BNCCORP Inc.
Annual Report 2020

Plain-text annual report

BNCCORP, INC.322 East Main AvenueBismarck, ND 58501(701) 250-3040www.bnccorp.com2020 ANNUAL REPORT | BNCCORP, INC.Future-Focused2020 ANNUAL REPORTStrong,Stable,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. The Bank also conducts mortgage banking from 11 locations in Arizona, North Dakota, Illinois, Kansas, Missouri, and Michigan. CORPORATE PROFILE BNCCORP, INC. (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. Our commercial banking relationships are primarily 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 and southern North Dakota. In recent years, our banking presence in Phoenix, Arizona, has grown significantly. By operating banking locations in Phoenix, 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 and Arizona, complimented by on-line and mobile banking solutions. 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. Our mortgage banking operations generate residential loans through a consumer-direct channel with locations in Kansas and Michigan, as well as a retail channel with locations in Arizona, 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: personal wealth advisory services, 401(k) and other retirement plan administration, and trust 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 business and financial goals. BNCCORP, INC. Annual Report 2020 1 Michael M. Vekich Chairman, Board of Directors TO OUR SHAREHOLDERS, CUSTOMERS, EMPLOYEES, AND COMMUNITY: In a year of extraordinary uncertainty and challenge, BNC has grown as an organization and achieved success on many fronts. The COVID-19 pandemic has affected everyone. We have seen firsthand its impact on our customers, employees and communities. By striving to meet their needs in trying times, we’ve grown as an organization, accelerating our digital evolution and amplifying BNC’s unique strengths in the marketplace. We accomplished this by remaining strong, stable and future-focused. We have emphasized building relationships, providing high-quality service, delivering solid financial results and meeting the needs of our customers. Concurrently, we have diligently worked to transform our business for a changing marketplace and new customer needs to remain competitive. Thanks to the dedication and resiliency of our team, and their tireless service and steadfast commitment to these important areas, we’re succeeding. In 2020, we achieved record levels of net income, and returns on assets and equity, as well as a 22% increase in tangible book value per share. Equally important, we were able to reward shareholders with a special dividend, while still maintaining our position of financial strength. SHAREHOLDER COMMITMENT As an organization, BNC has a strong commitment to shareholders. Our Board’s management philosophy prioritizes returning capital to shareholders beyond what is needed to grow the Company’s businesses, investments, and healthy reserve and liquidity levels. In 2020, we declared a special cash dividend of $8.00 per share, totaling an aggregate payment of approximately $28.7 million. Additionally, we approved a 175,000 share repurchase program. Both actions highlight our continuing confidence in BNC’s financial strength and flexibility. B O O K VA L U E P E R S H A R E $35.00 $30.00 $25.00 $20.00 $15.00 $10.00 $5.00 $0.00 2 $21.47 $22.40 $22.26 $33.39 $27.39 $8.00 2016 2017 2018 2019 2020 Book Value per common share outstanding Dividend on common stock BNCCORP, INC. Annual Report 2020 Our performance over the past five years also has resulted in significant shareholder value increases. As the chart above shows, BNC’s tangible book value per common share rose more than 56% between 2016 and 2020 – from $21.47 to $33.39. We are pleased with our track record of increasing shareholder value, yet we remain keenly aware of the changing world around us. As we look to the future, we will continue to closely monitor the economic environment and make prudent decisions regarding capital management and deployment to ensure the long-term health of the organization and shareholder value. RECORD FINANCIAL PERFORMANCE 2020 was another year of strong performance for BNC. Record low mortgage rates and our scalable, national mortgage origination platform drove record earnings in 2020. Net income rose significantly to $44.6 million, or $12.52 per diluted share as compared to $10.2 million, or $2.88 per diluted share in 2019. Daniel Collins Interim President and Chief Executive Officer D I L U T E D E A R N I N G S P E R C O M M O N S H A R E $12.52 $2.03 2016 $1.38 2017 $2.88 $1.93 2018 2019 2020 $15.00 $12.00 $9.00 $6.00 $3.00 $2.00 $1.00 $0.00 Our returns on average equity and assets for 2020 were 38.84% and 4.21%, respectively. This was significantly higher than corresponding 2019 levels of 11.41% and 1.01%. BNC’s tangible book value per common share rose more than 56% between 2016 and 2020 – from $21.47 to $33.39. BNCCORP, INC. Annual Report 2020 3 R E T U R N O N AV E R A G E T O TA L A S S E T S 4.21% 2020 0.78% 2016 0.50% 2017 0.70% 2018 1.01% 2019 R E T U R N O N AV E R A G E C O M M O N S T O C K H O L D E R ’ S E Q U I T Y 38.84% 10.35% 2016 6.45% 2017 8.33% 2018 11.41% 2019 2020 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% 45.00% 40.00% 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% Asset quality and capital levels remained strong. Nonperforming assets were $2.6 million, or 0.24% of total assets, at December 31, 2020, modestly higher than $2.0 million, or 0.21% of total assets, at December 31, 2019. Our tangible common equity, as seen in the following chart, increased to 11.01% of total assets at year-end 2020, up from 9.95% a year ago, while the Tier 1 leverage ratio of BNC National Bank was 10.92% and significantly above the “Well Capitalized” ratio threshold. At December 31, 2020, the Company’s capital ratios exceeded all regulatory capital thresholds, including the capital conservation buffer. 4 BNCCORP, INC. Annual Report 2020 B N C C O R P, I N C . A N D B N C N AT I O N A L B A N K C A P I TA L R AT I O S 11.01% 10.92% 9.67% 9.62% 9.92% 9.95% 9.81% 11.50% 11.00% 10.50% 10.00% 9.50% 9.00% 8.50% 8.00% 8.13% 8.18% 7.99% 7.50% 2016 2017 2018 2019 2020 BNCCORP, INC. Tangible common equity ratio BNC National Bank Tier 1 leverage ratio As noted above, BNC’s tangible book value per common share rose sharply in 2020 to $33.39, compared to $27.39 at December 31, 2019, an increase of $6.00, or 22%. The Company also recorded a dividend payable of $28.7 million or $8.00 per common share for a previously announced special cash dividend declared in December 2020 and payable on February 1, 2021. 2020 MILESTONES BNC achieved several important milestones in 2020, key among them: record mortgage performance, a sharper focus on core markets and the launch of key initiatives to further improve community banking performance. Record Mortgage Performance – 2020 represented a historic mortgage opportunity, with the low- interest-rate environment that began late in 2019 continuing throughout the year, generating a significant increase in BNC’s mortgage loan activity. Mortgage rates reached new lows and we were able to assist consumers through both our retail and highly scalable nationwide consumer-direct mortgage channels. Mortgage banking revenues were $79.9 million for the year, an increase of $55.0 million, compared to $24.9 million in 2019. In 2020, BNC funded 8,172 mortgage loans with combined balances of $2.9 billion, compared to 3,916 mortgage loans with combined balances of $1.3 billion in 2019. Over the past three years, our mortgage revenue increased significantly BNCCORP, INC. Annual Report 2020 5 $90,000 $80,000 $70,000 $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 - - M O R T G A G E R E V E N U E ( d o l l a r s i n t h o u s a n d s ) $79,888 $19,465 $11,301 2016 2017 $10,032 2018 $24,902 2019 2020 As an institution, we embrace transformation and continuous improvement, and we are committed to the values that make community banks unique. Core-market Focus – At BNC, we meet the needs of small- to middle-market businesses with a range of commercial banking services, as well as consumers on the retail front. Our commercial and retail banking networks and relationships are concentrated in North Dakota, where we’ve been rewarded with customer loyalty and retention. In recent years, we have significantly deepened our presence in Phoenix, Arizona. We also exited the Minnesota market with the divesture of our Golden Valley, Minnesota, branch. By concentrating on the North Dakota and Arizona markets, we create further opportunities for growth and diversify our credit exposure, allowing us to provide the best service, products and solutions to customers and communities. Planning for the Future: Initiatives to Drive Community Banking Performance – As an institution, we embrace transformation and continuous improvement, and we are committed to the values that make community banks unique. Every initiative that we undertake is done with the purpose of staying relevant to the needs of our customers and improving shareholder value. To drive performance in 2021, we plan to: • Pursue commercial banking growth opportunities in our core markets and assist our small business customers with Small Business Administration solutions as an SBA preferred lender; • Heighten our focus on operational expenses, including ensuring alignment of our incentive programs with our strategic priorities, while building on the progress from a streamlined management team; • Continue efforts to advance automation and system efficiencies, and digitize our operations; and, • Focus on capital return and optimization strategies. 