BNCCORP Inc.
Annual Report 2018

Plain-text annual report

CORPORATE DATA BNC National Bank Bank Branches – North Dakota: 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 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 Bank Branches - Arizona Bank Branches - Minnesota Glendale – Charter Address Golden Valley 20175 North 67th Ave Glendale, AZ 85308 650 North Douglas Drive Golden Valley, MN 55422 Mortgage Banking Offices: Glendale 6685 W. Beardsley Glendale, AZ 85383 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. 322 East Main Avenue, Bismarck, North Dakota 58501 Telephone (701) 250-3040 | Facsimile (701) 222-3653 Investor Relations E-mail Inquiries: corp@bncbank.com General Inquiries: BNCCORP, INC. Daniel J. Collins Chief Financial Officer 612-305-2210 Timothy J. Franz President/CEO 612-305-2213 Annual Meeting KPMG LLP Suite 1100 1000 Walnut Street Kansas City, MO 64106-2162 Securities Listing “BNCC.” Common Stock Prices For the Years Ended December 31, The 2018 annual meeting of stockholders will be held on Wednesday, June 19, 2019 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 BNCCORP, INC.’s common stock is traded on the OTCQX Markets under the symbol: (1) The quotes represent the high and low closing sales prices as reported by OTCQX Markets. First Quarter Second Quarter Third Quarter Fourth Quarter 2018(1) High $31.00 $27.25 $28.10 $27.90 Low $26.00 $25.41 $25.66 $19.20 2017(1) High $27.25 $26.49 $27.70 $31.00 Low $25.50 $25.30 $25.26 $26.90 Stock Transfer Agent and Registrar American Stock Transfer & Trust Company, LLC 6201 15th Avenue Brooklyn, NY 11219 (800) 937-5449 Corporate Broker D. A. Davidson Community Banking and Wealth Management Group 1-800-288-2811 | cbwm@dadco.com Directors, BNCCORP, INC. Tracy Scott Chairman of the Board and Retired Co-Founder of BNCCORP, INC. Timothy J. Franz President and Chief Executive 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 M. Vekich CEO, Vekich Chartered Tom Redmann Retired- Loan Manager, Bank of North Dakota Directors, BNC National Bank Doug Brendel Shawn Cleveland Daniel J. Collins Timothy J. Franz Dave Hoekstra Mark E. Peiler Scott Spillman Cheryl A. Stanton 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 13 locations. BNC also conducts mortgage banking from 12 locations in Arizona, 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, and personal wealth advisory services. 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. BNCCORP, INC. Annual Report 2018 3 Timothy J. Franz President and Chief Executive Officer TO OUR COMMUNITY, SHAREHOLDERS, CUSTOMERS AND EMPLOYEES: At BNC, we whole-heartedly believe that a community bank like ours plays a unique and vital role in the economic and social improvement of the people whose lives we touch. We make and keep important commitments: to supply the capital that enables businesses to thrive, to help individuals and families save and create wealth for the future, to provide a rewarding workplace for talented employees, to invest in the well- being of the community, and to deliver increasing value for shareholders. What enables us to deliver on these important commitments and grow our business is the strong platform that BNC has built over many years. It is this solid platform that supports the ability to engage with, and serve the needs of our customers, employees and neighbors, while delivering profitable growth for our shareholders. Building a Solid Platform The most important element of our platform is BNC’s relationship driven approach to serving our customers. In particular, we focus on the small and medium sized businesses that are the engines of growth in our communities. Because our bankers get to know their customers and understand their needs, they can deliver a high level of attentive, personalized service. Customers know they can “bank on their relationship” with BNC – and that we will be at their side to provide solutions that address specific financial challenges and opportunities. Relationship-based banking is not only better for BNC’s customers, but for our shareholders as well. By fostering enduring relationships, we have the ability to grow with our clients, providing additional products and services over time as their needs evolve. Our platform is also built on a valuable, deposit-rich franchise. Because of our relationship approach, we have been able to attract a base of deposits that provides It was a beautiful morning for a 5K run/walk when several employees and family members participated in the Head For The Cure event in Overland Park, Kansas, which benefits brain cancer research. 4 BNCCORP, INC. Annual Report 2018As a part of BNC’s project Give Back program our Wichita, Kansas mortgage team donated their time at the Kansas City Food Bank by packaging meals for other area food pantries. BNC employees collected cases of water that were then donated to nonprofit groups in their communities. a stable source of cost-effective funding. At December 31, 2018, our core deposits (including recurring customer repurchase agreement balances) totaled $860.1 million, and the cost of core deposits was 0.53%. BNC’s multi-state market presence – with banking offices in North Dakota, Arizona and Minnesota – gives us a diversified lending capability. We are positioned to take advantage of opportunities and balance our risk exposure across markets with differentiated economic cycles. In recent years, we have focused on building our lending teams in Minnesota and Arizona and approximately half of our growth in loan volume in 2018 came from those markets. As 2019 begins, we anticipate that lending opportunities in Minnesota and Arizona will be important drivers of future loan growth. A successful and growing wealth management business is another key element of BNC’s platform, and a valuable part of our business. Offering wealth management services, including retirement plans for businesses and individuals, allows us to provide greater value to customers and strengthen our long-term relationships. Wealth management assets under supervision amounted to $320.4 million at the end of 2018 and have risen 29% in the two years since January 1, 2016 (and grew to $341 million at January 31, 2019). This growth is the result of capturing wealth generated by commercial customers and converting new customers to our wealth management services. BNC’s ability to offer a wide range of financial solutions also contributes to the strength of our platform. Our relationship-based approach to customer service is “high-touch,” but we also recognize that clients are increasingly demanding the kind of convenient, personalized, 24/7 services enabled by today’s advanced technology. Among our newer service offerings are mobile wallet services and mobile phone based transaction capabilities. Customers expect access to their accounts anytime, anywhere and they expect a seamless experience across all channels. We have invested in a comprehensive suite of digital banking solutions, offering a safe, easy and fast way for customers to access information and initiate transactions across multiple channels. What enables us to deliver on these important commitments and grow our business, is the strong platform that BNC has built over many years. 5 BNCCORP, INC. Annual Report 2018Delivering Strong Performance Our focus on building a robust community banking enterprise has generated strong financial results since 2011. We delivered double-digit returns on equity in five of the past eight years, a performance that compares well to our community bank peers. Book value per share increased more than fourfold from $5.35 at the end of 2011 to $22.26 at December 31, 2018. Return on Equity 76.77% 15.77% 14.77% 11.91% 11.26% 9.48% 8.15% 9.00% 2011 2012 2013 2014 2015 2016 2017 2018 2017 ROE excludes the $1.5 million impact of the 2017 Tax Cut and Jobs Act. All ROE calculations include accumulated other comprehensive income. BNC’s relationship- oriented approach means that we not only provide financial solutions to individuals and businesses, but also become deeply engaged in the local communities. In 2018, our performance did not match the performance metrics of several recent years. Nonetheless, we generated $1.93 diluted earnings per share in a rising rate environment that adversely impacted mortgage banking and increased the cost of deposits. Despite these challenges, we delivered an increase in net income, grew loans and leases held for investment by 9.4%, grew core deposits by 2.9%, and maintained solid asset quality. Net income for 2018 increased by nearly $2.0 million to $6.8 million, compared to $4.9 million, or $1.38 per diluted share, for 2017. Our prior year net income and diluted earnings per share, adjusted for the impact of tax reform late in 2017, were $6.4 million and $1.81, respectively. Earnings growth in 2018 was primarily driven by higher net interest income due to increases in earning asset balances and yields on loans and investments, a decrease in non-interest expenses, and lower income tax expense. These factors were partly offset by a decrease in non-interest income as compared with 2017. Total assets were $971.0 million at December 31, 2018, rising $24.9 million, or 2.6%, compared to 2017. Loans and leases held for investment were $468.5 million at year-end 2018, an increase of $40.1 million, or 9.4%, since 2017. Total deposits increased $30.8 million to $848.6 million at December 31, 2018. Asset quality remained strong. Nonperforming assets were $1.7 million at December 31, 2018, down from $2.0 million a year earlier. The ratio of nonperforming assets to total assets was 0.17% at December 31, 2018, an improvement from 0.21% at December 31, 2017. 6 BNCCORP, INC. Annual Report 2018Focus on Driving Improved Results It is worth noting that while many economic forces are not under our control, such as market interest rates, we continually work to improve our performance. Our team has a track record of taking actions – both large and small – to drive operating improvements and we are sharply focused on enhancing BNC’s performance in 2019 and beyond. In recent years we have taken actions such as selling unprofitable peripheral branch offices, lowering costs in our mortgage banking business, exiting underperforming indirect lending in Arizona, and selling our tax practice to a third party to simplify and improve earnings. We have pursued technology initiatives to reduce the overall costs of our network, infrastructure, and applications, which have also resulted in improved efficiency and customer service. Commitment to Our Communities BNC’s relationship-oriented approach means that we not only provide financial solutions to individuals and businesses, but also become deeply engaged in the local communities where we, and our customers, live and work. For this reason, we actively invest in arts, education, business development and youth programs that are vital to the well-being of our communities. Our team members also embrace this vision and devote their time and talent to a wide range of community activities. Here are just a few of the many community organizations across our market area in which we were involved in the past year: • Sponsoring fund-raising walks for organizations such as the ALS Association of North Dakota and the American Heart Association. • Working with The Banquet, helping to fund, prepare and serve meals for homeless, elderly and other needy populations in the Bismarck/Mandan area. • Supporting organizations such as the United Way and Meals on Wheels in a number of communities. • In Minnesota, supporting Hammers of Hope, an organization of volunteers who help community members who need home repairs. • Participating in an event to assist Veterans in Business in Arizona. Volunteers prepared and served a meatloaf dinner for over 400 attendees at The Banquet - a weekly, free community meal. This event has become an annual tradition for Bismarck-Mandan North Dakota staff. • In Wichita, Kansas, members of our mortgage team volunteered for organizations such as Habitat for Humanity and a local food bank. And, in Kansas City our mortgage team participated in a drive to stock food pantries with bottled water during the summer. Developing a Talented Team BNC actively supports the professional development of our employees, to ensure they have the skills and experience to thrive in a rapidly changing financial services industry. We encourage employee development in many ways, including working to identify and promote self-starters – those doers and thinkers who take responsibility, get involved, and find new solutions. Such team members are given opportunities to develop policies and programs, and then lead them. We also cultivate employees who take the initiative to learn, apply, and master new challenges by supporting and promoting those who can identify, research, and apply knowledge to the emerging needs of our organization. 