182,224
176,439
180,192
222,765
218,068
20
BNCCORP, INC. Annual Report 2016 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 held for investment
2016
291,412
23,083
67,751
32,228
414,474
$
$
70 %
6 %
16 %
8 %
100 %
$
$
2015
259,271
26,022
68,796
25,766
379,855
68 %
7 %
18 %
7 %
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
Minnesota
California
Colorado
Ohio
Other
Total gross loans held for investment
$
2016
272,717
88,196
14,628
10,422
9,141
8,440
10,930
414,474
66 %
21 %
4 %
3 %
2 %
2 %
2 %
100 %
$
$
2015
244,797
83,086
10,685
10,837
9,197
8,732
12,521
379,855
65 %
22 %
3 %
3 %
2 %
2 %
3 %
100 %
The following table presents loans by type as of December 31 (in thousands):
2016
Total Loans and
Leases Held for
Investment
2015
Total Loans and
Leases Held for
Investment
North Dakota
Commercial and industrial
Construction
Agricultural
Land and land development
Owner-occupied commercial real estate
Commercial real estate
Small business administration
Consumer
Subtotal
Consolidated
Commercial and industrial
Construction
Agricultural
Land and land development
Owner-occupied commercial real estate
Commercial real estate
Small business administration
Consumer
Subtotal
$
$
$
$
41,769
6,819
19,351
9,674
45,350
100,975
4,512
44,267
272,717
54,037
12,215
20,273
15,982
49,294
171,972
31,518
59,183
414,474
$
$
$
$
46,311
11,937
16,159
11,549
37,832
79,119
2,662
39,228
244,797
62,940
15,187
18,003
17,627
44,066
149,099
25,860
47,073
379,855
21
BNCCORP, INC. Annual Report 2016 At December 31, 2016, the North Dakota commercial and industrial category above includes $9.7 million of oil
exploration and production (E&P) loans. Oil prices most directly impact on the value of the underlying collateral
for our E&P loans. Advances on E&P lines are generally limited to 50% of the value of proven, developed and
producing oil reserves with valuations generally being performed on a semi-annual basis. As of December 31,
2016, no E&P loans were considered classified or watch list loans.
As of December 31, 2016, the decrease in oil and agricultural commodity prices have yet to have a significant
negative effect on our credit quality. However, the economic activity in western North Dakota is subdued relative
to a few years ago. Prolonged periods of lower agricultural and oil prices could have an adverse economic impact
on the North Dakota economy, commodity dependent businesses, and our loan portfolio. In addition to E&P loans,
loans to customers serving the energy industries in western North Dakota are impacted by protracted low energy
prices, as depressed energy prices in recent periods have reduced economic activity and collateral values in western
North Dakota. Customers in, or serving the North Dakota agricultural sector have been experiencing lower
commodity prices for multiple years, which has had a dampening effect on economic activity in the region.
Loan Maturities (1)
The following table sets forth the remaining maturities of loans in our portfolio as of December 31, 2016 (in
thousands):
Over 1 year
through 5 years
One year
or less
Fixed
Rate
Floating
Rate
Commercial and industrial
Commercial real estate
SBA
Consumer
Land and land development
Construction
Total principal amount of loans
$
$
12,877 $
4,122
1,199
1,819
350
3,484
23,851 $
1,489 $
6,728
-
24
545
3,525
12,311 $
Fixed
Rate
Over 5 years
Floating
Rate
Total
Loans and
Leases
Held for
Investment
40,080 $ 123,604
29,215 $
171,972
10,512
31,518
5,777
59,183
4,542
15,982
1,922
3,877
12,215
55,845 $ 120,213 $ 202,254 $ 414,474
39,943 $
26,682
2,127
44,708
6,753
-
123,928
22,415
8,090
6,412
1,329
(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 2016, we recorded a provision for credit
losses of $800 thousand. This compared to a 2015 reversal of previously recorded provisions for credit losses
aggregating $400 thousand as a result of net recoveries of loans previously charged-off. The provision for credit
losses continues to remain low due to stable credit quality.
Allowance for Credit Losses
See Notes 1 and 5 of our Consolidated Financial Statements and “Accounting Policies” for further information
concerning accounting policies associated with the allowance for credit losses.
22
BNCCORP, INC. Annual Report 2016 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) recoveries
Provision (reduction) for credit losses
charged to operations
2016
2015
2014
2013
2012
For the Years ended December 31,
$
8,611
$
8,601
$
9,847
$
10,091
$
10,630
(1,004)
-
(71)
(99)
-
-
(1,174)
-
13
15
20
-
-
48
(1,126)
(47)
-
(145)
(43)
-
-
(235)
7
551
68
19
-
-
645
410
800
(400)
-
(439)
(109)
(42)
(190)
-
(780)
-
8
5
21
300
-
334
(446)
(800)
(916)
(87)
-
(106)
-
-
(1,109)
69
8
2
15
71
-
165
(944)
700
(70)
(767)
(10)
(58)
-
-
(905)
11
38
12
18
187
-
266
(639)
100
Balance of allowance for credit losses, end of
period
$
8,285
$
8,611
$
8,601
$
9,847
$
10,091
Ratio of net (charge-offs) recoveries to
average total loans
Ratio of net (charge-offs) recoveries to
average loans and leases held for
investment
Average gross loans and leases held for
(0.250)%
0.103%
(0.123)%
(0.277)%
(0.182)%
(0.282)%
0.117%
(0.134)%
(0.332)%
(0.225)%
investment
$
399,669
$
350,840
$
331,982
$
284,344
$
284,507
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
2.00%
1.82%
0.27%
2.27%
2.00%
0.06%
2.38%
2.11%
0.01%
3.10%
2.81%
0.67%
3.49%
2.62%
1.36%
23
BNCCORP, INC. Annual Report 2016 Allocation of the Allowance for Loan Losses
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).
2016
2015
2014
2013
2012
Loans as a
% of Gross
Loans Held
for
Investment
Allocation of
Allowance
Loans as a
% of Gross
Loans Held
for
Investment
Allocation of
Allowance
Loans as a
% of Gross
Loans Held
for
Investment
Allocation of
Allowance
Loans as a
% of Gross
Loans Held
for
Investment
Allocation of
Allowance
Loans as a
% of Gross
Loans Held
for
Investment
Allocation of
Allowance
Commercial and
industrial
$
2,323
30%
$
3,205
33%
$
2,686
37%
$
2,215
42%
$
2,546
40%
Commercial real
estate
SBA
Consumer
Land and land
development
Construction
3,231
1,433
772
413
113
41%
8%
14%
4%
3%
1,999
1,578
640
1,041
148
39%
7%
12%
5%
4%
2,496
1,190
516
1,436
277
30%
7%
11%
8%
7%
4,041
579
478
2,371
163
29%
6%
10%
9%
4%
4,790
616
382
1,609
148
30%
6%
9%
11%
4%
Total
$
8,285
100%
$
8,611
100%
$
8,601
100%
$
9,847
100%
$
10,091
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 probable losses inherent within the loan and lease
portfolio at December 31, 2016 and December 31, 2015. 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, financial conditions of borrowers, and other factors we
consider in arriving at our estimates may change. To the extent that these matters have negative developments, our
future earnings could be reduced by provisions for credit losses. See the Concentrations of Credit section within
this report for additional information.
24
BNCCORP, INC. Annual Report 2016 Nonperforming Loans and Assets
The following table sets forth nonperforming assets, the allowance for credit losses and certain related ratios (dollars
are in thousands):
2016
2015
As of December 31,
2014
2013
2012
Nonperforming loans:
Loans 90 days or more delinquent and still
accruing interest
Non-accrual loans
Total nonperforming loans
Other real estate and repossessed assets, 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
$
20 $
2,425
2,445
218
$
$
2,663 $
8,285 $
0.54%
175 $
390
565
242
807 $
8,611 $
0.13%
5 $
56
61
256
317 $
8,601 $
0.01%
961 $
4,656
5,617
1,056
6,673 $
9,847 $
1.60%
0.59%
0.29%
0.27%
0.15%
0.09%
0.06%
0.02%
0.03%
0.01%
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%
339%
1,524%
14,100%
175%
96%
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
Balance, end of period
2016
2015
565
3,086
(912)
(176)
(114)
(4)
2,445
$
$
61
1,178
(168)
(455)
(51)
-
565
$
$
In 2016, the level of nonperforming loans increased to $2.4 million from $565 thousand at December 31, 2015. The
increase in nonperforming loans primarily relates to one relationship greater than $1 million in the energy sector,
which was partially charged off in the third quarter of 2016, and several additional relationships that were deemed
to be nonperforming in the fourth quarter of 2016.
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
$
314
92
222
$
$
236
93
143
2016
2015
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.
25
BNCCORP, INC. Annual Report 2016
Non-accrual loans include loans on which the accrual of interest has been discontinued. Accrual of interest is
discontinued when we believe that the borrower’s financial condition is such that the collection of interest is
doubtful. A delinquent loan is generally placed on non-accrual status when it becomes 90 days or more past due
unless the loan is well secured and in the process of collection. When a loan is placed on non-accrual status, accrued
but uncollected interest income applicable to the current reporting period is reversed against interest income.
Accrued but uncollected interest income applicable to previous reporting periods is charged against the allowance
for credit losses. No additional interest is accrued on the loan balance until the collection of both principal and
interest becomes reasonably certain.
Troubled Debt Restructuring (TDR)
The table below summarizes the amounts of restructured loans as of December 31 (in thousands):
Total
Accrual
Non-accrual
$
2016
2015
2014
2013
2012
$
2,153
2,197
5,105
8,544
12,368
$
1,845
1,884
5,105
4,356
7,871
308
313
-
4,188
4,497
See Note 5 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 6 of our Consolidated Financial Statements for information on other real estate owned.
Impaired loans
See Note 5 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. The table below summarizes the
amounts of potential problem loans as of December 31 (in thousands):
Impaired
Watch List
Other
Total
$
$
-
-
1,587
-
-
$
8,125
7,945
473
176
5,235
8,125
7,945
2,060
176
5,235
Impaired
$
6
11
56
4,656
10,490
Substandard
Other
$
10,511
9,398
9,077
8,062
3,065
$
Total
10,517
9,409
9,133
12,718
13,555
2016
2015
2014
2013
2012
A significant portion of these potential problem loans are not in default but may have characteristics such as recent
adverse operating cash flows or general risk characteristics that the loan officer feels might jeopardize the future
timely collection of principal and interest payments. The ultimate resolution of these credits is subject to changes
in economic conditions and other factors. These loans are closely monitored to ensure that our position as creditor
is protected to the fullest extent possible.
26
BNCCORP, INC. Annual Report 2016 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
Federal Home Loan Bank advances
Long-term borrowings
Guaranteed preferred beneficial interests in
Company's subordinated debentures
Accrued interest payable
Accrued expenses
Other liabilities
Total liabilities
Stockholders' equity
As of December 31,
2016
2015
Increase (Decrease)
$
%
$
147,027
$
168,259
$
(21,232)
(13) %
(a)
453,897
58,789
92,914
12,510
38,000
10,000
15,013
777
6,685
593
836,205
74,195
460,385
86,817
64,988
13,851
7,300
10,000
15,015
487
7,398
758
835,258
68,988
(6,488)
(28,028)
27,926
(1,341)
30,700
-
(2)
290
(713)
(165)
947
5,207
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(1) %
(32) %
43 %
(10) %
421 %
- %
- %
60 %
(10) %
(22) %
0 %
8 %
Total liabilities and stockholders’
equity
$
910,400
$
904,246
$
6,154
1 %
(a) Non-interest bearing and savings deposits have decreased as customers deployed funds previously deposited in our North
Dakota branches.