6 BNCCORP, INC. Annual Report 2020 POSITIONED FOR SUCCESS BNC today is strong, stable and future-focused. We enter 2021 well positioned for success and with a keen eye on what is ahead. The global pandemic and its impact on our markets will certainly evolve – as it will for the entire banking industry. We are focused on improving the performance metrics of our community banking segment while assisting our customers through the undoubtable transitions ahead. Our efforts are supported by a strong balance sheet and liquidity, and we are dedicated to continuing growth in our core markets of North Dakota and Arizona, exercising fiscal prudence while maximizing opportunity. We would like to thank all our stakeholders for their support. Sincerely, Michael M. Vekich Chairman, Board of Directors Daniel J. Collins Interim President & 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. BNCCORP, INC. Annual Report 2020 7 ____________________________ Year End Financial Report ____________________________ For the Year Ended December 31, 2020 BNCCORP, INC. (OTCQX: BNCC) 322 East Main Avenue Bismarck, North Dakota 58501 (701) 250-3040 8 BNCCORP, INC. Annual Report 2020 BNCCORP, INC. INDEX TO YEAR END FINANCIAL REPORT December 31, 2020 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 10 12 13 34 37 BNCCORP, INC. Annual Report 2020 9 Selected Financial Data The selected consolidated financial data presented below should be read in conjunction with the consolidated financial statements and the notes thereto (dollars in thousands, except share and per share data): For the Years Ended December 31, 2020 2019 2018 2017 2016 Income Statement Data: Total interest income Total interest expense Net interest income Provision for credit losses Non-interest income Non-interest expense Income tax expense (1) Net income (1) Balance Sheet Data: (at end of period) Total assets Investments securities available for sale Loans held for sale-mortgage banking Loans held for investment, net of unearned income Allowance for credit losses Total deposits Short-term borrowings Federal Home Loan Bank advances Long-term borrowings Guaranteed preferred beneficial interests in Company’s subordinated debentures Dividends payable on common stock Common stockholders’ equity $ 36,546 $ 37,817 $ 34,478 $ 31,443 $ 4,238 32,308 2,670 85,954 57,107 13,871 9,101 28,716 700 29,131 43,991 2,921 $ 44,614 $ 10,235 $ 6,108 28,370 - 19,017 39,013 1,538 6,836 $ 3,578 27,865 350 19,499 39,116 3,020 4,878 $ $ 1,074,131 $ 966,750 $ 971,027 $ 946,150 $ 183,717 250,083 570,890 (10,324) 853,158 6,385 30,900 - 15,004 28,680 118,229 265,278 137,114 508,569 (8,141) 820,547 4,565 17,000 - 15,006 - 96,278 411,509 22,788 468,468 (7,692) 848,605 11,494 - 10,000 15,009 - 77,753 411,917 36,601 428,325 (7,861) 817,806 18,043 - 10,000 15,011 - 77,626 Book value per common share outstanding $ 33.39 $ 27.39 $ 22.26 $ 22.40 $ 11.01% 9.95% 7.99% 8.18% 29,346 3,343 26,003 800 25,777 41,193 2,631 7,156 910,400 400,136 39,641 414,673 (8,285) 752,627 12,510 38,000 10,000 15,013 - 74,195 21.47 8.13% 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 held for investment Allowance for credit losses to loans held for investment 4.21% 1.01% 0.70% 0.50% 0.78% $ $ 38.84% 48.29% 3.27% 3.14% 12.52 12.52 3,563,203 3,564,783 3,540,522 0.24% 0.24% 0.46% 1.81% 11.41% 76.05% 3.00% 2.79% 8.33% 82.33% 3.08% 2.90% 6.45% 82.59% 3.05% 2.92% $ $ 2.90 2.88 $ $ 1.96 1.93 $ $ 1.40 1.38 $ $ 3,526,096 3,557,585 3,514,770 3,487,846 3,539,755 3,493,298 3,474,988 3,540,698 3,465,992 0.21% 0.21% 0.40% 1.60% 0.17% 0.17% 0.36% 1.64% 0.21% 0.21% 0.46% 1.84% 10.35% 79.55% 3.03% 2.93% 2.08 2.03 3,447,635 3,520,818 3,456,008 0.29% 0.27% 0.59% 2.00% (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. 10 BNCCORP, INC. Annual Report 2020 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 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 2020 Third Quarter Fourth Quarter Full Year 9,002 1,578 7,424 550 6,874 10,794 12,007 5,661 1,359 4,302 1.21 1.21 $ $ $ $ 9,571 1,117 8,454 1,500 6,954 26,333 14,491 18,796 4,633 14,163 3.97 3.97 $ $ $ $ 8,735 827 7,908 350 7,558 25,191 14,603 18,146 4,446 13,700 3.84 3.84 $ $ $ $ 9,238 716 8,522 270 8,252 23,636 16,006 15,882 3,433 12,449 3.49 3.49 $ $ $ $ 36,546 4,238 32,308 2,670 29,638 85,954 57,107 58,485 13,871 44,614 12.52 12.52 3,558,702 3,566,523 3,567,980 3,570,656 3,567,980 3,568,419 3,568,067 3,568,331 3,563,203 3,564,783 First Quarter Second Quarter 2019 Third Quarter Fourth Quarter Full Year 9,128 2,173 6,955 - 6,955 4,502 9,682 1,775 337 1,438 0.41 0.40 $ $ $ $ 9,399 2,376 7,023 200 6,823 7,057 10,409 3,471 817 2,654 0.75 0.75 $ $ $ $ 9,698 2,389 7,309 300 7,009 11,938 12,871 6,076 1,450 4,626 1.31 1.30 $ $ $ $ 9,592 2,163 7,429 200 7,229 5,634 11,029 1,834 317 1,517 0.43 0.43 $ $ $ $ 37,817 9,101 28,716 700 28,016 29,131 43,991 13,156 2,921 10,235 2.90 2.88 $ $ $ $ $ $ $ $ 3,518,390 3,555,845 3,519,478 3,556,842 3,529,999 3,558,354 3,536,277 3,558,994 3,526,096 3,557,585 BNCCORP, INC. Annual Report 2020 11 Operating Strategy BNC National Bank 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.  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 quality loan and deposit growth. Providing loans and gathering deposits is a key strategy as our products are good for customers, communities, and shareholders. Growing low-cost core deposits is a key strategy. Our platforms and technology offers us a strategic opportunity to deliver high level deposit services to the businesses and professionals we serve and permits us to attract funds at a low cost. 12 BNCCORP, INC. Annual Report 2020 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 2020 2019 $ $ $ $ 36,546 4,238 32,308 2,670 85,954 57,107 58,485 13,871 44,614 12.52 12.52 $ $ $ $ 37,817 9,101 28,716 700 29,131 43,991 13,156 2,921 10,235 2.90 2.88 The following is a brief comparison of 2020 to 2019 net income:  In 2020, net interest income increased 12.5% from 2019. The increase primarily reflected the positive impact of decreased cost of deposits and borrowings, the redemption of $10.0 million of subordinated debt in the fourth quarter of 2019, and increases in loans held for sale and loans held for investment, including PPP loans. These increases were partially offset by lower yields on loans and the reduction of debt securities. Net interest margin increased to 3.27% in 2020, compared to 3.00% in 2019.  The provision for credit losses increased $2.0 million in 2020 resulting in a 1.81% ratio of allowance for credit losses to loans held for investment. Excluding $50.6 million of Small Business Administration Paycheck Protection Program (PPP) loans, the allowance for credit losses was 1.98% of loans held for investment at December 31, 2020, compared to 1.60% at December 31, 2019. At December 31, 2020, non- performing assets were 0.24% of total assets, compared to 0.21% at December 31, 2019.  Non-interest income increased $56.8 million, or 195.1%, when comparing 2020 to 2019. The increase primarily relates to a $55.0 million increase in mortgage banking revenue, net. Gains on sales of debt securities were $1.1 million for the 2020 period, compared to losses of $1.3 million in 2019.  Non-interest expense increased by $13.1 million, or 29.8%, in 2020. Salaries and employee benefits increased $6.7 million, or 30.0%, primarily driven by higher mortgage banking activity and executive related severance expense. Professional services expense increased $2.7 million, or 54.4%, largely due to mortgage banking operating costs. Marketing and promotion expenses increased $904 thousand, or 19.9%, largely attributed to increased purchase of mortgage leads. Other non-interest expense increased by $2.5 million which was impacted by mortgage banking operating costs and an impairment charge related to the Company’s Golden Valley, Minnesota location. In 2020, the effective tax rate increased to 23.7% from 22.2% in 2019. The increase in the effective tax rate is due to lower non-taxable interest income from municipal securities.  BNCCORP, INC. Annual Report 2020 13 General Net income in 2020 was $44.6 million compared to net income of $10.2 million in 2019. Earnings per diluted share was $12.52 in 2020 and $2.88 in 2019. Net Interest Income The following table sets forth information relating to the Company’s 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, 2019 Interest Earned or Owed 2020 Interest Earned or Owed 2018 Interest Earned or Owed Average Yield or Cost Average Yield or Cost Average Yield or Cost Average Balance Average Balance Average Balance Assets $ Interest-bearing due from banks FHLB Stock Federal Reserve Stock Debt securities-taxable Debt securities-tax exempt Loans held for sale-mortgage banking Loans held for investment Allowance for credit losses Total interest-earning assets Non-interest-earning assets: 49,000 $ 1,306 1,807 201,343 6,626 163,692 573,040 (9,031) 987,783 89 43 108 4,714 234 4,592 26,766 - 36,546 0.18% $ 3.29% 5.98% 2.34% 3.53% 2.81% 4.67% 0.00% 3.70% 15,980 $ 1,761 1,807 358,525 32,382 74,900 480,389 (7,794) 957,950 401 72 109 9,166 868 2,624 24,577 - 37,817 2.51% $ 4.09% 6.00% 2.56% 2.67% 3.50% 5.12% 0.00% 3.95% 14,992 $ 1,310 1,807 368,060 63,049 25,772 454,215 (7,792) 921,413 260 46 108 9,079 1,699 1,069 22,217 - 34,478 1.74% 3.51% 5.98% 2.47% 2.69% 4.15% 4.89% 0.00% 3.72% Cash and due from banks Other Total assets 8,256 63,075 $ 1,059,114 8,903 50,626 $ 1,017,479 8,961 48,972 979,346 $ 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 545,455 $ 38,886 141,770 726,111 6,482 3,649 - 15,005 751,247 165,827 917,074 21,743 938,817 120,297 1,624 20 2,202 3,846 12 22 - 358 4,238 0.30% $ 0.05% 1.55% 0.53% 542,700 $ 34,177 164,898 741,775 0.18% 0.60% 0.00% 2.39% 0.56% 5,284 15,110 9,753 15,007 786,929 130,430 917,359 12,161 929,520 87,959 4,412 24 3,104 7,540 23 334 621 583 9,101 0.81% $ 0.07% 1.88% 1.02% 486,754 $ 35,276 171,531 693,561 0.44% 2.21% 6.36% 3.83% 1.16% 17,944 4,662 10,000 15,010 741,177 154,984 896,161 7,253 903,414 75,932 2,439 19 2,303 4,761 74 95 635 543 6,108 0.50% 0.05% 1.34% 0.69% 0.41% 2.04% 6.35% 3.62% 0.82% stockholders’ equity $ 1,059,114 $ 1,017,479 $ 979,346 Net interest income $ 32,308 $ 28,716 $ 28,370 Net interest spread Net interest margin 3.14% 3.27% 2.79% 3.00% 2.90% 3.08% Ratio of average interest-earning assets to average interest-bearing liabilities 131.49% 121.73% 124.32% 14 BNCCORP, INC. Annual Report 2020 The following table allocates changes in the Company’s interest income and interest expense between the changes related to volume and interest rates (in thousands): For the Years Ended December 31, 2020 Compared to 2019 For the Years Ended December 31, 2019 Compared to 2018 Change Due to Change Due to Volume Rate Total Volume Rate Total $ $ 298 (17) - (3,734) (847) 2,580 4,725 $ (610) (12) (1) (718) 213 (612) (2,536) $ (312) (29) (1) (4,452) (634) 1,968 2,189 3,005 (4,276) (1,271) (8) 3 (405) 4 (139) (310) - (2,780) (7) (497) (15) (173) (311) (225) (2,788) (4) (902) (11) (312) (621) (225) $ 18 18 - (239) (822) 1,745 1,464 2,184 938 (1) 218 (55) 230 (16) - $ 123 8 1 326 (9) (190) 896 1,155 1,035 6 583 4 9 2 40 141 26 1 87 (831) 1,555 2,360 3,339 1,973 5 801 (51) 239 (14) 40 (855) (4,008) (4,863) 1,314 