7 BNCCORP, INC. Annual Report 2018Our talent development efforts are designed to reward those people who have the entrepreneurial spirit that is fundamental to BNC – and who demonstrate the drive and commitment we will need to serve our customers, advance our operational progress, and continue our growth and value creation. Looking Ahead BNC’s results in 2018 reflected our determination to operate a community bank that is positioned to build strong relationships with customers and generate increased value for shareholders. While we are not satisfied with recent results, we are delivering earnings and asset growth, improving the effectiveness of our operations, and investing in talent. I want to thank everyone who contributed to our enterprise: our colleagues for their hard work and integrity, our board members for their guidance, our shareholders for their confidence, and our customers and community for their loyalty and trust. As we look toward 2019 and beyond, we will strive to realize BNC’s potential by improving our mortgage operations, focusing on loan and deposit growth, and taking action to enhance sustainable core earnings. Our efforts will be aided by the solid platform we have constructed over the years – with a relationship-based approach to service, deposit-rich franchise, multi- regional loan generation capacity, and a diverse portfolio of financial solutions – delivered by a talented group of team members with a commitment to outstanding service. We are confident that BNC can continue to successfully execute on our strategic plans, enabling us to continue to grow profitably, serve our customers and community, and enhance shareholder value. 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. 8 BNCCORP, INC. Annual Report 2018____________________________ Year End Financial Report ____________________________ For the Year Ended December 31, 2018 BNCCORP, INC. (OTCQX: BNCC) 322 East Main Bismarck, North Dakota 58501 (701) 250-3040 BNCCORP, INC. Annual Report 2018 9 BNCCORP, INC. INDEX TO YEAR END FINANCIAL REPORT December 31, 2018 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 10 BNCCORP, INC. Annual Report 2018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, 2018 2017 2016 2015 2014 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 $ $ $ $ $ $ $ $ 34,478 $ 31,443 $ 29,346 $ 27,915 $ 6,108 28,370 - 19,017 39,013 1,538 6,836 - 6,836 971,027 411,509 22,788 468,468 (7,692) 848,605 860,099 11,494 - 10,000 15,009 - 77,753 22.26 24.24 7.99% $ $ $ $ $ 3,578 27,865 350 19,499 39,116 3,020 4,878 - 4,878 $ $ 946,150 $ 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% $ $ 3,343 26,003 800 25,777 41,193 2,631 7,156 - 7,156 910,400 400,136 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% $ $ $ $ $ 2,570 25,345 (400) 24,950 37,544 3,945 9,206 1,656 7,550 904,246 419,346 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% $ $ $ $ $ 29,264 3,308 25,956 (800) 20,454 34,683 4,071 8,456 1,796 6,660 934,419 449,333 47,109 360,789 (8,601) 811,231 773,279 16,002 - - 15,018 21,098 62,390 18.28 16.72 6.67% 0.70% 0.50% 0.78% 1.01% 0.94% 8.33% 82.33% 3.08% 2.90% 6.45% 82.59% 3.05% 2.92% 10.35% 79.55% 3.03% 2.93% 12.21% 74.65% 2.96% 2.86% 1.96 1.93 $ $ 1.40 1.38 $ $ 2.08 2.03 $ $ 2.23 2.16 $ $ 3,487,846 3,539,755 3,493,298 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 0.17% 0.17% 0.36% 1.57% 0.21% 0.21% 0.46% 1.69% 0.29% 0.27% 0.59% 1.82% 0.09% 0.06% 0.15% 2.00% 12.37% 74.73% 3.07% 2.97% 1.98 1.91 3,369,021 3,491,254 3,413,854 0.03% 0.01% 0.02% 2.11% (1) The 2017 results include amounts linked to tax reform legislation aggregating $1.515 million. Excluding the impact of these amounts, the Company 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 0.66% and Return on average common stockholder’s equity would have been 8.46%. Basic and diluted earnings per share would be $1.84 and $1.81, respectively. 11 BNCCORP, INC. Annual Report 2018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 2018 Third Quarter Fourth Quarter YTD $ 8,016 $ 8,520 $ 8,836 $ 9,106 $ 34,478 1,156 6,860 - 6,860 5,881 9,768 2,973 577 1,458 7,062 - 7,062 5,727 10,014 2,775 630 1,658 7,178 - 7,178 3,979 9,806 1,351 284 1,836 7,270 - 7,270 3,430 9,425 1,275 47 2,396 $ 2,145 $ 1,067 $ 1,228 $ 6,108 28,370 - 28,370 19,017 39,013 8,374 1,538 6,836 0.69 0.68 $ $ 0.61 0.60 $ $ 0.31 0.30 $ $ 0.35 0.35 $ $ 1.96 1.93 $ $ $ 3,487,155 3,496,135 3,497,426 3,507,426 3,487,846 3,547,427 3,548,350 3,549,793 3,550,207 3,539,755 12 BNCCORP, INC. Annual Report 2018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 13 BNCCORP, INC. Annual Report 2018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. 14 BNCCORP, INC. Annual Report 2018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 2018 2017 $ $ $ $ 34,478 6,108 28,370 - 19,017 39,013 8,374 1,538 6,836 1.96 1.93 $ $ $ $ 31,443 3,578 27,865 350 19,499 39,116 7,898 3,020 4,878 1.40 1.38 The following is a brief comparison of 2018 to 2017 performance:  In 2018, net interest income increased 1.8% from 2017 as a result of higher balances and yields on loans held for investment coupled with higher yields on investments, partially offset by increased deposit costs.  Non-interest income decreased $482 thousand, or 2.5%, in 2018, compared to 2017. The decrease primarily relates to an 11.2% decrease in mortgage banking revenue, net, partially offset by gains on sale of securities.  Credit quality remained strong in 2018. At December 31, 2018, our non-performing assets improved to 0.17% of total assets, compared to 0.21% at December 31, 2017.  Non-interest expense decreased by $103 thousand, or 0.3%, in 2018. Salaries and employee benefits decreased $420 thousand, or 2.0%. Professional services expense decreased $550 thousand, or 14.0%, primarily due to reduced mortgage banking volumes and reduced legal fees. Marketing and promotion expenses increased $765 thousand, or 22.2%, largely attributed to increased competition for mortgage banking leads. In 2018, the effective tax rate decreased to 18.4% from 38.2% in 2017. The decrease in the effective tax rate is primarily due to the enactment of federal tax legislation in late 2017 that reduced the statutory federal tax rate effective beginning January 1, 2018. The 2017 effective tax rate included the impact of a $1.208 million deferred tax asset revaluation.  15 BNCCORP, INC. Annual Report 2018General Net income in 2018 was $6.836 million compared to net income of $4.878 million in 2017. Earnings per diluted share was $1.93 in 2018 and $1.38 in 2017. 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, 2017 Interest earned or owed 2018 Interest earned or owed 2016 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 $ 14,992 $ $ $ 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 371,177 63,049 25,772 454,215 (7,792) 921,413 8,961 48,972 979,346 486,754 $ 35,276 171,531 693,561 17,944 4,662 10,000 15,010 741,177 154,984 896,161 7,253 903,414 75,932 260 9,233 1,699 1,069 22,217 - 34,478 1.74% $ 2.49% 2.69% 4.15% 4.89% 0.00% 3.72% 38,367 $ 345,621 90,324 27,271 420,906 (7,949) 914,540 416 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% 8,901 47,591 971,032 $ 8,774 46,474 914,017 $ 2,439 19 2,303 4,761 74 95 635 543 6,108 - 0.50% $ 0.05% 1.34% 0.69% 487,063 $ 35,067 158,266 680,396 0.41% 2.04% 6.35% 3.62% 0.82% 0.00% 14,732 1,903 10,000 15,012 722,043 163,603 885,646 6,967 892,613 78,419 953 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% 0.16% 0.54% 6.34% 2.10% 0.49% 0.00% stockholders’ equity $ 979,346 $ 971,032 $ 914,017 Net interest income $ 28,370 $ 27,865 $ 26,003 Net interest spread Net interest margin 2.90% 3.08% 2.92% 3.05% 2.93% 3.03% Ratio of average interest-earning assets to average interest-bearing liabilities 124.32% 126.66% 125.71% 16 BNCCORP, INC. Annual Report 2018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, 2018 Compared to 2017 For the Years Ended December 31, 2017 Compared to 2016 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 (330) 583 (754) (58) 1,657 $ $ 174 1,104 (242) 117 784 $ (156) 1,687 (996) 59 2,441 $ 388 386 (33) $ 17 1,033 24 (823) 946 183 (24) 405 1,419 (9) (640) 922 Total increase in interest income 1,098 1,937 3,035 864 1,233 2,097 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 1 - 296 7 40 - - 344 1,485 9 461 40 39 - 152 1,486 9 757 47 79 - 152 141 1 8 1 (254) - - 2,186 2,530 (103) 241 - (56) 4 72 1 76 338 382 1 (48) 5 (182) 1 76 235 income $ 754 $ (249) $ 505 $ 967 $ 895 $ 1,862 Net interest income was $28.370 million in 2018 compared to $27.865 million in 2017, an increase of $505 thousand, or 1.8%. The net interest margin increased to 3.08% for the year ended December 31, 2018 from 3.05% in 2017. Overall, yields on earning assets were 3.72% in 2018 and 3.42% in 2017. Average loans held for investment increased $33.3 million in 2018, or 7.9%, compared to 2017, while average loans held for sale decreased $1.5 million and average investments decreased $1.7 million. The cost of interest bearing deposits was 0.69% in 2018 and 0.37% in 2017. The cost of interest bearing liabilities increased to 0.82% in 2018 from 0.50% in 2017. After successfully managing rising interest rates in recent years, the Company enacted certain adjustments to deposit rates in response to the most recent rate increases. 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%. 17 BNCCORP, INC. Annual Report 2018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, 2018 2017 Increase (Decrease) % $ 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 $ $ 2,687 1,810 10,032 187 2,293 2,008 19,017 $ $ 2,719 1,717 11,301 736 745 2,281 19,499 $ $ (32) 93 (1,269) (549) 1,548 (273) (482) (1) % 5 % (a) (11) % (b) (75) % (c) 208 % (d) (12) % (e) (2) % (a) Wealth management revenues increased as average assets under administration were higher during 2018. (b) Mortgage banking revenues were lower in 2018 as increasing rates resulted in lower mortgage production and compressed margins. The rate of decline slowed from a 49% reduction from 2016 to 2017. (c) Gains on sale of loans can vary significantly from period to period. Recently, the Company has retained the guaranteed portion of SBA loans as the premiums investors are willing to pay have compressed. (d) Gains and losses on sales of securities may vary significantly from period to period. 2017 included losses on sales of securities intended to maximize the positive impact of tax reform. (e) Other income in 2018 included $1.442 million of income resulting from the divestiture of a portfolio company by one of our SBIC Fund investments. Other income in 2017 included funds associated with a legal settlement, as well as a gain on the sale of a bank 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, 2018 2017 Increase (Decrease) % $ $ $ 20,074 3,378 4,027 4,212 2,408 540 1,545 574 - 2,255 39,013 82.33% $ $ 20,494 3,928 3,716 3,447 2,436 556 1,627 629 (31) 2,314 39,116 82.59% $ $ (420) (550) 311 765 (28) (16) (82) (55) 31 (59) (103) (0.26)% (2) % (14) % (a) 8 % (b) 22 % (c) (1) % (3) % (5) % (9) % (d) (100) % (e) (3) % - % (a) Professional service expense is lower due to reduced mortgage banking activity and legal costs. (b) Data processing fees increased as standard core processing costs continue to increase along with additional infrastructure expense to expand our current platform in response to continued customer growth. (c) Marketing and promotion increased primarily due increased competition for mortgage banking leads. (d) Office supplies and postage decreased as the Company continues to more efficiently distribute hardcopy data. (e) Other real estate costs will vary from period to period depending on valuation adjustments on our foreclosed properties– see Note 6 of our Consolidated Financial Statements. At December 31, 2018, the Company held no property in other real estate. 