In 2016, BNC redeemed $33.4 million of higher rate callable brokered certificates of deposit.
(b)
(c) BNC has increased retail certificates of deposit, primarily in North Dakota.
(d) Short-term borrowings will vary depending on our customers need to use repurchase agreements.
(e) The Company has borrowed on a short-term basis from the Federal Home Loan Bank as an efficient source of liquidity for
flexible borrowings in higher periods of mortgage lending volume.
(f) The increase is primarily due to accrued interest on the subordinated debt, issued in October 2015, and growth in retail
certificates of deposit, which are offset by reduced brokered deposit balances.
(g) Other liabilities decreased primarily due to the change in taxes payable.
Mortgage Banking Obligations
Included in accrued expenses is an estimate of mortgage banking reimbursement obligations which aggregated $1.3
million and $1.8 million at December 31, 2016 and 2015, 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 disputes arise between lenders and investors. Such requests for repurchase
are commonly due to purported fraudulent or faulty representations and generally emerge at varied timeframes
subsequent to the original sale of the loan. To estimate the obligation, we track historical reimbursements and
calculate the ratio of reimbursement to loan production volumes. Using reimbursement ratios and recent production
levels, we estimate the future reimbursement amounts and record the estimated obligation. See Note 18 of our
Consolidated Financial Statements for a description of financial instruments with off-balance-sheet risk.
27
BNCCORP, INC. Annual Report 2016 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,
2016
Percent Wgtd.
avg.
rate
of
deposits
2015
Percent Wgtd.
avg.
rate
of
deposits
2014
Percent Wgtd.
avg.
rate
of
deposits
Average
balance
Average
balance
Average
balance
Interest checking and
MMDAs
$ 424,393
56.4%
0.13% $ 430,838
55.4%
0.12% $ 409,519
53.0%
0.13%
Savings deposits
32,146
4.3%
0.03%
29,724
3.8%
0.03%
24,249
3.1%
0.04%
Time deposits (CDs):
CDs under $100,000
CDs $100,000 and over
Total time deposits
Total interest-bearing
deposits
Non-interest-bearing
demand deposits
68,612
82,108
9.1%
1.52%
10.9%
0.67%
93,169
59,999
12.0%
1.41%
113,769
14.7%
1.27%
7.7%
0.49%
77,812
10.1%
0.54%
150,720
20.0%
1.05%
153,168
19.7%
1.05%
191,581
24.8%
0.97%
607,259
80.7%
0.36%
613,730
78.9%
0.35%
625,349
80.9%
0.39%
145,842
19.3%
-
163,755
21.1%
-
147,884
19.1%
-
Total deposits (1)
$ 753,101
100.0%
0.29% $ 777,485
100.0%
0.28% $ 773,233
100.0%
0.31%
(1)
Included in average total deposits are $11.7 million, $41.0 million, and $57.0 million of average brokered deposits for the years ending 2016, 2015,
and 2014, 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%, 0.16%, and 0.17% for 2016, 2015, and 2014, respectively.
During the period of higher energy prices our North Dakota deposits grew rapidly. In recent periods, deposits in
Arizona have grown significantly. The table below shows total deposits since 2012 (in thousands):
2016
2015
As of December 31,
2014
2013
2012
ND Bakken Branches
ND Non-Bakken Branches
Total ND Branches
Brokered Time Deposits
Other
Total Deposits
$
$
178,677 $
384,476
563,153
-
189,474
752,627 $
190,670 $
388,630
579,300
33,363
167,786
780,449 $
178,565 $
433,129
611,694
53,955
145,582
811,231 $
166,904 $
382,225
549,129
64,525
109,575
723,229 $
144,662
335,452
480,114
65,000
104,490
649,604
Time deposits, in denominations of $100,000 and over, totaled $92.9 million at December 31, 2016 as compared to
$65.0 million at December 31, 2015. The following table sets forth the amount and maturities of time deposits of
$100,000 and over as of December 31, 2016 (in thousands):
Maturing in:
3 months or less
Over 3 months through 6 months
Over 6 months through 12 months
Over 12 months
$
$
17,068
8,162
24,549
43,135
92,914
28
BNCCORP, INC. Annual Report 2016 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
2016
2015
2014
$
$
$
12,510
0.15%
16,901
13,919
0.16%
$
$
$
13,851
0.14%
20,799
16,299
0.16%
$
$
$
16,002
0.15%
24,833
20,575
0.17%
Note 9 of our Consolidated Financial Statements summarizes the general terms of our short-term borrowings
outstanding at December 31, 2016 and 2015.
FHLB advances totaled $38 million at December 31, 2016 and $7.3 million at December 31, 2015, respectively.
Notes 10, 11 and 12 of our Consolidated Financial Statements summarize the general terms of our FHLB advances,
long-term borrowings and other borrowings at December 31, 2016 and 2015.
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)
Total risk based capital (Consolidated)
Common equity tier 1 risk based capital (Consolidated)
Tier 1 risk based capital (Consolidated)
Tangible common equity (Consolidated)
Tier 1 leverage (BNC Bank)
Total risk based capital (BNC Bank)
Common equity tier 1 risk based capital (BNC Bank)
Tier 1 risk based capital (BNC Bank)
2016
2015
2014
9.47%
19.96%
13.90%
16.78%
8.13%
9.67%
18.41%
17.16%
17.16%
9.00%
20.07%
13.57%
16.72%
7.62%
9.45%
18.71%
17.45%
17.45%
9.94%
21.10%
N/A
19.85%
6.67%
9.13%
19.73%
N/A
18.48%
2013
10.94%
23.15%
N/A
21.67%
5.79%
10.06%
21.40%
N/A
20.13%
2012
11.17%
22.43%
N/A
20.49%
6.21%
10.68%
21.06%
N/A
19.80%
See Note 14 and Note 15 of our Consolidated Financial Statements for a discussion of stockholders equity and
regulatory capital and the current operating environment.
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 became effective January 1, 2015. The
new common equity tier 1 (CET 1) ratio, which is generally a comparison of a bank’s core equity capital with its
total risk weighted assets, is a measure of the current risk profile of our asset base from a regulatory perspective.
The Tier 1 leverage ratio, which is calculated by dividing Tier 1 capital by average total assets, does not consider
the mix of risk weighted assets. In recent periods, regulators have required Tier 1 ratios that significantly exceed
the “Well Capitalized” ratio levels. As such, we are managing our Tier 1 leverage ratio to levels significantly above
the “Well Capitalized” thresholds. 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 regulatory capital table below.
The Company routinely evaluates the sufficiency of capital in order to insure compliance with regulatory capital
standards and be a source of strength for the Bank. We manage capital by assessing the composition of capital and
amounts available for growth, risk or other purposes. In recent periods, capital has grown through retention of
earnings and the Company has reduced certain higher cost forms of capital such as the redemption in 2014 of $7.5
million in Guaranteed Preferred Beneficial Interests in Subordinated Debt costing 12.05% and the redemption in
29
BNCCORP, INC. Annual Report 2016 2015 of $21.1 million of Series A and B Preferred Stock costing 9%. Management will continue to evaluate capital
requirements and prudent capital management opportunities. See Note 13 and Note 14 of our Consolidated
Financial Statements for a detailed description of Subordinated Debentures and Preferred Stock.
Off-Balance-Sheet Arrangements
In the normal course of business, we are a party to various financial instruments with off-balance-sheet risk. These
instruments include commitments to extend credit, commercial letters of credit, performance and financial standby
letters of credit and interest rate swaps, caps and floors. Such instruments help us to meet the needs of our customers,
manage our interest rate risk and effectuate various transactions. These instruments and commitments, which we
enter into for purposes other than trading, carry varying degrees of credit, interest rate or liquidity risk. See Notes
18 and 19 of our Consolidated Financial Statements for a detailed description of each of these instruments.
Contractual Obligations, Contingent Liabilities and Commitments
We are a party to financial instruments with risks that can be subdivided into two categories:
Cash financial instruments, generally characterized as on-balance-sheet items, include investments, loans,
mortgage-backed securities, deposits and debt obligations.
Credit-related financial instruments, generally characterized as off-balance-sheet items, include such
instruments as commitments to extend credit, commitments to sell mortgage loans, commercial letters of credit
and performance and financial standby letters of credit. See Note 19 of our Consolidated Financial Statements.
At December 31, 2016, the aggregate contractual obligations (excluding bank deposits) and commitments were as
follows (in thousands):
Contractual Obligations:
Total borrowings
Commitments to sell loans
Annual rental commitments under non-
cancelable operating leases
Total
Payments due by period
Less than 1
year
1 to 3 years
3 to 5 years
After 5 years
Total
$
$
$
50,510
38,516
$
-
-
$
-
-
$
25,013
-
75,523
38,516
956
89,982 $
1,050
1,050 $
703
703 $
938
25,951 $
3,647
117,686
Other Commitments:
Commitments to originate loans
Commitments to sell loans
Standby and commercial letters of
credit
Total
Amount of Commitment - Expiration by Period
Less than 1
year
1 to 3 years
3 to 5 years
After 5 years
Total
$
$
125,309 $
123,132
23,516 $
-
2,950 $
-
454 $
-
152,229
123,132
749
249,190 $
234
23,750 $
-
2,950 $
-
454 $
983
276,344
30
BNCCORP, INC. Annual Report 2016 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 our 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 ($137.4
million as of December 31, 2016);
2. Borrowing capacity from the FHLB ($122.6 million as of December 31, 2016); and
3. Capacity to issue brokered deposits with maturities of less than 12 months ($127.8 million as of
December 31, 2016).
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.
31
BNCCORP, INC. Annual Report 2016 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;
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. 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
32
BNCCORP, INC. Annual Report 2016 sheet accounts are held constant at their December 31, 2016 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, 2016 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, 2016, 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 3.75% to 4.75% 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 2017 is shown
below:
Net Interest Income Simulation
Movement in interest rates
Projected 12-month net interest
income
Dollar change from unchanged
scenario
Percentage change from
unchanged scenario
$
$
(474)
(1.65)%
-100bp
Unchanged
+100bp
+200bp
+300bp
+400bp
28,193
$
28,667
$
28,191
$
27,738
$
27,405
-
$
(476)
$
(929)
$
(1,262)
-
(1.66)%
(3.24)%
(4.40)%
(4.96)%
$
$
27,246
(1,421)
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, 2016 (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, 2016. Assets and liabilities are classified by the earliest possible
repricing date or maturity, whichever occurs first.