1,679 2,993 Interest Earned on Interest- Earning Assets Interest-bearing due from banks FHLB Stock Federal reserve stock Debt securities-taxable Debt securities-tax exempt Loans held for sale- mortgage banking Loans held for investment Total increase (decrease) in interest income Interest Expense on Interest- Bearing Liabilities Interest checking and money market accounts Savings Certificates of deposit Short-term borrowings FHLB advances Long-term borrowings Subordinated debentures Total increase (decrease) in interest expense Increase (decrease) in net interest income $ 3,860 $ (268) $ 3,592 $ 870 $ (524) $ 346 Net interest income was $32.3 million in 2020 compared to $28.7 million in 2019, an increase of $3.6 million, or 12.5%. The net interest margin increased to 3.27% for the year ended December 31, 2020, from 3.00% in 2019. Overall, yields on earning assets were 3.70% in 2020 and 3.95% in 2019. Average loans held for investment increased $92.7 million in 2020, or 19.3%, compared to 2019. PPP loans, largely funded in the second quarter of 2020 drove $58.7 million of the $92.7 million increase in average loans held for investment. Loans held for sale significantly influenced income growth achieving an average balance increase of $88.8 million during 2020. The increase in interest income due to higher average loan balances was partially offset by lower loan yields due to the growth of lower yielding PPP loans and loans held for sale. Average debt securities decreased $182.9 million from 2019, providing liquidity to fund loan growth. The cost of interest bearing deposits was 0.53% in 2020 and 1.02% in 2019 reflecting the positive impact of decreased cost of deposits and a reduction in the volume of certificates of deposit. The cost of interest-bearing liabilities decreased to 0.56% in 2020 from 1.16% in 2019 due to the decrease in cost of deposits as well as a reduction in the cost of subordinated debentures, the cost and use of FHLB advances, and the redemption of $10 million of subordinated debt in the fourth quarter of 2019. Net interest income was $28.7 million in 2019 compared to $28.4 million in 2018, an increase of $346 thousand, or 1.2%. The net interest margin decreased to 3.00% for the year ended December 31, 2019 from 3.08% in 2018. Overall, yields on earning assets were 3.95% in 2019 and 3.72% in 2018. Average loans held for investment increased $26.2 million in 2019, or 5.8%, compared to 2018, while loans held for sale significantly influenced BNCCORP, INC. Annual Report 2020 15 income growth achieving an average balance increase of $49.1 million during 2019. Average debt securities decreased $40.2 million in 2019, providing liquidity to fund loan growth. The cost of interest-bearing deposits was 1.02% in 2019 and 0.69% in 2018. After successfully managing rising interest rates in earlier periods, the Company increased deposit rates in the fourth quarter of 2018 in response to market pressures. The cost of interest bearing liabilities increased to 1.16% in 2019 from 0.82% in 2018. Certain deposit rates were adjusted down in 2019 following Federal Reserve actions to lower rates. Increased use of FHLB advances as a source of liquidity in 2019 also increased interest expense. Non-interest Income The following table presents the major categories of the Company’s non-interest income (dollars are in thousands): For the Years Ended December 31, 2020 2019 Increase (Decrease) % $ Bank charges and service fees Wealth management revenues Mortgage banking revenues, net Gains on sales of loans, net Gains (losses) on sales of securities, net Other Total non-interest income $ $ 2,342 1,794 79,888 99 1,128 703 85,954 $ $ 2,614 1,735 24,902 155 (1,296) 1,021 29,131 $ $ (272) 59 54,986 (56) 2,424 (318) 56,823 (10) % (a) 3 % 221 % (b) (36) % (c) (187) % (d) (31) % (e) 195 % (a) Bank charges and service fees decreased due to decreases in loan servicing income and non-use fees on lines of credit. Overdraft charges and interchange income from debit cards also decreased. (b) Mortgage banking revenues increased as lower interest rates facilitated higher origination activity in addition to increased margins. In 2020, the Company’s mortgage banking division funded 8,172 mortgage loans with combined balances of $2.9 billion, compared to 3,916 mortgage loans with combined balances of $1.3 billion in 2019. (c) Gains on sale of loans can vary significantly from period to period. (d) Gains and losses on sales of debt securities may vary significantly from period to period as the Company manages liquidity needs and the risk and return profile of its debt securities portfolio. (e) Other income decreased due to a distribution from a SBIC received in 2019 that did not recur in 2020. Non-interest Expense The following table presents the major categories of the Company’s non-interest expense (dollars are in thousands): For the Years Ended December 31, 2020 2019 Increase (Decrease) % $ Salaries and employee benefits Professional services Data processing fees Marketing and promotion Occupancy Regulatory costs Depreciation and amortization Office supplies and postage Other Total non-interest expense Efficiency ratio $ $ 29,204 7,680 4,829 5,442 2,152 298 1,404 492 5,606 57,107 48.29% $ $ 22,459 4,973 4,321 4,538 2,218 435 1,452 531 3,064 43,991 76.05% $ $ 6,745 2,707 508 904 (66) (137) (48) (39) 2,542 13,116 (27.76)% 30 % (a) 54 % (b) 12 % (c) 20 % (d) (3) % (31) % (e) (3) % (7) % (f) 83 % (g) 30 % (a) Salaries and employee benefits increased due to increased mortgage production and executive related severance expense in 2020. (b) Professional services expense increased primarily due to increased mortgage banking production costs partially offset by reductions in audit, and legal expenses. (c) Data processing fees increased due to increased software maintenance, licensing fees and IT security costs. 16 BNCCORP, INC. Annual Report 2020 (d) Marketing and promotion expense increased due to increased mortgage banking lead costs partially offset by reduced expenses in the banking markets. (e) Regulatory costs decreased from a reduction in the FDIC and OCC assessments. (f) Office supplies and postage decreased due to a reduction in paper, office and data supplies, and customer checks. (g) Other expenses increased due to recruitment cost for mortgage banking operations support staff, provisions to the reserve for mortgage banking obligations, and an impairment charge related to the Company’s Golden Valley, Minnesota location. Mortgage Banking Division Selected Data The following table sets forth information related to mortgage banking products funded and sold with servicing released by the bank. The following selected data is not intended to be interpreted as a statement of profit and loss as it excludes interest income, interest expense, shared service expenses, and tax expense. (dollars in thousands) 2020 2019 Number of funded mortgage loans held for sale Mortgage loans held for sale funded Year-to-date average loans held for sale-mortgage banking Year-end loans held for sale-mortgage banking Non-interest income: Gains on sale of loans held for sale, net of commission expense Unrealized gain on mortgage financial instruments (1) 8,172 2,937,081 163,692 250,083 65,122 14,751 $ $ $ $ $ 3,916 1,328,706 74,900 137,114 19,959 4,934 $ $ $ $ $ (1) Includes changes in fair value of mortgage commitments, hedge instruments, and loans held for sale The Company’s mortgage banking division originates and sells a variety of conventional and government sponsored mortgage loan products with servicing released through two primary channels. The retail channel is predominantly relationship driven with originators capitalizing on local relationships to originate loans through four retail bank branches and seven mid-west retail mortgage locations. The consumer direct channel is a nationwide mortgage platform operating from locations in Overland Park, Kansas and Farmington Hills, Michigan that uses a call-center with internet sales focused on both purchase and refinance transactions. The low interest rate environment that began late in 2019 and continued throughout 2020 generated a significant increase in mortgage loan activity. Non-interest income includes gains on the sale of loans, changes in the fair value of loans held for sale and loans in the various stages of processing prior to funding (net of commission expense), and hedge instruments. See Note 26 of the Consolidated Financial Statements for more information about the mortgage banking segment. Income Tax Expense During 2020, the Company recorded tax expense of $13.9 million, which resulted in an effective tax rate of 23.7%. The increase in the effective tax rate is due to lower non-taxable interest income from municipal securities. During 2019, the Company recorded tax expense of $2.9 million, which resulted in an effective tax rate of 22.2%. The increase in the effective tax rate is due to lower non-taxable interest income from municipal securities. Subject to certain statutory limitations, the Company is able to carry forward state tax net operating losses aggregating $19 thousand as of December 31, 2020. The state net operating losses expire between 2024 and 2031. Financial Condition Total assets were $1.1 billion at December 31, 2020, an increase of $107.4 million, compared to $966.8 million at December 31, 2019. This increase is primarily due to increased mortgage loans held for sale and loans held for investment balances as a result of PPP loan originations, offset by decreased balances of debt securities. PPP loan balances of $50.6 million largely drove a $60.1 million, or 12.3%, increase in loans held for investment compared to December 31, 2019. BNCCORP, INC. Annual Report 2020 17 Total loans held for investment aggregated $560.6 million at December 31, 2020. Loans held for sale as of December 31, 2020, were $250.1 million, an increase of $113.0 million when compared to December 31, 2019, due to higher mortgage origination activity in 2020. Debt securities decreased $81.6 million from year-end 2019. Cash and cash equivalent balances were $12.4 million as of December 31, 2020. Assets The following table presents our assets by category (dollars are in thousands): As of December 31, 2020 2019 Increase (Decrease) % $ Cash and cash equivalents Debt securities available for sale Federal Reserve Bank and Federal Home $ Loan Bank stock Loans held for sale-mortgage banking Loans held for investment, net Premises and equipment, net Operating lease right of use asset Accrued interest receivable Other assets Total assets $ 12,443 183,717 $ 10,523 265,278 $ 1,920 (81,561) 4,201 250,083 560,566 14,398 2,451 4,721 41,551 1,074,131 $ 3,651 137,114 500,428 16,401 2,638 3,681 27,036 966,750 $ 550 112,969 60,138 (2,003) (187) 1,040 14,515 107,381 18 % (a) (31) % (b) 15 % (c) 82 % (d) 12 % (e) (12) % (f) (7) % 28 % (g) 54 % (h) 11 % (a) Cash balances can fluctuate significantly from period to period based on liquidity sources and uses of the business. (b) Debt securities balances have decreased as loan growth has utilized bank liquidity. (c) Federal Reserve Bank and Federal Home Loan Bank of Des Moines stock will vary based on the Company’s utilization of Federal Home Loan Bank advances. (d) Loans held for sale increased as balances will fluctuate with the timing of loan funding and sales. During 2020, mortgage banking loan funding increased due to interest rates favorable to mortgage refinancing activity. (e) PPP loans totaling $50.6 million drove an increase in loans held for investment. (f) Premises and equipment decreased due to an impairment charge of the Company’s Golden Valley, Minnesota location. (g) Accrued interest receivable increased due to the impact of payment deferrals on loans modified to provide assistance to borrowers under Section 4013 of the CARES Act. (h) Other assets increased primarily due to the increase in fair value of mortgage banking commitments to originate. 