18 BNCCORP, INC. Annual Report 2018Income Tax Expense During 2018, we recorded tax expense of $1.538 million, which resulted in an effective tax rate of 18.4%. It is lower than the federal statutory rate primarily due to a portion of the Company’s pretax income being derived from tax- exempt securities in 2018. Subject to certain statutory limitations, the Company is able to carry forward state tax net operating losses aggregating $431 thousand as of December 31, 2018. The state net operating losses expire between 2024 and 2031. 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. Financial Condition Assets The following table presents our assets by category (dollars are in thousands): As of December 31, 2018 2017 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 Premises and equipment, net Accrued interest receivable Other assets Total assets $ 25,185 411,509 2,941 22,788 460,776 16,761 5,079 25,988 971,027 $ $ 25,830 411,917 2,897 36,601 420,464 19,403 4,848 24,190 946,150 $ $ (645) (408) 44 (13,813) 40,312 (2,642) 231 1,798 24,877 (2) % - % 2 % (38) % (a) 10 % (b) (14) % (c) 5 % 7 % (d) 3 % (a) Loans held for sale decreased as balances will fluctuate with the timing of loan funding and sales. (b) Loans and lease held for investment, net increased in each of our core markets. (c) Premises and equipment decreased primarily due to the sale of land in Gilbert, Arizona. (d) Other a ssets increased primarily due to an increase in deferred tax assets related to unrealized losses in investment securities. 19 BNCCORP, INC. Annual Report 2018Investment Securities Available for Sale The following table presents the composition of the available-for-sale investment portfolio (in thousands): December 31, 2018 2017 Amortized cost Estimated fair market value Amortized cost Estimated fair market value U.S. Treasury securities U.S. government agency mortgage-backed securities issued by FNMA/FHLMC U.S. government agency small business administration pools guaranteed by SBA Collateralized mortgage obligations guaranteed by GNMA/VA Collateralized mortgage obligations issued by FNMA or FHLMC Asset-backed securities State and municipal bonds Total investments $ 59,710 $ 58,794 $ 40,002 $ 39,466 10,221 10,132 4,522 4,512 158,430 150,966 141,837 139,392 63,149 52,635 24,170 53,862 62,257 51,779 24,045 53,536 69,296 51,550 16,071 90,048 $ 422,177 $ 411,509 $ 413,326 $ 67,916 50,517 16,010 94,104 411,917 There were no securities that management concluded were other-than-temporarily impaired during 2018 or 2017. 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, 2018 (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/FHLMC(1) (2) U.S. government agency small business administration pools guaranteed by SBA(1) (2) Collateralized mortgage obligations guaranteed by GNMA(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% $ 34,692 2.07% $ 25,018 2.11% $ - 0.00% $ 59,710 2.09% 0.00% - 0.00% 5,967 3.39% 4,254 2.90% 10,221 3.19% 0.00% 469 1.45% 39,006 2.65% 118,955 2.49% 158,430 2.53% 0.00% 0.00% 0.00% 0.00% - - - - 0.00% 0.00% 0.00% 0.00% - - 0.00% 63,149 2.98% 63,149 2.98% 0.00% 52,635 3.23% 52,635 3.23% 24,170 2.93% - 0.00% 24,170 2.93% - 0.00% 53,862 3.83% 53,862 3.83% 0.00% $ 35,161 2.06% $ 94,161 2.63% $ 292,855 2.98% 422,177 2.83% (10,668) $ 411,509 2.90% (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. 20 BNCCORP, INC. Annual Report 2018As of December 31, 2018, we had $411.5 million of available-for-sale securities in the investment portfolio compared to $411.9 million at December 31, 2017. In 2018, available-for-sale investment securities were relatively unchanged as compared to 2017. At December 31, 2018, all classifications of investment securities available for sale 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, 2018 and December 31, 2017. Loans The following table presents our loan portfolio as of December 31 (dollars are in thousands): 2018 2017 2016 2015 2014 Amount % Amount % Amount % Amount % Amount % $ 22,788 100.0 $ 36,601 100.0 $ 39,641 100.0 $ 50,445 100.0 $ 47,109 100.0 Loans held for sale- mortgage banking Loans Held for Investment: Commercial and industrial $ 149,886 32.0 $ 126,169 29.4 $ 123,604 29.8 $ 125,009 32.9 $ 132,229 Commercial real estate 174,868 37.3 6.9 16.7 2.4 4.5 177,429 25,064 71,876 14,168 13,167 41.4 5.9 16.8 3.3 3.1 171,972 31,518 59,183 15,982 12,215 41.5 7.6 14.3 3.9 2.9 149,099 25,860 47,073 17,627 15,187 39.3 6.8 12.4 4.6 4.0 108,122 26,972 40,470 28,220 24,916 32,505 78,055 11,398 21,257 36.6 30.0 7.5 11.2 7.8 6.9 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 467,969 99.9 427,873 99.9 414,474 100.0 379,855 100.0 360,929 100.0 499 0.1 452 0.1 199 - 48 - (140) - $ 468,468 100.0 $ 428,325 100.0 $ 414,673 100.0 $ 379,903 100.0 $ 360,789 100.0 21 BNCCORP, INC. Annual Report 2018The following table presents the change in our loan portfolio (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 December 31, Increase (Decrease) 2018 2017 $ % 22,788 $ 36,601 $ (13,813) (37.7) % (a) $ 149,886 174,868 32,505 78,055 11,398 21,257 467,969 499 $ 126,169 177,429 25,064 71,876 14,168 13,167 427,873 452 23,717 (2,561) 7,441 6,179 (2,770) 8,090 40,096 18.8 % (1.4) % 29.7 % (b) 8.6 % (c) (19.6) % 61.4 % 9.4 % 47 10.4 % unamortized fees and costs $ 468,468 $ 428,325 $ 40,143 9.4 % (d) (a) Loans held for sale decreased as balances will fluctuate with the timing of loan funding and sales. (b) The Company has retained the guaranteed portion of SBA loans as the premiums investors are willing to pay have compressed. (c) Consumer loans increased primarily due to North Dakota indirect vehicle lending. (d) Loans held for investment increased due to continued loan production in our core markets. Loan Participations Pursuant to our lending policy, loans may not exceed 85% of the Bank’s legal lending limit (except to the extent collateralized by U.S. Treasury securities or Bank deposits and, accordingly, excluded from the Bank’s legal lending limit) unless the Chief Credit Officer and the Executive Credit Committee grant prior approval. To accommodate customers whose financing needs exceed lending limits and internal loan concentration limits, the Bank sells loan participations to outside participants without recourse. Loan participations sold on a nonrecourse basis to outside financial institutions were as follows as of December 31 (in thousands): 2018 2017 2016 2015 2014 $ 166,291 176,733 182,224 176,439 180,192 22 BNCCORP, INC. Annual Report 2018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 2018 325,646 80,896 32,215 29,212 467,969 $ $ 70 % 17 % 7 % 6 % 100 % $ $ 2017 304,129 65,284 24,144 34,316 427,873 71 % 15 % 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 South Dakota Other Total gross loans held for investment $ 2018 302,813 99,394 25,870 12,521 9,266 7,814 5,331 4,960 467,969 65 % 21 % 5 % 3 % 2 % 2 % 1 % 1 % 100 % $ $ 2017 286,075 88,514 16,697 9,965 8,416 8,134 3,824 6,248 427,873 67 % 21 % 4 % 2 % 2 % 2 % 1 % 1 % 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 2018 Total Loans and Leases Held for Investment 2017 Total Loans and Leases Held for Investment $ $ $ $ 45,241 4,439 25,525 7,932 42,591 109,829 5,044 62,212 302,813 66,545 21,257 26,425 11,398 56,916 174,868 32,505 78,055 467,969 $ $ $ $ 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 23 BNCCORP, INC. Annual Report 2018Loan Maturities (1) The following table sets forth the remaining maturities of loans in our portfolio as of December 31, 2018 (in thousands): Over 1 year through 5 years Over 5 years One year or less Fixed Rate Indexed Rate Fixed Rate Indexed Rate Commercial and industrial Commercial real estate SBA Consumer Land and land development Construction Total principal amount of loans $ $ 18,979 1,000 1,778 1,468 1,300 2,434 26,959 $ $ 6,792 1,821 600 427 1,033 3,590 14,263 $ $ 17,418 $ 1,741 4,440 3,848 1,296 15,233 43,976 $ 52,447 $ 41,120 3,331 63,581 5,971 - 166,450 $ 54,250 $ 129,186 22,356 8,731 1,798 - 216,321 $ Total Loans and Leases Held for Investment 149,886 174,868 32,505 78,055 11,398 21,257 467,969 (1) Maturities are based on contractual maturities. Indexed 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 2018, no provision for credit losses was recorded, compared to $350 thousand in 2017. 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. 24 BNCCORP, INC. Annual Report 2018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 Balance of allowance for credit losses, end of period 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 investment 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 2018 2017 2016 2015 2014 For the Years ended December 31, $ 7,861 $ 8,285 $ 8,611 $ 8,601 $ 9,847 (71) (1) (59) (129) - - (260) 40 16 4 31 - - 91 (169) - (84) - (566) (123) (103) - (876) - 12 48 40 2 - 102 (774) 350 (1,004) - (71) (99) - - (1,174) - 13 15 20 - - 48 (1,126) (47) - (145) (43) - - (235) 7 551 68 19 - - 645 410 800 (400) - (439) (109) (42) (190) - (780) - 8 5 21 300 - 334 (446) (800) $ 7,692 $ 7,861 $ 8,285 $ 8,611 $ 8,601 (0.035)% (0.173)% (0.250)% 0.103% (0.123)% (0.037)% (0.184)% (0.282)% 0.117% (0.134)% $ 454,215 $ 420,906 $ 399,669 $ 350,840 $ 331,982 1.64% 1.57% 0.17% 1.84% 1.69% 0.21% 2.00% 1.82% 0.27% 2.27% 2.00% 0.06% 2.38% 2.11% 0.01% 25 BNCCORP, INC. Annual Report 2018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). 2018 2017 2016 2015 2014 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 $ 1,937 32% $ 2,158 30% $ 2,323 30% $ 3,205 33% $ 2,686 Commercial real estate SBA Consumer Land and land development Construction 3,558 845 928 225 199 37% 7% 17% 2% 5% 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 37% 30% 7% 11% 8% 7% Total $ 7,692 100% $ 7,861 100% $ 8,285 100% $ 8,611 100% $ 8,601 100% 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. 26 BNCCORP, INC. Annual Report 2018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 total nonperforming loans to total assets Ratio of allowance for credit losses to total nonperforming loans 2018 2017 As of December 31, 2016 2015 2014 $ $ $ - 1,686 1,686 - 1,686 7,692 0.34% 0.36% 0.17% 0.17% $ $ $ 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% 456% 397% 339% 1,524% 14,100% 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 2018 2017 1,978 349 (194) (26) (409) (12) - 1,686 $ $ 2,445 938 (790) - (551) (24) (40) 1,978 $ $ 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 2018 2017 $ $ 436 88 348 $ $ 372 89 283 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. 27 BNCCORP, INC. Annual Report 2018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): $ 2018 2017 2016 2015 2014 Total Accrual Non-accrual $ 3,348 1,908 2,153 2,197 5,105 $ 1,779 1,801 1,845 1,884 5,105 1,569 107 308 313 - 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 $ $ 5,206 1,730 8,125 7,945 473 5,206 1,730 8,125 7,945 2,060 Impaired $ 106 52 6 11 56 Substandard Other $ 9,069 9,062 10,511 9,398 9,077 $ Total 9,175 9,114 10,517 9,409 9,133 2018 2017 2016 2015 2014 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. 