2017
ANNUALREPORT BNCCORP, INC. (BNCCORP or the Company) is a bank holding
company registered under the Bank Holding Company Act of
1956 headquartered in Bismarck, North Dakota. It is the parent
company of BNC National Bank (the Bank). The Company operates
community banking and wealth management businesses in North
Dakota, Arizona and Minnesota from 15 locations. BNC also
conducts mortgage banking from 13 locations in Arizona, Minnesota,
North Dakota, Illinois, Kansas, and Missouri.
CORPORATE PROFILE:
THE BUSINESS OF BNC
BNC (or the Company) 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, we serve the agricultural communities of central
North Dakota. In recent years, our banking presence in Phoenix, Arizona has grown
significantly. By operating banking locations in Phoenix and Minnesota we 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, 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 channel
emphasizes the use of technology, including internet-generated leads and a call
center, to originate loans throughout the U.S. The retail channel 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.
1
BNCCORP, INC. Annual Report 2017 Timothy J. Franz
President and Chief Executive Officer
TO OUR COMMUNITY, SHAREHOLDERS,
CUSTOMERS AND EMPLOYEES:
The dictionary definition of a bank is, “an establishment authorized to act as an
intermediary in financial transactions and provide other services to its customers.”
While this definition may be functionally accurate, it lacks passion, a sense of
community, and the value that comes from building customer-focused relationships.
Furthermore, it certainly does not describe a place where I would entrust my family’s
financial well-being, or where I would turn for critical business needs.
At BNC, we are defined by a clear purpose and commitment. We are a community
bank energized by people who are driven to improve the communities where they live,
and we create value by delivering relationship-based services.
In 2017, as in years past, our focus on serving the needs of our community and
nurturing strong financial relationships led to solid performance. BNC’s financial and
operating results were distinguished by exceptional deposit growth, solid loan growth,
and significant expansion in wealth management assets. We also continued to manage
our business in an entrepreneurial and resourceful manner, streamlining operations
and costs in areas such as mortgage banking.
Most importantly, our team is united by the common purpose of providing
relationship-based services that create value for clients and shareholders, as well
as a commitment to community participation. We will showcase examples of our
relationship-based client service and community engagement throughout this report.
The Power of Relationship-Based Banking
Serving the needs of small and medium sized businesses is a
primary focus for BNC. The foundation of our approach
to this market niche is relationship-based business banking.
Our bankers invest time with our clients and their businesses,
so we can deliver a high level of customer service and be
a valued partner. We’re at the business owner’s side to provide
thoughtful solutions tailored to their needs, not simple,
standardized financial products and services. As a business-
focused community bank, our strategic advantage is that
we can be more nimble than large banks – thinking “outside
the box” to offer flexible approaches to business challenges
and opportunities.
While enabling a more personalized level of customer service,
relationship-based banking also enhances shareholder value.
Our model leads to stable, enduring client relationships
that grow over time, as customers turn to us for additional
products and services when their needs evolve. BNC has
business customer relationships and trust accounts that have
lasted for decades; for example, our wealth management
division has serviced the same family for four generations.
BNC employees preparing to transport over 18,000 employee-donated
food items to a local food bank.
2
BNCCORP, INC. Annual Report 2017 BNC’s approach to customer service is “high-touch,” but clients also benefit
from access to advances in banking technology. For example, we offer mobile
wallet services, mobile phone based transaction capabilities, and online banking.
Unfortunately, cybersecurity threats are routine in the current environment, which
is why we support our services with a robust systems, operational and information
security infrastructure.
An Entrepreneurial Bank for
Entrepreneurial Customers
At BNC, we share our clients’ entrepreneurial spirit. We know
how important it is to be agile and flexible in responding to
– and even anticipating – customers’ needs in a fast-changing
business climate. We partner with our clients to provide
them with the products, services, and enterprising thought
that enables them to fulfill their dreams. Our entrepreneurial
approach and dedication to relationship-based banking are
evident in the following “real world” examples of community
banking in action.
▪
▪
Several decades ago, a young man in North Dakota had
the vision to recognize that energy deregulation would
create opportunity. He created a new business to compete
against large-scale utilities by providing energy to local
municipalities and businesses. Today, that business has
grown to a size, scope and complexity that would have
been hard to imagine some years ago. BNC, the banking
partner from the beginning, has helped this long-term
client grow every step of the way.
After spending years in the field acquiring the skills
needed to survive and succeed on a mission, a retired
Army Special Forces disabled veteran wanted to start
a company in Arizona to train active duty military
personnel in the same skills. His company won a
significant U.S. military contract, but needed working
capital to fund the contract. BNC partnered with this
distinguished veteran to provide financing using a little-
known SBA program. His company is now an approved
“prime” contractor and well positioned for future
contracts that will drive the growth of the business and
provide critical training to save the lives of American
service men and women.
Over 30 BNC employees serve 473 meals at a community based food shelf
that provides meals and fellowship to hundreds of people each week.
3
BNCCORP, INC. Annual Report 2017 ▪
▪
For the new owner of a book publishing company in Minneapolis, a weekend trip to the neighborhood
grocery store resulted in a chance encounter with a familiar face: a BNC banker. While her publishing
business self-finances and is unlikely to need a bank loan, she believed the BNC banker could provide
business advice tailored to her circumstances. After a quickly arranged visit to discuss her new business,
BNC is now home to her business deposits.
The owner of a business was working with a “big box bank” – only to be transferred to the loan workout
group when the business hit tough times. This owner, realizing that a community bank would understand
the difference between a short-term event and a broken business, turned to BNC. We listened and
provided a solution, by refinancing via loans that fit the circumstances of the business while freeing the
owner from burdensome debt.
In each of these cases, and many more, BNC worked side-by-side with the business owners to deliver
solutions to help them succeed. As a community bank, we are able to be more responsive than the generic
“big box bank”. That responsiveness, combined with our customer-centric focus, represents a strategic
advantage. When we do community banking right, we help our customers grow – which helps our own
business grow in turn and creates value for our shareholders.
2017 Financial Performance
Net income was $4.9 million, or $1.38 per diluted share, for 2017. This included a $1.2 million tax charge
to revalue net deferred tax assets as a result of tax reform, as well as the sale of certain securities at an
Book Value per Share (Excluding OCI)
2011
2012
2013
2014
2015 2016
2017
Core Deposits (in millions)
$25.00
$20.00
$15.00
$10.00
$5.00
$-
$900
$780
$660
$540
$420
$300
2012
2013
2014
2015
2016
2017
4
after-tax loss of $307,000 to maximize federal tax deductibility.
Excluding these events linked to tax reform, BNC’s adjusted
net income would have been $6.4 million, or $1.81 per diluted
share. Net income in 2016 was $7.2 million, or $2.03 per diluted
share. The trend in net income from 2016 to 2017 was largely
due to an $8.2 million decrease in mortgage banking income,
which was partly offset by higher net interest income and reduced
non-interest expenses. The 2017 results also demonstrated
BNC’s entrepreneurial and resourceful spirit in driving value for
shareholders as we sold a branch for an $864,000 gain and received
settlement funds related to litigation. We reduced our operating
expenses by more than $2.0 million, as we right-sized mortgage-
banking operations and contained costs across all lines of business.
Our earnings and return on average equity in 2017 did not quite
measure up to the exceptionally strong results of the period from
2013 to 2016, when our average return on equity was 12.5%.
The 2017 results were due in part to a very difficult market for
mortgage banking due to compressed margins and higher interest
rates, and continued softness in commodity pricing, which negatively
influenced the markets we serve in North Dakota. As a result of
these challenges, our adjusted return on equity was a more modest
8.5% in 2017. That said, we focused sharply on the factors under our
control. We improved banking operations, resulting in a
BNCCORP, INC. Annual Report 2017 7.1% increase in net interest income, while reducing non-
interest expenses 5.0%, which should provide a strong
foundation for future profitable growth. We also continued to
increase BNC’s book value per share to $22.40 at the end of
2017, which compares very favorably to our book value per
share of $5.35 at the end of 2011.
Total assets were $946.1 million at December 31, 2017,
increasing 3.9% from a year earlier. Loans held for investment
totaled $428.3 million at the end of 2017, an increase of 3.3%
year-over-year. The modest loan growth was impacted by
sizeable loan prepayments from borrowers in North Dakota,
who opted to deleverage in response to market conditions.
Importantly, we enjoyed strong growth in total deposits during
2017, which rose 8.7% to $817.8 million at December 31,
2017. This reflected especially robust growth in core deposits,
which increased 9.2% after considering the December 2017
sale of a North Dakota bank branch. Growing deposits in a
cost effective manner is a key value proposition for community
banks. BNC remains a deposit-rich franchise and the continued growth in deposits during
2017 notably improved the results of operations and created value for shareholders.
We are also pleased with the significant increase in trust assets under management
or administration, which rose 17.4%, to $321.3 million at December 31, 2017. Our
customers, particularly business owners, are generating wealth for themselves and, with
increasing frequency, we are helping them manage their wealth.
“Team BNC” employees support those who cannot walk for themselves at the
Walk to Defeat ALS fundraiser, directly supporting ALS education and
access to care services.
Asset quality remained strong. Nonperforming assets were $2.0 million at December 31,
2017, down from $2.7 million a year earlier. The ratio of nonperforming assets to total
assets was 0.21% at December 31, 2017, down from 0.29% at December 31, 2016.
Great People Make the Difference
The success of BNC’s community banking model – and of the Company overall –
depends largely on the skill, professionalism and dedication of our people. We have
been fortunate to attract and retain talented people who are passionate about serving
their community and customers. They are aligned with our relationship-based approach
and work as a united team, each and every day. We think we have one of the most
experienced teams in our core market area, and are proud that 30% of our banking
operations employees have been with the Company for 10 years or more.
Committed to Our Communities
BNC and its employees recognize the connection between community banking and the
vibrancy of our local neighborhoods. Our obligation is to provide financial services to
individuals and businesses and to support activities that enhance the places where we,
our team members and our customers live and work. That is why BNC enthusiastically
5
BNCCORP, INC. Annual Report 2017 invests in arts, education, business development and youth programs that bring vitality
to our communities. Our people also embrace this vision and devote their time and
talent to community activities of all kinds. Pictured on these pages are some of the
many community organizations which we were involved in the past year.
Looking Ahead
As we look toward the future, there are many reasons for an optimistic outlook.
Generally speaking, global and national economic conditions appear to be
strengthening. The recent U.S. tax reform legislation bodes well for many individuals
and businesses, including BNC. At the same time, the trend toward less restrictive
government regulation, particularly in the banking industry, should be a positive in
terms of our cost structure and competitiveness.
Most importantly, at BNC our fundamentals are strong. We have a relationship-
based banking model that works, and delivers value for our clients, communities and
shareholders. We have resilient, profitable businesses supported by a solid capital
foundation. And we have a team of talented people who are on the front lines each
and every day, doing their jobs with professionalism, energy and passion. We thank
our colleagues for their hard work and integrity, our board members for their guidance,
our shareholders for their investment, and our customers and community for their
loyalty and trust.
Sincerely,
Timothy J. Franz
President and Chief Executive Officer
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 2017 ____________________________
Year End Financial Report
____________________________
For the Year Ended December 31, 2017
BNCCORP, INC.
(OTCQX: BNCC)
322 East Main
Bismarck, North Dakota 58501
(701) 250-3040
7
7
BNCCORP, INC. Annual Report 2017
BNCCORP, INC.