18 BNCCORP, INC. Annual Report 2020 Debt Securities Available for Sale The following table presents the composition of the available-for-sale investment portfolio (in thousands): December 31, 2020 2019 Amortized Cost Estimated Fair Market Value Amortized Cost Estimated Fair Market Value $ 4,996 $ 5,063 $ 4,992 $ 4,994 14,727 29,478 17,422 66,258 13,165 12,878 3,062 13,687 175,673 $ 14,646 28,323 18,710 69,876 15,177 13,371 3,079 15,472 183,717 $ 5,634 53,873 21,120 68,353 21,625 56,530 12,810 19,873 264,810 $ 5,643 51,637 21,790 68,615 22,556 56,779 12,893 20,371 265,278 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 Collateralized mortgage obligations issued by FNMA/FHLMC Commercial mortgage-backed securities issued by FHLMC Other commercial mortgage-backed securities Asset-backed securities State and municipal bonds Total investments $ There were no securities that management concluded were other-than-temporarily impaired during 2020 or 2019. See Note 2 of the Consolidated Financial Statements. BNCCORP, INC. Annual Report 2020 19 The following table presents contractual maturities for securities available for sale and yields thereon at December 31, 2020 (dollars are in thousands): Within 1 Year After 1 But Within 5 Years Amount Yield Amount Yield After 5 But Within 10 Years Amount Yield After 10 Years Total 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/FHLMC(1) (2) Commercial mortgage-backed securities issued by FHLMC(1) (2) Other commercial mortgage- backed securities(1) (2) Asset-backed securities(1) (2) State and municipal bonds(2) (3) Total book value of debt $ 4,996 1.59% $ - - - - - - - - 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% securities $ 4,996 1.59% $ Net unrealized gain on debt securities available for sale Total investment in debt securities available for sale - - - - - - - - - - 0.00% $ 0.00% - - 0.00% $ - 0.00% $ 4,996 1.59% 0.00% 14,727 1.83% 14,727 1.83% 0.00% 11,912 1.37% 17,566 0.74% 29,478 1.00% 0.00% - 0.00% 17,422 3.37% 17,422 3.37% 0.00% 895 4.00% 65,363 2.67% 66,258 2.69% 0.00% 0.00% 0.00% 0.00% 13,165 3.18% - 0.00% 13,165 3.18% 6,618 3.29% 6,260 3.00% 12,878 3.15% 3,062 3.25% - 0.00% 3,062 3.25% - 0.00% 13,687 3.95% 13,687 3.95% 0.00% $ 35,652 2.62% $ 135,025 2.57% 175,673 2.55% 8,044 $ 183,717 2.44% (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. As of December 31, 2020, the Company had $183.7 million of available-for-sale securities in the investment portfolio compared to $265.3 million at December 31, 2019. In 2020, available-for-sale debt securities decreased as compared to 2019. Debt securities were sold to generate liquidity to support increases in loans held for investment and loans held for sale. At December 31, 2020, all classifications of debt securities available for sale with the exception of U.S. Treasury securities and asset-backed securities exceeded 10% of stockholders’ equity. A portion of the Company’s debt securities portfolio was pledged as collateral. See Note 2 of the Consolidated Financial Statements for more information about debt securities available for sale. Federal Reserve Bank and Federal Home Loan Bank The Company’s equity securities consisted of $1.8 million of Federal Reserve Bank (“FRB”) stock and $2.4 million of Federal Home Loan Bank (“FHLB”) stock as of December 31, 2020 and $1.8 million of FRB stock and $1.9 million of FHLB stock as of and December 31, 2019. 20 BNCCORP, INC. Annual Report 2020 Loans The following table presents the Company’s loan portfolio as of December 31 (dollars are in thousands): 2020 2019 2018 2017 2016 Amount % Amount % Amount % Amount % Amount % $ 250,083 100.0 $ 137,114 100.0 $ 22,788 100.0 $ 36,601 100.0 $ 39,641 100.0 Loans held for sale- mortgage banking Loans held for investment: Commercial and industrial $ 165,994 29.1 $ 162,592 32.0 $ 149,886 32.0 $ 126,169 29.4 $ 123,604 Commercial real estate SBA Consumer Land and land development Construction 190,939 102,064 81,783 8,603 21,748 33.4 17.9 14.3 1.5 3.8 193,203 46,799 82,498 10,449 12,656 38.0 9.2 16.2 2.0 2.5 174,868 32,505 78,055 11,398 21,257 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 29.8 41.5 7.6 14.3 3.9 2.9 571,131 100.0 508,197 99.9 467,969 99.9 427,873 99.9 414,474 100.0 Unearned income and net unamortized deferred fees and costs Loans, net of unearned income and unamortized fees and costs (241) - 372 0.1 499 0.1 452 0.1 199 - $ 570,890 100.0 $ 508,569 100.0 $ 468,468 100.0 $ 428,325 100.0 $ 414,673 100.0 The following table presents the change in the Company’s 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) 2020 2019 $ % 250,083 $ 137,114 $ 112,969 82.4 % (a) $ 165,994 190,939 102,064 81,783 8,603 21,748 571,131 (241) $ 162,592 193,203 46,799 82,498 10,449 12,656 508,197 3,402 (2,264) 55,265 (715) (1,846) 9,092 62,934 2.1 % (1.2) % 118.1 % (b) (0.9) % (17.7) % 71.8 % 12.4 % 372 (613) (164.8) % (c) unamortized fees and costs $ 570,890 $ 508,569 $ 62,321 12.3 % (d) (a) Loans held for sale increased as balances will fluctuate with the timing of loan funding and sales. In 2020, mortgage banking loan funding increased due to lower interest rates that were favorable to mortgage refinancing activity. (b) PPP loans totaling $50.6 million drove an increase in SBA loans. In addition, in recent periods, the Company began retaining rather than selling the guaranteed portion of SBA loans as the premiums investors are willing to pay had compressed. As of December 31, 2020, $27.9 million of the remaining PPP loans has been submitted to the SBA for forgiveness consideration. (c) The year-over-year change is due to unamortized fees from PPP loan originations during 2020. (d) Loans held for investment increased due $50.6 million of PPP loans and continued loan production in the Company’s core markets. BNCCORP, INC. Annual Report 2020 21 Loan Participations Pursuant to the Company’s 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): 2020 2019 2018 2017 2016 $ 130,356 152,163 166,291 176,733 182,224 Concentrations of Credit The following table summarizes the location of the Company’s borrowers as of December 31 (dollars are in thousands): North Dakota Arizona Minnesota Other Total gross loans held for investment 2020 378,793 121,797 30,599 39,942 571,131 $ $ 66 % 21 % 6 % 7 % 100 % $ $ 2019 347,179 101,244 33,594 26,180 508,197 68 % 20 % 7 % 5 % 100 % The Company’s borrowers use loan proceeds for projects in various geographic areas. The following table summarizes the locations where its 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 $ 2020 331,824 153,264 25,348 18,369 13,858 7,357 7,552 13,559 571,131 58 % 27 % 5 % 3 % 3 % 1 % 1 % 2 % 100 % $ $ 2019 306,609 122,192 27,777 18,541 15,297 7,477 4,168 6,136 508,197 60 % 24 % 5 % 4 % 3 % 2 % 1 % 1 % 100 % 22 BNCCORP, INC. Annual Report 2020 The following table approximates the Company’s significant concentrations by industry, excluding PPP loans of $50.6 million, (dollars are in thousands): $ Non-owner occupied commercial real estate (not otherwise categorized) Consumer, not otherwise categorized Hotels Healthcare and social assistance Agriculture, forestry, fishing and hunting Retail trade Transportation and warehousing Non-hotel accommodation and food service Mining, oil and gas extraction Construction contractors Manufacturing Other service Real estate and rental and leasing support Art, entertainment and recreation All other Gross loans held for investment (excluding PPP loans) $ The following table presents loans by type as of December 31 (in thousands): December 31, 2020 143,361 76,363 76,335 37,632 27,321 26,129 24,897 23,530 20,223 12,235 11,139 8,394 7,735 7,279 17,974 520,547 28 % 15 15 7 5 5 5 5 4 2 2 2 1 1 3 100 % 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 2020 Total Loans Held for Investment 2019 Total Loans Held for Investment $ $ $ $ 48,745 4,355 26,899 5,676 37,185 100,456 36,111 72,397 331,824 71,503 21,748 27,092 8,603 67,399 190,939 102,064 81,783 571,131 $ $ $ $ 51,483 897 29,909 6,373 38,127 106,835 4,737 68,248 306,609 77,706 12,656 29,914 10,449 54,972 193,203 46,799 82,498 508,197 BNCCORP, INC. Annual Report 2020 23 Loan Maturities (1) The following table sets forth the remaining maturities of loans in the Company’s portfolio as of December 31, 2020 (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 $ $ 22,343 1,258 1,394 1,585 608 4,047 31,235 $ $ 14,079 7,789 49,605 3,803 3,161 500 78,937 $ $ 4,968 $ 8,961 2,427 5,560 1,615 14,149 37,680 $ 48,391 $ 37,153 6,593 59,162 2,551 831 154,681 $ 76,213 $ 135,778 42,045 11,673 668 2,221 268,598 $ Total Loans Held for Investment 165,994 190,939 102,064 81,783 8,603 21,748 571,131 (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 The Company provides for credit losses to maintain its allowance for credit losses at a level adequate to cover estimated probable losses inherent in the portfolio as of each balance sheet date. In 2020, a $2.7 million provision for credit losses was recorded, compared to $700 thousand in 2019. Allowance for Credit Losses See Notes 1 and 5 of the 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 2020 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 Provision for credit losses charged to operations Balance of allowance for credit losses, end of period Ratio of net charge-offs to average loans held for investment Average gross loans held for investment Ratio of allowance for credit losses to loans held for investment Ratio of nonperforming loans to total assets For the Years Ended December 31, 2020 2019 2018 2017 2016 $ 8,141 $ 7,692 $ 7,861 $ 8,285 $ 8,611 (88) (453) - (38) - - (579) 17 45 9 12 9 - 92 (487) 2,670 $ $ 10,324 (0.085)% 573,040 $ $ 1.81% 0.24% (125) - (82) (97) - - (304) - 13 11 29 - - 53 (251) 700 8,141 (0.052)% 480,389 1.60% 0.21% (71) (1) (59) (129) - - (260) 40 16 4 31 - - 91 (169) - 7,692 (0.037)% 454,215 1.64% 0.17% (84) - (566) (123) (103) - (876) - 12 48 40 2 - 102 (774) 350 7,861 (0.184)% 420,906 1.84% 0.21% $ $ $ $ (1,004) - (71) (99) - - (1,174) - 13 15 20 - - 48 (1,126) 800 8,285 (0.282)% 399,669 2.00% 0.27% $ $ Allocation of the Allowance for Credit 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 as of December 31 (dollars are in thousands). 