33
BNCCORP, INC. Annual Report 2016 Interest Sensitivity Gap Analysis
0–3
Months
Estimated maturity or repricing at December 31, 2016
4–12
1–5
Over
Months
Years
(dollars are in thousands)
5 years
Interest-earning assets:
Interest-bearing deposits with banks
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
$
11,113 $
111,518
-
$
-
$
-
$
9,392
98,511
141,853
4,411
-
-
-
9,382
88,227
-
-
39,641
-
24,157
9,868
-
-
-
-
-
-
-
-
80,471
173,654
23,334
5,580
Total
11,113
361,274
4,411
-
39,641
-
137,344
277,329
Total interest-earning assets
$
224,651
$
83,058
$
352,636
$
170,767
$
831,112
Interest-bearing liabilities:
Interest checking and money market accounts
$
421,092
$
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, 2016
32,805
20,666
45,731
12,510
38,000
-
15,000
585,804
(361,153)
(361,153)
$
$
$
$
-
-
$
-
-
18,922
27,368
18,803
19,610
-
-
-
-
$
$
$
46,290
36,768
(324,385)
$
$
$
-
-
-
-
$
$
$
38,413
314,223
(10,162)
(1.12)%
$
421,092
32,805
58,789
92,914
12,510
38,000
10,000
15,013
$
$
681,123
149,989
-
-
398
205
-
-
10,000
13
10,616
160,151
149,989
16.48%
Cumulative interest rate gap to total assets
(39.67)%
(35.63)%
(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.
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, 2016 and do not contemplate any actions we might undertake in response to changes in market interest rates.
34
BNCCORP, INC. Annual Report 2016 BNCCORP, INC. AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 2016 and 2015
(With Independent Auditors’ Report Thereon)
35
BNCCORP, INC. Annual Report 2016 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors’ Report
Consolidated Balance Sheets as of December 31, 2016 and 2015
Consolidated Statements of Income for the Years Ended December 31, 2016 and 2015
Page
37
38
39
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2016 and 2015
40
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2016 and 2015
Consolidated Statements of Cash Flows for the Years Ended December 31, 2016 and 2015
Notes to Consolidated Financial Statements
41
42
44
36
BNCCORP, INC. Annual Report 2016 Independent Auditors’ Report
The Board of Directors
BNCCORP, INC.:
We have audited the accompanying consolidated financial statements of BNCCORP, INC. and its subsidiaries,
which comprise the consolidated balance sheets as of December 31, 2016 and 2015, and the related
consolidated statements of income, 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.
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, 2016 and 2015, and the
results of their operations and their cash flows for the years then ended, in accordance with U.S. generally
accepted accounting principles.
March 23, 2017
37
BNCCORP, INC. Annual Report 2016KPMG LLP is a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. KPMG LLPSuite 3001212 N. 96th StreetOmaha, NE 68114-2274Suite 11201248 O StreetLincoln, NE 68508-1493 FINANCIAL INFORMATION
Financial Statements
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31
(In thousands, except share data)
ASSETS
CASH AND CASH EQUIVALENTS
INVESTMENT SECURITIES AVAILABLE FOR SALE
FEDERAL RESERVE BANK AND FEDERAL HOME LOAN BANK
STOCK
LOANS HELD FOR SALE-MORTGAGE BANKING
LOANS AND LEASES HELD FOR INVESTMENT
ALLOWANCE FOR CREDIT LOSSES
Net loans and leases held for investment
OTHER REAL ESTATE and REPOSSESSED ASSETS, net
PREMISES AND EQUIPMENT, net
ACCRUED INTEREST RECEIVABLE
OTHER
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
FEDERAL HOME LOAN BANK ADVANCES
LONG-TERM BORROWINGS
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN
COMPANY’S SUBORDINATED DEBENTURES
ACCRUED INTEREST PAYABLE
ACCRUED EXPENSES
OTHER
Total liabilities
STOCKHOLDERS’ EQUITY:
Common stock, $.01 par value – Authorized 35,000,000 shares; 3,456,008
and 3,428,416 shares issued and outstanding
Capital surplus – common stock
Retained earnings
Treasury stock (212,645 and 240,237 shares, respectively)
Accumulated other comprehensive income, net
Total stockholders’ equity
Total liabilities and stockholders’ equity
2016
2015
11,113
400,136
4,411
39,641
414,673
(8,285)
406,388
218
19,381
4,444
24,668
910,400
$
$
15,189
419,346
3,219
50,445
379,903
(8,611)
371,292
242
17,574
4,027
22,912
904,246
147,027
$
168,259
453,897
58,789
92,914
752,627
12,510
38,000
10,000
15,013
777
6,685
593
836,205
35
25,996
49,328
(2,847)
1,683
74,195
910,400
$
460,385
86,817
64,988
780,449
13,851
7,300
10,000
15,015
487
7,398
758
835,258
34
25,979
42,172
(3,278)
4,081
68,988
904,246
$
$
$
$
See accompanying notes to consolidated financial statements.
38
BNCCORP, INC. Annual Report 2016 BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the Years Ended December 31
(In thousands, except per share data)
2016
2015
$
20,504
$
18,610
INTEREST INCOME:
Interest and fees on loans
Interest and dividends on investments
Taxable
Tax-exempt
Dividends
Total interest income
INTEREST EXPENSE:
Deposits
Short-term borrowings
Federal Home Loan Bank advances
Long-term borrowings
Subordinated debentures
Total interest expense
Net interest income
PROVISION (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, net
Gains on sales of loans, net
Gains on sales of securities, net
Other
Total non-interest income
NON-INTEREST EXPENSE:
Salaries and employee benefits
Professional services
Data processing fees
Marketing and promotion
Occupancy
Regulatory costs
Depreciation and amortization
Office supplies and postage
Other real estate costs
Other
Total non-interest expense
Income before income taxes
Income tax expense
Net income
Preferred stock costs
Net income available to common shareholders
Basic earnings per common share
Diluted earnings per common share
5,970
2,705
167
29,346
2,174
22
198
634
315
3,343
26,003
800
25,203
2,731
1,532
19,465
234
729
1,086
25,777
21,432
4,581
3,666
3,798
2,160
675
1,519
687
34
2,641
41,193
9,787
2,631
7,156
-
7,156
2.08
2.03
$
$
$
$
$
$
See accompanying notes to consolidated financial statements.
6,480
2,706
119
27,915
2,148
26
10
128
258
2,570
25,345
(400)
25,745
2,901
1,476
16,214
1,138
1,655
1,566
24,950
19,692
3,923
3,059
3,523
1,981
696
1,415
648
18
2,589
37,544
13,151
3,945
9,206
1,656
7,550
2.23
2.16
39
BNCCORP, INC. Annual Report 2016 BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the Years Ended December 31
(In thousands)
NET INCOME
Unrealized loss on securities available for sale
Reclassification adjustment for gains included in
net income
Other comprehensive loss before tax
Income tax benefit related to items of other
comprehensive loss
Other comprehensive loss
TOTAL COMPREHENSIVE INCOME
2016
2015
$
7,156
$
9,206
$
(3,138)
$
(350)
(729)
(3,867)
1,469
(2,398)
(2,398)
4,758
$
(1,655)
(2,005)
762
(1,243)
(1,243)
7,963
$
See accompanying notes to consolidated financial statements.
40
BNCCORP, INC. Annual Report 2016 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, 2014
21,098 $ 21,098
3,413,854 $
34 $ 25,831
$ 34,622 $ (3,421)
$
5,324 $ 83,488
Net income
Other comprehensive loss
-
-
-
-
Redemption of preferred stock
(21,098)
(21,098)
Dividend on preferred stock
Impact of share-based
compensation
BALANCE, December 31, 2015
Net income
Other comprehensive loss
Impact of share-based
compensation
-
-
- $
-
-
-
BALANCE, December 31, 2016
- $
-
-
-
-
-
-
-
-
-
-
-
14,562
-
-
-
-
-
-
-
-
-
9,206
-
-
(1,656)
-
-
-
-
148
-
143
-
9,206
(1,243)
(1,243)
-
-
-
(21,098)
(1,656)
291
3,428,416 $
34
$ 25,979
$ 42,172
$ (3,278)
$
4,081 $ 68,988
-
-
27,592
-
-
1
-
-
17
7,156
-
-
-
-
431
-
7,156
(2,398)
(2,398)
-
449
3,456,008 $
35 $ 25,996 $
49,328 $
(2,847) $
1,683 $
74,195
See accompanying notes to consolidated financial statements.
41
BNCCORP, INC. Annual Report 2016
BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31
(In thousands)
OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by operating
activities -
Provision (reduction) for credit losses
Provision for other real estate losses
Depreciation and amortization
Net amortization of premiums and (discounts) on investment securities and
subordinated debentures
Share-based compensation
Change in accrued interest receivable and other assets, net
Gain on sale of other real estate
Gain on sale of bank premises and equipment
Net realized gains on sales of investment securities
Decrease (increase) 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 used in investing activities
2016
2015
$
7,156
$
9,206
800
28
1,519
7,524
449
(4,134)
(4)
(1)
(729)
300
990
(1,026,734)
1,037,524
23
67
1,532
(234)
26,076
(122,052)
97,415
34,655
(24,042)
22,850
(37,194)
4
14
(3,339)
(31,689)
(400)
14
1,415
8,152
291
(2,347)
(7)
(56)
(1,655)
(148)
1,219
(942,729)
939,345
151
(189)
11,881
(1,138)
23,005
(176,781)
152,736
46,291
(7,892)
7,490
(29,448)
7
163
(2,867)
(10,301)
See accompanying notes to consolidated financial statements.
42
BNCCORP, INC. Annual Report 2016 BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, continued
For the Years Ended December 31
(In thousands)
2016
2015
FINANCING ACTIVITIES:
Net decrease in deposits
Net decrease in short-term borrowings
Increase in long-term borrowings
Repayments of Federal Home Loan Bank advances
Proceeds from Federal Home Loan Bank advances
Redemption of preferred stock
Dividends paid on preferred stock
Net cash provided by (used in) financing activities
NET DECREASE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, beginning of period
$
(27,822)
$
(1,341)
-
(635,450)
666,150
-
-
1,537
(4,076)
15,189
CASH AND CASH EQUIVALENTS, end of period
$
11,113
$
(30,782)
(2,151)
10,000
(178,150)
185,450
(21,098)
(1,908)
(38,639)
(25,935)
41,124
15,189
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid
Income taxes paid
$
$
3,052
3,209
$
$
2,421
3,804
See accompanying notes to consolidated financial statements.
43
BNCCORP, INC. Annual Report 2016 BNCCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 1. Description of Business and Significant Accounting Policies
Description of Business
BNCCORP, INC. (BNCCORP or BNC) is a registered bank holding company incorporated under the laws of
Delaware. It is the parent company of BNC National Bank (the Bank or BNC Bank). BNC operates community
banking and wealth management businesses in North Dakota, Arizona and Minnesota from 17 locations. The Bank
also conducts mortgage banking through a consumer-direct channel complimented by retail channels from 14
locations in Arizona, Minnesota, North Dakota, Illinois, Kansas and Missouri. The consumer direct channel
emphasizes technology (internet leads and call-in center) to originate mortgage loans throughout the United States.
The retail channel is more relationship driven and origination are generally near our mortgage banking locations.
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), impairments, and income taxes.
Ultimate results could differ from those estimates.
SIGNIFICANT 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”.
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.