INDEX TO YEAR END FINANCIAL REPORT
December 31, 2017
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
8
BNCCORP, INC. Annual Report 2017 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,
2017
2016
2015
2014
2013
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 (1)
Net income (1)
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 common equity ratio
Earnings Performance / Share Data:
Return on average total assets (1)
Return on average common stockholders’ equity, excluding accumulated
other comprehensive income (1)
Efficiency ratio
Net interest margin
Net interest spread
Basic earnings per common share (1)
Diluted earnings per common share (1)
Average common shares outstanding
Average common and common equivalent shares
Shares outstanding at year end
Other Key Ratios
Nonperforming assets to total assets
Nonperforming loans to total assets
Nonperforming loans to loans and leases held for investment
Allowance for credit losses to total loans
$
$
$
$
$
$
$
$
31,443
$
29,346
$
27,915
$
29,264
$
3,578
27,865
350
19,499
39,116
3,020
4,878
-
4,878
$
$
3,343
26,003
800
25,777
41,193
2,631
7,156
-
7,156
$
$
2,570
25,345
(400)
24,950
37,544
3,945
9,206
1,656
7,550
$
$
3,308
25,956
(800)
20,454
34,683
4,071
8,456
1,796
6,660
$
$
946,150
$
910,400
$
904,246
$
934,419
$
411,917
36,601
428,325
(7,861)
817,806
835,850
18,043
-
10,000
15,011
-
77,626
22.40
22.38
8.18%
$
$
400,136
39,641
414,673
(8,285)
752,627
765,138
12,510
38,000
10,000
15,013
-
74,195
21.47
20.98
8.13%
$
$
419,346
50,445
379,903
(8,611)
780,449
760,937
13,851
7,300
10,000
15,015
-
68,988
20.12
18.93
7.62%
$
$
449,333
47,109
360,789
(8,601)
811,231
773,279
16,002
-
-
15,018
21,098
62,390
18.28
16.72
6.67%
$
$
23,706
3,861
19,845
700
29,285
35,981
3,822
8,627
1,320
7,307
843,123
435,719
32,870
317,928
(9,847)
723,229
678,670
19,967
-
-
22,432
21,098
48,767
14.45
14.89
5.78%
0.50%
0.78%
1.01%
0.94%
1.07%
6.45%
82.59%
3.05%
2.92%
10.35%
79.55%
3.03%
2.93%
12.21%
74.65%
2.96%
2.86%
12.37%
74.73%
3.07%
2.97%
1.40
1.38
$
$
2.08
2.03
$
$
2.23
2.16
$
$
1.98
1.91
$
$
3,474,988
3,540,698
3,465,992
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
0.21%
0.21%
0.46%
1.69%
0.29%
0.27%
0.59%
1.82%
0.09%
0.06%
0.15%
2.00%
0.03%
0.01%
0.02%
2.11%
15.15%
73.24%
2.65%
2.54%
2.22
2.11
3,297,235
3,468,390
3,374,601
0.79%
0.67%
1.77%
2.81%
(1) The 2017 results include amounts linked to tax reform legislation aggregating $1.515 million. Excluding the impact of these amounts, the Company’s would have reported
income tax expense of $1.505 million and net income of $6.393 million. Return on average total assets would have been 8.46% and Return on average common
stockholder’s equity would have been 0.66%. Basic and diluted earnings per share would be $1.84 and $1.81, respectively.
9
9
BNCCORP, INC. Annual Report 2017 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
Basic earnings per common share
Diluted earnings per common share
Average common shares:
Basic
Diluted
First
Quarter
Second
Quarter
2017
Third
Quarter
Fourth
Quarter
YTD
$
7,314
$
7,901
$
8,219
$
8,009
$
31,443
781
6,533
-
6,533
4,747
9,858
1,422
361
862
7,039
150
6,889
5,157
10,131
1,915
480
962
7,257
100
7,157
5,180
9,576
2,761
708
973
7,036
100
6,936
4,415
9,551
1,800
1,471
1,061
$
1,435
$
2,053
$
329
$
3,578
27,865
350
27,515
19,499
39,116
7,898
3,020
4,878
0.31
0.30
$
$
0.41
0.41
$
$
0.59
0.58
$
$
0.09
0.09
$
$
1.40
1.38
$
$
$
3,472,401
3,473,025
3,477,916
3,482,527
3,474,988
3,541,246
3,540,264
3,542,989
3,544,209
3,540,698
10
10
BNCCORP, INC. Annual Report 2017 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
Basic earnings per common share
Diluted earnings per common share
Average common shares:
Basic
Diluted
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
10,628
2,949
914
776
6,632
400
6,232
7,759
10,718
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
0.41
0.40
$
$
0.59
0.58
$
$
0.65
0.64
$
$
0.42
0.41
$
$
2.08
2.03
$
$
$
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
11
11
BNCCORP, INC. Annual Report 2017 Operating Strategy
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 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
12
BNCCORP, INC. Annual Report 2017 Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Overview
The following table summarizes selected income statement data and earnings per share data (in thousands, except
per share data):
SELECTED INCOME STATEMENT DATA
Interest income
Interest expense
Net interest income
Provision for credit losses
Non-interest income
Non-interest expense
Income before income taxes
Income tax expense
Net income
EARNINGS PER SHARE DATA
Basic earnings per common share
Diluted earnings per common share
The following is a brief overview of recent periods:
2017
2016
$
$
$
$
31,443
3,578
27,865
350
19,499
39,116
7,898
3,020
4,878
1.40
1.38
$
$
$
$
29,346
3,343
26,003
800
25,777
41,193
9,787
2,631
7,156
2.08
2.03
In 2017, net interest income increased 7.2% from 2016 due primarily to higher loans held for investment
balances and investment balances as well as higher yields on investment securities.
Non-interest income decreased $6.3 million, or 24.4%, in 2017, compared to 2016. The decrease primarily
relates to a 41.9% decrease in mortgage banking revenue, which was partially offset by increased gains on
sales of loans of $502 thousand, a gain on the sale of a bank branch of $864 thousand, and receipt of
litigation settlement funds.
Credit quality remained steady in 2017. At December 31, 2017, our non-performing assets were 0.21% of
total assets, compared to 0.29% at December 31, 2016.
Non-interest expense decreased by $2.1 million, or 5.0%, in 2017. Salaries and employee benefits decreased
$938 thousand, or 4.4%, as headcount decreased related to mortgage support staff as the business was being
right-sized to fit current revenues. Professional services expense decreased $653 thousand, or 14.3%, in
response to significantly lower mortgage loan production and reduced legal expenses. Marketing and
promotion expenses decreased $351 thousand, or 9.2%, primarily related to lower mortgage activity.
In 2017, the effective tax rate increased to 38.2% from 26.9% in 2016. The increase is primarily due to the
Company recording $1.208 million of income tax expense to revalue net deferred tax assets as a result of
the December 22, 2017 Tax Cuts and Jobs Act that reduced the federal tax rate to 21.0% beginning January
1, 2018. Excluding the effect of the revaluation adjustment, the effective rate would have been 22.9%.
13
13
BNCCORP, INC. Annual Report 2017 General
Net income in 2017 was $4.878 million compared to net income of $7.156 million in 2016. Earnings per diluted
share was $1.38 in 2017 and $2.03 in 2016.
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,
2016
Interest
earned
or owed
2017
Interest
earned
or owed
2015
Interest
earned
or owed
Average
yield or
cost
Average
yield or
cost
Average
yield or
cost
Average
balance
Average
balance
Average
balance
Assets
Federal funds sold/interest-bearing due
from banks
$
38,367 $
$
$
Taxable investments
Tax-exempt investments
Loans held for sale-mortgage banking
Loans and leases held for investment
Allowance for credit losses
Total interest-earning assets
Non-interest-earning assets:
Cash and due from banks
Other
Total assets
Liabilities and Stockholders’ Equity
Deposits:
Interest checking and money
market accounts
Savings
Certificates of deposit
Total interest-bearing deposits
Borrowings:
Short-term borrowings
FHLB advances
Long-term borrowings
Subordinated debentures
Total interest-bearing liabilities
Non-interest-bearing demand
accounts
Total deposits and interest-bearing
liabilities
Other non-interest-bearing liabilities
Total liabilities
Stockholders’ equity
Total liabilities and
345,621
90,324
27,271
420,906
(7,949)
914,540
8,901
47,591
971,032
487,063 $
35,067
158,266
680,396
14,732
1,903
10,000
15,012
722,043
163,603
885,646
6,967
892,613
78,419
416
7,546
2,695
1,009
19,777
-
31,443
1.08% $
2.18%
2.98%
3.70%
4.70%
0.00%
3.42%
1,937 $
324,350
91,431
49,944
399,669
(8,562)
858,769
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%
8,774
46,474
914,017
$
9,150
43,214
909,351
$
953
11
1,545
2,509
27
16
635
391
3,578
-
0.20% $
0.03%
0.98%
0.37%
424,393 $
32,146
150,720
607,259
0.18%
0.84%
6.35%
2.60%
0.50%
0.00%
13,919
36,942
10,000
15,013
683,133
145,842
828,975
9,525
838,500
75,517
571
10
1,593
2,174
22
198
634
315
3,343
-
0.13% $
0.03%
1.06%
0.36%
430,838 $
29,724
153,168
613,730
0.16%
0.54%
6.34%
2.10%
0.49%
0.00%
16,299
3,357
2,016
15,016
650,418
163,755
814,173
9,428
823,601
85,750
530
9
1,609
2,148
26
10
128
258
2,570
-
0.12%
0.03%
1.05%
0.35%
0.16%
0.30%
6.35%
1.72%
0.40%
0.00%
stockholders’ equity
$
971,032
$
914,017
$
909,351
Net interest income
$
27,865
$
26,003
$
25,345
Net interest spread
Net interest margin
2.92%
3.05%
2.93%
3.03%
2.86%
2.96%
Ratio of average interest-earning assets
to average interest-bearing liabilities
126.66%
125.71%
131.76%
14
14
BNCCORP, INC. Annual Report 2017 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,
2017 Compared to 2016
For the Years Ended December 31,
2016 Compared to 2015
Change Due to
Change Due to
Volume
Rate
Total
Volume
Rate
Total
Interest Earned on Interest-
Earning Assets
Federal funds sold/interest-bearing
due from banks
$
Taxable investments
Tax-exempt investments
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
Short-term borrowings
FHLB advances
Long-term borrowings
Subordinated debentures
Total increase (decrease) in
interest expense
Increase (decrease) in net interest
$
388
386
(33)
$
17
1,033
24
(823)
946
183
(24)
$
405
1,419
(9)
(640)
922
$
(72)
(627)
119
104
2,314
$
33
205
(121)
(58)
(466)
(39)
(422)
(2)
46
1,848
864
1,233
2,097
1,838
(407)
1,431
141
1
8
1
(254)
-
-
(103)
241
-
(56)
4
72
1
76
338
382
1
(48)
5
(182)
1
76
(8)
1
(238)
(4)
174
506
-
235
431
49
-
222
-
14
-
57
342
41
1
(16)
(4)
188
506
57
773
658
income
$
967
$
895
$
1,862
$
1,407
$
(749)
$
Net interest income was $27.865 million in 2017 compared to $26.003 million in 2016, an increase of $1.862 million
or 7.2%. The net interest margin increased to 3.05% for the year ended December 31, 2017 from 3.03% in 2016.
Overall, yields on earning assets were 3.42% in 2017 and 2016. Average loans held for investment increased $21.2
million in 2017, or 5.3%, compared to 2016, while average loans held for sale decreased $22.7 million and average
investments increased $21.6 million. The cost of interest bearing deposits was 0.37% in 2017 and 0.36% in 2016.