2020 2019 2018 2017 2016 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 $ 3,275 29% $ 2,366 32% $ 1,937 32% $ 2,158 30% $ 2,323 Commercial real estate SBA Consumer Land and land development Construction 3,923 1,779 948 170 229 33% 18% 14% 2% 4% 3,502 1,131 853 187 102 38% 9% 16% 2% 3% 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 30% 41% 8% 14% 4% 3% Total $ 10,324 100% $ 8,141 100% $ 7,692 100% $ 7,861 100% $ 8,285 100% BNCCORP, INC. Annual Report 2020 25 The amount of the allowance for credit losses can vary depending on macroeconomic conditions and risk in the portfolio. The allocation of the allowance for credit losses can vary depending on relative volume of asset groups in the portfolio and risks therein. The allocation of the allowance for credit losses as shown in the table above 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. Allowance for Credit Losses; Impact on Earnings The Company has established the allowance for credit losses to cover probable losses inherent within the loan portfolio at the balance sheet dates. The allowance for credit losses is an estimate based upon several judgmental factors. The Company is not aware of known trends, commitments or other events that could reasonably occur that would materially affect its 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 the Company considers in arriving at its estimates may change. To the extent that these matters have negative developments, future earnings could be reduced by provisions for credit losses. See the Concentrations of Credit section within this report for additional information. 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 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 2020 2019 As of December 31, 2018 2017 2016 $ $ $ 1 2,611 2,612 - 2,612 10,324 0.32% 0.46% 0.24% 0.24% $ $ $ - 2,033 2,033 - 2,033 8,141 0.31% 0.40% 0.21% 0.21% $ $ $ - 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% 395% 400% 456% 397% 339% Nonperforming Loans The following table sets forth information concerning the Company’s 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 2020 2019 $ $ 2,033 2,535 (235) (349) (1,367) (5) - 2,612 $ $ 1,686 1,179 (148) (242) (186) (46) (210) 2,033 26 BNCCORP, INC. Annual Report 2020 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 2020 2019 $ $ 311 - 311 $ $ 327 75 252 Loans 90 days or more delinquent and still accruing interest include loans over 90 days past due which the Company believes, based on its specific analysis of the loans, do not present doubt about the collection of interest and principal in accordance with the loan contract. Loans in this category must be well secured and in the process of collection. Non-accrual loans include loans on which the accrual of interest has been discontinued. Accrual of interest is discontinued when the Company believes 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): $ 2020 2019 2018 2017 2016 Total Accrual Non-accrual $ 1,966 3,245 3,348 1,908 2,153 $ - 1,448 1,779 1,801 1,845 1,966 1,797 1,569 107 308 See Note 5 of the 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, the Company 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 the Consolidated Financial Statements for information on other real estate owned. Impaired loans See Note 5 of the Consolidated Financial Statements for information on impaired loans. BNCCORP, INC. Annual Report 2020 27 Potential Problem Loans The Company attempts 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 $ - 1,448 - - - Watch List Other Total $ $ 9,121 7,713 5,206 1,730 8,125 9,121 9,161 5,206 1,730 8,125 Impaired $ 480 514 106 52 6 Substandard Other $ 4,721 7,247 9,069 9,062 10,511 $ Total 5,201 7,761 9,175 9,114 10,517 2020 2019 2018 2017 2016 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 the Company’s position as creditor is protected to the fullest extent possible. In the first quarter of 2020, the United States Congress enacted the Coronavirus Aid, Relief, and Economic Security (CARES) Act in response to economic conditions related to the COVID-19 pandemic. As a part of the CARES Act, Congress provided temporary relief from trouble debt restructurings under Section 4013. Specifically, financial institutions may elect to suspend U.S. GAAP for loan modifications related to COVID-19 and suspend any loan modified as a result of the effects of COVID-19 as being a troubled debt restructuring, including impairment so long as the subject loan was not more than 30 days past due as of December 31, 2019. Subsequently, guidance was issued jointly by regulatory authorities related to troubled debt restructuring loan treatment that is consistent with the CARES Act. The guidance allows banks to prudently modify loans such as the temporary deferral of principal and interest. Financial institutions have been encouraged to provide modifications in situations where it will provide time to allow otherwise performing borrowers the opportunity to financially recover from potentially short-term COVID-19 related economic conditions. The Company continues to monitor the effects of COVID-19 on its customers and end markets. The Company also continues to assist borrowers through the COVID-19 pandemic. To this end, the Company modified loans consistent with Section 4013 of the CARES Act. These loans were current as of December 31, 2019, and as a result, are not currently subject to troubled debt restructuring accounting standards. The COVID-19 “Phase IV” Stimulus signed into law on December 27, 2020 extends the relief provided by Section 4013 of the CARES Act through January 1, 2022. At December 31, 2020, loans modified consistent with Section 4013 of the CARES Act totaled $42 million compared to $205 million earlier in 2020. The majority of these modified loans (55%) are in the hotel industry. Other services to the hospitality industry and the accommodation and food service industry comprise another 10% and 8% of CARES Act modified loans, respectively. Approximately 25% of these modified loans will reach the end of their payment modification period by March 31, 2021, with the remaining 75% of payment modifications expiring by June 30, 2021. Economic conditions, including pandemic-related challenges, may result in the Company agreeing to additional loan modifications to assist borrowers consistent with CARES Act legislation extended through January 1, 2022. 28 BNCCORP, INC. Annual Report 2020 The following table provides a summary of loan modifications by industry made pursuant to Section 4013 of the CARES Act as of December 31, 2020 (in thousands): Hotels Other services Non-owner occupied commercial real estate Non-hotel accommodation and food service Healthcare and social assistance Mining, oil and gas extraction Transportation and warehousing Educational services Manufacturing Art, entertainment and recreation Consumer, not otherwise categorized Total Principal Payment Deferral Full Payment Deferral Total $ $ 11,370 4,078 3,593 3,155 1,567 86 - - - - - 23,849 $ $ 11,667 - - - 421 1,630 1,580 1,535 563 529 180 18,105 $ $ 23,037 4,078 3,593 3,155 1,988 1,716 1,580 1,535 563 529 180 41,954 Liabilities and Stockholders’ Equity The following table presents the Company’s liabilities and stockholders’ equity (dollars are in thousands): Deposits: Non-interest-bearing Interest-bearing Savings, interest checking and money market Time deposits Short-term borrowings Federal Home Loan Bank advances Guaranteed preferred beneficial interests in Company's subordinated debentures Accrued interest payable Accrued expenses Operating lease liabilities Other liabilities Total liabilities Stockholders' equity As of December 31, 2020 2019 Increase (Decrease) $ % $ 167,667 $ 136,313 $ 31,354 23 % (a) 570,656 114,835 6,385 30,900 15,004 560 13,338 2,620 33,937 955,902 118,229 514,869 169,365 4,565 17,000 15,006 1,685 7,580 2,822 1,267 870,472 96,278 55,787 (54,530) 1,820 13,900 (2) (1,125) 5,758 (202) 32,670 85,430 21,951 11 % (a) (32) % (b) 40 % (c) 82 % (d) - % (67) % (e) 76 % (f) (7) % 2,579 % (g) 10 % 23 % (h) Total liabilities and stockholders’ equity $ 1,074,131 $ 966,750 $ 107,381 11 % (a) The Bank exercised its ability to assume deposits previously moved off-balance sheet. Deposit growth was further supported by PPP lending activity and the maintenance of liquidity by customers. (b) Time deposits have decreased as the Bank has lowered rates on new certificates of deposit. (c) Short-term borrowings will vary depending on customers need to use repurchase agreements. (d) The Company has borrowed on a short-term basis from the FHLB as an efficient source of liquidity. (e) Accrued interest payable decreased primarily due to decreased time deposit balances and decreased cost of deposits. (f) The increase is primarily due to increased accrued mortgage commissions and mortgage incentive compensation. (g) The increase primarily relates to recording a dividend payable of $28.7 million related to a special, one-time cash dividend of $8.00 per share of BNCCORP, INC. common stock declared by the Company’s Board of Directors in December 2020 and payable on February 1, 2021. Additionally, the fair value of mortgage banking commitments increased $3.3 million. (h) Stockholders’ equity increased due to net income of $44.6 million less the above mentioned $28.7 million dividend payable. BNCCORP, INC. Annual Report 2020 29 Included in accrued expenses is an estimate of mortgage banking reimbursement obligations which aggregated $1.0 million and $906 thousand at December 31, 2020, and 2019, respectively. 