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, 2016 and 2015, except for Federal
Reserve Bank (FRB) and the Federal Home Loan Bank (FHLB) stock, which have an indeterminable maturity.
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.
44
BNCCORP, INC. Annual Report 2016 Other-Than-Temporary Impairment
Declines in the fair value of individual available-for-sale 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 the Company considers includes, but is not limited to, the following:
Financial condition of issuers or guarantors;
Seniority of invested tranches and subordinated credit support;
• Recent and expected performance of the securities;
•
• Recent cash flows;
•
• 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 2 to these consolidated financial statements includes a summary of investment securities in a loss position at
December 31, 2016 and 2015.
Federal Reserve Bank and Federal Home Loan Bank of Des Moines Stock
Investments in Federal Reserve Bank (FRB) and Federal Home Loan Bank (FHLB) of Des Moines 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
45
BNCCORP, INC. Annual Report 2016 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, but will continue to be
reported as impaired.
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.
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:
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
46
BNCCORP, INC. Annual Report 2016 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. The Company’s
methodology incorporates an estimated loss emergence period for each risk group. The loss emergence period
is the period of time from when a borrower experiences a loss event and when the actual loss is recognized in
the financial statements, generally at the time of initial charge-off of the loan balance. The Company’s
methodology also includes qualitative risk factors that allow management to adjust its estimates of losses based
on the most recent information available and to address other limitations in the quantitative component that is
based on historical loss rates.
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.
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 income. Operating expenses of
properties are charged to other real estate costs.
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.
47
BNCCORP, INC. Annual Report 2016 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.
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 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.
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, other than treasury
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. Treasury securities are based upon quoted prices for identical
instruments traded in active markets.
48
BNCCORP, INC. Annual Report 2016 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. Fair value measurements
on loans held for sale are based on quoted market prices for similar loans in the secondary market, market
quotes from anticipated sales contracts and commitments, or contract prices from firm sales commitments.
Accrued Interest Receivable. The fair value of accrued interest receivable equals the amount receivable due
to the current nature of the amounts receivable.
Derivative Financial Instruments. The fair value of the Company’s derivatives are based upon quoted prices
for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are
not active, and model-based valuation techniques for which significant assumptions are observable in the
market.
Interest-Bearing Deposits. Fair values of interest-bearing deposit liabilities are estimated by discounting future
cash flow payment streams using rates at which comparable current deposits with comparable maturities are
being issued.
Borrowings and Advances. The carrying amount of short-term borrowings approximates fair value due to the
short maturity and the instruments’ floating interest rates, which are tied to market conditions. The fair values
of long-term borrowings are estimated by discounting future cash flow payment streams using rates at which
comparable borrowings are currently being offered.
Accrued Interest Payable. The fair value of accrued interest payable equals the amount payable due to the
current nature of the amounts payable.
Guaranteed Preferred Beneficial Interests in Company’s Subordinated Debentures. The fair values of the
Company’s subordinated debentures are estimated by discounting future cash flow payment streams using
discount rates estimated to reflect those at which comparable instruments could currently be offered.
Financial Instruments with Off-Balance-Sheet Risk. The fair values of the Company’s commitments to
extend credit and commercial and standby letters of credit are estimated using fees currently charged to enter
into similar agreements.
Derivative Financial Instruments
FASB ASC 815, Derivatives and Hedging, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other contracts, and for hedging activities.
Accordingly, the Company records all derivatives at fair value.
The Company enters into interest rate lock commitments on certain mortgage loans related to our mortgage banking
operations on a best efforts basis, which are commitments to originate loans whereby the interest rate on the loan is
determined prior to funding. The Company also has corresponding forward sales contracts related to these interest
rate lock commitments. Both the mortgage loan commitments and the related forward sales contracts are accounted
for as derivatives and carried at fair value with changes in fair value recorded in mortgage banking revenues, net.
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.
49
BNCCORP, INC. Annual Report 2016 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, 2016, the Company had four stock-based compensation plans, which are described more fully in
Note 23 and Note 25 to these consolidated financial statements.
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 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 deferred tax assets to amounts
that are more likely than not expected to be realized.
Earnings Per Share
Basic earnings per share (EPS) excludes dilution and is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding during the applicable period. Diluted
EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common stock that then shared in the
earnings of the Company. Such potential dilutive instruments include stock options and contingently issuable stock.
Note 22 to these consolidated financial statements includes disclosure of the Company’s EPS calculations.
Comprehensive Income
Comprehensive income is the total of net income and accumulated other comprehensive income, which for the
Company, is generally comprised of unrealized gains and losses on securities available for sale, net of corresponding
tax effects.
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, required 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
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 adoption of this ASU did not have a material impact on the Company’s consolidated
financial statements.
50
BNCCORP, INC. Annual Report 2016 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 was effective
for annual reporting periods beginning after December 15, 2014. The adoption of this ASU did not have a material
impact on the Company’s consolidated financial statements.
ASU No. 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt
Issuance Costs was issued to clarify that debt issuance costs are to be presented in the balance sheet as a direct
reduction from the carrying value of the related debt liability. ASU 2015-03 is effective for entities, other than
public entities, for annual reporting periods beginning after December 15, 2015, and interim periods within fiscal
years beginning after December 15, 2016. Early adoption of the amendment is permitted. The adoption of this ASU
did not have a material impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This ASU requires lessees to recognize a
lease liability and a right-to-use asset for all leases, including operating leases, with a term greater than twelve
months on its balance sheet. Impact on the income statement will generally be through amortization of a right of
use asset and recognition of expense for lease payments. This ASU is effective in annual and interim periods in
fiscal years beginning after December 15, 2018, with early adoption permitted, and requires a modified retrospective
transition method. We are currently in the process of evaluating the impact that this new guidance will have on our
consolidated financial statements.
ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Statements was issued to improve financial reporting about expected credit losses on loans and other financial assets
held by banks, financial institutions and other organizations. The new standard will require financial institutions to
forecast future conditions considering expected credit losses on the life of the asset and record a provision for credit
losses at the origination of the asset. ASU 2016-13 is effective for public entities, who are non-SEC filers, for fiscal
years beginning after December 15, 2020, including interim periods within those fiscal years. We are currently in
the process of evaluating the impact that this new guidance will have on our consolidated financial statements and
related disclosures.
51
BNCCORP, INC. Annual Report 2016 NOTE 2. 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, 2016 or
2015. The carrying amount of available-for-sale securities and their estimated 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 small business
administration pools guaranteed by SBA
Collateralized mortgage obligations
guaranteed by GNMA/VA
Collateralized mortgage obligations issued by
FNMA or FHLMC
State and municipal bonds
2016
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
$
24,967
$
-
$
(252)
$
24,715
46,003
122,519
85,462
35,849
84,143
$
398,943
$
295
731
607
180
3,918
5,731
(1,028)
45,270
(387)
122,863
(1,849)
(687)
(335)
84,220
35,342
87,726
$
(4,538)
$
400,136
2015
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
U.S. Treasury securities
U.S. government agency mortgage-backed
securities guaranteed by GNMA
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
State and municipal bonds
$
32,925
$
9
$
(285)
$
32,649
105,407
105,150
61,418
21,607
87,779
46
737
678
206
5,413
(1,022)
104,431
(209)
(203)
(151)
(159)
105,678
61,893
21,662
93,033
$
414,286
$
7,089
$
(2,029)
$
419,346
52
BNCCORP, INC. Annual Report 2016 The amortized cost and estimated fair market value of available-for-sale securities classified according to their
contractual maturities at December 31, 2016, 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
-
15,204
40,603
343,136
398,943
$
$
-
15,420
41,023
343,693
400,136
The table above is not intended to reflect actual maturities, cash flows, or interest rate risk. Actual maturities may
differ from the contractual maturities shown above as a result of prepayments.
Securities carried at approximately $117.8 million and $77.1 million at December 31, 2016 and 2015, 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
2016
2015
$
$
$
97,415
796
(67)
729
$
152,736
2,565
(910)
1,655
53
BNCCORP, INC. Annual Report 2016 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):
Description of
Securities
U.S. Treasury securities
U.S. government agency
mortgage-backed securities
guaranteed by GNMA
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
State and municipal bonds
Total temporarily impaired
securities
Description of
Securities
U.S. Treasury securities
U.S. government agency
mortgage-backed securities
guaranteed by GNMA
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
State and municipal bonds
Total temporarily impaired
securities
2016
Less than 12 months
12 months or more
Total
Fair
Value
Unrealized
Loss
$
24,715
$
(252)
#
-
Fair
Value
Unrealized
Loss
$
-
$
-
Fair
Value
Unrealized
Loss
$
24,715
$
(252)
#
2
28,357
(1,028)
-
-
-
5
28,357
(1,028)
31,123
(182)
7
13,152
(205)
14
44,275
(387)
44,257
(1,849)
-
-
-
6
44,257
(1,849)
16,618
15,643
(649)
(335)
1
-
2,330
-
(38)
-
4
7
18,948
15,643
(687)
(335)
#
2
5
7
6
3
7
30
$ 160,713
$
(4,295)
8
$
15,482
$
(243)
38
$ 176,195
$
(4,538)
2015
Less than 12 months
12 months or more
Total
Fair
Value
Unrealized
Loss
$
24,673
$
(285)
#
2
#
-
Fair
Value
Unrealized
Loss
$
-
$
-
Fair
Value
Unrealized
Loss
$
24,673
$
(285)
#
2
15
99,357
(1,022)
-
-
-
15
99,357
(1,022)
9
7
1
2
32,910
(138)
21,299
(203)
4,854
8,147
(74)
(159)
3
-
2
-
4,691
(71)
12
37,601
(209)
-
-
3,577
-
(77)
-
7
3
2
21,299
(203)
8,431
8,147
(151)
(159)
36
$ 191,240
$
(1,881)
5
$
8,268
$
(148)
41
$ 199,508
$
(2,029)
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 management concluded were other-than-temporarily impaired during 2016 or 2015.
54
BNCCORP, INC. Annual Report 2016 NOTE 3. 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
2016
1,807
2,604
4,411
$
$
2015
1,807
1,412
3,219
$
$
There is no contractual maturity on these investments; the investments are required by counterparties.
NOTE 4. 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
Gross loans and leases held for investment
Unearned income and net unamortized deferred fees and costs
Loans, net of unearned income and unamortized fees and costs
Allowance for credit losses
Net loans and leases held for investment
2016
2015
$
$
$
39,641
123,604
171,972
31,518
59,183
15,982
12,215
414,474
199
414,673
(8,285)
406,388
$
$
$
50,445
125,009
149,099
25,860
47,073
17,627
15,187
379,855
48
379,903
(8,611)
371,292
Loans to Related Parties
Note 20 to these consolidated financial statements includes information relating to loans to executive officers,
directors, principal shareholders and associates of such persons.