28 BNCCORP, INC. Annual Report 2018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 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, 2018 2017 Increase (Decrease) $ % $ 157,663 $ 164,401 $ (6,738) (4) % (a) 542,735 148,207 11,494 10,000 15,009 1,277 5,700 1,189 893,274 77,753 498,044 155,361 18,043 10,000 15,011 950 6,107 607 868,524 77,626 44,691 (7,154) (6,549) - (2) 327 (407) 582 24,750 127 9 % (a) (5) % (a) (36) % (b) - % - % 34 % (c) (7) % (d) 96 % (e) 3 % - % equity $ 971,027 $ 946,150 $ 24,877 3 % (a) BNC markets have been successful in generating deposit growth throughout 2018. This increase largely relates to significant deposits by customers experiencing large cash generating transactions. (b) Short-term borrowings will vary depending on our customers need to use repurchase agreements. (c) Accrued interest payable increased predominantly due to the increased cost of deposits throughout 2018. (d) Accrued expenses decreased due to decreased accruals for incentive compensation and mortgage production commission. (e) The increase is primarily due to higher commitments to sell and timing of tax payments. Mortgage Banking Obligations Included in accrued expenses is an estimate of mortgage banking reimbursement obligations which aggregated $982 thousand and $1.1 million at December 31, 2018 and 2017, 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 19 of our Consolidated Financial Statements for a description of financial instruments with off-balance-sheet risk. 29 BNCCORP, INC. Annual Report 2018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, 2018 Percent Wgtd. avg. rate of deposits 2017 Percent of deposits Average balance Average balance Wgtd. avg. rate Average balance 2016 Percent Wgtd. avg. rate of deposits $ 486,754 57.4% 0.50% $ 487,063 57.7% 0.20% $ 424,393 56.4% 0.13% 35,276 171,531 4.2% 0.05% 20.2% 1.34% 35,067 158,266 4.1% 0.03% 18.8% 0.98% 32,146 150,720 4.3% 0.03% 20.0% 1.05% 693,561 81.7% 0.69% 680,396 80.6% 0.37% 607,259 80.7% 0.36% 154,984 18.3% 0.00% 163,603 19.4% 0.00% 145,842 19.3% 0.00% Interest checking and MMDAs Savings deposits Time deposits Total interest-bearing deposits Non-interest-bearing demand deposits Total deposits (1) $ 848,545 100.0% 0.56% $ 843,999 100.0% 0.30% $ 753,101 100.0% 0.29% (1) Included in average total deposits are $18.2 million, $0, and $11.7 million of average brokered deposits for the years ending 2018, 2017, and 2016, 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. In recent periods, deposits in North Dakota and Arizona have grown significantly. The table below shows total deposits since 2014 (in thousands): 2018 2017 As of December 31, 2016 2015 2014 ND Bakken Branches ND Non-Bakken Branches Total ND Branches Brokered Time Deposits Other Total Deposits $ $ 185,713 431,246 616,959 - 231,646 848,605 $ $ 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 Time deposits, in denominations of $250,000 and over, totaled $34.2 million at December 31, 2018 as compared to $28.9 million at December 31, 2017. The following table sets forth the amount and maturities of time deposits of $250,000 and over as of December 31, 2018 (in thousands): Maturing in: 3 months or less Over 3 months through 6 months Over 6 months through 12 months Over 12 months $ $ 4,703 4,734 9,141 15,634 34,212 30 BNCCORP, INC. Annual Report 2018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 2018 2017 2016 $ $ $ 11,494 0.84% 19,955 17,944 0.41% $ $ $ 18,043 0.25% 24,671 14,732 0.18% $ $ $ 12,510 0.15% 16,901 13,919 0.16% Note 9 of our Consolidated Financial Statements summarizes the general terms of our short-term borrowings outstanding at December 31, 2018 and 2017. FHLB advances totaled $0 at December 31, 2018 and December 31, 2017. 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, 2018 and 2017. 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) 2018 2017 2016 2015 2014 9.97% 20.26% 14.67% 17.28% 7.99% 9.92% 18.44% 17.19% 17.19% 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% 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 its 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 of our Consolidated Financial Statements for a detailed description of Subordinated Debentures. 31 BNCCORP, INC. Annual Report 2018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, standby and commercial letters of credit, and performance and financial standby letters of credit. 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 Note 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 three 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. Investment-related financial instruments, characterized as an off-balance-sheet item, include potential funding for investments in Small Business Investment Companies (SBIC). See Note 20 of our Consolidated Financial Statements. At December 31, 2018, 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 Commitments to fund SBIC Total Payments due by period Less than 1 year 1 to 3 years 3 to 5 years After 5 years Total 11,494 22,495 1,155 35,144 $ $ - - 1,818 1,818 $ $ - - 1,407 1,407 $ $ 25,009 - 855 25,864 $ $ 36,503 22,495 5,235 64,233 Amount of Commitment - Expiration by Period Less than 1 year 1 to 3 years 3 to 5 years After 5 years Total 122,507 93,319 885 800 217,511 $ $ 19,587 - 10 200 19,797 $ $ 5,801 - - - 5,801 $ $ 1,230 - - 405 1,635 $ $ 149,125 93,319 895 1,405 244,744 $ $ $ $ 32 BNCCORP, INC. Annual Report 2018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 ($143.2 million as of December 31, 2018); 2. Borrowing capacity from the FHLB ($147.0 million as of December 31, 2018); and 3. Capacity to issue brokered deposits with maturities of less than 12 months ($135.9 million as of December 31, 2018). 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. 33 BNCCORP, INC. Annual Report 2018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 34 BNCCORP, INC. Annual Report 2018sheet accounts are held constant at their December 31, 2018 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, 2018 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. 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 5.50% to 6.50% 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 2019 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 -300bp -200bp -100bp Unchanged +100bp +200bp +300bp $ $ 28,264 (1,381) $ $ 29,011 (634) $ $ (136) 29,509 $ 29,645 (4.66)% (2.14)% (0.46)% $ $ 29,302 (343) $ $ 28,946 (699) $ $ 28,746 (899) (1.16)% (2.36)% (3.03)% - - 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, 2018 (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, 2018. Assets and liabilities are classified by the earliest possible repricing date or maturity, whichever occurs first. 35 BNCCORP, INC. Annual Report 2018 Interest Sensitivity Gap Analysis Estimated maturity or repricing at December 31, 2018 0–3 Months 4–12 Months 1–5 Years (dollars are in thousands) Over 5 years Interest-earning assets: Interest-bearing deposits with banks $ 25,185 $ - $ - $ - $ Investment securities (a) FRB and FHLB stock Loans held for sale-mortgage banking, fixed rate Loans held for investment, fixed rate Loans held for investment, indexed rate 143,393 14,245 94,970 132,604 2,941 22,788 13,875 94,785 - - 33,081 26,518 - - 118,075 153,273 - - 25,221 3,640 Total 25,185 385,212 2,941 22,788 190,252 278,216 Total interest-earning assets $ 302,967 $ 73,844 $ 366,318 $ 161,465 $ 904,594 Interest-bearing liabilities: Interest checking and money market accounts Savings Time deposits Short-term borrowings Long-term borrowings Subordinated debentures $ 507,011 $ 35,724 20,554 11,494 - - Total interest-bearing liabilities Interest rate gap Cumulative interest rate gap at December 31, 2018 Cumulative interest rate gap to total assets $ $ $ 574,783 (271,816) (271,816) (27.99%) $ $ $ $ - - $ - - $ 507,011 57,296 - - 15,000 72,296 1,548 (270,268) (27.83%) $ $ $ 70,165 - 10,000 - 80,165 286,153 15,885 1.64% - - 192 - - 9 35,724 148,207 11,494 10,000 15,009 727,445 177,149 $ $ $ $ $ 201 161,264 177,149 18.24% (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, 2018 and do not contemplate any actions we might undertake in response to changes in market interest rates. 36 BNCCORP, INC. Annual Report 2018BNCCORP, INC. AND SUBSIDIARIES Consolidated Financial Statements December 31, 2018 and 2017 (With Independent Auditors’ Report Thereon) 37 BNCCORP, INC. Annual Report 2018INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Independent Auditors’ Report Consolidated Balance Sheets as of December 31, 2018 and 2017 Consolidated Statements of Income for the Years Ended December 31, 2018 and 2017 Consolidated Statements of Comprehensive (Loss) Income for the Years Ended December 31, 2018 and 2017 Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2018 and 2017 Consolidated Statements of Cash Flows for the Years Ended December 31, 2018 and 2017 Notes to Consolidated Financial Statements Page 73 83 93 40 41 42 44 38 BNCCORP, INC. Annual Report 2018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, 2018 and 2017, and the related consolidated statements of income, comprehensive (loss) 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, 2018 and 2017, 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 26, 2019 39 BNCCORP, INC. Annual Report 2018KPMG 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 11001000 Walnut StreetKansas City, MO 64106-2162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 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 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; 3,493,298 and 3,465,992 shares issued and outstanding Capital surplus – common stock Retained earnings Treasury stock (175,355 and 202,661 shares, respectively) Accumulated other comprehensive income, net Total stockholders’ equity Total liabilities and stockholders’ equity $ $ $ $ 2018 2017 25,185 411,509 2,941 22,788 468,468 (7,692) 460,776 16,761 5,079 25,988 971,027 $ $ 25,830 411,917 2,897 36,601 428,325 (7,861) 420,464 19,403 4,848 24,190 946,150 157,663 $ 164,401 542,735 148,207 848,605 11,494 10,000 15,009 1,277 5,700 1,189 893,274 35 25,990 61,042 (2,386) (6,928) 77,753 971,027 $ 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 See accompanying notes to consolidated financial statements. 40 BNCCORP, INC. Annual Report 2018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 2018 2017 $ 23,286 $ 9,339 1,699 154 34,478 4,761 74 95 635 543 6,108 28,370 - 28,370 2,687 1,810 10,032 187 2,293 2,008 19,017 20,074 3,378 4,027 4,212 2,408 540 1,545 574 - 2,255 39,013 8,374 1,538 6,836 1.96 1.93 $ $ $ $ $ $ See accompanying notes to consolidated financial statements. 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 41 BNCCORP, INC. Annual Report 2018BNCCORP, INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive (Loss) Income For the Years Ended December 31 (In thousands) NET INCOME Unrealized loss on investment securities available 2018 $ 6,836 2017 $ 4,878 for sale $ (6,966) $ (1,857) Reclassification adjustment for gains on sales of securities, net, included in net income Other comprehensive loss before tax Income tax benefit related to items of other comprehensive loss Other comprehensive loss (2,293) (9,259) 2,277 (6,982) $ (745) (2,602) 973 (1,629) (6,982) $ TOTAL COMPREHENSIVE (LOSS) INCOME $ (146) (1,629) 3,249 $ See accompanying notes to consolidated financial statements. 42 BNCCORP, INC. Annual Report 2018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), net Total BALANCE, December 31, 2016 3,456,008 $ 35 $ 25,996 $ 49,328 $ (2,847) $ 1,683 $ 74,195 Net income Other comprehensive loss 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 Net income Other comprehensive loss Share-based compensation - - 27,306 - - - - - (82) 6,836 - - - - 355 - (6,982) - 6,836 (6,982) 273 BALANCE, December 31, 2018 3,493,298 $ 35 $ 25,990 $ 61,042 $ (2,386) $ (6,928) $ 77,753 See accompanying notes to consolidated financial statements. 43 BNCCORP, INC. Annual Report 2018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 bank premises and equipment Gain on sale of bank branch Net realized gains on sales of investment securities (Increase) 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 available for sale Proceeds from sales of investment securities available for sale Proceeds from maturities of investment securities available for sale Purchases of Federal Reserve and Federal Home Loan Bank Stock Sales of Federal Reserve and Federal Home Loan Bank Stock Net increase in loans and leases held for investment Proceeds from sales of other real estate Proceeds from sales of premises and equipment Purchases of premises and equipment Net cash used in investing activities 2018 2017 $ 6,836 $ 4,878 - - 1,545 7,778 273 355 21 - (2,293) (88) 248 (642,695) 656,003 505 233 2,209 (187) 30,743 (129,930) 62,516 53,077 (15,456) 15,412 (42,334) - 2,307 (1,230) (55,638) 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) See accompanying notes to consolidated financial statements. 44 BNCCORP, INC. Annual Report 2018BNCCORP, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows, continued For the Years Ended December 31 (In thousands) 2018 2017 FINANCING ACTIVITIES: Net increase in deposits Net (decrease) increase 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 (DECREASE) INCREASE 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. $ 30,799 $ (6,549) (395,000) 395,000 24,250 (645) 25,830 25,185 3,945 1,102 $ $ $ 65,179 5,533 (101,450) 63,450 32,712 14,717 11,113 25,830 3,405 821 - $ 40 45 BNCCORP, INC. Annual Report 2018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 Bank operates community banking and wealth management businesses in North Dakota, Arizona and Minnesota from 13 locations. The Bank also conducts mortgage banking through a consumer-direct channel complimented by retail channels from 12 locations in Arizona, 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. With respect to group concentrations of credit risk, most of the Company’s business activity is with customers in North Dakota. At December 31, 2018, the Company did not have any significant credit concentrations in any particular industry. The consolidated financial statements included herein are for BNCCORP and subsidiaries. The accounting and reporting policies of BNCCORP and 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, reserves for mortgage banking reimbursement obligations, fair value measurements for financial instruments (including derivatives), impairment of long-lived assets, contingencies, and income taxes. Ultimate results could materially differ from those estimates. SIGNIFICANT ACCOUNTING POLICIES Cash and Cash Equivalents 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 (Loss) Income). All securities were classified as available for sale as of December 31, 2018 and 2017, except for Federal Reserve Bank (FRB) and Federal Home Loan Bank (FHLB) stocks, which have indeterminable maturities. 