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 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, the Company tracks historical reimbursements and calculate the ratio of reimbursement to loan production volumes. Using reimbursement ratios and recent production levels, the Company estimate the future reimbursement amounts and record the estimated obligation. See Note 19 of the Consolidated Financial Statements for a description of financial instruments with off-balance-sheet risk. Deposits The following table sets forth, for the periods indicated, the distribution of the Company’s 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, 2020 Percent Wgtd. Avg. Rate of Deposits Average Balance 2019 Percent Wgtd. Avg. Rate of Deposits 2018 Percent Wgtd. Avg. Rate of Deposits Average Balance Average Balance $ 545,455 61.2% 0.30% $ 542,700 62.2% 0.81% $ 486,754 57.4% 0.50% 38,886 141,770 4.4% 0.05% 15.9% 1.55% 34,177 164,898 3.9% 0.07% 18.9% 1.88% 35,276 171,531 4.2% 0.05% 20.2% 1.34% 726,111 81.5% 0.53% 741,775 85.0% 1.02% 693,561 81.8% 0.69% 165,827 18.5% 0.00% 130,430 15.0% 0.00% 154,984 18.2% 0.00% Interest checking and MMDAs Savings deposits Time deposits Total interest-bearing deposits Non-interest-bearing demand deposits Total deposits (1) $ 891,938 100.0% 0.43% $ 872,205 100.0% 0.86% $ 848,545 100.0% 0.56% (1) Included in average total deposits are $18.2 million of average brokered deposits for year-end 2018. Time deposits, in denominations of $250,000 and over, totaled $24.6 million at December 31, 2020, as compared to $45.7 million at December 31, 2019. The following table sets forth the amount and maturities of time deposits of $250,000 and over as of December 31, 2020 (in thousands): Maturing in: 3 months or less Over 3 months through 6 months Over 6 months through 12 months Over 12 months $ $ 6,316 6,915 7,683 3,712 24,626 30 BNCCORP, INC. Annual Report 2020 Borrowed Funds The following table provides a summary of the Company’s 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 2020 2019 2018 $ $ $ 6,385 0.16% 8,951 6,482 0.18% $ $ $ 4,565 0.21% 10,681 5,283 0.44% $ $ $ 11,494 0.84% 19,955 17,944 0.41% Note 10 of the Consolidated Financial Statements summarizes the general terms of the Company’s short-term borrowings outstanding at December 31, 2020 and 2019. FHLB advances totaled $30.9 million at December 31, 2020 and $17.0 million at December 31, 2019. Notes 11 and 12 of the Consolidated Financial Statements summarize the general terms of the Company’s FHLB advances and other borrowings at December 31, 2020 and 2019. Guaranteed Preferred Beneficial Interests in Company’s Subordinated Debentures See Note 13 of the 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 (Bank) Total risk-based capital (Bank) Common equity tier 1 risk-based capital (Bank) Tier 1 risk-based capital (Bank) 2020 11.74% 17.88% 14.65% 16.63% 11.01% 10.92% 16.72% 15.47% 15.47% 2019 10.65% 17.13% 13.76% 15.95% 9.95% 9.81% 15.88% 14.69% 14.69% 2018 2017 2016 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% See Note 14 and Note 15 of the 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 the Company’s 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, the Company is managing its Tier 1 leverage ratio to levels 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, the Company has included the ratio in the regulatory capital table above. 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. The Company’s capital management philosophy includes the return of capital to shareholders in excess of what is invested to maintain its businesses, deployed for profitable investments, or retained as a capital reserve and liquidity buffer for the Company and the Bank. During the fourth quarter of 2020, the Company declared an $8.00 per share special cash dividend payable on February 1, 2021 and a 175,000 share repurchase authorization. Management will continue to evaluate capital requirements and prudent capital management opportunities. BNCCORP, INC. Annual Report 2020 31 Off-Balance-Sheet Arrangements In the normal course of business, the Company is 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 the Company meet the needs of its customers, manage its interest rate risk and effectuate various transactions. These instruments and commitments, which the Company enters into for purposes other than trading, carry varying degrees of credit, interest rate or liquidity risk. See Note 19 of the Consolidated Financial Statements for a detailed description of each of these instruments. Contractual Obligations, Contingent Liabilities and Commitments The Company is 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. include such Credit-related financial 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 the Consolidated Financial Statements. instruments, generally characterized as off-balance-sheet items, 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 the Consolidated Financial Statements. At December 31, 2020, the aggregate contractual obligations (excluding bank deposits) and commitments were as follows (in thousands): Contractual Obligations: Less Than 1 Year 1 to 3 Years 3 to 5 Years After 5 Years Total Payments due by period Total borrowings Commitments to sell loans Lease liabilities under non-cancelable operating leases Total $ 37,285 241,247 $ 699 $ 279,231 $ - - 1,244 1,244 $ $ - - 527 527 $ $ $ 15,004 - 52,289 241,247 150 2,620 15,154 $ 296,156 Other Commitments: Commitments to originate loans Commitments to sell loans Standby and commercial letters of credit Commitments to fund SBIC Total Amount of Commitment - Expiration by Period Less Than 1 Year $ $ 659,569 839,701 562 - 1,499,832 1 to 3 Years 3 to 5 Years After 5 Years Total $ $ 18,196 - 508 - 18,704 $ $ 8,475 - - 200 8,675 $ $ 4,768 - - 1,007 5,775 $ $ 691,008 839,701 1,070 1,207 1,532,986 32 BNCCORP, INC. Annual Report 2020 Liquidity Risk Management Liquidity risk is the possibility of being unable to meet present and future financial obligations in a timely manner. Liquidity risk management encompasses the Company’s ability to meet all present and future financial obligations in a timely manner. The objectives of the Company’s 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 debt securities, the Company may utilize brokered deposits, sell debt securities under agreements to repurchase and borrow overnight Federal funds. The Bank is a member of the FHLB of Des Moines. Advances from the FHLB are collateralized by the Bank’s mortgage loans and various debt securities. The Bank has the ability to borrow from the Federal Reserve Bank, through the Discount Window, by pledging mortgage loans and/or the Paycheck Protection Program Liquidity Facility (PPPLF) by pledging PPP loans. As of December 31, 2020, the Company has not utilized the PPPLF. Funding through the issuance of subordinated notes, subordinated debentures, and long-term borrowings also has been utilized. The Company’s liquidity is defined by its ability to meet the organization’s cash and collateral obligations at a reasonable cost and with a minimum loss of income. Given the uncertain nature of customers’ demands, as well as the Company’s desire to take advantage of earnings enhancement opportunities, the Company must have adequate sources of on- and off-balance-sheet funds that can be acquired in time of need. The Company’s liquidity position is measured on an as needed basis, but no less frequently than monthly using each of the following items: 1. Estimated liquid assets and certain off-balance sheet considerations less estimated volatile liabilities using the aforementioned methodology ($73.7 million as of December 31, 2020); 2. Borrowing capacity from the FHLB ($84.8 million as of December 31, 2020); and 3. Capacity to issue brokered deposits with maturities of less than 12 months ($147.6 million as of December 31, 2020). On an on-going basis, the Company uses a variety of factors to assess the Company’s liquidity position including, but not limited to, the following: Stability of its deposit base;   Amount of unpledged debt securities;  Liquidity of its loan portfolio; and  Potential loan demand. The Company’s liquidity assessment process segregates its balance sheet into liquid assets along with certain off- balance sheet considerations 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. The Company has a targeted range for its liquidity position over this horizon and manage operations to achieve these targets. The Company further projects cash flows over a 12-month horizon based on its assets and liabilities and sources and uses of funds for anticipated events. Pursuant to the Company’s contingency funding plan, it estimates cash flows over a 12-month horizon under a variety of stressed scenarios to identify potential funding needs and funding sources. The Company’s contingency plan identifies actions that could be taken in response to adverse liquidity events. The Company believes this process, combined with its policies and guidelines, should provide for adequate levels of liquidity to fund the anticipated needs of on- and off- balance sheet items. BNCCORP, INC. Annual Report 2020 33 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. The Company cautions readers that these forward-looking statements, including without limitation, those relating to its 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 its major market; competition for its 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 its acquisition and growth strategies; and other risks which are difficult to predict and many of which are beyond its control. Recently Issued and Adopted Accounting Pronouncements Note 1 of the 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 the Consolidated Financial Statements includes a summary of 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 the Company’s earnings or value. The Company’s 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. The Company has risk management policies to monitor and limit exposure to interest rate risk. The Company’s asset/liability management process is utilized to manage its 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. The