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
2016
2015
38,747
90,798
30,943
575
161,063
$
$
37,130
88,948
22,487
644
149,209
$
$
55
BNCCORP, INC. Annual Report 2016 NOTE 5. 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
2016
Land and
land
SBA
Consumer
development Construction
Total
$
3,205
$
1,999
$
1,578
$
640
$
1,041
$
148
$
8,611
122
(1,004)
-
1,219
-
13
(89)
(71)
15
211
(99)
20
(628)
-
-
(35)
-
-
800
(1,174)
48
Balance, beginning
of period
Provision
(reduction)
Loans charged off
Loan recoveries
Balance, end of
period
$
2,323
$
3,231
$
1,433
$
772
$
413
$
113
$
8,285
Commercial
and
industrial
Commercial
real estate
2015
Land and
land
SBA
Consumer
development Construction
Total
$
2,686
$
2,496
$
1,190
$
516
$
1,436
$
277
$
8,601
559
(47)
7
(1,048)
-
551
465
(145)
68
148
(43)
19
(395)
(129)
-
-
-
-
(400)
(235)
645
Balance, beginning
of period
Provision
(reduction)
Loans charged off
Loan recoveries
Balance, end of
period
$
3,205
$
1,999
$
1,578
$
640
$
1,041
$
148
$
8,611
The following table shows the balance in the allowance for credit losses at December 31, 2016, and December 31,
2015, and the related loan balances, segregated on the basis of impairment methodology (in thousands). Impaired
loans are loans on nonaccrual status and troubled debt restructurings, which are individually evaluated for
impairment, and other loans deemed to have similar risk characteristics. All other loans are collectively evaluated
for impairment.
Allowance For Credit Losses
Gross Loans and Leases Held for Investment
Impaired
Other
Total
Impaired
Other
Total
December 31, 2016
Commercial and industrial
Commercial real estate
$
SBA
Consumer
Land and land development
Construction
Total
December 31, 2015
Commercial and industrial
Commercial real estate
$
SBA
Consumer
Land and land development
Construction
Total
56
$
514
286
376
14
-
-
$
1,809
2,945
1,057
758
413
113
$
2,323
3,231
1,433
772
413
113
1,909
1,547
481
333
-
-
$
121,695
$
123,604
170,425
171,972
31,037
58,850
15,982
12,215
31,518
59,183
15,982
12,215
$
1,190
$
7,095
$
8,285
$
4,270
$
410,204
$
414,474
$
-
-
313
33
-
-
$
3,205
1,999
1,265
607
1,041
148
3,205
1,999
1,578
640
1,041
148
$
-
$
125,009
$
1,578
313
383
-
-
147,521
25,547
46,690
17,627
15,187
125,009
149,099
25,860
47,073
17,627
15,187
$
346
$
8,265
$
8,611
$
2,274
$
377,581
$
379,855
BNCCORP, INC. Annual Report 2016
Performing and non-accrual loans
The Bank’s key credit quality indicator is the loan’s performance status, defined as accrual or non-accrual.
Performing loans are considered to have a lower risk of loss and are on accrual status. Non-accrual loans include
loans on which the accrual of interest has been discontinued. Accrual of interest is discontinued when we believe
that the borrower’s financial condition is such that the collection of principal and interest is doubtful. A delinquent
loan is generally placed on non-accrual status when it becomes 90 days or more past due unless the loan is well
secured and in the process of collection. When a loan is placed on non-accrual status, accrued but uncollected
interest income applicable to the current reporting period is reversed against interest income. Accrued but
uncollected interest income applicable to previous reporting periods is charged against the allowance for credit
losses. No additional interest is accrued on the loan balance until the collection of both principal and interest
becomes reasonably certain. Delinquent balances are determined based on the contractual terms of the loan adjusted
for charge-offs and payments applied to principal.
The following table sets forth information regarding the Bank’s performing and non-accrual loans at December 31
(in thousands):
2016
Current
31-89 Days
Past Due
90 Days or
More Past
Due And
Accruing
Total
Performing Non-accrual
Total
Commercial and industrial:
Business loans
$
52,107
$
Agriculture
Owner-occupied commercial real
estate
Commercial real estate
SBA
Consumer:
Automobile
Home equity
1st mortgage
Other
Land and land development
Construction
20,206
49,295
171,972
31,037
7,098
8,787
13,472
29,722
15,827
12,215
Total loans held for investment
411,738
Loans held for sale
39,637
-
$
67
-
-
-
15
-
-
54
155
-
291
4
20
$
52,127
$
1,909
$
-
-
-
-
-
-
-
-
-
-
20,273
49,295
171,972
31,037
7,113
8,787
13,472
29,776
15,982
12,215
-
-
-
481
35
-
-
-
-
-
54,036
20,273
49,295
171,972
31,518
7,148
8,787
13,472
29,776
15,982
12,215
20
412,049
2,425
414,474
-
39,641
-
39,641
Total gross loans
$
451,375
$
295
$
20
$
451,690
$
2,425
$
454,115
57
BNCCORP, INC. Annual Report 2016 2015
Current
31-89 Days
Past Due
90 Days or
More Past
Due And
Accruing
Total
Performing Non-accrual
Total
Commercial and industrial:
Business loans
$
62,563
$
377
$
Agriculture
Owner-occupied commercial real
estate
Commercial real estate
SBA
Consumer:
Automobile
Home equity
1st mortgage
Other
Land and land development
Construction
18,003
44,066
149,099
24,632
6,057
8,134
12,161
20,564
17,452
15,187
-
-
-
915
69
-
-
11
-
-
Total loans held for investment
377,918
1,372
-
-
-
-
-
-
-
-
-
175
-
175
$
62,940
$
18,003
44,066
149,099
25,547
6,126
8,134
12,161
20,575
17,627
15,187
$
-
-
-
-
313
51
-
-
26
-
-
62,940
18,003
44,066
149,099
25,860
6,177
8,134
12,161
20,601
17,627
15,187
379,465
390
379,855
Loans held for sale
50,444
1
-
50,445
-
50,445
Total gross loans
$
428,362
$
1,373
$
175
$
429,910
$
390
$
430,300
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
2016
2015
$
$
104
-
104
$
$
14
-
14
58
BNCCORP, INC. Annual Report 2016 Credit Risk by Internally Assigned Grade
The Company maintains an internal risk rating process in order to manage credit risk. Internal grade is generally
categorized into the following four categories: pass, watch list, substandard, and doubtful.
At December 31, 2016, the Company had $393.4 million of loans categorized as pass rated loans. This compares
to $362.1 million at December 31, 2015.
Loans designated as watch list are loans that possess some credit deficiency that deserves close attention due to
emerging problems. Such loans pose unwarranted financial risk that, if left uncorrected, may result in deterioration
of the repayment prospects for the asset or in the Bank’s credit position at some future date. At December 31, 2016
the Company had $8.1 million of loans categorized as watch list loans compared to $7.9 million at December 31,
2015.
Loans graded as Substandard or Doubtful are considered “Classified” loans for regulatory purposes. Loans
classified as substandard are loans that are generally inadequately protected by the current net worth and paying
capacity of the obligor, or by the collateral pledged, if any. Loans classified as substandard have a well-defined
weakness or weaknesses that jeopardize the liquidation of the debt. Substandard loans are characterized by the
distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loans classified as
doubtful have the weaknesses of those classified as substandard, with additional characteristics that make collection
in full on the basis of currently existing facts, conditions and values questionable, and there is a higher probability
of loss. At December 31, 2016, the Company had $10.5 million of substandard loans and $2.4 million of doubtful
loans. This compares to $9.4 million of substandard loans and $379 thousand doubtful loans as of December 31,
2015.
59
BNCCORP, INC. Annual Report 2016 Impaired loans
Impaired loans include loans the Bank will not be able to collect all amounts due in accordance with the terms of
the loan agreement. Impaired loans include non-accruing and loans that have been modified in a troubled debt
restructuring. All loans are individually reviewed for impairment.
The following table summarizes impaired loans and related allowances as of and for the years ended December 31,
2016 and 2015 (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
2016
Unpaid
Principal
Recorded
Investment
Related
Allowance
Average
Recorded
Balance
Interest
Income
Recognized
(12 months)
$
2,714
$
1,909
$
514
$
2,128
$
-
-
1,846
510
-
-
1,547
481
30
28
-
-
-
-
-
-
-
-
-
-
-
-
-
-
286
376
14
-
-
-
-
-
-
-
-
1,569
489
33
-
-
-
-
-
-
-
-
-
80
-
-
-
-
-
-
-
-
$
5,100
$
3,965
$
1,190
$
4,219
$
80
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
60
$
-
-
-
-
-
10
$
-
-
-
-
-
7
-
1,878
298
-
-
-
-
$
$
1,888
$
6,988
$
-
-
-
-
305
$
-
-
-
-
-
-
-
-
-
-
-
-
-
$
$
-
-
-
-
-
7
-
302
-
-
-
-
$
309
$
-
-
-
-
-
-
-
12
-
-
-
-
12
92
4,270
$
1,190
$
4,528
$
BNCCORP, INC. Annual Report 2016 2015
Unpaid
Principal
Recorded
Investment
Related
Allowance
Average
Recorded
Balance
Interest
Income
Recognized
(12 months)
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
$
-
-
-
-
$
-
-
-
-
$
-
-
-
-
$
-
-
-
-
325
313
313
324
39
-
-
26
-
-
-
39
-
-
26
-
-
-
20
-
-
13
-
-
-
40
-
-
26
-
-
-
390
$
378
$
346
$
390
$
$
-
-
-
$
-
-
-
1,876
-
29
-
1,878
-
-
-
-
1,578
-
12
-
306
-
-
-
-
$
$
3,783
$
4,173
$
1,896
$
2,274
$
-
-
-
-
-
-
-
-
-
-
-
-
-
$
$
346
$
$
-
-
-
1,579
-
15
-
308
-
-
-
-
1,902 $
2,292
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
80
-
-
-
13
-
-
-
-
93
93
61
BNCCORP, INC. Annual Report 2016 Troubled Debt Restructuring (TDR)
Included in net loans and leases held for investment, 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 that we would not otherwise consider, compared to the original terms and conditions
of the loan, the modified loan is considered a troubled debt restructuring.
The table below summarizes the amounts of restructured loans as of December 31 (in thousands):
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
Accrual
Non-accrual
Total
Allowance
2016
$
$
-
-
-
1,547
-
-
-
298
-
-
-
-
$
-
-
-
-
308
-
-
-
-
-
-
-
$
-
-
-
1,547
308
-
-
298
-
-
-
-
-
-
-
286
308
-
-
-
-
-
-
-
$
1,845
$
308
$
2,153
$
594
Accrual
Non-accrual
Total
Allowance
2015
$
$
-
-
-
1,578
-
-
-
306
-
-
-
-
$
-
-
-
-
313
-
-
-
-
-
-
-
$
-
-
-
1,578
313
-
-
306
-
-
-
-
-
-
-
-
313
-
-
-
-
-
-
-
$
1,884
$
313
$
2,197
$
313
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.
62
BNCCORP, INC. Annual Report 2016 When a loan is modified as a TDR, there may be a direct, material impact on the loan balances, as principal balances
may be partially forgiven. For the year ended December 31, 2016 there was one new TDR with a pre-modification
balance of $119 thousand and a post-modification balance of $119 thousand. For the year ended December 31, 2015
there were three new TDR with a pre-modification balance of $329 thousand and a post-modification balance of
$313 thousand.