The cost of interest bearing liabilities increased to 0.50% from 0.49%.
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 0.35% in 2015 to 0.36% 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.
15
15
BNCCORP, INC. Annual Report 2017 Non-interest Income
The following table presents the major categories of our non-interest income (dollars are in thousands):
For the Years Ended
December 31,
2017
2016
Increase (Decrease)
%
$
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
$
$
2,719
1,717
11,301
736
745
2,281
19,499
$
$
2,731
1,532
19,465
234
729
1,086
25,777
$
$
(12)
185
(8,164)
502
16
1,195
(6,278)
- %
12 % (a)
(42) % (b)
215 % (c)
2 %
110 % (d)
(24) %
(a) Wealth management revenues increased as assets under management increased by $47.6 million.
(b) Mortgage banking revenues were lower in 2017 as increasing rates resulted in lower mortgage production and
compressed margins.
(c) Gains on the sale of loans increased as a result of SBA loan activity in the fourth quarter of 2016 and first quarter of
2017 resulting in higher gains during the first quarter of 2017. Gains on sale of loans can vary significantly from
period to period.
(d) Other income increased during the twelve month period due to the confidential settlement of a litigation matter and
the sale of a ND Branch.
Non-interest Expense
The following table presents the major categories of our non-interest expense (dollars are in thousands):
Salaries and employee benefits
Professional services
Data processing fees
Marketing and promotion
Occupancy
Regulatory costs
Depreciation and amortization
Office supplies and postage
Other real estate costs
Other
Total non-interest expense
Efficiency ratio
For the Years Ended
December 31,
2017
2016
Increase (Decrease)
%
$
$
$
20,494
3,928
3,716
3,447
2,436
556
1,627
629
(31)
2,314
39,116
82.59%
$
$
21,432
4,581
3,666
3,798
2,160
675
1,519
687
34
2,641
41,193
79.55%
$
$
(938)
(653)
50
(351)
276
(119)
108
(58)
(65)
(327)
(2,077)
3.04%
(4) % (a)
(14) % (b)
1 %
(9) % (c)
13 % (d)
(18) % (e)
7 % (f)
(8) %
(191) % (g)
(12) % (h)
(5) %
(a) Salaries and employee benefits decreased as we reduced mortgage support staff as the business is being right-sized to
fit current revenues and decreased incentive compensation expense.
(b) Professional service expense is lower due to reduced mortgage banking activity and legal costs.
(c) Marketing and promotion decreased primarily due to reduced mortgage activity.
(d) Occupancy increased in the first quarter of 2017 due to higher seasonal maintenance expense in banking locations and
costs incurred to modify mortgage banking locations.
(e) Regulatory costs decreased due to a decrease in the FDIC assessment rate.
(f) Depreciation increased due to updates to our older branch facilities.
(g) Other real estate costs will vary from period to period depending on valuation adjustments on our foreclosed
properties– see Note 6. At December 31, 2017, the Company held no property in other real estate.
(h) Other decreased due to managements cost containment focus across all lines of business.
16
16
BNCCORP, INC. Annual Report 2017 Income Tax Expense
During 2017, we recorded tax expense of $3.020 million which resulted in an effective tax rate of 38.2%. The
recorded tax expense includes a $1.208 million charge to revalue net deferred tax assets as a result of the Tax Cuts
and Jobs Act that was signed into law during the fourth quarter of 2017. Excluding this charge, the effective tax
rate for 2017 would have been 22.9%, which is lower than the federal statutory rate primarily due a portion of the
Company’s pretax income being derived from tax-exempt securities in 2017. Subject to certain statutory limitations,
the Company is able to carry forward state tax net operating losses aggregating $392 thousand as of December 31,
2017. The state net operating losses expire between 2018 and 2031.
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.
Financial Condition
Assets
The following table presents our assets by category (dollars are in thousands):
As of December 31,
2017
2016
Increase (Decrease)
%
$
Cash and cash equivalents
Investment securities available for sale
Federal Reserve Bank and Federal Home
$
Loan Bank
Loans held for sale-mortgage banking
Loans and leases held for investment, net
Other real estate and repossessed assets, net
Premises and equipment, net
Accrued interest receivable
Other assets
Total assets
$
25,830
411,917
$
11,113
400,136
$
2,897
36,601
420,464
-
19,403
4,848
24,190
946,150
$
4,411
39,641
406,388
218
19,381
4,444
24,668
910,400
$
14,717
11,781
(1,514)
(3,040)
14,076
(218)
22
404
(478)
35,750
132 % (a)
3 %
(34) % (b)
(8) % (c)
3 % (d)
(100) % (e)
- %
9 % (f)
(2) %
4 %
(a) Cash balances can fluctuate significantly.
(b) The change in FHLB stock varies in proportion to the level of FHLB advances outstanding.
(c) Loans held for sale decreased as balances will fluctuate with the timing of loan funding and sales.
(d) Growth in Loans and leases held for investment was restrained in 2017 by sales of SBA loans and our North Dakota
customers prepaid balances after their liquidity improved.
(e) Decrease relates to the sale of other real estate and repossessed asset. See Note 6.
(f) Accrued interest receivable can fluctuate from period to period, but has generally increased with higher levels of cash,
investments and loan interest earning assets.
17
17
BNCCORP, INC. Annual Report 2017 Investment Securities Available for Sale
The following table presents the composition of the available-for-sale investment portfolio (in thousands):
December 31,
2017
2016
Amortized
cost
Estimated
fair market
value
Amortized
cost
Estimated
fair market
value
$
40,002
$
39,466
$
24,967
$
24,715
-
4,522
-
46,003
45,270
4,512
-
-
141,837
139,392
122,519
122,863
69,296
51,550
16,071
90,048
67,916
50,517
16,010
94,104
$
413,326
$
411,917
$
85,462
84,220
35,849
-
84,143
398,943
$
35,342
-
87,726
400,136
U.S. Treasury securities
U.S. government agency mortgage-backed
securities guaranteed by GNMA
U.S. government agency mortgage-backed
securities issued by FNMA
U.S. government agency small business
administration pools guaranteed by SBA
Collateralized mortgage obligations guaranteed
by GNMA/VA
Collateralized mortgage obligations issued by
FNMA or FHLMC
Asset-backed securities
State and municipal bonds
Total investments
There were no securities that management concluded were other-than-temporarily impaired during 2017 or 2016.
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, 2017 (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
U.S. Treasury securities(1)
U.S. government agency
$
mortgage-backed securities
issued by FNMA(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)
Asset-backed securities(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% $
14,981
1.78% $
25,021
2.11% $
-
0.00% $
40,002
1.99%
0.00%
-
0.00%
-
0.00%
4,522
2.96%
4,522
2.96%
0.00%
870
2.22%
15,522
1.22%
125,445
2.40%
141,837
2.27%
0.00%
0.00%
0.00%
0.00%
-
-
-
0.00%
0.00%
0.00%
-
-
0.00%
69,297
2.63%
69,297
2.63%
0.00%
51,550
2.74%
51,550
2.74%
16,071
2.26%
-
0.00%
16,071
2.26%
2,330
5.89%
14,162
5.70%
73,555
5.06%
90,047
5.18%
0.00% $
18,181
2.33% $
70,776
2.67% $
324,369
3.07%
413,326
3.01%
(1,409)
$
411,917
3.02%
(1) Based on amortized cost rather than fair value.
(2) Maturities are based on contractual maturities. Actual cash flows from securities may vary from contractual maturities due to call options, cash
flow structures of securitizations, and prepayments.
(3) Yields include adjustment for tax exempt income.
18
18
BNCCORP, INC. Annual Report 2017 As of December 31, 2017, we had $411.9 million of available-for-sale securities in the investment portfolio
compared to $400.1 million at December 31, 2016.
In 2017, available-for-sale investment securities increased as we deployed proceeds from deposit growth.
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.
At December 31, 2017, U.S. Treasury securities, U.S. Government agency small business administration pools,
U.S. Government Agency collateralized mortgage obligations, asset-backed securities, and state and municipal
bonds 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
Our equity securities consisted of $1.8 million of Federal Reserve Bank (“FRB”) stock and $1.1 million of Federal
Home Loan Bank (“FHLB”) stock as of December 31, 2017 and $1.8 million and $2.6 million of FRB and FHLB
stock, as of December 31, 2016, respectively.
Loans
The following table presents our loan portfolio as of December 31 (dollars are in thousands):
Loans held for sale-
mortgage banking
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
unamortized fees and
costs
2017
2016
2015
2014
2013
Amount
%
Amount
%
Amount
%
Amount
%
Amount
%
$
36,601
100.0
$
39,641
100.0
$
50,445
100.0
$
47,109
100.0
$
32,870
100.0
126,169
177,429
25,064
71,876
14,168
13,167
29.4
41.4
5.9
16.8
3.3
3.1
123,604
171,972
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
427,873
99.9
414,474
100.0
379,855
100.0
360,929
100.0
318,008
100.0
452
0.1
199
-
48
-
(140)
-
(80)
-
$
428,325
100.0
$
414,673
100.0
$
379,903
100.0
$
360,789
100.0
$
317,928
100.0
19
19
BNCCORP, INC. Annual Report 2017 The following table presents the change in our loan portfolio (dollars are in thousands):
Loans held for sale-mortgage banking
$
36,601
$
39,641
$
(3,040)
(7.7) % (a)
December 31,
Increase (Decrease)
2017
2016
$
%
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
126,169
177,429
25,064
71,876
14,168
13,167
427,873
452
123,604
171,972
31,518
59,183
15,982
12,215
414,474
199
2,565
5,457
(6,454)
12,693
(1,814)
952
13,399
2.1 %
3.2 %
(20.5) %
21.4 % (b)
(11.4) %
7.8 %
3.2 %
253
127.1 %
unamortized fees and costs
$
428,325
$
414,673
$
13,652
3.3 % (c)
(a) Loans held for sale balances can vary at year-end based on the timing of loan sales within the December holiday season.
(b) Consumer loans increased primarily due to North Dakota indirect vehicle lending.
(c) Loans held for investment increased due to continued loan production in our core markets. However, growth was restrained
due to sales of SBA loans and prepayments by North Dakota customers after their liquidity improved.
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):
2017
2016
2015
2014
2013
$
176,733
182,224
176,439
180,192
222,765
20
20
BNCCORP, INC. Annual Report 2017 Concentrations of Credit
The following table summarizes the location of our borrowers as of December 31 (dollars are in thousands):
North Dakota
Arizona
Minnesota
Other
Total gross loans held for investment
2017
304,129
65,284
24,144
34,316
427,873
$
$
71 %
15 %
6 %
8 %
100 %
$
$
2016
291,412
67,751
23,083
32,228
414,474
70 %
16 %
6 %
8 %
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
$
2017
286,075
88,514
16,697
9,965
8,416
8,134
10,072
427,873
67 %
21 %
4 %
2 %
2 %
2 %
2 %
100 %
$
$
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 %
The following table presents loans by type as of December 31 (in thousands):
North Dakota
Commercial and industrial
Construction
Agricultural
Land and land development
Owner-occupied commercial real estate
Commercial real estate
Small business administration
Consumer
Subtotal
Consolidated
Commercial and industrial
Construction
Agricultural
Land and land development
Owner-occupied commercial real estate
Commercial real estate
Small business administration
Consumer
Subtotal
2017
Total Loans and
Leases Held for
Investment
2016
Total Loans and
Leases Held for
Investment
$
$
$
$
36,590
4,747
23,004
8,494
44,173
108,191
4,558
56,318
286,075
51,524
13,167
23,773
14,168
50,872
177,429
25,064
71,876
427,873
$
$
$
$
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
21
21
BNCCORP, INC. Annual Report 2017 Loan Maturities (1)
The following table sets forth the remaining maturities of loans in our portfolio as of December 31, 2017 (in
thousands):
Over 1 year
through 5 years
Over 5 years
One year
or less
Fixed
Rate
Floating
Rate
Fixed
Rate
Floating
Rate
Commercial and industrial
Commercial real estate
SBA
Consumer
Land and land development
Construction
Total principal amount of loans
$
$
13,915
1,296
406
1,234
-
1,526
18,377
$
$
2,568
2,777
-
285
530
1,765
7,925
$
$
11,199 $
7,923
2,416
5,457
1,905
9,876
38,776 $
46,058 $
38,716
1,999
55,731
6,333
-
148,837 $
52,429 $
126,717
20,243
9,169
5,400
-
213,958 $
Total
Loans and
Leases
Held for
Investment
126,169
177,429
25,064
71,876
14,168
13,167
427,873
(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 2017, we recorded a provision for credit
losses of $350 thousand, compared to $800 thousand in 2016.