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. 46 BNCCORP, INC. Annual Report 2018Other-Than-Temporary Impairment Declines in the fair value of individual available-for-sale securities below amortized cost, which are deemed other- than-temporary, 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 Securities. Any credit-related impairments are recognized through a charge to earnings. The amount of non-credit related impairments is recognized through comprehensive (loss) 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, 2018 and 2017. 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 ASC 825, Financial Instruments. Gains and losses from the changes in fair value are included in mortgage banking revenues, net. Loans and Leases Held For Investment Loans and leases held for investment are stated at their outstanding principal amount net of unearned income, 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 47 BNCCORP, INC. Annual Report 2018interest rate. The fair value of collateral of an impaired collateral-dependent loan or an observable market price of the loan 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 or a valuation allowance is established for the difference. Troubled debt 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. 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 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 its 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, Receivables. A loan is impaired when, based on current information, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Any allowance on impaired loans is generally based on one of three methods: the present value of expected cash flows at the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral of the loan. Specific reserves may also be established for credits that have been internally classified as credits requiring management’s attention due to underlying problems in the borrower’s business or collateral concerns. 48 BNCCORP, INC. Annual Report 2018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 credit 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 credit losses may materially 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 for credit losses 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 income from and gains on disposition of these assets are included in other non-interest income. Net operating expenses, losses on disposition, and subsequent declines in the estimated fair value of these assets 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. The impairment review includes a comparison of future cash flows (undiscounted and without interest charges) expected to be generated by the assets to their current carrying value. If impairment is identified, the assets are written down to their fair value through a charge to non-interest expense. 49 BNCCORP, INC. Annual Report 2018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. ASC 820, Fair Value Measurement, 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 less 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 levels to assets and liabilities accounted for at 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. Investment Securities Available for Sale. The fair value of the Company’s securities, other than U.S. Treasury securities, are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are less active, and model-based valuation techniques for which significant assumptions are observable in the market. U.S. Treasury securities are based upon quoted prices for identical instruments traded in active markets. 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 ASC 825, Financial Instruments. Fair value measurements on loans held for sale are based on quoted market prices for similar loans in the secondary market, market quotes from anticipated sales contracts and commitments, or contract prices from firm sales commitments. 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 less active, and model-based valuation techniques for which significant assumptions are observable in the market. Financial Instruments with Off-Balance-Sheet Risk. The fair values of the Company’s commitments to extend credit and commercial and standby letters of credit are estimated using fees currently charged to enter into similar agreements. 50 BNCCORP, INC. Annual Report 2018Derivative Financial Instruments 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 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 in other assets 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 in other liabilities with changes in fair value recorded in mortgage banking revenues, net. Share-Based Compensation ASC 718, Compensation – Stock Compensation, 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, 2018, the Company had four stock-based compensation plans, which are described more fully in Note 24 and Note 25 to these consolidated financial statements. Income Taxes The Company files consolidated federal and unitary state income tax returns where allowed. The determination of current and deferred income taxes is based on analyses of many factors including interpretation of federal and state income tax laws, differences between tax and financial reporting basis of assets and liabilities, expected reversals of temporary differences, estimates of amounts due or owed and current financial accounting standards. Actual results could differ significantly from the estimates and interpretations used in determining the current and deferred income taxes. Deferred income taxes are accounted for using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The 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 evaluates 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. 51 BNCCORP, INC. Annual Report 2018Comprehensive (Loss) Income Comprehensive income is the total of net income and other comprehensive (loss) income, which for the Company, is generally comprised of unrealized losses and gains on securities available for sale, net of corresponding tax effects. RECENTLY ISSUED OR ADOPTED ACCOUNTING PRONOUNCEMENTS The Company adopted Accounting Standards Update (ASU) No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, on January 1, 2018 using the modified retrospective approach. This amendment addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The adoption of this amended guidance did not materially impact the Company’s consolidated financial statements. The Company adopted ASC 606, Revenue from Contracts with Customers (ASC 606), on January 1, 2018 using the full retrospective approach. ASC 606 amends the revenue recognition guidance for contracts with customers for goods and services and specifically excludes interest income, as well as other revenues associated with financial assets and liabilities, including loans, leases, and derivatives. The adoption of ASC 606 had no impact on the Company’s consolidated financial statements, except for additional consolidated financial statement disclosures, which are included in Note 16 to these consolidated financial statements. In February 2016, the FASB issued ASU 2016-02, Leases. The amended guidance changes the accounting treatment of leases, in that lessees will recognize most leases on-balance sheet. This will increase reported assets and liabilities, as lessees will be required to recognize a right-of-use asset along with a lease liability, measured on a discounted basis. Lessees are allowed to account for short-term leases (those with a term of twelve months or less) off-balance sheet. The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The amended guidance allows an entity to choose either the effective date, or the beginning of the earliest comparative period presented in the consolidated financial statements, as its date of initial application. The Company will adopt the amended guidance on January 1, 2019 and use the effective date as the date of initial application. The Company does not anticipate that there will be a cumulative effect adjustment made to retained earnings as a result of adopting the amended guidance. The most significant effects of the adoption of this guidance will be additional consolidated financial statement disclosures. The adoption of this accounting pronouncement did not have a material impact on the Company’s consolidated financial statements. ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, replaces the current incurred loss methodology for recognizing credit losses with a current expected credit loss model, which requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This amended guidance broadens the information that an entity must consider in developing its expected credit loss estimates. Additionally, this update amends the accounting for credit losses for available-for-sale debt securities and purchased financial assets with a more-than-insignificant amount of credit deterioration since origination. This update requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of a company’s loan portfolio. This update is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years, and early adoption in fiscal years beginning after December 15, 2018 is permitted. This update requires the use of the modified retrospective adoption approach and the Company is currently evaluating the impact that this amended guidance will have on its consolidated financial statements and disclosures. 52 BNCCORP, INC. Annual Report 2018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, 2018 or 2017. The carrying amount of investment securities available for sale securities and their estimated fair values were as follows as of December 31 (in thousands): U.S. Treasury securities U.S. government sponsored entity mortgage- backed securities issued by FNMA/FHLMC U.S. government agency small business administration pools guaranteed by SBA Collateralized mortgage obligations guaranteed by GNMA Collateralized mortgage obligations issued by FNMA or FHLMC Asset-backed securities State and municipal bonds 2018 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value $ 59,710 $ - $ (916) $ 58,794 10,221 158,430 63,149 52,635 24,170 53,862 $ 422,177 $ (121) (7,464) (1,166) (903) (125) (760) 10,132 150,966 62,257 51,779 24,045 53,536 $ (11,455) $ 411,509 32 - 274 47 - 434 787 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) 4,512 139,392 67,916 50,517 16,010 94,104 $ (6,076) $ 411,917 53 BNCCORP, INC. Annual Report 2018The amortized cost and estimated fair value of investment securities available for sale classified according to their contractual maturities at December 31, 2018, 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 $ $ - 35,160 94,162 292,855 422,177 $ $ - 34,764 92,269 284,476 411,509 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. Investment securities available for sale with estimated fair values of $113.9 million and $118.8 million at December 31, 2018 and 2017, 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 2018 2017 62,516 2,513 (220) 2,293 $ $ 99,910 1,398 (653) 745 $ $ 54 BNCCORP, INC. Annual Report 2018The following table shows the Company’s gross unrealized losses and fair value of investment securities available for sale aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31 (in thousands): Less than 12 months 12 months or more Total 2018 Description of Securities Fair Value Unrealized Loss # $ 19,652 $ (55) - - Fair Value Unrealized Loss $ 39,142 $ (861) 4,132 (121) # 2 3 Fair Value Unrealized Loss $ 58,794 $ (916) 4,132 (121) # 4 3 2 - U.S. Treasury securities U.S. government sponsored entity mortgage-backed securities issued by FNMA/FHLMC U.S. government agency small business administration pools guaranteed by SBA Collateralized mortgage obligations guaranteed by GNMA - Collateralized mortgage obligations issued by FNMA or FHLMC 5 Asset-backed securities State and municipal bonds Total temporarily impaired securities 3 4 9 28,836 (1,444) 40 122,130 (6,020) 45 150,966 (7,464) - - 13,965 14,752 30,441 (88) (46) (402) 5 8 4 6 40,146 (1,166) 5 40,146 (1,166) 34,583 9,293 16,575 (815) (79) (358) 11 8 15 48,548 24,045 47,016 (903) (125) (760) 23 $ 107,646 $ (2,035) 68 $ 266,001 $ (9,420) 91 $ 373,647 $ (11,455) 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) 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 before a recovery of amortized cost. 