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 interest 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
2016
2015
$
$
229
92
137
$
$
222
93
129
There were no additional funds committed to borrowers who are in TDR status at December 31, 2016 and December
31, 2015.
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, 2016 and December 31, 2015, the Bank had no 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).
63
BNCCORP, INC. Annual Report 2016 NOTE 6. Other Real Estate, net
Other real estate (ORE), net includes property acquired through foreclosure, property in judgment and in-substance
foreclosures. ORE is carried at fair value less estimated selling costs. Each property is evaluated regularly and the
amounts provided to decrease the carrying amount are included in non-interest expense. A summary of the activity
related to ORE is presented below for the years ended December 31 (in thousands):
2016
2015
Balance, beginning of period
Real estate sold
Net gains on sale of assets
Provision
Balance, end of period
$
$
242
(4)
4
(28)
214
The following is a summary of ORE as of December 31 (in thousands):
Other real estate
Valuation allowance
Other real estate, net
2016
954
(740)
214
$
$
$
$
$
$
256
(7)
7
(14)
242
2015
954
(712)
242
NOTE 7. 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
$
$
2016
4,469
16,436
549
10,409
31,863
(12,482)
$
19,381
$
2015
4,326
14,499
545
10,103
29,473
(11,899)
17,574
Depreciation and amortization expense totaled approximately $1.5 million and $1.4 million for the years ended
December 31, 2016 and 2015, respectively.
64
BNCCORP, INC. Annual Report 2016
NOTE 8. Deposits
The scheduled maturities of time deposits as of December 31, 2016 are as follows (in thousands):
$
2017
2018
2019
2020
2021
Thereafter
79,070
51,346
11,451
5,430
3,736
670
$
151,703
At December 31, 2016 and 2015, the Bank had $0 and $33.4 million, respectively, of time deposits that had been
acquired through a traditional broker channel. In addition, the Company had $126.9 million and $144.7 million of
interest-bearing deposits that meet the regulatory definition of a brokered deposit as of December 31, 2016 and
2015, respectively.
At December 31, 2016 and 2015, the Bank had $22.3 million and $11.6 million, respectively, in time deposits
greater than $250 thousand.
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
2016
2015
$
$
9
60
512
1,593
2,174
$
$
9
64
466
1,609
2,148
Deposits Received from Related Parties
Note 20 to these consolidated financial statements includes information relating to deposits received from executive
officers, directors, principal shareholders and associates of such persons.
NOTE 9. 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
Repurchase agreements with customers, renewable daily, interest payable monthly,
rates ranging from 0.05% to 0.40% in 2016 and 2015, secured by U.S. Treasury
securities and general obligations of municipalities
2016
2015
$
-
$
-
12,510
13,851
$
12,510
$
13,851
The weighted average interest rate on short-term borrowings outstanding as of December 31, 2016 and 2015 was
0.15% and 0.14%, respectively.
65
BNCCORP, INC. Annual Report 2016
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, 2016, $12.5 million of securities sold under repurchase agreements, with a weighted average interest rate of
0.15%, were collateralized by U.S. Treasury securities and general obligations of municipalities having a market
value of $25.8 million and unamortized principal balances of $24.5 million. At December 31, 2015, $13.9 million
of securities sold under repurchase agreements, with a weighted average interest rate of 0.14%, were collateralized
by U.S. Treasury securities and general obligations of municipalities having a market value of $34.5 million and
unamortized principal balances of $32.0 million.
NOTE 10. Federal Home Loan Bank Advances
As of December 31, 2016, the Bank had $38 million of FHLB advances outstanding. At December 31, 2016, the
Bank has mortgage loans with unamortized principal balances of approximately $158.2 million and securities with
unamortized principal balances of approximately $49.2 million pledged as collateral to the FHLB. The Bank has
the ability to draw advances up to approximately $122.6 million based upon the aggregate collateral that is currently
pledged, subject to a requirement to purchase additional FHLB stock.
As of December 31, 2015, the Bank had $7.3 million of FHLB advances outstanding. At December 31, 2015, the
Bank had mortgage loans pledged as collateral to the FHLB with unamortized principal balances of approximately
$127.4 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.
NOTE 11. Long-Term Borrowings
The following table sets forth selected information for long-term borrowings (borrowings with an original maturity
of greater than one year) as of December 31 (in thousands):
2016
2015
Note payable, interest due quarterly, beginning on April 1, 2016 ending October 19,
2025, interest payable at a fixed rate of 6.35%
$
10,000
$
10,000
On October 19, 2015, the Company entered into a $10.0 million term loan agreement with another bank. The long
term borrowing is subordinated debt that qualifies as Tier 2 capital for the Company. The loan agreement includes
various covenants that are primarily operational rather than financial in nature. As of December 31, 2016, the
Company was in compliance with these covenants. The note may be repaid by the Company at par in whole or in
part beginning October 19, 2020.
66
BNCCORP, INC. Annual Report 2016 NOTE 12. Other Borrowings
The following table presents selected information regarding other borrowings at December 31 (in thousands):
Unsecured Borrowing Lines:
2016
BNC National Bank Lines (1)
$
34,500
$
- $ 34,500
Line
Outstanding
Available
Secured Borrowing Lines:
BNC National Bank Line
$
575
$
406
$
BNC Line
91,435
10,000
$
-
-
406
10,000
Collateral
Pledged
Line
Outstanding
Available
Total
10,406
(1) The unsecured BNC National Bank Lines consists of three separate lines with three institutions in individual amounts of $12.5 million, $10
92,010
10,406
$
$
$
$
-
million, and $12 million.
At December 31, 2016, the pledged collateral for the BNC National Bank Line was comprised of collateralized
mortgage obligations and the pledged collateral for the BNC Line is the common stock of BNC National Bank.
Unsecured Borrowing Line:
2015
BNC National Bank Lines (1)
$
34,500
$
-
$
34,500
Line
Outstanding
Available
Secured Borrowing Line:
BNC National Bank Line
$
650
$
387
$
BNC Line
87,862
10,000
$
-
-
387
10,000
Collateral
Pledged
Line
Outstanding
Available
Total
10,387
(1) The unsecured BNC National Bank Lines consists of three separate lines with three institutions in individual amounts of $12.5 million, $10
10,387
88,512
$
$
$
$
-
million, and $12 million.
At December 31, 2015, the pledged collateral for the BNC National Bank Line was comprised of collateralized
mortgage obligations and the pledged collateral for the BNC Line is the common stock of BNC National Bank.
67
BNCCORP, INC. Annual Report 2016 NOTE 13. Guaranteed Preferred Beneficial Interest’s in Company’s Subordinated
Debentures
In July 2007, BNC 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, 2016 and December 31,
2015 was 2.05% and 1.73%, 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 Federal Reserve Board.
NOTE 14. Stockholders’ Equity
On January 16, 2009, BNC received net proceeds of approximately $20.1 million through the sale of its Series A
shares of non-voting senior perpetual 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. Series B perpetual non-voting preferred stock, which had an aggregate liquidation
preference of approximately $1.0 million. The Treasury Department exercised this warrant on January 16, 2009.
During 2015, the Company, after receiving approval from its regulator, redeemed the Series A and Series B
preferred stock. The redemption price for these shares of preferred stock was the stated liquidation preference
amount of $1,000 per share or an aggregate $21,098,000.
Prior to the redemption, the Series A preferred stock (20,093 shares) accrued and paid dividends at 5% per annum
until February 2014 and 9% per annum thereafter. Series B preferred stock (1,005 shares) accrued and paid
dividends at 9% per annum.
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.
Pursuant to the rights plan, the rights are issued to each common stockholder of record, and are exercisable only if
a person acquires, or announces a tender offer, that would result in ownership of 15% or more of BNCCORP’s
outstanding common stock. The rights plan was amended in 2011 such that it now expires on May 30, 2021.
NOTE 15. Regulatory Capital and Current Operating Environment
BNC and BNC Bank are subject to various regulatory capital requirements administered by the Federal banking
agencies. Failure to meet capital requirements mandated by regulators can trigger 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, BNC and BNC 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.
At December 31, 2016, our capital ratios exceeded all regulatory capital thresholds and maintained sufficient capital
conservation buffers to avoid limitations on certain types of capital distributions.
68
BNCCORP, INC. Annual Report 2016 The capital amounts and ratios presented below for December 31, 2016 and December 31, 2015 were as follows
(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
2016
Total Risk Based Capital:
Consolidated
$ 103,887
19.96 % $
41,646
≥8.0 % $
N/A
N/A % $
N/A
BNC National Bank
95,655
18.41
41,558
≥8.0
51,947
10.0
43,708
N/A %
8.41
Tier 1 Risk Based Capital:
Consolidated
BNC National Bank
Common Equity Tier 1 Risk
Based Capital:
Consolidated
BNC National Bank
Tier 1 Leverage Capital:
Consolidated
BNC National Bank
Tangible Common Equity
(to total assets):
Consolidated
BNC National Bank
2015
Total Risk Based Capital:
87,358
89,139
16.78
17.16
72,345
89,139
13.90
17.16
87,358
89,139
74,048
91,288
9.47
9.67
8.13
9.71
31,235
31,168
23,426
23,376
36,902
36,873
N/A
N/A
≥6.0
≥6.0
≥4.5
≥4.5
≥4.0
≥4.0
N/A
N/A
N/A
41,558
N/A
33,766
N/A
46,092
N/A
N/A
N/A
8.0
N/A
6.5
N/A
5.0
N/A
N/A
N/A
47,581
N/A
9.16
N/A
55,373
N/A
10.66
N/A
43,048
N/A
N/A
N/A
4.67
N/A
N/A
Consolidated
$
95,770
20.07 %
$ 38,172
≥8.0 %
$
N/A
N/A %
$
N/A
BNC National Bank
89,178
18.71
38,130
≥8.0
47,662
10.0
41,516
N/A %
8.71
Tier 1 Risk Based Capital:
Consolidated
BNC National Bank
Common Equity Tier 1 Risk
Based Capital:
Consolidated
BNC National Bank
Tier 1 Leverage Capital:
Consolidated
BNC National Bank
Tangible Common Equity
(to total assets):
Consolidated
BNC National Bank
79,773
83,187
16.72
17.45
64,758
83,187
13.57
17.45
79,773
83,187
68,860
87,733
9.00
9.45
7.62
9.71
28,629
28,597
21,472
21,448
35,471
35,212
N/A
N/A
≥6.0
≥6.0
≥4.5
≥4.5
≥4.0
≥4.0
N/A
N/A
N/A
38,130
N/A
30,980
N/A
44,015
N/A
N/A
N/A
8.0
N/A
6.5
N/A
5.0
N/A
N/A
N/A
45,057
N/A
9.45
N/A
52,207
N/A
10.95
N/A
39,172
N/A
N/A
N/A
4.45
N/A
N/A
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.