Allowance for Credit Losses
See Notes 1 and 5 of our Consolidated Financial Statements and “Significant Accounting Policies” for further
information concerning accounting policies associated with the allowance for credit losses.
22
22
BNCCORP, INC. Annual Report 2017 Analysis of Allowance for Credit Losses
The following table summarizes activity in the allowance for credit losses and certain ratios (dollars are in
thousands):
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
2017
2016
2015
2014
2013
For the Years ended December 31,
$
8,285
$
8,611
$
8,601
$
9,847
$
10,091
(84)
-
(566)
(123)
(103)
-
(876)
-
12
48
40
2
-
102
(774)
350
(1,004)
-
(71)
(99)
-
-
(1,174)
-
13
15
20
-
-
48
(1,126)
800
(47)
-
(145)
(43)
-
-
(235)
7
551
68
19
-
-
645
410
(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
Balance of allowance for credit losses, end of
period
$
7,861
$
8,285
$
8,611
$
8,601
$
9,847
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
(0.173)%
(0.250)%
0.103%
(0.123)%
(0.277)%
(0.184)%
(0.282)%
0.117%
(0.134)%
(0.332)%
investment
$
420,906
$
399,669
$
350,840
$
331,982
$
284,344
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
1.84%
1.69%
0.21%
2.00%
1.82%
0.27%
2.27%
2.00%
0.06%
2.38%
2.11%
0.01%
3.10%
2.81%
0.67%
23
23
BNCCORP, INC. Annual Report 2017 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).
2017
2016
2015
2014
2013
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
$ 2,158
30% $
2,323
30% $
3,205
33% $
2,686
37% $
2,215
Commercial real
estate
SBA
Consumer
Land and land
development
Construction
3,471
834
914
358
126
41%
6%
17%
3%
3%
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
42%
29%
6%
10%
9%
4%
Total
$ 7,861
100% $
8,285
100% $
8,611
100% $
8,601
100% $
9,847
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 the balance sheet dates. 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
24
BNCCORP, INC. Annual Report 2017 Nonperforming Loans and Assets
The following table sets forth nonperforming assets, the allowance for credit losses and certain related ratios (dollars
are in thousands):
Nonperforming loans:
$
$
$
Loans 90 days or more delinquent and still
accruing interest
Non-accrual loans
Total nonperforming loans
Other real estate 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
2017
2016
As of December 31,
2015
2014
2013
$
$
$
26
1,952
1,978
-
1,978
7,861
0.43%
0.46%
0.21%
0.21%
$
$
$
20
2,425
2,445
218
2,663
8,285
0.54%
0.59%
0.29%
0.27%
$
$
$
175
390
565
242
807
8,611
0.13%
0.15%
0.09%
0.06%
$
$
$
5
56
61
256
317
8,601
0.01%
0.02%
0.03%
0.01%
961
4,656
5,617
1,056
6,673
9,847
1.60%
1.77%
0.79%
0.67%
397%
339%
1,524%
14,100%
175%
Nonperforming Loans
The following table sets forth information concerning our nonperforming loans as of December 31 (in thousands):
Balance, beginning of period
Additions to nonperforming
Charge-offs
Reclassified back to performing
Principal payments received
Transferred to repossessed assets
Transferred to other real estate owned
Balance, end of period
2017
2016
2,445
938
(790)
-
(551)
(24)
(40)
1,978
$
$
565
3,086
(912)
(176)
(114)
(4)
-
2,445
$
$
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
2017
2016
$
$
372
89
283
$
$
314
92
222
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
25
BNCCORP, INC. Annual Report 2017 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):
$
2017
2016
2015
2014
2013
Total
Accrual
Non-accrual
$
1,908
2,153
2,197
5,105
8,544
$
1,801
1,845
1,884
5,105
4,356
107
308
313
-
4,188
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
$
-
-
-
1,587
-
Watch List
Other
Total
$
$
1,730
8,125
7,945
473
176
1,730
8,125
7,945
2,060
176
Impaired
$
52
6
11
56
4,656
Substandard
Other
$
9,062
10,511
9,398
9,077
8,062
$
Total
9,114
10,517
9,409
9,133
12,718
2017
2016
2015
2014
2013
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
26
BNCCORP, INC. Annual Report 2017 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
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
Total liabilities and stockholders’
As of December 31,
2017
2016
Increase (Decrease)
$
%
$
164,401
$
147,027
$
17,374
12 % (a)
498,044
155,361
18,043
-
10,000
15,011
950
6,107
607
868,524
77,626
453,897
151,703
12,510
38,000
10,000
15,013
777
6,685
593
836,205
74,195
44,147
3,658
5,533
(38,000)
-
(2)
173
(578)
14
32,319
3,431
10 % (a)
2 %
44 % (b)
(100) % (c)
- %
- %
22 % (d)
(9) % (e)
2 %
4 %
5 %
4 %
equity
$
946,150
$
910,400
$
35,750
(a) BNC markets have been successful in generating deposit growth throughout 2017. This increase largely relates to
significant deposits by customers experiencing large cash generating transactions in the first quarter 2017.
(b) Short-term borrowings will vary depending on our customers need to use repurchase agreements.
(c) The Company has borrowed on a short-term basis from the Federal Home Loan Bank as an efficient source of liquidity.
As deposits have increased, and mortgage funding levels decreased, the utilization of this liquidity option decreased.
(d) Accrued interest payable increased predominantly due to increased time deposit balances.
(e) The decrease is primarily due to decreased incentive accruals.
Mortgage Banking Obligations
Included in accrued expenses is an estimate of mortgage banking reimbursement obligations which aggregated $1.1
million and $1.3 million at December 31, 2017 and 2016, 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
27
BNCCORP, INC. Annual Report 2017 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,
2017
Percent
of
deposits
Wgtd.
avg.
rate
2016
Percent
of
deposits
Average
balance
Average
balance
Wgtd.
avg.
rate
Average
balance
2015
Percent Wgtd.
avg.
rate
of
deposits
$ 487,063
57.7% 0.20% $
424,393
56.4% 0.13% $
430,838
55.4% 0.12%
35,067
158,266
4.1% 0.03%
18.8% 0.98%
32,146
150,720
4.3% 0.03%
20.0% 1.05%
29,724
153,168
3.8% 0.03%
19.7% 1.05%
680,396
80.6% 0.37%
607,259
80.7% 0.36%
613,730
78.9% 0.35%
163,603
19.4% 0.00%
145,842
19.3% 0.00%
163,755
21.1% 0.00%
Interest checking and
MMDAs
Savings deposits
Time deposits
Total interest-bearing
deposits
Non-interest-bearing
demand deposits
Total deposits (1)
$ 843,999
100.0% 0.30% $
753,101
100.0% 0.29% $
777,485
100.0% 0.28%
(1)
Included in average total deposits are $0, $11.7 million, and $41.0 million of average brokered deposits for the years ending 2017, 2016, and 2015,
respectively.
During periods of higher energy prices our North Dakota deposits grew rapidly. In 2017, a ND Bakken branch with
$14.0 million of deposits was sold for a gain of $864 thousand. Excluding the effect of the sold branch, ND Bakken
deposits rose slightly compared to December 2016. ND Non-Bakken deposits grew $50.8 million in 2017 compared
to year-end 2016. In recent periods, deposits in Arizona have also grown significantly. The table below shows total
deposits since 2013 (in thousands):
2017
2016
As of December 31,
2015
2014
2013
ND Bakken Branches
ND Non-Bakken Branches
Total ND Branches
Brokered Time Deposits
Other
Total Deposits
$
$
168,981
435,255
604,236
-
213,570
817,806
$
$
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
Time deposits, in denominations of $250,000 and over, totaled $28.9 million at December 31, 2017 as compared to
$22.3 million at December 31, 2016. The following table sets forth the amount and maturities of time deposits of
$250,000 and over as of December 31, 2017 (in thousands):
Maturing in:
3 months or less
Over 3 months through 6 months
Over 6 months through 12 months
Over 12 months
$
$
3,873
8,366
9,691
6,984
28,914
28
28
BNCCORP, INC. Annual Report 2017 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
2017
2016
2015
$
$
$
18,043
0.25%
24,671
14,732
0.18%
$
$
$
12,510
0.15%
16,901
13,919
0.16%
$
$
$
13,851
0.14%
20,799
16,299
0.16%
Note 9 of our Consolidated Financial Statements summarizes the general terms of our short-term borrowings
outstanding at December 31, 2017 and 2016.
FHLB advances totaled $0 at December 31, 2017 and $38 million at December 31, 2016, 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, 2017 and 2016.
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)
2017
2016
2015
2014
9.53%
19.98%
14.15%
16.90%
8.18%
9.62%
18.31%
17.06%
17.06%
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%
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.
The 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. 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. 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.
29
29
BNCCORP, INC. Annual Report 2017 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, 2017, 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
Other Commitments:
Commitments to originate loans
Commitments to sell loans
Standby and commercial letters of
credit
Total
Payments due by period
Less than 1
year
1 to 3 years
3 to 5 years
After 5 years
Total
18,043
35,802
1,144
54,989
$
$
-
-
1,855
1,855
$
$
-
-
1,447
1,447
$
$
25,011
-
1,230
26,241
$
$
43,054
35,802
5,676
84,532
Amount of Commitment - Expiration by Period
Less than 1
year
1 to 3 years
3 to 5 years
After 5 years
Total
128,433
111,691
1,026
241,150
$
$
17,744
-
23
17,767
$
$
7,034
-
-
7,034
$
$
303
-
-
303
$
$
153,514
111,691
1,049
266,254
$
$
$
$
30
30
BNCCORP, INC. Annual Report 2017 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.
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 ($112.9
million as of December 31, 2017);
2. Borrowing capacity from the FHLB ($152.0 million as of December 31, 2017); and
3. Capacity to issue brokered deposits with maturities of less than 12 months ($133.5 million as of
December 31, 2017).
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
31
BNCCORP, INC. Annual Report 2017 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
32
BNCCORP, INC. Annual Report 2017 sheet accounts are held constant at their December 31, 2017 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, 2017 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, 2017, the downward scenarios for interest rate movements
is limited to -200bp. 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 4.50% to 5.50% 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 2018 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
-200bp
-100bp
Unchanged
+100bp
+200bp
+300bp
$
$
28,077
(1,737)
$
$
(785)
29,029
$
29,814
(5.83)%
(2.63)%
$
$
29,481
(333)
$
$
29,165
(649)
$
$
28,854
(960)
(1.12)%
(2.18)%
(3.22)%
-
-
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, 2017 (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, 2017. Assets and liabilities are classified by the earliest possible
repricing date or maturity, whichever occurs first.