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 2018 or 2017. 55 BNCCORP, INC. Annual Report 2018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 2018 2017 $ $ 1,807 1,134 2,941 $ $ 1,807 1,090 2,897 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 2018 2017 22,788 149,886 174,868 32,505 78,055 11,398 21,257 467,969 499 468,468 (7,692) 460,776 $ $ $ 36,601 126,169 177,429 25,064 71,876 14,168 13,167 427,873 452 428,325 (7,861) 420,464 $ $ $ To accommodate customers whose financing needs exceed the Bank’s lending limits, BNC sells loan participations on a nonrecourse basis to outside financial institutions and derecognizes the portion of the loan balance sold. At December 31, 2018 and 2017, loan participations sold on a nonrecourse basis to outside financial institutions totaled $166.3 million and $176.7 million, respectively. 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 FHLB, FRB, and the Bank of North Dakota as of December 31(in thousands): Commercial and industrial Commercial real estate Consumer 2018 2017 43,130 97,788 32,357 173,275 $ $ 39,274 98,647 33,123 171,044 $ $ 56 BNCCORP, INC. Annual Report 2018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 2018 $ 2,158 $ 3,471 $ 834 $ 914 $ 358 $ 126 $ 7,861 (190) (71) 40 72 (1) 16 66 (59) 4 112 (129) 31 (133) - - 73 - - - (260) 91 Balance, beginning of period Provision (reduction) Loans charged off Loan recoveries Balance, end of period $ 1,937 $ 3,558 $ 845 $ 928 $ 225 $ 199 $ 7,692 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 The following table shows the balance in the allowance for credit losses at December 31, 2018, and December 31, 2017, 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, 2018 Commercial and industrial Commercial real estate SBA Consumer Land and land development Construction Total December 31, 2017 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 $ 246 $ 73 62 6 - - $ 1,691 3,485 $ 1,937 3,558 783 922 225 199 845 928 225 199 1,758 1,496 104 80 28 - $ 148,128 $ 173,372 32,401 77,975 11,370 21,257 149,886 174,868 32,505 78,055 11,398 21,257 $ $ 387 $ 7,305 $ 7,692 $ 3,466 $ 464,503 $ 467,969 407 $ 87 64 10 - - $ 1,751 3,384 $ 2,158 3,471 $ 1,737 1,510 124,432 175,919 $ 126,169 177,429 770 904 358 126 834 914 358 126 143 311 52 - 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 57 BNCCORP, INC. Annual Report 2018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. Accrual of interest on loans 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): 2018 Current 31-89 Days Past Due 90 Days or More Past Due And Accruing Total Performing Non-accrual Total Commercial and industrial: Business loans $ 64,437 $ 644 $ Agriculture Owner-occupied commercial real estate Commercial real estate SBA Consumer: Automobile Home equity 1st mortgage Other Land and land development Construction 26,425 56,916 174,868 32,343 22,377 8,567 12,505 34,265 11,370 21,257 Total loans held for investment 465,330 Loans held for sale 22,788 - - - 47 10 - 229 23 - - 953 - Total gross loans $ 488,118 $ 953 $ - - - - - - - - - - - - - - $ 65,081 $ 1,464 $ 26,425 56,916 174,868 32,390 22,387 8,567 12,734 34,288 11,370 21,257 - - - 115 55 - - 24 28 - 66,545 26,425 56,916 174,868 32,505 22,442 8,567 12,734 34,312 11,398 21,257 466,283 1,686 467,969 22,788 - 22,788 $ 489,071 $ 1,686 $ 490,757 58 BNCCORP, INC. Annual Report 2018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 $ 49,686 $ 75 $ 26 $ 49,787 $ 1,737 $ Agriculture Owner-occupied commercial real estate Commercial real estate SBA Consumer: Automobile Home equity 1st mortgage Other Land and land development Construction 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 - - 217 416 11 14 - 49 - - 782 1 - - - - - - - - - - 26 - 23,773 50,872 177,429 24,921 16,642 9,290 14,401 31,523 14,116 13,167 - - - 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 The following table indicates the effect on interest income on loans 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 on loans 2018 2017 $ $ 123 - 123 $ $ 161 - 161 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. Loans are assigned one of the following four internally assigned grades: pass, watch list, substandard, and doubtful. At December 31, 2018, the Company had $452.0 million of loans categorized as pass rated loans. This compares to $415.1 million at December 31, 2017. 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, 2018, the Company had $5.2 million of loans categorized as watch list loans compared to $1.7 million at December 31, 2017. 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 loan. 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 59 BNCCORP, INC. Annual Report 2018in full on the basis of currently existing facts, conditions and values questionable, and there is a higher probability of loss. At December 31, 2018, the Company had $9.2 million of substandard loans and $1.6 million of doubtful loans. This compares to $9.1 million of substandard loans and $1.9 million doubtful loans as of December 31, 2017. 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-accrual loans 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, 2018 and 2017 (in thousands): 2018 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 $ 1,996 $ 1,454 $ 246 $ 1,484 $ - - 1,795 143 16 - - - - - - - - 1,496 115 12 - - - - - - - - 73 62 6 - - - - - - - - 1,497 117 15 - - - - - - - - - 76 - - - - - - - - 3,950 $ 3,077 $ 387 $ 3,113 $ 76 1,915 $ 294 $ - - - - 62 - - 45 150 - - - - - - 43 - - 24 28 - - - - - - - - - - - - - - - 387 $ 305 $ 12 - - - - 44 - - 26 40 - - - - - - - - - - - - - $ $ 415 3,528 $ $ 12 88 Total impaired loans without an allowance recorded TOTAL IMPAIRED LOANS $ $ 2,172 6,122 $ $ 389 3,466 $ $ 60 BNCCORP, INC. Annual Report 2018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 2017 Unpaid Principal Recorded Investment Related Allowance Average Recorded Balance Interest Income Recognized (12 months) $ 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 61 Total impaired loans without an allowance recorded TOTAL IMPAIRED LOANS $ $ 2,167 6,798 $ $ 379 3,753 $ $ BNCCORP, INC. Annual Report 2018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 2018 $ 284 $ 1,454 $ 1,738 $ - - 1,496 - - - - - - - - - - - 115 - - - - - - - - - 1,496 115 - - - - - - - 244 - - 73 63 - - - - - - - $ 1,780 $ 1,569 $ 3,349 $ 380 Accrual Non-accrual Total Allowance 2017 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 $ - - - 1,510 - - - 291 - - - - $ - - - - 107 - - - - - - - $ - - - 1,510 107 - - 291 - - - - - - - 87 64 - - - - - - - $ 1,801 $ 107 $ 1,908 $ 151 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, 2018, there were three new TDRs with a pre- 62 BNCCORP, INC. Annual Report 2018modification and post modification balance of $1.5 million. For the year ended December 31, 2017, there were no new TDRs. 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 on loans 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 on loans 2018 2017 $ $ 313 88 225 $ $ 211 89 122 There were no additional funds committed to borrowers who are in TDR status at December 31, 2018 and December 31, 2017. 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, 2018 and December 31, 2017, 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): Balance, beginning of period Transfers from nonperforming loans Real estate sold Net gains on sale of assets (Provision) reduction Balance, end of period 2018 2017 - - - - - - $ $ 214 40 (264) - 10 - $ $ 63 BNCCORP, INC. Annual Report 2018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 2018 2017 $ 2,853 17,534 543 9,825 30,755 (13,994) 16,761 $ 4,949 16,973 525 9,987 32,434 (13,031) 19,403 $ $ Depreciation and amortization expense totaled $1.545 million and $1.627 million for the years ended December 31, 2018 and 2017, respectively. NOTE 8. Deposits The scheduled maturities of time deposits as of December 31, 2018 are as follows (in thousands): $ 2019 2020 2021 2022 2023 Thereafter 77,824 45,434 17,108 4,041 3,608 192 $ 148,207 At December 31, 2018 and 2017, the Bank had no time deposits that had been acquired through a traditional broker channel. In addition, the Company had $101.3 million and $152.9 million of interest-bearing deposits that meet the regulatory definition of a brokered deposit as of December 31, 2018 and 2017, respectively. At December 31, 2018 and 2017, the Bank had $34.2 million and $28.9 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 2018 2017 $ $ 19 160 2,279 2,303 4,761 $ $ 11 64 889 1,545 2,509 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. 64 BNCCORP, INC. Annual Report 2018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 0.20% to 1.50% and 0.10% to 0.40%, respectively, secured by U.S. Treasury securities and general obligations of municipalities 2018 2017 $ $ - 11,494 11,494 $ $ - 18,043 18,043 The weighted average interest rate on short-term borrowings outstanding as of December 31, 2018 and 2017 was 0.84% and 0.25%, 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 U.S. government, U.S. 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, 2018, $11.5 million of securities sold under repurchase agreements, with a weighted average interest rate of 0.84%, were collateralized by U.S. Treasury securities having a fair value of $32.0 million and unamortized principal balances of $32.7 million. 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 fair value of $32.1 million and unamortized principal balances of $31.3 million. NOTE 10. Federal Home Loan Bank Advances As of December 31, 2018, the Bank had no FHLB advances outstanding. At December 31, 2018, the Bank had loans with unamortized principal balances of approximately $170.3 million and securities with unamortized principal balances of approximately $32.9 million pledged as collateral to the FHLB. As of December 31, 2017, the Bank had no FHLB advances outstanding. At December 31, 2017, the Bank had 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. As of December 31, 2018, the Bank has the ability to draw advances up to approximately $147.0 million based upon the aggregate collateral that is currently pledged, subject to a requirement to purchase additional FHLB stock, based upon collateral pledged. 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): 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 The long term borrowing is subordinated debt that qualifies as Tier 2 capital for the Company and the borrowing may be repaid by the Company at par in whole or in part beginning October 19, 2020. The loan agreement includes 2018 2017 65 BNCCORP, INC. Annual Report 2018various covenants that are primarily financial in nature. As of December 31, 2018, the Company was in compliance with these covenants. NOTE 12. Other Borrowings The following table presents selected information regarding other borrowings at December 31 (in thousands): Unsecured Borrowing Lines: 2018 BNC National Bank Lines (1) $ 34,500 $ - $ 34,500 Line Outstanding Available Secured Borrowing Lines: BNC National Bank Line $ 2,377 $ 2,162 $ BNC Line 92,633 10,000 $ - - 2,162 10,000 Collateral Pledged Line Outstanding Available Total 12,162 (1) The unsecured BNC National Bank Lines consists of three separate lines with three institutions in individual amounts of $12.5 million, $10 95,010 12,162 $ $ $ $ - million, and $12 million. At December 31, 2018, the pledged collateral for the secured BNC National Bank Line was comprised of collateralized mortgage obligations and the pledged collateral for the secured BNC Line is the common stock of BNC National Bank. 