69
BNCCORP, INC. Annual Report 2016 NOTE 16. Fair Value Measurements
The following table summarizes the financial assets and liabilities of the Company for which fair values are
determined on a recurring basis as of December 31 (in thousands):
Carrying Value at December 31, 2016
Twelve Months
Ended
December 31, 2016
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
$
400,136
$
24,715
$
375,421
$
39,641
1,414
259
-
-
-
39,641
1,414
259
Total assets at fair value
$
441,450
$
24,715
$
416,735
$
LIABILITIES
Mortgage banking short positions
Total liabilities at fair value
$
$
53
53
$
$
-
-
$
$
53
53
$
$
-
-
-
-
-
-
-
$
$
$
$
729
(23)
(379)
342
669
(30)
(30)
Carrying Value at December 31, 2015
Twelve Months
Ended
December 31, 2015
Total
Level 1
Level 2
Level 3
Total gains/(losses)
ASSETS
Securities available for sale
Loans held for sale
Commitments to originate mortgage loans
$
419,346
$
32,649
$
386,697
$
50,445
1,859
-
-
50,445
1,859
Total assets at fair value
$
471,650
$
32,649
$
439,001
$
LIABILITIES
Commitments to sell mortgage loans
Mortgage banking short positions
Total liabilities at fair value
$
$
83
23
106
$
$
-
-
-
$
$
83
23
106
$
$
-
-
-
-
-
-
-
$
$
$
$
1,655
(151)
(185)
1,319
162
212
374
The Company sells 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.
For the periods presented, Treasury Securities were considered to be Level 1 while all other assets and liabilities
valued at fair value were considered to be Level 2. There were no transfers into or out of the respective levels during
the periods presented.
70
BNCCORP, INC. Annual Report 2016
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):
Impaired loans(1)
Other real estate(2)
Total
Impaired loans(1)
Other real estate(2)
Total
Total
Level 1
3,080
214
3,294
$
$
Total
Level 1
1,928
242
2,170
$
$
$
$
$
$
-
-
-
-
-
-
$
$
$
$
2016
Level 2
Level 3
Total gains/(losses)
3,080
214
3,294
$
$
-
-
-
$
$
(1,714)
4
(1,710)
2015
Level 2
Level 3
Total gains/(losses)
1,928
242
2,170
$
$
-
-
-
$
$
192
(7)
185
(1) The carrying value represents the book value less allocated reserves based on the appraised value of the collateral. The gain or loss
reported is the change in the reserve balances allocated on individual impaired loans in addition to the actual write-downs for the
period presented.
(2) The carrying value represents the fair value of the collateral less estimated selling costs and is based upon appraised values. The
gain or loss reported is a combination of gains and/or losses on sales of other real estate and provisions for other real estate losses.
At the beginning of the period, all assets and liabilities valued at fair value on a nonrecurring basis were considered
to be Level 2. There were no transfers into or out of Level 2 during the periods presented.
71
BNCCORP, INC. Annual Report 2016 NOTE 17. Fair Value of Financial Instruments
The estimated fair values of the Company’s financial instruments are as follows as of December 31
(in thousands):
Level in
Fair Value
Measurement
Hierarchy
December 31, 2016
December 31, 2015
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
Level 1
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
$
11,113
24,715
375,421
4,411
39,641
1,414
259
406,388
4,444
$
$
11,113
24,715
375,421
4,411
39,641
1,414
259
405,302
4,444
15,189
32,649
386,697
3,219
50,445
1,859
-
371,292
4,027
$
15,189
32,649
386,697
3,219
50,445
1,859
-
370,243
4,027
$
867,806
$
866,720
$
865,377
$
864,328
$
147,027
$
147,027
$
168,259
$
168,259
605,600
60,510
777
6,685
-
53
604,823
60,748
777
6,685
-
53
612,190
31,151
487
7,398
83
23
612,449
31,204
487
7,398
83
23
Level 2
15,013
10,292
15,015
9,426
$
835,665
$
830,405
$
834,606
$
829,329
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
Loans and leases held for investment,
net
Accrued interest receivable
Liabilities and Stockholders’ Equity:
Deposits, noninterest-bearing
Deposits, interest-bearing
Borrowings and advances
Accrued interest payable
Accrued expenses
Commitments to sell mortgage loans
Mortgage banking short positions
Guaranteed preferred beneficial
interests in Company’s subordinated
debentures
Financial instruments with off-balance-
sheet risk:
Commitments to extend credit
Standby and commercial letters of
credit
Level 2
Level 2
$
$
-
-
$
$
132
10
$
$
-
-
$
$
203
13
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.
72
BNCCORP, INC. Annual Report 2016 NOTE 18. Financial Instruments with Off-Balance-Sheet Risk
In the normal course of business, the Company is a party to various financial instruments with off-balance-sheet
risk, primarily to meet the needs of our customers as well as to manage our interest rate risk. These instruments,
which are issued by the Company for purposes other than trading, carry varying degrees of credit, interest rate or
liquidity risk in excess of the amounts reflected in the consolidated balance sheets.
Commitments to Extend Credit
Commitments to extend credit are agreements to lend to a customer, which are binding, provided there is no
violation of any condition in the contract, and generally have fixed expiration dates or other termination clauses.
The contractual amount represents the Bank’s exposure to credit loss in the event of default by the borrower. At
December 31, 2016, based on current information, no losses were anticipated as a result of these commitments. The
Bank manages this credit risk by using the same credit policies it applies to loans. Collateral is obtained to secure
commitments based on management’s credit assessment of the borrower. The collateral may include marketable
securities, receivables, inventory, equipment or real estate. Since the Bank expects many of the commitments to
expire without being drawn, total commitment amounts do not necessarily represent the Bank’s future liquidity
requirements related to such commitments.
In our mortgage banking operations, we commit to extend credit for purposes of originating residential loans. We
underwrite these commitments to determine whether each loan meets criteria established by the secondary market
for residential loans. See Note 1 and 16 to these consolidated financial statements for more information on financial
instruments and derivatives related to our mortgage banking operations.
Standby and Commercial Letters of Credit
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a
customer to a third party. Commercial letters of credit are issued on behalf of customers to ensure payment or
collection in connection with trade transactions. In the event of a customer’s nonperformance, the Bank’s credit
loss exposure is up to the letter’s contractual amount. At December 31, 2016, based on current information, no
losses were anticipated as a result of these commitments. Management assesses the borrower’s creditworthiness 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):
2016
2015
Fixed
Rate
Variable
Rate
Fixed
Rate
Variable
Rate
Commitments to extend credit
$
10,576
$
57,039
$
14,747
$
51,298
Standby and commercial letters of credit
561
421
585
709
In addition to the amounts in the table above, our mortgage banking commitments to fund loans totaled $84.6
million at December 31, 2016 and $94.3 million at December 31, 2015. Also, our mortgage banking commitments
to sell loans totaled $123.1 million at December 31, 2016 and $143.6 million at December 31, 2015.
73
BNCCORP, INC. Annual Report 2016
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):
Balance, beginning of period
Provision
Write offs, net
Balance, end of period
2016
2015
1,781
90
(532)
1,339
$
$
1,879
145
(243)
1,781
$
$
NOTE 19. Guarantees and Contingent Consideration
Guaranteed Preferred Beneficial Interests in Company’s Subordinated Debentures
BNCCORP fully and unconditionally guarantees the Company’s subordinated debentures.
Performance and Financial Standby Letters of Credit
As of December 31, 2016 and 2015, the Bank had outstanding $172 thousand and $131 thousand, respectively, of
performance standby letters of credit and $3.2 million and $5.5 million, respectively, of financial standby letters of
credit. Performance standby letters of credit are irrevocable obligations to the beneficiary on the part of the Bank
to make payment on account in an event of default by the account party in the performance of a nonfinancial or
commercial obligation. Financial standby letters of credit are irrevocable obligations to the beneficiary on the part
of the Bank to repay money for the account of the account party or to make payment on account of any indebtedness
undertaken by the account party, in the event that the account party fails to fulfill its obligation to the beneficiary.
Under these arrangements, the Bank could, in the event of the account party’s nonperformance, be required to pay
a maximum of the amount of issued letters of credit. The Bank has recourse against the account party up to and
including the amount of the performance standby letter of credit. The Bank evaluates each account party’s
creditworthiness on a case-by-case basis and the amount of collateral obtained varies and is based on management’s
credit evaluation of the account party.
NOTE 20. Related-Party/Affiliate Transactions
The Bank has entered into transactions with related parties, such as opening deposit accounts for and extending
credit to employees of the Company. The related party transactions have been made under terms substantially the
same as those offered by the Bank to unrelated parties.
In the normal course of business, loans are granted to, and deposits are received from, executive officers, directors,
principal stockholders and associates of such persons. The aggregate dollar amount of these loans was $1.5 million
and $2.3 million at December 31, 2016 and 2015, respectively. Advances of loans to related parties in 2016 and
2015 totaled $74 thousand and $486 thousand, respectively. Loan pay downs and other reductions by related parties
in 2016 and 2015 were $821 thousand and $1.5 million, respectively. Commitments to extend credit to related
parties increased to $278 thousand at December 31, 2016 from $179 thousand at December 31, 2015. The total
amount of deposits received from these parties was $764 thousand at December 31, 2016 and $2.7 million at
December 31, 2015. 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
74
BNCCORP, INC. Annual Report 2016 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, 2016, BNCCORP and its
affiliates were in compliance with these requirements.
NOTE 21. Income Taxes
The expense (benefit) for income taxes on operations consists of the following for the years ended December 31 (in
thousands):
Current:
Federal
State
Deferred:
Federal
State
Total
2016
2015
$
$
1,968
363
2,331
215
85
300
2,631
$
$
3,528
565
4,093
(182)
34
(148)
3,945
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
Bank-owned life insurance
Other, net
Total
2016
2015
$
$
3,328
296
(901)
(150)
58
2,631
$
$
4,471
395
(910)
(148)
137
3,945
75
BNCCORP, INC. Annual Report 2016
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
Compensation
Acquired intangibles
Net operating loss carryforwards
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
2016
2015
$
$
3,413
560
193
20
74
316
4,576
459
16
721
250
1,446
3,130
(14)
$
3,116
$
3,808
562
199
21
65
204
4,859
1,929
13
727
229
2,898
1,961
(14)
1,947
Subject to certain limiting statutes, the Company is able to carry forward state tax net operating losses aggregating
$483 thousand as of December 31, 2016. The state net operating losses expire between 2017 and 2031.
The Company files consolidated federal and unitary state income tax returns where allowed. Tax years ended
December 31, 2013 through 2016 remain open to federal examination. Tax years ended December 31, 2012 through
2016 remain open to state examinations.
NOTE 22. Earnings Per Share
The following table shows the amounts used in computing per share results (in thousands, except share and per
share data):
Denominator for basic earnings per share:
Average common shares outstanding
Dilutive effect of stock compensation
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
76
2016
2015
3,447,635
73,183
3,520,818
7,156
-
7,156
2.08
2.03
$
$
$
$
3,386,600
111,140
3,497,740
9,206
1,656
7,550
2.23
2.16
$
$
$
$
BNCCORP, INC. Annual Report 2016 NOTE 23. Benefit Plans
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 2016 and 2015, 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 $599,000 and $559,000 for 2016 and 2015, 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, 2016, the assets in the plan totaled $21.9 million and included
$789,000 (30,000 shares) invested in BNCCORP common stock. At December 31, 2015, the assets in the plan
totaled $19.6 million and included $570,000 (35,000 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.
During 2015, the Company adopted a non-qualified deferred compensation plan for the benefit of select employees.