33
33
BNCCORP, INC. Annual Report 2017 Interest Sensitivity Gap Analysis
Estimated maturity or repricing at December 31, 2017
0–3
Months
4–12
Months
1–5
Years
(dollars are in thousands)
Over
5 years
Total
Interest-earning assets:
Interest-bearing deposits with banks
$
25,830
$
-
$
-
$
-
$
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
127,767
2,897
-
36,601
-
10,313
77,784
10,323
95,236
142,356
-
-
-
-
-
-
-
-
-
-
-
-
35,916
26,182
99,568
155,834
18,246
4,482
Total interest-earning assets
$
291,192
$
72,421
$
350,638
$
165,084
$
25,830
375,682
2,897
-
36,601
-
164,043
264,282
869,335
Interest-bearing liabilities:
Interest checking and money market
accounts
$
463,028
$
Savings
Time deposits
Short-term borrowings
FHLB advances
Long-term borrowings
Subordinated debentures
Total interest-bearing liabilities
Interest rate gap
Cumulative interest rate gap at December 31, 2017
Cumulative interest rate gap to total assets
35,016
51,884
18,043
-
-
15,000
582,971
(301,779)
(301,779)
(31.90%)
$
$
$
$
-
-
$
-
-
-
-
55,852
39,198
8,427
$
463,028
-
-
-
-
-
-
-
-
$
$
$
55,852
16,569
(285,210)
(30.14%)
$
$
$
$
$
$
39,198
311,440
26,230
2.77%
-
-
10,000
11
18,438
146,646
172,876
18.27%
$
$
35,016
155,351
18,043
-
10,000
15,011
696,459
172,876
(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, 2017 and do not contemplate any actions we might undertake in response to changes in market interest rates.
34
34
BNCCORP, INC. Annual Report 2017 BNCCORP, INC. AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 2017 and 2016
(With Independent Auditors’ Report Thereon)
35
35
BNCCORP, INC. Annual Report 2017
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors’ Report
Consolidated Balance Sheets as of December 31, 2017 and 2016
Consolidated Statements of Income for the Years Ended December 31, 2017 and 2016
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2017 and 2016
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2017 and 2016
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017 and 2016
Notes to Consolidated Financial Statements
Page
37
38
39
40
41
42
44
36
36
BNCCORP, INC. Annual Report 2017
Independent Auditors’ Report
The Board of Directors
BNCCORP, INC.:
We have audited the accompanying consolidated financial statements of BNCCORP, INC. and subsidiaries,
which comprise the consolidated balance sheets as of December 31, 2017 and 2016, 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 subsidiaries as of December 31, 2017 and 2016, 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 22, 2018
37
37
BNCCORP, INC. Annual Report 2017KPMG 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 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
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 11,300,000 shares; 3,465,992
and 3,456,008 shares issued and outstanding
Capital surplus – common stock
Retained earnings
Treasury stock (202,661 and 212,645 shares, respectively)
Accumulated other comprehensive income, net
Total stockholders’ equity
Total liabilities and stockholders’ equity
2017
2016
25,830
411,917
2,897
36,601
428,325
(7,861)
420,464
-
19,403
4,848
24,190
946,150
$
$
11,113
400,136
4,411
39,641
414,673
(8,285)
406,388
218
19,381
4,444
24,668
910,400
164,401
$
147,027
498,044
155,361
817,806
18,043
-
10,000
15,011
950
6,107
607
868,524
35
26,072
54,206
(2,741)
54
77,626
946,150
$
453,897
151,703
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
$
$
$
$
See accompanying notes to consolidated financial statements.
38
38
BNCCORP, INC. Annual Report 2017 BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the Years Ended December 31
(In thousands, except per share data)
INTEREST INCOME:
Interest and fees on loans
Interest and dividends on investments
Taxable
Tax-exempt
Dividends
Total interest income
INTEREST EXPENSE:
Deposits
Short-term borrowings
Federal Home Loan Bank advances
Long-term borrowings
Subordinated debentures
Total interest expense
Net interest income
PROVISION FOR CREDIT LOSSES
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES
NON-INTEREST INCOME:
Bank charges and service fees
Wealth management revenues
Mortgage banking revenues, 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
Basic earnings per common share
Diluted earnings per common share
2017
2016
$
20,786
$
7,838
2,695
124
31,443
2,509
27
16
635
391
3,578
27,865
350
27,515
2,719
1,717
11,301
736
745
2,281
19,499
20,494
3,928
3,716
3,447
2,436
556
1,627
629
(31)
2,314
39,116
7,898
3,020
4,878
1.40
1.38
$
$
$
$
$
$
20,504
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
2.08
2.03
See accompanying notes to consolidated financial statements.
39
39
BNCCORP, INC. Annual Report 2017 BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the Years Ended December 31
(In thousands)
NET INCOME
Unrealized loss on investment securities available
2017
$
4,878
2016
$
7,156
for sale
$
(1,857)
$
(3,138)
Reclassification adjustment for gains on sales of
investment securities, net, 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
(745)
(2,602)
973
(1,629)
(1,629)
3,249
$
(729)
(3,867)
1,469
(2,398)
(2,398)
4,758
$
See accompanying notes to consolidated financial statements.
40
40
BNCCORP, INC. Annual Report 2017 BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
For the Years Ended December 31
(In thousands, except share data)
Capital
Surplus
Accumulated
Other
Common Stock
Common
Retained
Treasury
Comprehensive
Shares
Amount
Stock
Earnings
Stock
Income (Loss)
Total
BALANCE, December 31, 2015
3,428,416 $
34
$
25,979
$
42,172
$
(3,278)
$
4,081
$
68,988
Net income
Other comprehensive loss
-
-
Impact of share-based compensation
27,592
-
-
1
-
-
17
7,156
-
-
-
-
431
-
(2,398)
-
7,156
(2,398)
449
BALANCE, December 31, 2016
3,456,008 $
35
$
25,996
$
49,328
$
(2,847)
$
1,683
$
74,195
Net income
Other comprehensive loss
-
-
-
-
Impact of share-based compensation
9,984
-
-
76
4,878
-
-
-
-
106
-
(1,629)
-
4,878
(1,629)
182
BALANCE, December 31, 2017
3,465,992 $
35
$
26,072
$
54,206
$
(2,741) $
54 $
77,626
See accompanying notes to consolidated financial statements.
41
41
BNCCORP, INC. Annual Report 2017 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 for credit losses
Provision (reduction) for other real estate losses
Depreciation and amortization
Net amortization of premiums and (discounts) on investment securities and
subordinated debentures
Share-based compensation
Change in accrued interest receivable and other assets, net
Gain on sale of other real estate
Gain on sale of bank premises and equipment
Gain on sale of bank branch
Net realized gains on sales of investment securities
Decrease in deferred taxes
Change in other liabilities, net
Funding of loans held for sale, mortgage banking
Proceeds from sales of loans held for sale, mortgage banking
Fair value adjustment for loans held for sale, mortgage banking
Fair value adjustment on mortgage banking derivatives
Proceeds from sales of loans
Gains on sales of loans, net
Net cash provided by operating activities
INVESTING ACTIVITIES:
Purchases of investment securities
Proceeds from sales of investment securities
Proceeds from maturities of investment securities
Purchases of Federal Reserve and Federal Home Loan Bank Stock
Sales of Federal Reserve and Federal Home Loan Bank Stock
Net increase in loans held for investment
Proceeds from sales of other real estate
Proceeds from sales of premises and equipment
Additions to premises and equipment
Net cash used in investing activities
2017
2016
$
4,878
$
7,156
350
(10)
1,627
7,743
182
(1,019)
-
(8)
(864)
(745)
1,518
110
(686,302)
689,017
326
170
7,191
(736)
23,428
(157,034)
99,910
36,369
(2,633)
4,147
(20,923)
264
205
(1,728)
(41,423)
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)
See accompanying notes to consolidated financial statements.
42
42
BNCCORP, INC. Annual Report 2017 BNCCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, continued
For the Years Ended December 31
(In thousands)
2017
2016
FINANCING ACTIVITIES:
Net increase (decrease) in deposits
$
65,179
$
Net increase (decrease) in short-term borrowings
Repayments of Federal Home Loan Bank advances
Proceeds from Federal Home Loan Bank advances
Net cash provided by financing activities
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, beginning of period
CASH AND CASH EQUIVALENTS, end of period
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid
Income taxes paid
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Additions to other real estate in the settlement of loans
$
$
$
$
See accompanying notes to consolidated financial statements.
5,533
(101,450)
63,450
32,712
14,717
11,113
25,830
3,405
821
$
$
$
(27,822)
(1,341)
(635,450)
666,150
1,537
(4,076)
15,189
11,113
3,052
3,209
40
$
-
43
43
BNCCORP, INC. Annual Report 2017 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 15 locations. The Bank
also conducts mortgage banking through a consumer-direct channel complimented by retail channels from 13
locations in Arizona, Minnesota, North Dakota, Illinois, Kansas and Missouri. The consumer direct channel
emphasizes technology (internet leads and call center) to originate mortgage loans throughout the United States.
The retail channel is primarily relationship driven and originations are generally near 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, deferred tax assets,
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, 2017 and 2016, 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
44
BNCCORP, INC. Annual Report 2017 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 its 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;
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 recognized 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, 2017 and 2016.
Federal Reserve Bank and Federal Home Loan Bank
Investments in Federal Reserve Bank and Federal Home Loan Bank 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
Accounting Standards Codification 825, Financial Instruments. Gains and losses from the changes in fair value are
included in mortgage banking revenue, net.
Loans and Leases Held For Investment
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
45
BNCCORP, INC. Annual Report 2017 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, the Company periodically reviews use of lines on a retrospective basis and
recognizes 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 consolidated 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 the Bank’s 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
the Bank’s 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 the Bank estimates the allowance for
credit losses.
The Bank’s methodology has been consistently applied. However, the Bank enhances our methodology as
circumstances dictate.
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 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
46
46
BNCCORP, INC. Annual Report 2017 collateral of the loan. Specific reserves may also be established for credits that have been internally classified
as credits requiring management’s attention due to underlying problems in the borrower’s business or collateral
concerns.
Reserves for Homogeneous Loan Pools. The Bank makes a significant number of loans and leases that, due
to their underlying similar characteristics, are assessed for loss as “homogeneous” pools. Included in the
homogeneous pools are loans which have been excluded from the specific reserve allocation. 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 consolidated financial statements, generally at the time of initial charge-off of the loan balance.
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 Assets, net
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. Net operating results and gains and losses on disposition of the asset
are included in other non-interest income. Subsequent declines in the estimated fair value and operating expenses
of properties are charged to other non-interest expense.
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 non-interest 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 capitalized and amortized over the
shorter of the lease term or the estimated useful life of the improvement. 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.
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.
47
47
BNCCORP, INC. Annual Report 2017 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, 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 the Company’s 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.
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
48
48
BNCCORP, INC. Annual Report 2017
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 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 mortgage banking
revenues, net.
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, 2017, the Company had four stock-based compensation plans, which are described more fully in
Note 24 and Note 25 to these consolidated financial statements.