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 10,000 93,838 $ $ $ $ - million, and $12 million. At December 31, 2017, the pledged collateral for the secured BNC Line is the common stock of BNC National Bank. 66 BNCCORP, INC. Annual Report 2018NOTE 13. Guaranteed Preferred Beneficial Interests 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, 2018 and 2017 was 3.80% and 2.74%, 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 BNC, subject to approval by the Federal Reserve Board. The payment of interest and ultimate redemption of these debentures is primarily dependent upon the ability of the Bank to transfer funds to BNC in the form of cash dividends, which are subject to regulatory restrictions disclosed in Note 14 to these consolidated financial statements. Pursuant to the subordinated debentures agreement, BNC may defer the payment of interest on the subordinated debentures for up to 20 consecutive quarterly periods. BNC did not defer the payment of interest on the subordinated debentures during the years ended December 31, 2018 and 2017. BNC fully and unconditionally guarantees the Company’s subordinated debentures. 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, 2018, the capital ratios exceeded all regulatory capital thresholds and maintained sufficient capital conservation buffers to avoid limitations on certain types of capital distributions. 67 BNCCORP, INC. Annual Report 2018The capital amounts and ratios presented below for December 31, 2018 and December 31, 2017 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 2018 Total Risk Based Capital: Consolidated $ 116,734 20.26 % $ 46,091 ≥8.00 % $ N/A N/A % $ N/A BNC National Bank 106,154 18.44 46,053 ≥8.00 57,566 10.00 48,588 N/A% 8.44 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): (a) Consolidated BNC National Bank 2017 Total Risk Based Capital: 99,527 98,952 17.28 17.19 34,568 34,540 ≥6.00 ≥6.00 84,518 98,952 99,527 98,952 77,611 92,490 14.67 17.19 9.97 9.92 7.99 9.53 25,926 25,905 39,930 39,890 ≥4.50 ≥4.50 ≥4.00 ≥4.00 N/A N/A N/A N/A N/A 46,053 N/A 37,418 N/A 49,862 N/A N/A N/A 8.00 N/A 6.50 N/A 5.00 N/A N/A N/A 52,899 N/A 9.19 N/A 61,534 N/A 49,090 N/A N/A N/A 10.69 N/A 4.92 N/A N/A Consolidated $ 109,187 19.98 % $ 43,717 ≥8.00% $ N/A N/A % $ N/A BNC National Bank 99,933 18.31 43,657 ≥8.00 54,572 10.00 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): (a) Consolidated BNC National Bank 92,344 93,098 16.90 17.06 32,788 32,743 ≥6.00 ≥6.00 77,333 93,098 92,344 93,098 77,407 93,618 14.15 17.06 9.53 9.62 8.18 9.91 24,591 24,557 38,749 38,713 ≥4.50 ≥4.50 ≥4.00 ≥4.00 N/A N/A N/A N/A N/A 43,657 N/A 35,472 N/A 48,392 N/A N/A N/A 8.00 N/A 6.50 N/A 5.00 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 (a) Tangible common equity is calculated by dividing common equity, less intangible assets, by total period end assets. The most recent notifications from the 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. 68 BNCCORP, INC. Annual Report 2018NOTE 16. Revenue from Contracts with Customers Accounting for revenue within the scope of ASC 606 is consistent with the policies and practices prior to adoption of ASC 606. The majority of the Company’s performance obligations for revenue from contracts with customers are satisfied at a point in time and are typically collected from customers at the time of the transaction or shortly thereafter. The following is a description of the principal activities from which the Company generates revenue that are within the scope of ASC 606: Service charges on deposits – Service charges on deposit accounts represent daily and monthly analysis fees recognized for the services related to customer deposit accounts, including account maintenance, overdraft fees, and depository transactions processing fees. Depository accounts charge fees in accordance with the customer’s pricing schedule or may be assessed a flat service fee per month. The Company satisfies the performance obligation related to providing depository accounts daily as transactions are processed and deposit service charge revenue is recognized daily. Bankcard fees – Bankcard fees primarily represent income earned from interchange revenue from Visa for the Company’s processing of debit card transactions. The performance obligation for interchange revenue is the processing of each transaction through the Company’s access to the banking system. This performance obligation is completed for each individual transaction and revenue is recognized per transaction in accordance with interchange rates established by Visa. Wealth management revenue – Wealth management revenue consists of fees earned on personal trust accounts, retirement plan administration, and wealth management services. The performance obligations related to this revenue include items such as performing trustee service administration, investment management services, custody and record-keeping services, retirement plan administration, and tax services. These fees are part of contractual agreements and the performance obligations are satisfied upon completion of services. The fees are generally a fixed flat annual rate or based on a percentage of the account’s market value per the contract with the customer and revenue is recognized over time as earned. Other income – The Company recognizes other miscellaneous income through a variety of other revenue streams, the most material of which include revenue from investments in Small Business Investment Companies (SBIC), gains on sales of financial assets, and bank-owned life insurance income. These revenue streams are outside of the scope of ASC 606 and are recognized in accordance with the applicable U.S. generally accepted accounting principles. The remainder of Other income is primarily earned through transactions with personal banking customers, including stop payment charges and fees for cashier’s checks. The performance obligations of these types of fees are satisfied as transactions are completed and revenue is recognized upon transaction execution according to established fee schedules with the customers. The Company had no material contract assets or remaining performance obligations as of December 31, 2018. Total receivables from revenue recognized under the scope of ASC 606 were $417 thousand and $393 thousand as of December 31, 2018 and December 31, 2017, respectively. These receivables are included as part of the Other assets line on the Company’s Consolidated Balance Sheets. 69 BNCCORP, INC. Annual Report 2018The following table disaggregates non-interest income subject to ASC 606 (in thousands): Service charges on deposits Bankcard fees Bank charges and service fees not within scope of ASC 606 Total bank charges and service fees Wealth management revenue Wealth management revenue not within the scope of ASC 606 Total wealth management revenues Other Other not within the scope of ASC 606 (a) Total other Other non-interest income not within the scope of ASC 606 (a) Total non-interest income 2018 2017 $ $ $ 727 1,031 929 2,687 1,810 - 1,810 53 1,955 2,008 12,512 19,017 $ 775 950 994 2,719 1,697 20 1,717 55 2,226 2,281 12,782 19,499 (a) This revenue is not within the scope of ASC 606, and includes fees related to mortgage banking operations, gains on sale of loans, gains on sale of securities, revenue from investments in SBIC, and various other transactions. NOTE 17. 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, 2018 Twelve Months Ended December 31, 2018 Total Level 1 Level 2 Level 3 Total gains/(losses) ASSETS Investment securities available for sale Loans held for sale Commitments to originate mortgage loans Total assets at fair value LIABILITIES Commitments to sell mortgage loans Mortgage banking short positions Total liabilities at fair value $ $ $ $ 411,509 22,788 1,479 435,776 148 210 358 $ $ $ $ 58,794 - - 58,794 - - - $ $ $ $ 352,715 22,788 1,479 376,982 148 210 358 $ $ $ $ - - - - - - - $ $ $ $ 2,293 (505) 71 1,859 (198) (106) (304) 70 BNCCORP, INC. Annual Report 2018Carrying Value at December 31, 2017 Twelve Months Ended December 31, 2017 Total Level 1 Level 2 Level 3 Total gains/(losses) ASSETS Investment securities available for sale Loans held for sale Commitments to originate mortgage loans Total assets at fair value LIABILITIES Commitments to sell mortgage loans Mortgage banking short positions Total liabilities at fair value $ $ $ $ 411,917 36,601 1,457 449,975 42 12 54 $ $ $ $ 39,466 - - 39,466 - - - $ $ $ $ 372,451 36,601 1,457 410,509 42 12 54 $ $ $ $ - - - - - - - $ $ $ $ 745 (326) 90 509 (301) 41 (260) The Company sells short positions in mortgage-backed securities to manage 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, U.S. 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. 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 $ $ $ $ 3,079 - 3,079 Total 3,185 - 3,185 $ $ $ $ Level 1 2018 Level 2 3,079 - 3,079 2017 Level 2 3,185 - 3,185 $ $ $ $ - - - - - - $ $ $ $ Level 3 Total gains/(losses) - - - - - - $ $ 36 - 36 Total gains/(losses) $ $ (20) 10 (10) 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. 71 BNCCORP, INC. Annual Report 2018NOTE 18. Fair Value of Financial Instruments The estimated fair values of the Company’s financial instruments are as follows as of December 31 (in thousands): Assets: Cash and cash equivalents Investment securities available for sale Investment securities available for sale Federal Reserve Bank and Federal Home Loan Bank stock Loans held for sale-mortgage banking Commitments to originate mortgage loans 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 in Fair Value Measurement Hierarchy December 31, 2018 December 31, 2017 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 $ 25,185 58,794 352,715 2,941 22,788 1,479 460,776 5,079 $ 25,185 58,794 352,715 2,941 22,788 1,479 456,586 5,079 $ 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 $ 929,757 $ 925,567 $ 904,014 $ 901,047 $ 157,663 690,942 21,494 1,277 5,700 148 210 $ 157,663 689,213 21,467 1,277 5,700 148 210 $ 164,401 653,405 28,043 950 6,107 42 12 $ 164,401 651,923 28,284 950 6,107 42 12 Level 2 15,009 10,208 15,011 10,691 $ 892,443 $ 885,886 $ 867,971 $ 862,410 Level 2 Level 2 $ $ - - $ $ 169 9 $ $ - - $ $ 181 11 The Company is required to disclose the estimated fair value of financial instruments. Fair value estimates are subjective in nature, involving uncertainties and matters of significant judgment, and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. 72 BNCCORP, INC. Annual Report 2018 NOTE 19. 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 losses in the event of default by the borrower. At December 31, 2018, 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. The Bank underwrites these commitments to determine whether each loan meets criteria established by the secondary market for residential loans. See Note 1 and 17 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, 2018, 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): 2018 2017 Fixed Rate Variable Rate Fixed Rate Variable Rate Commitments to extend credit $ 10,407 $ 67,894 $ 15,573 $ 62,052 Standby and commercial letters of credit 18 877 220 829 In addition to the amounts in the table above, mortgage banking commitments to fund loans totaled $70.8 million at December 31, 2018 and $75.9 million at December 31, 2017. Mortgage banking commitments to sell loans totaled $93.3 million at December 31, 2018 and $111.7 million at December 31, 2017. Performance and Financial Standby Letters of Credit As of December 31, 2018 and 2017, the Bank had outstanding $13 thousand and $238 thousand, respectively, of performance standby letters of credit and $3.7 million and $4.1 million, respectively, of financial standby letters of credit. Performance standby letters of credit are irrevocable obligations to the beneficiary on the part of the Bank to make payment on account 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. 73 BNCCORP, INC. Annual Report 2018 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. 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 2018 2017 1,103 - (121) 982 $ $ 1,339 - (236) 1,103 $ $ 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, 2018 and 2017 was $1.3 million and $1.2 million, respectively, for facilities, and $20 thousand and $25 thousand, respectively, for equipment and other items. At December 31, 2018, the total minimum annual base lease payments for operating leases were as follows (in thousands): $ 2019 2020 2021 2022 2023 Thereafter 1,155 998 820 725 682 855 Small Business Investment Companies (SBIC) The Bank has made investments in the Small Business Administration’s SBIC program to enhance small business access to venture capital. At December 31, 2018, the Bank may be required to fund $1.4 million of additional capital calls related to its SBIC investments. Legal Proceedings From time to time, the Company may be a party to legal proceedings arising from 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 the Company could be subject to such a claim in an amount that could be material. Based upon a review with legal counsel, the Company believes that the ultimate disposition of any such litigation will not have a material effect on the Company’s financial condition, results of operations or cash flows. 