Company’s 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 it 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 the Company’s 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 the Company’s Consolidated Financial Statements for a summary of accounting policies pertaining to such instruments. The Company’s primary tool for measuring and managing interest rate risk is net interest income simulation. This exercise includes assumptions regarding the changes in interest rates and the impact on the Company’s 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 34 BNCCORP, INC. Annual Report 2020 for various coupon segments of the portfolio. For purposes of this simulation, projected month end balances of the various balance sheet accounts are held constant at their December 31, 2020 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, 2020 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. The Company monitors the results of net interest income simulation on a regular basis. Net interest income is generally simulated for the upcoming 12-month horizon in seven interest rate scenarios. The scenarios generally modeled are parallel interest rate ramps of +/- 100bp, 200bp, and 300bp along with a rates unchanged scenario. Given the current low absolute level of interest rates as of December 31, 2020, the downward scenarios for interest rate movements is limited to -100bp. The parallel movement of interest rates means all projected market interest rates move up or down by the same amount. A ramp in interest rates means that the projected change in market interest rates occurs over the 12-month horizon on a pro-rata basis. For example, in the +100bp scenario, the projected Prime rate is projected to increase from 3.25% to 4.25% 12 months later. The Prime rate in this example will increase 1/12th of the overall increase of 100 basis points each month. The net interest income simulation result for the 12-month horizon that covers the calendar year of 2021 is shown below (dollars in thousands): Net Interest Income Simulation Movement in interest rates Projected 12-month net interest income Dollar change from unchanged scenario Percentage change from unchanged scenario -100bp Unchanged +100bp +200bp +300bp $ $ 30,930 $ 31,746 (816) (2.57)% - - $ $ 31,515 (231) $ $ 31,290 (456) $ $ 31,070 (676) (0.73)% (1.44)% (2.13)% 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 assets and liabilities as of December 31, 2020 (without forward adjustments for planned growth and anticipated business activities) and do not contemplate any actions the Company 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 the Company’s rate sensitivity position as of December 31, 2020. Assets and liabilities are classified by the earliest possible repricing date or maturity, whichever occurs first. BNCCORP, INC. Annual Report 2020 35 Interest Sensitivity Gap Analysis Estimated maturity or repricing at December 31, 2020 0–3 Months 4–12 Months 1–5 Years (dollars are in thousands) Over 5 years Interest-earning assets: Interest-bearing deposits with banks $ 12,443 $ - $ - $ - $ Debt 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 32,471 4,201 250,083 11,332 119,740 20,805 52,067 59,335 - - 45,496 27,109 - - 154,392 172,017 - - 29,385 11,419 Total 12,443 164,678 4,201 250,083 240,605 330,285 Total interest-earning assets $ 430,270 $ 93,410 $ 378,476 $ 100,139 $ 1,002,295 Interest-bearing liabilities: Interest checking and money market accounts $ 528,932 $ Savings Time deposits Short-term borrowings FHLB advances Subordinated debentures 41,724 24,177 6,385 30,900 - Total interest-bearing liabilities Interest rate gap Cumulative interest rate gap at December 31, 2020 Cumulative interest rate gap to total assets $ $ $ 632,118 (201,848) (201,848) (18.79%) $ $ $ - - 15,000 78,907 14,503 (187,345) (17.44%) $ - - $ - - 63,907 26,636 - - - $ $ $ $ $ $ 26,636 351,840 164,495 15.31% $ $ 119 100,020 264,515 24.63% - - 115 - - 4 $ 528,932 41,724 114,835 6,385 30,900 15,004 737,780 264,515 (a) Values for debt 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. The table assumes that all savings and interest-bearing demand deposits reprice in the earliest period presented, however, management believes a significant portion of these accounts are generally not rate sensitive. The Company’s 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 the Company’s assets and liabilities as of December 31, 2020, and do not contemplate any actions the Company might undertake in response to changes in market interest rates. 36 BNCCORP, INC. Annual Report 2020 BNCCORP, INC. AND SUBSIDIARIES Consolidated Financial Statements December 31, 2020 and 2019 (With Independent Auditors’ Report Thereon) BNCCORP, INC. Annual Report 2020 37 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Independent Auditors’ Report Consolidated Balance Sheets as of December 31, 2020 and 2019 Consolidated Statements of Income for the Years Ended December 31, 2020 and 2019 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2020 and 2019 Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2020 and 2019 Consolidated Statements of Cash Flows for the Years Ended December 31, 2020 and 2019 Notes to Consolidated Financial Statements Page 39 41 42 43 44 45 47 38 BNCCORP, INC. Annual Report 2020 INDEPENDENT AUDITORS’ REPORT Audit Committee and Board of Directors BNCCORP, INC. and Subsidiaries Bismarck, North Dakota We have audited the accompanying consolidated financial statements of BNCCORP, INC. and Subsidiaries, which comprise the consolidated balance sheets as of December 31, 2020 and 2019, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; 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 of 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. BNCCORP, INC. Annual Report 2020 39 Audit Committee and Board of Directors BNCCORP, INC. and Subsidiaries 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, 2020 and 2019, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. CliftonLarsonAllen LLP Minneapolis, Minnesota March 19, 2021 40 BNCCORP, INC. Annual Report 2020 BNCCORP, INC. AND SUBSIDIARIES Consolidated Balance Sheets As of December 31, (In thousands, except share data) ASSETS Cash and cash equivalents Debt securities available for sale Federal Reserve Bank and Federal Home Loan Bank stock Loans held for sale-mortgage banking Loans held for investment Allowance for credit losses Net loans held for investment Premises and equipment, net Operating lease right of use asset Accrued interest receivable Other Total assets LIABILITIES AND STOCKHOLDERS’ EQUITY LIABILITIES: Deposits: Non-interest-bearing Interest-bearing – Savings, interest checking and money market Time deposits Total deposits Short-term borrowings Federal Home Loan Bank advances Guaranteed preferred beneficial interest in Company’s subordinated debentures Accrued interest payable Accrued Expenses Operating lease liabilities Other Total liabilities STOCKHOLDERS’ EQUITY: Common stock, $.01 par value – Authorized 11,300,000 shares; 3,540,522 and 3,514,770 shares issued and outstanding Capital surplus – common stock Retained earnings Treasury stock (128,131 and 153,883 shares, respectively) Accumulated other comprehensive income, net Total stockholders’ equity Total liabilities and stockholders’ equity 2020 2019 12,443 183,717 4,201 250,083 570,890 (10,324) 560,566 14,398 2,451 4,721 41,551 1,074,131 $ $ 10,523 265,278 3,651 137,114 508,569 (8,141) 500,428 16,401 2,638 3,681 27,036 966,750 167,667 $ 136,313 570,656 114,835 853,158 6,385 30,900 15,004 560 13,338 2,620 33,937 955,902 35 25,871 86,991 (1,850) 7,182 118,229 1,074,131 $ 514,869 169,365 820,547 4,565 17,000 15,006 1,685 7,580 2,822 1,267 870,472 35 25,831 71,057 (2,115) 1,470 96,278 966,750 $ $ $ $ See accompanying notes to consolidated financial statements. BNCCORP, INC. Annual Report 2020 41 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 (losses) 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 Total non-interest expense Income before income taxes Income tax expense Net income Basic earnings per common share Diluted earnings per common share 2020 2019 $ 31,358 $ 4,803 234 151 36,546 3,846 12 22 - 358 4,238 32,308 2,670 29,638 2,342 1,794 79,888 99 1,128 703 85,954 29,204 7,680 4,829 5,442 2,152 298 1,404 492 5,606 57,107 58,485 13,871 44,614 12.52 12.52 $ $ $ $ $ $ 27,201 9,567 868 181 37,817 7,540 23 334 621 583 9,101 28,716 700 28,016 2,614 1,735 24,902 155 (1,296) 1,021 29,131 22,459 4,973 4,321 4,538 2,218 435 1,452 531 3,064 43,991 13,156 2,921 10,235 2.90 2.88 See accompanying notes to consolidated financial statements. 42 BNCCORP, INC. Annual Report 2020 BNCCORP, INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income For the Years Ended December 31, (In thousands) NET INCOME Unrealized gain on debt securities available for sale Reclassification adjustment for (gains) losses on sales of securities, net, included in net income Other comprehensive income before tax Income tax expense related to items of other comprehensive income Other comprehensive income TOTAL COMPREHENSIVE INCOME $ $ 2020 2019 $ 44,614 $ 10,235 8,704 (1,128) 7,576 (1,864) 5,712 $ 9,840 1,296 11,136 (2,738) 8,398 8,398 18,633 $ 5,712 $ $ 50,326 See accompanying notes to consolidated financial statements. BNCCORP, INC. Annual Report 2020 43 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, 2018 3,493,298 $ 35 $ 25,990 $ 61,042 $ (2,386) $ (6,928) $ Net income Other comprehensive income Share-based compensation Cumulative effect adjust for adoption of ASC 842 - Leases - - 21,472 - - - - - - - (159) 10,235 - - - (220) - - 271 - - 8,398 - - 77,753 10,235 8,398 112 (220) BALANCE, December 31, 2019 3,514,770 $ 35 $ 25,831 $ 71,057 $ (2,115) $ 1,470 $ 96,278 Net income Other comprehensive income Share-based compensation Dividends declared on common stock ($8.00) - - 25,752 - - - - - - - 40 - 44,614 - - (28,680) - - 265 - - 5,712 - - 44,614 5,712 305 (28,680) BALANCE, December 31, 2020 3,540,522 $ 35 $ 25,871 $ 86,991 $ (1,850) $ 7,182 $ 118,229 See accompanying notes to consolidated financial statements. 