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.
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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.