74 BNCCORP, INC. Annual Report 2018NOTE 21. Income Taxes Income tax expense (benefit) consists of the following for the years ended December 31 (in thousands): Current: Federal State Deferred: Federal State Total 2018 2017 $ $ 1,281 345 1,626 (72) (16) (88) 1,538 $ $ 1,232 270 1,502 1,459 59 1,518 3,020 On December 22, 2017 the Tax Cuts and Jobs Act was signed into Federal law (2017 Tax Act). The 2017 Tax Act restructured the corporate tax rates from a graduated schedule with a maximum enacted tax rate of 35.0% to a flat enacted income 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 income tax charge to revalue net deferred tax assets. The reconciliation between income tax expense computed by applying the statutory federal income tax rate of 21.0% for the year ended December 31, 2018 and 34.0% for the year ended December 31, 2017 is as follows (in thousands): Statutory federal income tax expense Impact related to the 2017 Tax Act State income taxes, net of federal income tax benefit Tax-exempt interest income Tax-exempt life insurance Other, net Total 2018 2017 $ $ 1,759 - 260 (325) (91) (65) 1,538 $ $ 2,686 1,208 217 (895) (147) (49) 3,020 75 BNCCORP, INC. Annual Report 2018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 assets: Loans, primarily due to credit losses Compensation Unrealized loss on investment securities available for sale Acquired intangibles Net operating loss carryforwards Other Deferred tax assets Deferred tax liabilities: Discount accretion on securities Premises and equipment Other Deferred tax liabilities Valuation allowance Net deferred tax assets 2018 2017 1,975 446 2,624 122 19 174 5,360 47 395 134 576 4,784 (14) 4,770 $ $ 2,045 406 347 125 19 144 3,086 15 499 154 668 2,418 (14) 2,404 $ $ Subject to certain limiting statutes, the Company is able to carry forward state tax net operating losses aggregating $431 thousand as of December 31, 2018. The state net operating losses expire between 2024 and 2031. Tax years ended December 31, 2015 through 2018 remain open to federal examination. Tax years ended December 31, 2014 through 2018 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 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 income tax expense within the consolidated statements of income. At December 31, 2018 and 2017, the Company did not have any uncertain tax positions. 76 BNCCORP, INC. Annual Report 2018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 share-based compensation Denominator for diluted earnings per share Numerator (in thousands): Net income Basic earnings per common share Diluted earnings per common share NOTE 23. Related-Party Transactions 2018 2017 3,487,846 51,909 3,539,755 $ $ $ 6,836 1.96 1.93 $ $ $ 3,474,988 65,710 3,540,698 4,878 1.40 1.38 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 $897 thousand and $1.1 million at December 31, 2018 and 2017, respectively. Advances of loans to related parties in 2018 and 2017 totaled $247 thousand and $170 thousand, respectively. Loan pay downs and other reductions by related parties in 2018 and 2017 were $475 thousand and $561 thousand, respectively. Commitments to extend credit to related parties increased to $289 thousand at December 31, 2018 from $239 thousand at December 31, 2017. The total amount of deposits received from these parties was $1.0 million at December 31, 2018 and $930 thousand at December 31, 2017. 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, 2018, 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 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 2018 and 2017, BNCCORP and subsidiaries made matching contributions of up to 50% of eligible employee deferrals up to a maximum employer contribution of 5% of employee compensation. Generally, all participant contributions and earnings are fully and immediately vested. The Company makes its matching contribution during the first calendar quarter following the last day of each calendar year and an employee must be employed by the Company on the last day of the calendar year in order to receive 77 BNCCORP, INC. Annual Report 2018the current year’s employer matching contribution. 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 $646,000 and $620,000 for 2018 and 2017, 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, 2018, the assets in the plan totaled $25.4 million and included $544,000 (27,000 shares) invested 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. 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 cash 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 ratably over 5 years. A participant’s retirement account generally vests 50% upon an initial contribution and ratably 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 offset the change in value of this liability. Assets in the trust offsetting in-service liabilities are recorded in other assets. BNC common stock held in the trust related to the Company’s retirement account obligation is recorded in treasury stock and equates to 27,192 shares as of December 31, 2018 and 22,800 shares as of December 31, 2017. As of December 31, 2018, the plan obligation totaled $985 thousand and $878 thousand as of December 31, 2017. 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 BNC common stock at the time of separation from service with the Company. The deferred shares of BNC common stock were 8,298 shares and 6,464 shares as of December 31, 2018 and 2017, respectively. NOTE 25. Share-Based Compensation The Company has four share-based plans for certain key employees and directors whereby shares of BNC 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 BNC common stock at the grant date. The company generally issues shares held in treasury when options are exercised and restricted stock is granted. Total shares in plan and total shares available as of December 31, 2018 are as follows: Total Shares in Plan Total Shares Available 1995 250,000 45,951 2002 125,000 - 2010 250,000 250,000 2015 Total 50,000 39,415 675,000 335,366 The Company recognized share-based compensation expense of $21,000 and $18,000 for the years ended December 31, 2018 and 2017, respectively, related to restricted stock. The tax benefits associated with share-based compensation was approximately $7,000 for the year ended December 31, 2018 and was approximately $26,000 for the year ended December 31, 2017. 78 BNCCORP, INC. Annual Report 2018At December 31, 2018, the Company had $60,000 of unamortized restricted stock compensation, which is expected to be recognized over a period of three years. 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: Non-vested, beginning of year Granted Vested Forfeited Non-vested, end of year Number Restricted Stock Shares 3,467 - (1,367) - 2,100 2018 $ Weighted Average Grant Date Fair Value 26.45 - 22.86 - 28.78 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 Following is a summary of vested stock options and options expected to vest as of December 31, 2018: Number Weighted-average exercise price Weighted-average remaining contractual term Stock Options Outstanding 42,600 $3.00 1.20 years Stock Options Currently Exercisable 42,600 $3.00 1.20 years Stock Options Vested and Expected to Vest 42,600 $3.00 1.20 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 2018 2017 Options to Purchase Shares 68,600 - (26,000) - 42,600 42,600 Weighted Average Exercise Price $ 3.00 - 3.00 - 3.00 3.00 Options to Purchase Shares 75,600 - (7,000) - 68,600 68,600 Weighted Average Exercise Price $ 3.00 - 3.00 - 3.00 3.00 The total intrinsic value of options exercised during the year ended December 31, 2018 and 2017 was $585 thousand and $171 thousand, respectively. The aggregate intrinsic value of options exercisable as of December 31, 2018 was $746 thousand. 79 BNCCORP, INC. Annual Report 2018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; 3,493,298 and 3,465,992 shares issued and outstanding Capital surplus – common stock Retained earnings Treasury stock (175,355 and 202,661 shares, respectively) Accumulated other comprehensive (loss) income, net Total stockholders’ equity Total liabilities and stockholders’ equity 2018 2017 10,442 93,098 481 437 104,458 15,009 10,000 69 1,627 26,705 35 25,990 61,042 (2,386) (6,928) 77,753 104,458 $ $ $ $ 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 $ $ $ $ 80 BNCCORP, INC. Annual Report 2018Parent Company Only Condensed Statements of Income For the Years Ended December 31 (In thousands) 2018 2017 $ 1,990 $ 2,075 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 $ 24 4 2,018 1,195 1,345 678 718 3,936 (1,918) 476 (1,442) 8,278 6,836 $ 8 28 2,111 1,038 1,388 729 757 3,912 (1,801) 649 (1,152) 6,030 4,878 81 BNCCORP, INC. Annual Report 2018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 operating $ 6,836 $ 4,878 2018 2017 activities - Equity in earnings of subsidiaries Dividend paid by subsidiaries Share-based compensation Change in other assets Change in other liabilities Net cash provided by operating activities Net increase in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year Supplemental cash flow information: Interest paid Income taxes paid (8,278) (6,030) 2,500 273 2,325 236 3,892 3,892 6,550 10,442 1,151 990 $ $ $ $ $ $ 2,000 182 1,199 156 2,385 2,385 4,165 6,550 1,019 707 82 BNCCORP, INC. Annual Report 2018NOTE 27. Subsequent Events The Company has evaluated subsequent events from December 31, 2018 through March 26, 2019, which is the date the consolidated financial statements were issued, and determined there are no other items to record or disclose related to subsequent events. 83 BNCCORP, INC. Annual Report 2018This page intentionally left blank. 84 BNCCORP, INC. Annual Report 2018This page intentionally left blank. 85 BNCCORP, INC. Annual Report 2018This page intentionally left blank. 86 BNCCORP, INC. Annual Report 2018BNC National Bank Bank Branches – North Dakota: 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 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 Bank Branches - Arizona Bank Branches - Minnesota Glendale – Charter Address 20175 North 67th Ave Glendale, AZ 85308 Golden Valley 650 North Douglas Drive Golden Valley, MN 55422 Mortgage Banking Offices: Glendale 6685 W. Beardsley Glendale, AZ 85383 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. 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 J. 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 19, 2019 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 1100 1000 Walnut Street Kansas City, MO 64106-2162 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, First Quarter Second Quarter Third Quarter Fourth Quarter 2018(1) High $31.00 $27.25 $28.10 $27.90 Low $26.00 $25.41 $25.66 $19.20 2017(1) High $27.25 $26.49 $27.70 $31.00 Low $25.50 $25.30 $25.26 $26.90 (1) The quotes represent the high and low closing sales prices as reported by OTCQX Markets. Stock Transfer Agent and Registrar American Stock Transfer & Trust Company, LLC 6201 15th Avenue Brooklyn, NY 11219 (800) 937-5449 Corporate Broker D. A. Davidson Community Banking and Wealth Management Group 1-800-288-2811 | cbwm@dadco.com Directors, BNCCORP, INC. Tracy Scott Gaylen Ghylin 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 Retired EVP, Secretary and CFO of Tiller Corporation d/b/a Barton Sand & Gravel Co., Commercial Asphalt Co. and Barton Enterprises, Inc. Michael M. Vekich CEO, Vekich Chartered Tom Redmann Retired- Loan Manager, Bank of North Dakota Directors, BNC National Bank Doug Brendel Shawn Cleveland Daniel J. Collins Timothy J. Franz Dave Hoekstra Mark E. Peiler Scott Spillman Cheryl A. Stanton 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 13 locations. BNC also conducts mortgage banking from 12 locations in Arizona, North Dakota, Illinois, Kansas, and Missouri. 

Continue reading text version or see original annual report in PDF format above