49
49
BNCCORP, INC. Annual Report 2017 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 effects of changes in tax rates on deferred tax
assets and liabilities are recognized in income in the period of enactment regardless of the balance sheet
classification of the underlying deferred tax asset or liability.
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 other comprehensive income (loss), 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
Accounting Standards Codification (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
generally accepted accounted principles 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 Company plans to adopt the amended guidance using the modified retrospective approach
on January 1, 2018. The Company has assessed its revenue streams and identified those contracts that are
specifically excluded from the scope of the amended guidance and those that may be subject to the amended
guidance. Based on the evaluation of the contracts that may be subject to the guidance, the adoption of this
accounting pronouncement is not expected to have a significant impact on the Company’s Consolidated Financial
Statements. The Company continues to evaluate the impact the amended guidance will have on its related
disclosures.
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
50
50
BNCCORP, INC. Annual Report 2017
transition method. The Company is evaluating the effect that ASU 2016-02 will have on its consolidated financial
statements and related disclosures.
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 over 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. The
Company is in the process of evaluating the impact that this new guidance will have on its consolidated financial
statements and related disclosures.
51
51
BNCCORP, INC. Annual Report 2017 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, 2017 or
2016. The carrying amount of available-for-sale securities and their estimated fair values were as follows as of
December 31 (in thousands):
2017
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair
Value
U.S. Treasury securities
U.S. government sponsored entity mortgage-
backed securities issued by FNMA
U.S. government agency small business
administration pools guaranteed by SBA
Collateralized mortgage obligations
guaranteed by GNMA/VA
Collateralized mortgage obligations issued by
FNMA or FHLMC
Asset-backed securities
State and municipal bonds
$
40,002
$
4,522
141,837
69,296
51,550
16,071
90,048
$
413,326
$
-
-
20
337
90
-
4,220
4,667
$
(536)
$
39,466
(10)
(2,465)
(1,717)
(1,123)
(61)
(164)
(6,076)
4,512
139,392
67,916
50,517
16,010
94,104
$
411,917
$
2016
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
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
52
52
BNCCORP, INC. Annual Report 2017 The amortized cost and estimated fair market value of available-for-sale securities classified according to their
contractual maturities at December 31, 2017, were as follows (in thousands):
Amortized
Cost
Estimated
Fair Value
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Total
$
$
-
18,181
70,776
324,369
413,326
$
$
-
18,097
71,088
322,732
411,917
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 $118.8 million and $117.8 million at December 31, 2017 and 2016, 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
2017
2016
99,910
1,398
(653)
745
$
$
97,415
796
(67)
729
$
$
53
53
BNCCORP, INC. Annual Report 2017 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 sponsored entity
mortgage-backed securities issued
by FNMA
U.S. government agency small
business administration pools
guaranteed by SBA
Collateralized mortgage
obligations guaranteed by
GNMA/VA
Collateralized mortgage
obligations issued by FNMA or
FHLMC
Asset-backed securities
State and municipal bonds
Total temporarily impaired
securities
Less than 12 months
12 months or more
Total
2017
Fair
Value
Unrealized
Loss
$
39,466
$
(536)
4,512
(10)
#
2
3
32
117,695
(1,870)
4
5
4
5
2,046
(15)
25,320
16,010
12,185
(630)
(61)
(164)
#
-
-
5
4
4
-
-
Fair
Value
Unrealized
Loss
$
$
-
-
-
-
#
2
3
Fair
Value
Unrealized
Loss
$
39,466
$
(536)
4,512
(10)
15,670
(595)
37
133,365
(2,465)
42,326
(1,702)
17,287
(493)
-
-
-
-
8
9
4
5
44,372
(1,717)
42,607
16,010
12,185
(1,123)
(61)
(164)
55
$ 217,234
$
(3,286)
13
$
75,283
$
(2,790)
68
$ 292,517
$
(6,076)
Less than 12 months
12 months or more
Total
2016
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
Fair
Value
Unrealized
Loss
$
24,715
$
(252)
28,357
(1,028)
31,123
(182)
44,257
(1,849)
16,618
15,643
(649)
(335)
#
2
5
7
6
3
7
30
$ 160,713
$
(4,295)
#
-
-
7
-
1
-
8
Fair
Value
Unrealized
Loss
$
$
-
-
-
-
#
2
5
Fair
Value
Unrealized
Loss
$
24,715
$
(252)
28,357
(1,028)
13,152
(205)
14
44,275
(387)
-
2,330
-
-
(38)
-
6
4
7
44,257
(1,849)
18,948
15,643
(687)
(335)
$
15,482
$
(243)
38
$ 176,195
$
(4,538)
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 2017 or 2016.
54
54
BNCCORP, INC. Annual Report 2017 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, at cost
Total
2017
2016
$
$
1,807
1,090
2,897
$
$
1,807
2,604
4,411
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
2017
2016
36,601
126,169
177,429
25,064
71,876
14,168
13,167
427,873
452
428,325
(7,861)
420,464
$
$
$
39,641
123,604
171,972
31,518
59,183
15,982
12,215
414,474
199
414,673
(8,285)
406,388
$
$
$
Loans to Related Parties
Note 23 to these consolidated financial statements includes information relating to loans to executive officers,
directors, principal shareholders and associates of such persons.
Loans Pledged as Collateral
The table below present’s 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
2017
2016
39,274
98,647
33,123
-
171,044
$
$
38,747
90,798
30,943
575
161,063
$
$
55
55
BNCCORP, INC. Annual Report 2017 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
SBA
Consumer
Land and
land
development
Construction
Total
2017
$
2,323
$
3,231
$
1,433
$
772
$
413
$
113
$
8,285
(81)
(84)
-
228
-
12
(81)
(566)
48
225
(123)
40
46
(103)
2
13
-
-
350
(876)
102
Balance, beginning
of period
Provision
(reduction)
Loans charged off
Loan recoveries
Balance, end of
period
$
2,158
$
3,471
$
834
$
914
$
358
$
126
$
7,861
Commercial
and
industrial
Commercial
real estate
SBA
Consumer
Land and
land
development
Construction
Total
2016
$
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
The following table shows the balance in the allowance for credit losses at December 31, 2017, and December 31,
2016, 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.
December 31, 2017
Commercial and industrial
Commercial real estate
SBA
Consumer
Land and land development
Construction
Total
December 31, 2016
Commercial and industrial
Commercial real estate
SBA
Consumer
Land and land development
Construction
Total
Allowance For Credit Losses
Gross Loans and Leases Held for Investment
Impaired
Other
Total
Impaired
Other
Total
$
407
$
87
64
10
-
-
$
1,751
3,384
$
2,158
3,471
770
904
358
126
834
914
358
126
1,737
1,510
143
311
52
-
$
124,432
$
126,169
175,919
177,429
24,921
71,565
14,116
13,167
25,064
71,876
14,168
13,167
$
$
568
$
7,293
$
7,861
$
3,753
$
424,120
$
427,873
$
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
170,425
$
123,604
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
56
56
BNCCORP, INC. Annual Report 2017 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 the Bank
believes 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):
2017
Current
31-89 Days
Past Due
90 Days or
More Past
Due And
Accruing
Total
Performing
Non-accrual
Total
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
49,686
23,773
50,872
177,212
24,505
16,631
9,276
14,401
31,474
14,116
13,167
Total loans held for investment
425,113
Loans held for sale
36,600
$
75
$
26
$
-
-
217
416
11
14
-
49
-
-
782
1
-
-
-
-
-
-
-
-
-
-
26
-
49,787
23,773
50,872
177,429
24,921
16,642
9,290
14,401
31,523
14,116
13,167
$
1,737
$
-
-
-
143
20
-
-
-
52
-
51,524
23,773
50,872
177,429
25,064
16,662
9,290
14,401
31,523
14,168
13,167
425,921
1,952
427,873
36,601
-
36,601
Total gross loans
$
461,713
$
783
$
26
$
462,522
$
1,952
$
464,474
57
57
BNCCORP, INC. Annual Report 2017 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
412,049
2,425
414,474
39,641
-
39,641
-
-
-
-
-
-
-
-
-
-
20
-
Total gross loans
$
451,375
$
295
$
20
$
451,690
$
2,425
$
454,115
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
2017
2016
$
$
161
-
161
$
$
104
-
104
Credit Risk by Internally Assigned Grade
The Company maintains an internal risk rating process in order to increase the precision and effectiveness of credit
risk management. Internal grade is generally categorized into the following four categories: pass, watch list,
substandard, and doubtful.
At December 31, 2017, the Company had $415.1 million of loans categorized as pass rated loans. This compares
to $393.4 million at December 31, 2016.
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, 2017
the Company had $1.7 million of loans categorized as watch list loans compared to $8.1 million at December 31,
2016.
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
58
58
BNCCORP, INC. Annual Report 2017 in full on the basis of currently existing facts, conditions and values questionable, and there is a higher probability
of loss. At December 31, 2017, the Company had $9.1 million of substandard loans and $1.9 million of doubtful
loans. This compares to $10.5 million of substandard loans and $2.4 million doubtful loans as of December 31,
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,
2017 and 2016 (in thousands):
2017
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
$
2,678
$
1,737
$
407
$
1,821
$
-
-
1,809
121
23
-
-
-
-
-
-
-
-
1,510
107
20
-
-
-
-
-
-
-
-
87
64
10
-
-
-
-
-
-
-
-
1,526
111
24
-
-
-
-
-
-
-
-
-
77
-
-
-
-
-
-
-
-
4,631
$
3,374
$
568
$
3,482
$
77
$
-
-
-
-
134
-
-
1,878
-
155
-
-
$
-
-
-
-
36
-
-
291
-
52
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
568
$
$
-
-
-
-
108
-
-
295
-
52
-
-
$
$
455
3,937
$
$
-
-
-
-
-
-
-
12
-
-
-
-
12
89
59
59
Total impaired loans without an allowance
recorded
TOTAL IMPAIRED LOANS
$
$
2,167
6,798
$
$
379
3,753
$
$
BNCCORP, INC. Annual Report 2017 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
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
30
-
-
-
-
-
-
-
-
1,547
481
28
-
-
-
-
-
-
-
-
286
376
14
-
-
-
-
-
-
-
-
1,569
489
33
-
-
-
-
-
-
-
-
-
80
-
-
-
-
-
-
-
-
5,100
$
3,965
$
1,190
$
4,219
$
80
$
-
-
-
-
-
10
-
1,878
-
-
-
-
$
-
-
-
-
-
7
-
298
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1,190
$
$
-
-
-
-
-
7
-
302
-
-
-
-
$
$
309
4,528
$
$
-
-
-
-
-
-
-
12
-
-
-
-
12
92
Total impaired loans without an allowance
recorded
TOTAL IMPAIRED LOANS
$
$
1,888
6,988
$
$
305
4,270
$
$
60
60
BNCCORP, INC. Annual Report 2017 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 would not otherwise be considered, 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
Accrual
Non-accrual
Total
Allowance
2017
$
-
-
-
1,510
-
-
-
291
-
-
-
-
$
-
-
-
-
107
-
-
-
-
-
-
-
$
-
-
-
1,510
107
-
-
291
-
-
-
-
-
-
-
87
64
-
-
-
-
-
-
-
$
1,801
$
107
$
1,908
$
151
Accrual
Non-accrual
Total
Allowance
2016
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
$
-
-
-
1,547
-
-
-
298
-
-
-
-
$
-
-
-
-
308
-
-
-
-
-
-
-
$
-
-
-
1,547
308
-
-
298
-
-
-
-
-
-
-
286
308
-
-
-
-
-
-
-
$
1,845
$
308
$
2,153
$
594
TDR concessions can include reduction of interest rates, extension of maturity dates, forgiveness of principal and/or
interest due, or acceptance of real estate or other assets in full or partial satisfaction of the debt. Loan modifications
are not reported as TDR’s after 12 months if the loan was modified at a market rate of interest for comparable risk
loans, and the loan is performing in accordance with the terms of the restructured agreement for at least six months.