The plan structure permits the Company to make discretionary awards into an in-service account or a retirement
account of a plan participant established under the plan. BNC recognizes the expense for discretionary awards in
the period it commits to such awards. Additionally, plan participants may defer some or all of their annual incentive
awards into their in-service accounts. Company discretionary awards to the participant’s in-service account are
generally vested 50% upon initial participation with the remainder vesting over 5 years. A participant’s retirement
account generally vests 50% upon an initial contribution and thereafter over 10 years. Participants may allocate
their in-service account balance among a fixed number of investment options. The value of the payout from the in-
service account will depend on the performance of such investment options. Company discretionary awards into a
participant’s retirement account are denominated in shares of BNC common stock and upon retirement, the plan
participant will receive the number of shares of BNC common stock credited to the participant’s retirement account
at that time. A separate Rabbi Trust has been established by the Company to hedge the change in value of this
liability. Assets in the trust hedging in-service liabilities are recorded in other assets. BNC stock held in the trust
related to the Company’s retirement account obligation is recorded in treasury stock and equates to 19,500 shares
as of December 31, 2016 and 11,000 shares as of December 31, 2015. As of December 31, 2016, the plan obligation
totaled $665 thousand and $330 thousand as of December 31, 2015.
In December of 2015, the Company adopted a non-qualified deferred compensation plan for directors of
BNCCORP. Effective with 2016 service, a director may voluntarily make contributions of earned director
compensation to a deferred account that is ultimately payable with BNCCORP, INC. common stock at the time of
separation from service with the Company.
77
BNCCORP, INC. Annual Report 2016 NOTE 24. 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, 2016 and 2015 was $1.1 million and $975,000, respectively, for
facilities, and $8,000 and $20,000, respectively, for equipment and other items. At December 31, 2016, the total
minimum annual base lease payments for operating leases were as follows (in thousands):
$
2017
2018
2019
2020
2021
Thereafter
956
531
519
407
296
938
NOTE 25. Share-Based Compensation
The Company has four share-based plans for certain key employees and directors whereby shares of common stock
have been reserved for awards in the form of stock options, restricted stock, or common stock equivalent 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, 2016 are as follows:
Total Shares in Plan
Total Shares Available
1995
250,000
48,751
2002
125,000
-
2010
2015
Total
250,000
250,000
50,000
44,629
675,000
343,380
The Company recognized share-based compensation expense of $94,000 and $136,000 for the years ended
December 31, 2016 and 2015, respectively, related to restricted stock.
The tax benefits associated with share-based compensation was approximately $74,000 for the year ended
December 31, 2016 and was approximately $59,000 for the year ended December 31, 2015.
At December 31, 2016, the Company had $18,000 of unamortized restricted stock compensation. At December 31,
2015, the Company had $111,000 of unamortized restricted stock compensation. Restricted shares of stock granted
generally have vesting and amortization periods of at least three years.
Following is a summary of restricted stock activities for the years ended December 31:
2016
2015
Number
Restricted
Stock
Shares
14,334
-
(11,000)
-
3,334
Weighted
Average
Grant Date
Fair Value
$
12.91
-
12.41
-
14.06
Number
Restricted
Stock
Shares
27,667
2,000
(15,333)
-
14,334
Weighted
Average
Grant Date
Fair Value
$
12.29
16.65
12.28
-
12.91
Nonvested, beginning of year
Granted
Vested
Forfeited
Nonvested, end of year
78
BNCCORP, INC. Annual Report 2016
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, 2016 and
2015, respectively, related to stock options. At December 31, 2016, 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, 2016:
Number
Weighted-average exercise price
Weighted-average remaining contractual term
Stock Options
Outstanding
75,600
$3.00
3.20 years
Stock Options
Currently
Exercisable
75,600
$3.00
3.20 years
Stock Options
Vested and
Expected to Vest
75,600
$3.00
3.20 years
Following is a summary of stock option transactions for the years ended December 31:
2016
2015
Options to
Purchase
Shares
Outstanding, beginning of year
Granted
Exercised
Forfeited
Outstanding, end of year
Exercisable, end of year
Weighted average fair value of options:
Granted
Exercised
Forfeited
$
$
$
107,200
-
(31,600)
-
75,600
75,600
-
1.47
-
Weighted
Average
Exercise Price
$
3.00
-
3.00
3.00
3.00
$
$
$
Weighted
Average
Exercise Price
$
3.00
-
3.00
-
3.00
3.00
Options to
Purchase
Shares
125,800
-
(18,600)
-
107,200
107,200
-
1.47
-
Following is a summary of the status of options outstanding at December 31, 2016:
Outstanding Options
Exercisable Options
Weighted
Average
Remaining
Contractual
Life
Weighted
Average
Exercise
Price
Weighted
Average
Exercise
Price
Number
Options with exercise prices of:
Number
$
3.00
75,600
3.20 years
$
3.00
75,600 $
3.00
79
BNCCORP, INC. Annual Report 2016
NOTE 26. Condensed Financial Information-Parent Company Only
Condensed financial information of BNCCORP, INC. on a parent company only basis is as follows:
Parent Company Only
Condensed Balance Sheets
As of December 31
(In thousands, except per share data)
Assets:
Cash and cash equivalents
Investment in subsidiaries
Receivable from subsidiaries
Other
Total assets
Liabilities and stockholders’ equity:
Subordinated debentures
Long-term borrowings
Payable to subsidiaries
Accrued expenses and other liabilities
Total liabilities
Common stock, $.01 par value – Authorized 35,000,000 shares; 3,456,008 and
3,428,416 shares issued and outstanding
Capital surplus – common stock
Retained earnings
Treasury stock (212,645 and 240,237 shares, respectively)
Accumulated other comprehensive loss, net of income taxes
Total stockholders’ equity
Total liabilities and stockholders’ equity
2016
2015
4,165
89,304
3,333
1,108
97,910
15,013
10,000
119
717
25,849
35
25,996
49,328
(2,847)
(451)
72,061
97,910
$
$
$
$
5,351
83,332
964
482
90,129
15,015
10,000
54
604
25,673
34
25,979
42,172
(3,278)
(451)
64,456
90,129
$
$
$
$
80
BNCCORP, INC. Annual Report 2016 Parent Company Only
Condensed Statements of Income
For the Years Ended December 31
(In thousands)
2016
2015
$
1,875
$
1,820
Income:
Management fee income
Interest
Other
Total income
Expenses:
Interest
Salaries and benefits
Legal and other professional
Other
Total expenses
Loss before income tax benefit and equity in earnings of subsidiaries
Income tax benefit
Loss before equity in earnings of subsidiaries
Equity in earnings of subsidiaries
Net income
$
6
12
1,893
958
1,593
571
769
3,891
(1,998)
684
(1,314)
8,470
7,156
$
4
9
1,833
394
1,404
603
779
3,180
(1,347)
330
(1,017)
10,223
9,206
81
BNCCORP, INC. Annual Report 2016 Parent Company Only
Condensed Statements of Cash Flows
For the Years Ended December 31
(In thousands)
Operating activities:
Net income
Adjustments to reconcile net income to net cash used in operating activities -
2016
2015
$
7,156
$
9,206
Equity in earnings of subsidiaries
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:
Redemption of preferred stock
Dividends paid on preferred stock
Increase in long-term borrowings
Net cash used in financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental cash flow information:
Interest paid
Income taxes paid
(8,470)
449
(2,996)
175
(3,686)
2,500
2,500
-
-
-
-
(1,186)
5,351
4,165
1,007
2,935
$
$
$
(10,223)
291
(57)
(54)
(837)
13,000
13,000
(21,098)
(1,908)
10,000
(13,006)
(843)
6,194
5,351
527
3,463
$
$
$
82
BNCCORP, INC. Annual Report 2016 NOTE 27. Subsequent Events
The Company has evaluated subsequent events from the balance sheet date through March 23, 2017, the date at
which the consolidated financial statements were available to be issued, and determined there are no other items to
record or disclose related to subsequent events.
83
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86
BNCCORP, INC. Annual Report 2016 CORPORATE DATA
Investor Relations
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
Daniel Collins
Chief Financial Offi cer
612-305-2210
Timothy J. Franz
President/CEO
612-305-2213
Annual Meeting
The 2017 annual meeting of stockholders will be
held on Wednesday, June 21, 2017 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,
2015(1)
Low
2016(1)
High
Low High
First Quarter
$16.40 $14.26 $17.10 $15.30
Second Quarter $15.50 $14.80 $17.20 $15.09
Third Quarter $21.00 $15.25 $17.35 $16.00
Fourth Quarter $26.35 $20.10 $16.85 $15.95
(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, LLC
6201 15th Avenue
Brooklyn, NY 11219
(800) 937-5449
Corporate Broker
D. A. Davidson Community Banking and
Wealth Management Group
1-800-288-2811
cbwm@dadco.com
Directors, BNCCORP, INC.
Tracy Scott
Chairman of the Board and
Retired Co-Founder of BNCCORP, INC.
Timothy J. Franz
President and
Chief Executive Offi cer 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.
Michael O’Rourke
Attorney / Author
Directors, BNC National Bank
Doug Brendel
Shawn Cleveland
Daniel J. Collins
Timothy J. Franz
Dave Hoekstra
Mark E. Peiler
Scott Spillman
Cheryl A. Stanton
Bank Branches – North Dakota:
Bismarck Main(2)
322 East Main Avenue
Bismarck, ND 58501
Bismarck South
219 South 3rd Street
Bismarck, ND 58504
Bismarck North(2)
801 East Century Avenue
Bismarck, ND 58503
Bismarck Sunrise(2)
3000 Yorktown Drive
Bismarck, ND 58503
Primrose Assisted Living Apartments
1144 College Drive
Bismarck, ND 58501
Touchmark on West Century
1000 West Century Avenue
Bismarck, ND 58503
Crosby
206 South 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(2)
2711 Sunset Drive NW
Mandan, ND 58554
Bank Branches – Arizona
Glendale – Charter Address
20175 North 67th Avenue
Glendale, AZ 85308
Perimeter
17550 North Perimeter Drive
Scottsdale, AZ 85255
Bank Branches – Minnesota
Golden Valley(2)
650 North Douglas Drive
Golden Valley, MN 55422
Mortgage Banking Offi ces:
Glendale
6685 W. Beardsley
Glendale, AZ 85383
Bloomington
7201 West 78th Street
Bloomington, MN 55439
Wichita
2868 North Ridge Road
Wichita, KS 67205
Wichita
12031 East 13th Street
Wichita, KS 67206
McPherson
1345 N Main Street
McPherson, KS 67460
Overland Park
7007 College Boulevard
Overland Park, KS 66211
Moline
800 36th Avenue
Moline, IL 61265
Lee’s Summit
600 SW Jefferson
Lee’s Summit, Missouri 64063
Lebanon
1403 West Elm Street
Lebanon, Missouri 65336
(2) Bank branches offering mortgage banking
services.
87
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 17 locations. BNC also
conducts mortgage banking from 14 locations in Arizona, Minnesota,
North Dakota, Illinois, Kansas, and Missouri.
BNCCORP, INC. Annual Report 2016
88
BNCCORP, INC. Annual Report 20162016ANNUAL REPORT