When a loan is modified as a TDR, there may be a direct, material impact on the loan balances, as principal balances
may be partially forgiven. For the year ended December 31, 2017 there was no new TDRs. For the year ended
61
61
BNCCORP, INC. Annual Report 2017 December 31, 2016 there was one new TDR with a pre-modification balance of $119 thousand and a post-
modification balance of $119 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
2017
2016
$
$
211
89
122
$
$
229
92
137
There were no additional funds committed to borrowers who are in TDR status at December 31, 2017 and December
31, 2016.
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, 2017 and December 31, 2016, 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).
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):
2017
2016
Balance, beginning of period
Transfers from nonperforming loans
Real estate sold
Net gains on sale of assets
Provision
Balance, end of period
$
$
214
40
(264)
-
10
-
The following is a summary of ORE as of December 31 (in thousands):
Other real estate
Valuation allowance
Other real estate, net
2017
$
$
-
-
-
$
$
$
$
242
-
(4)
4
(28)
214
2016
954
(740)
214
62
62
BNCCORP, INC. Annual Report 2017 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
2017
2016
$
4,949
16,973
525
9,987
32,434
(13,031)
19,403
$
4,469
16,436
549
10,409
31,863
(12,482)
19,381
$
$
Depreciation and amortization expense totaled approximately $1.6 million and $1.5 million for the years ended
December 31, 2017 and 2016, respectively.
NOTE 8. Deposits
The scheduled maturities of time deposits as of December 31, 2017 are as follows (in thousands):
2018
2019
2020
2021
2022
Thereafter
$
104,021
26,637
16,276
4,609
3,721
97
$
155,361
At December 31, 2017 and 2016, the Bank had no time deposits that had been acquired through a traditional broker
channel. In addition, the Company had $152.9 million and $126.9 million of interest-bearing deposits that meet the
regulatory definition of a brokered deposit as of December 31, 2017 and 2016, respectively.
At December 31, 2017 and 2016, the Bank had $28.9 million and $22.3 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
2017
2016
$
$
11
64
889
1,545
2,509
$
$
9
60
512
1,593
2,174
Deposits Received from Related Parties
Note 23 to these consolidated financial statements includes information relating to deposits received from executive
officers, directors, principal shareholders and associates of such persons.
63
63
BNCCORP, INC. Annual Report 2017 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 0.10% to 0.40% and 0.05% to 0.40%, respectively, secured by
U.S. Treasury securities and general obligations of municipalities
2017
2016
$
$
-
18,043
18,043
$
$
-
12,510
12,510
The weighted average interest rate on short-term borrowings outstanding as of December 31, 2017 and 2016 was
0.25% and 0.15%, respectively.
Customer repurchase agreements are used by the Bank to acquire funds from customers where the customers are
required, or desire, to have their funds supported by collateral consisting of government, government agency or
other types of securities. The repurchase agreement is a promise to sell these securities to a customer at a certain
price and repurchase them at a future date at that same price plus interest accrued at an agreed upon rate. The Bank
uses customer repurchase agreements in its liquidity plan as well as an accommodation to customers. At December
31, 2017, $18.0 million of securities sold under repurchase agreements, with a weighted average interest rate of
0.25%, were collateralized by U.S. Treasury securities and general obligations of municipalities having a market
value of $32.1 million and unamortized principal balances of $31.3 million. 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.
NOTE 10. Federal Home Loan Bank Advances
As of December 31, 2017, the Bank had no FHLB advances outstanding. At December 31, 2017, the Bank has
mortgage loans with unamortized principal balances of approximately $168.5 million and securities with
unamortized principal balances of approximately $35.5 million pledged as collateral to the FHLB. The Bank has
the ability to draw advances up to approximately $152.0 million based upon the aggregate collateral that is currently
pledged, subject to a requirement to purchase additional FHLB stock.
As of December 31, 2016, the Bank had $38.0 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.
64
64
BNCCORP, INC. Annual Report 2017 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):
2017
2016
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, 2017, 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.
NOTE 12. Other Borrowings
The following table presents selected information regarding other borrowings at December 31 (in thousands):
Unsecured Borrowing Lines:
2017
BNC National Bank Lines (1)
$
34,500
$
-
$
34,500
Line
Outstanding
Available
Secured Borrowing Lines:
BNC Line
$
93,838
$
10,000
$
-
$
10,000
Collateral
Pledged
Line
Outstanding
Available
Total
10,000
(1) The unsecured BNC National Bank Lines consists of three separate lines with three institutions in individual amounts of $12.5 million, $10
93,838
10,000
$
$
$
$
-
million, and $12 million.
At December 31, 2017, the pledged collateral for the BNC Line is the common stock of BNC National Bank.
Unsecured Borrowing Line:
2016
BNC National Bank Lines (1)
$
34,500
$
-
$
34,500
Line
Outstanding
Available
Secured Borrowing Line:
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
10,406
92,010
$
$
$
$
-
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.
65
65
BNCCORP, INC. Annual Report 2017 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, 2017 and December 31,
2016 was 2.74% and 2.05%, 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
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. Regulators continue to impose capital requirements that are specific to individual institutions.
The requirements are generally above the statutory ratios.
At December 31, 2017, the capital ratios exceeded all regulatory capital thresholds and maintained sufficient capital
conservation buffers to avoid limitations on certain types of capital distributions.
66
66
BNCCORP, INC. Annual Report 2017 The capital amounts and ratios presented below for December 31, 2017 and December 31, 2016 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
2017
Total Risk Based Capital:
Consolidated
$ 109,187
19.98 % $
43,717
≥8.0 % $
N/A
N/A % $
N/A
BNC National Bank
99,933
18.31
43,657
≥8.0
54,572
10.0
45,361
N/A%
8.31
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
2016
Total Risk Based Capital:
92,344
93,098
16.90
17.06
77,333
93,098
92,344
93,098
77,407
93,618
14.15
17.06
9.53
9.62
8.18
9.91
32,788
32,743
24,591
24,557
38,749
38,713
N/A
N/A
≥6.0
≥6.0
≥4.5
≥4.5
≥4.0
≥4.0
N/A
N/A
N/A
43,657
N/A
35,472
N/A
48,392
N/A
N/A
N/A
8.0
N/A
6.5
N/A
5.0
N/A
N/A
N/A
49,441
N/A
9.06
N/A
57,626
N/A
44,706
N/A
N/A
N/A
10.56
N/A
4.62
N/A
N/A
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
87,358
89,139
16.78
17.16
72,345
89,139
87,358
89,139
74,048
91,288
13.90
17.16
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
43,048
N/A
N/A
N/A
10.66
N/A
4.67
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.
67
67
BNCCORP, INC. Annual Report 2017 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, 2017
Twelve Months
Ended
December 31, 2017
Total
Level 1
Level 2
Level 3
Total gains/(losses)
$
411,917
$
39,466
$
372,451
$
ASSETS
Securities available for sale
Loans held for sale
Commitments to originate mortgage loans
Commitments to sell mortgage loans
36,601
1,457
-
Total assets at fair value
$
449,975
LIABILITIES
Commitments to sell mortgage loans
Mortgage banking short positions
Total liabilities at fair value
$
$
42
12
54
-
-
-
36,601
1,457
-
39,466
$
410,509
-
-
-
$
$
42
12
54
$
$
$
$
$
$
-
-
-
-
-
-
-
-
$
$
$
$
745
(326)
90
-
509
(301)
41
(260)
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
$
400,136
$
24,715
$
375,421
$
Loans held for sale
Commitments to originate mortgage loans
Commitments to sell mortgage loans
39,641
1,414
259
Total assets at fair value
$
441,450
LIABILITIES
Commitments to sell mortgage loans
Mortgage banking short positions
Total liabilities at fair value
$
$
-
53
53
-
-
-
39,641
1,414
259
24,715
$
416,735
-
-
-
$
$
-
53
53
$
$
$
$
$
$
-
-
-
-
-
-
-
-
$
$
$
$
729
(23)
(379)
342
669
-
(30)
(30)
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 the 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
recorded at fair value were considered to be Level 2. There were no transfers into or out of the respective levels
during the periods presented.
68
68
BNCCORP, INC. Annual Report 2017 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
$
$
$
$
3,185
-
3,185
Total
3,080
214
3,294
$
$
$
$
Level 1
2017
Level 2
3,185
-
3,185
2016
Level 2
3,080
214
3,294
$
$
$
$
-
-
-
-
-
-
$
$
$
$
Level 3
Total gains/(losses)
-
-
-
-
-
-
$
$
(20)
10
(10)
Total gains/(losses)
$
$
(1,714)
4
(1,710)
Level 3
(1) The carrying value represents the book value less allocated reserves. 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.
69
69
BNCCORP, INC. Annual Report 2017 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, 2017
December 31, 2016
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
$
25,830
39,466
372,451
2,897
36,601
1,457
-
420,464
4,848
$
25,830
39,466
372,451
2,897
36,601
1,457
-
417,497
4,848
$
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
$
904,014
$
901,047
$
867,806
$
866,720
$
164,401
653,405
28,043
950
6,107
42
12
$
164,401
651,923
28,284
950
6,107
42
12
$
147,027
605,600
60,510
777
6,685
-
53
$
147,027
604,823
60,748
777
6,685
-
53
Level 2
15,011
10,691
15,013
10,292
$
867,971
$
862,410
$
835,665
$
830,405
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
$
$
-
-
$
$
181
11
$
$
-
-
$
$
132
10
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.
70
70
BNCCORP, INC. Annual Report 2017
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 customers as well as to manage 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, 2017, 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 the mortgage banking operations, the Bank commits 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 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, 2017, 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 the
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):
2017
2016
Fixed
Rate
Variable
Rate
Fixed
Rate
Variable
Rate
Commitments to extend credit
$
15,573
$
62,052
$
10,576
$
57,039
Standby and commercial letters of credit
220
829
561
421
In addition to the amounts in the table above, mortgage banking commitments to fund loans totaled $75.9 million
at December 31, 2017 and $84.6 million at December 31, 2016. Mortgage banking commitments to sell loans totaled
$111.7 million at December 31, 2017 and $123.1 million at December 31, 2016.
71
71
BNCCORP, INC. Annual Report 2017
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. Although the Company sells
mortgage banking loans without recourse, industry standards require standard representations and warranties which
require sellers to reimburse investors for economic losses if loans default or prepay after the sale. Repurchase risk
is also evident within the mortgage banking industry as continued disputes arise between lenders and
investors. Such requests for repurchase are commonly due to faulty representation and generally emerge at varied
timeframes subsequent to the original sale of the loan. To estimate the contingent obligation, the Company tracks
historical reimbursements and calculates the ratio of reimbursement to loan production volumes. Using
reimbursement ratios and recent production levels, the Company estimates the future reimbursement amounts and
records the estimated obligation. 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
2017
2016
1,339
-
(236)
1,103
$
$
1,781
90
(532)
1,339
$
$
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, 2017 and 2016, the Bank had outstanding $238 thousand and $172 thousand, respectively, of
performance standby letters of credit and $4.1 million and $3.2 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. 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, 2017 and 2016 was $1.2 million and $1.1 million, respectively, for
facilities, and $25,000 and $8,000, respectively, for equipment and other items. At December 31, 2017, the total
minimum annual base lease payments for operating leases were as follows (in thousands):
$
2018
2019
2020
2021
2022
Thereafter
1,144
980
875
771
676
1,230
72
72
BNCCORP, INC. Annual Report 2017 Legal Proceedings
From time to time, the Company may be a party to legal proceedings arising out of our lending, deposit operations
or other activities. While the Company is not aware of any such actions or allegations that should reasonably give
rise to any material adverse effect, it is possible that we could be subjected to such a claim in an amount that could
be material. Based upon a review with our legal counsel, the Company believe that the ultimate disposition of such
pending litigation will not have a material effect on our financial condition, results of operations or cash flows.
NOTE 21. Income Taxes
The expense for income taxes on operations consists of the following for the years ended December 31 (in
thousands):
Current:
Federal
State
Deferred:
Federal
State
Total
2017
2016
$
$
1,232
270
1,502
1,459
59
1,518
3,020
$
$
1,968
363
2,331
215
85
300
2,631
On December 22, 2017 the Tax Cuts and Jobs Act was signed into Federal law. This act restructured the corporate
tax rates from a graduated schedule with a maximum effective tax rate of 35.0% to a flat effective tax rate of 21.0%
for tax years beginning after December 31, 2017. As a result of this enactment, 2017 includes a $1.208 million tax
charge to revalue net deferred tax assets.
The expense for 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
$
2,686
$
Adjustment to deferred tax asset for change in
2017
2016
Federal tax rate
State taxes (net of Federal benefit)
Tax-exempt interest
Bank-owned life insurance
Other, net
Total
$
1,208
217
(895)
(147)
(49)
3,020
$
3,328
-
296
(901)
(150)
58
2,631
73
73
BNCCORP, INC. Annual Report 2017 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
Unrealized loss on securities available for sale
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
2017
2016
2,045
406
347
125
19
-
144
3,086
-
15
499
154
668
2,418
(14)
2,404
$
$
3,413
560
-
193
20
74
316
4,576
459
16
721
250
1,446
3,130
(14)
3,116
$
$
Subject to certain limiting statutes, the Company is able to carry forward state tax net operating losses aggregating
$392 thousand as of December 31, 2017. The state net operating losses expire between 2024 and 2031.
The Company files consolidated federal and unitary state income tax returns where allowed. Tax years ended
December 31, 2014 through 2017 remain open to federal examination. Tax years ended December 31, 2013 through
2017 remain open to state examinations.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax
position will be sustained on examination by the taxing authorities, based upon the technical merits of the position.
The tax benefit recognized in the consolidated financial statements from such a position is measured based on the
largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Also, interest and
penalties expense is recognized on the full amount of deferred benefits for uncertain tax positions. The Company’s
policy is to include interest and penalties related to unrecognized tax benefits in the income tax provision within the
consolidated statements of income. At December 31, 2017 and 2016, the Company did not have any uncertain tax
positions.
74
74
BNCCORP, INC. Annual Report 2017
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
Basic earnings per common share
Diluted earnings per common share
2017
2016
3,474,988
65,710
3,540,698
$
$
$
4,878
1.40
1.38
$
$
$
3,447,635
73,183
3,520,818
7,156
2.08
2.03
NOTE 23. Related-Party/Affiliate Transactions
The Bank has entered into transactions with related parties, such as opening deposit accounts for and extending
credit to employees of the Company. The related party transactions have 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 $1.1 million
and $1.5 million at December 31, 2017 and 2016, respectively. Advances of loans to related parties in 2017 and
2016 totaled $170 thousand and $74 thousand, respectively. Loan pay downs and other reductions by related parties
in 2017 and 2016 were $561 thousand and $821 thousand, respectively. Commitments to extend credit to related
parties decreased to $239 thousand at December 31, 2017 from $278 thousand at December 31, 2016. The total
amount of deposits received from these parties was $930 thousand at December 31, 2017 and $764 thousand at
December 31, 2016. 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.
In 2017, the Company purchased a $500 thousand death benefit right on a split dollar life insurance policy from a
director for $250 thousand.
The Federal Reserve Act limits amounts of, and requires collateral on, extensions of credit by the Bank to
BNCCORP, and with certain exceptions, its non-bank affiliates. There are also restrictions on the amounts of
investment by the Bank in stocks and other subsidiaries of BNCCORP and such affiliates and restrictions on the
acceptance of their securities as collateral for loans by the Bank. As of December 31, 2017, BNCCORP and its
affiliates were in compliance with these requirements.
NOTE 24. 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 2017 and 2016, BNCCORP and its subsidiaries made matching
contributions of up to 50% of eligible employee deferrals up to a maximum employer contribution of 5% of
75
75
BNCCORP, INC. Annual Report 2017 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 $620,000 and $599,000 for 2017 and 2016, 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, 2017, the assets in the plan totaled $26.2 million and included
$869,000 (28,000 shares) invested 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. 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 22,800 shares
as of December 31, 2017 and 19,500 shares as of December 31, 2016. As of December 31, 2017, the plan obligation
totaled $878 thousand and $674 thousand as of December 31, 2016.
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. The deferred shares of BNCCORP, INC. stock were 6,464 shares and
5,371shares as of December 31, 2017 and 2016, respectively.
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, 2017 are as follows:
Total Shares in Plan
Total Shares Available
1995
250,000
45,951
2002
125,000
-
2010
250,000
250,000
2015
50,000
42,684
Total
675,000
338,635
The Company recognized share-based compensation expense of $18,000 and $94,000 for the years ended December
31, 2017 and 2016, respectively, related to restricted stock.
76
76
BNCCORP, INC. Annual Report 2017 The tax benefits associated with share-based compensation was approximately $26,000 for the year ended
December 31, 2017 and was approximately $74,000 for the year ended December 31, 2016.
At December 31, 2017, the Company had $81,000 of unamortized restricted stock compensation. At December 31,
2016, the Company had $18,000 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:
Nonvested, beginning of year
Granted
Vested
Forfeited
Nonvested, end of year
Number
Restricted
Stock
Shares
3,334
2,800
(2,667)
-
3,467
2017
$
Weighted
Average
Grant Date
Fair Value
14.57
28.78
14.06
-
26.45
Number
Restricted
Stock
Shares
14,334
-
(11,000)
-
3,334
2016
$
Weighted
Average
Grant Date
Fair Value
12.91
-
12.41
-
14.57
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, 2017:
Number
Weighted-average exercise price
Weighted-average remaining contractual term
Stock Options
Outstanding
68,600
$3.00
2.20 years
Stock Options
Currently
Exercisable
68,600
$3.00
2.20 years
Stock Options
Vested and
Expected to Vest
68,600
$3.00
2.20 years
Following is a summary of stock option transactions for the years ended December 31:
Outstanding, beginning of year
Granted
Exercised
Forfeited
Outstanding, end of year
Exercisable, end of year
Weighted average fair value of options:
Granted
Exercised
Forfeited
$
$
$
2017
2016
Options to
Purchase
Shares
75,600
-
(7,000)
-
68,600
68,600
-
27.36
-
Weighted
Average
Exercise Price
$
3.00
-
3.00
-
3.00
3.00
Options to
Purchase
Shares
107,200
-
(31,600)
-
75,600
75,600
-
17.51
-
$
$
$
Weighted
Average
Exercise Price
$
3.00
-
3.00
3.00
3.00
77
77
BNCCORP, INC. Annual Report 2017 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 11,300,000 shares; 3,465,992 and
3,456,008 shares issued and outstanding
Capital surplus – common stock
Retained earnings
Treasury stock (202,661 and 212,645 shares, respectively)
Accumulated other comprehensive income (loss), net of income taxes
Total stockholders’ equity
Total liabilities and stockholders’ equity
2017
2016
$
$
$
$
6,550
93,838
2,528
714
103,630
15,011
10,000
76
917
26,004
35
26,072
54,206
(2,741)
54
77,626
103,630
$
$
$
$
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
78
78
BNCCORP, INC. Annual Report 2017 Parent Company Only
Condensed Statements of Income
For the Years Ended December 31
(In thousands)
2017
2016
$
2,075
$
1,875
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
$
8
28
2,111
1,038
1,388
729
757
3,912
(1,801)
649
(1,152)
6,030
4,878
$
6
12
1,893
958
1,593
571
769
3,891
(1,998)
684
(1,314)
8,470
7,156
79
79
BNCCORP, INC. Annual Report 2017 Parent Company Only
Condensed Statements of Cash Flows
For the Years Ended December 31
(In thousands)
Operating activities:
Net income
Adjustments to reconcile net income to net cash provided by (used in)
$
4,878
$
7,156
2017
2016
operating activities -
Equity in earnings of subsidiaries
Share-based compensation
Change in other assets
Change in other liabilities
Net cash provided by (used in) operating activities
Investing activities:
Dividend paid by subsidiaries
Net cash provided by investing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental cash flow information:
Interest paid
Income taxes paid
(6,030)
182
1,199
156
385
2,000
2,000
2,385
4,165
6,550
1,019
707
$
$
$
(8,470)
449
(2,996)
175
(3,686)
2,500
2,500
(1,186)
5,351
4,165
1,007
2,935
$
$
$
80
80
BNCCORP, INC. Annual Report 2017 NOTE 27. Subsequent Events
The Company has evaluated subsequent events from the consolidated balance sheet date through March 22, 2018,
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.
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BNCCORP, INC. Annual Report 2017 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 Officer
612-305-2210
Timothy J. Franz
President/CEO
612-305-2213
Annual Meeting
The 2018 annual meeting of stockholders will be
held on Wednesday, June 27, 2018 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
Suite 300
1212 N. 96th Street
Omaha, NE 68114-2274
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)
2017(1)
High
Low High
First Quarter
$27.25 $25.50 $16.40 $14.26
Second Quarter $26.49 $25.30 $15.50 $14.80
Third Quarter $27.70 $25.26 $21.00 $15.25
Fourth Quarter $31.00 $26.90 $26.35 $20.10
Low
(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
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
Crosby
206 South Main Street
Crosby, ND 58730
Garrison
92 North Main
Garrison, ND 58540
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 Offices:
Glendale
6685 W. Beardsley
Glendale, AZ 85383
Bloomington
7201 West 78th Street
Bloomington, MN 55439
Directors, BNCCORP, INC.
(as of December 31, 2017)
Tracy Scott
Chairman of the Board and
Retired Co-Founder of BNCCORP, INC.
Timothy J. Franz
President and
Chief Executive Officer of BNCCORP, INC.
Nathan P. Brenna
Owner, Brenna Farm and Ranch
Former Attorney
Gaylen Ghylin
Retired 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
Michael M. Vekich
CEO, Vekich Chartered
Directors, BNC National Bank
Doug Brendel
Shawn Cleveland
Daniel J. Collins
Timothy J. Franz
Dave Hoekstra
Mark E. Peiler
Scott Spillman
Cheryl A. Stanton
Wichita
8558 W 21st Street N
Wichita, KS 67205
Wichita
12031 East 13th Street
Wichita, KS 67206
Andover
1718 N Webb Road
Andover, KS 67206
Overland Park
7007 College Boulevard
Overland Park, KS 66211
Moline
800 36th Avenue
Moline, IL 61265
Lebanon
1403 West Elm Street
Lebanon, Missouri 65336
(2) Bank branches offering mortgage
banking services.
BNCCORP, INC.
322 East Main Avenue
Bismarck, ND 58501
(701) 250-3040
www.BNCCorp.com
2017 ANNUAL REPORT