44 BNCCORP, INC. Annual Report 2020 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 2020 2019 $ 44,614 $ 10,235 activities - Provision for credit losses Depreciation and amortization Net amortization of premiums and (discounts) on debt securities and subordinated debentures Share-based compensation Change in accrued interest receivable and other assets, net Gain on sale of other real estate Loss (gain) on sale of bank premises and equipment Net realized (gains) losses on sales of debt securities Deferred tax benefit 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 used in operating activities INVESTING ACTIVITIES: Purchases of debt securities available for sale Proceeds from sales of debt securities available for sale Proceeds from maturities of debt 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 held for investment Proceeds from sales of other real estate Proceeds from sales of premises and equipment Purchases of premises and equipment Net cash provided by investing activities 2,670 1,404 3,320 305 1,517 - 8 (1,128) (1,172) 2,734 (2,937,081) 2,829,811 (5,698) (9,053) 12,625 (99) (55,223) (17,663) 71,958 30,787 (12,256) 11,706 (75,335) - 1 (386) 8,812 See accompanying notes to consolidated financial statements. 700 1,452 7,170 112 (1,903) (35) (10) 1,296 (96) 4,185 (1,328,706) 1,216,900 (2,844) (2,090) 1,710 (155) (92,079) (172,304) 263,218 57,872 (30,430) 29,720 (41,907) 316 22 (1,103) 105,404 BNCCORP, INC. Annual Report 2020 45 BNCCORP, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows, continued For the Years Ended December 31, (In thousands) 2020 2019 FINANCING ACTIVITIES: Net increase (decrease) in deposits $ 32,611 $ Net increase (decrease) in short-term borrowings Decrease in long-term borrowings Repayments of Federal Home Loan Bank advances Proceeds from Federal Home Loan Bank advances Net cash provided by (used in) financing activities NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, beginning of period CASH AND CASH EQUIVALENTS, end of period SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid Income taxes paid SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Additions to other real estate in the settlement of loans $ $ $ $ See accompanying notes to consolidated financial statements. 1,820 - (292,500) 306,400 48,331 1,920 10,523 12,443 5,364 14,578 $ $ $ (28,058) (6,929) (10,000) (804,400) 821,400 (27,987) (14,662) 25,185 10,523 8,693 3,527 - $ 281 46 BNCCORP, INC. Annual Report 2020 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 the Company) is a registered bank holding company incorporated under the laws of Delaware. It is the parent company of BNC National Bank (the Bank). BNC National 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 complemented by retail channels from 11 locations in Arizona, North Dakota, Illinois, Kansas, Missouri, and Michigan. 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, 2020, 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 (GAAP) 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. GAAP 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. Debt Securities Debt 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, liquidity needs, or prepayment risk are classified as available for sale. Available for sale securities are carried at fair value. Net unrealized gains and losses, net of deferred income taxes, on securities available for sale are reported as a separate component of stockholders’ equity until realized (see Comprehensive Income). Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to yield using the effective interest method. For callable securities purchased at a premium, such premium is amortized over the period to the earliest call date. Dividend and interest income is recognized when earned. Realized gains and losses on the sale of debt securities are determined using the specific-identification method and recognized in non- interest income on the trade date. BNCCORP, INC. Annual Report 2020 47 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 is other-than-temporary. The its securities to determine whether impairment available information about 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 debt securities in a loss position at December 31, 2020, and 2019. Federal Reserve Bank and Federal Home Loan Bank Investments in Federal Reserve Bank and Federal Home Loan Bank stock qualify as restricted stock, which is not subject to equity security accounting treatment, and is reported at cost, subject to impairment. 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 Held For Investment Loans 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 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 is adequately secured and in the process of collection. When a loan 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 and uncollected in the current year is reversed against interest income in the current period. Interest payments received on non-accrual loans are generally applied to principal unless the remaining principal balance has been determined to be fully collectable. Accrual of interest may be resumed when it is determined that all amounts due are expected to be collected and the loan has exhibited a sustained level of performance, generally at least six months. A loan is considered impaired when it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans are reviewed for impairment on an individual basis. Impaired loans are measured at the present value of expected future cash flows discounted at the loan’s initial effective interest rate. The fair value of collateral of an impaired collateral-dependent loan or an observable market price of the loan is also used as an alternative to discounting cash flows. If the measure of the impaired loan is less than the 48 BNCCORP, INC. Annual Report 2020 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 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 of Financial Assets. 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 portfolio as of the consolidated balance sheet dates. The loan 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 including sensitivity to interest rate movements or other quantifiable external factors. individual borrowers, 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. BNCCORP, INC. Annual Report 2020 49 Reserves for Homogeneous Loan Pools. The Bank makes a significant number of loans 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. This analysis 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 and other extensions of credit deemed uncollectable 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. 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. Actual credit losses may materially vary from the current estimated allowance for credit losses. 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 forty years for buildings and three to ten 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. 50 BNCCORP, INC. Annual Report 2020 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. Debt 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. BNCCORP, INC. Annual Report 2020 51 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, 2020, the Company had two stock-based compensation plans, which are described more fully in Note 24 and Note 25 to these consolidated financial statements. Revenue from Contracts with Customers 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, and retirement plan administration. 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 includes revenue from investments in Small Business Investment 52 BNCCORP, INC. Annual Report 2020 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. GAAP. 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. Note 16 to these consolidated financial statements includes disclosure of revenue from contracts with customers. 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. Comprehensive Income Comprehensive income is the total of net income and other comprehensive income, which for the Company, is generally comprised of unrealized losses and gains on securities available for sale, net of corresponding tax effects. BNCCORP, INC. Annual Report 2020 53 RECENTLY ISSUED OR ADOPTED ACCOUNTING PRONOUNCEMENTS & INTERPRETATIONS losses with a current expected credit ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, replaces the current incurred loss methodology for recognizing 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, 2022. 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. ASC 310-40, Receivables – Troubled Debt Restructurings by Creditors. In the first quarter of 2020, in response to economic conditions related to the COVID-19 pandemic, federal and state prudential banking regulators issued guidance on their approach for loan modifications. The guidance indicates that short-term modifications such as payment deferrals, made on a good faith basis in response to COVID-19, to borrowers who were current on contractually required payments as of December 31, 2019, are not considered Troubled Debt Restructurings (TDRs). The Financial Accounting Standards Board was consulted on and concurs with this guidance. 54 BNCCORP, INC. Annual Report 2020 NOTE 2. Debt Securities Available For Sale Debt 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, 2020, or 2019. The amortized cost of debt securities available for sale and their estimated fair values were as follows as of December 31 (in thousands): 2020 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/FHLMC U.S. government agency small business administration pools guaranteed by SBA Collateralized mortgage obligations guaranteed by GNMA Collateralized mortgage obligations issued by FNMA/FHLMC Commercial mortgage-backed securities issued by FHLMC Other commercial mortgage-backed securities Asset-backed securities State and municipal bonds $ 4,996 $ 14,727 29,478 17,422 66,258 13,165 12,878 3,062 13,687 $ 175,673 $ 67 72 - 1,288 3,618 2,012 493 17 1,785 9,352 $ - $ 5,063 (153) (1,155) - - - - - - 14,646 28,323 18,710 69,876 15,177 13,371 3,079 15,472 $ (1,308) $ 183,717 2019 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/FHLMC U.S. government agency small business administration pools guaranteed by SBA Collateralized mortgage obligations guaranteed by GNMA Collateralized mortgage obligations issued by FNMA/FHLMC Commercial mortgage-backed securities issued by FHLMC Other commercial mortgage-backed securities Asset-backed securities State and municipal bonds $ 4,992 $ 5,634 53,873 21,120 68,353 21,625 56,530 12,810 19,873 2 16 - 671 523 931 921 83 948 $ - $ 4,994 (7) (2,236) (1) (261) - (672) - (450) 5,643 51,637 21,790 68,615 22,556 56,779 12,893 20,371 $ 264,810 $ 4,095 $ (3,627) $ 265,278 BNCCORP, INC. Annual Report 2020 55 The amortized cost and estimated fair value of debt securities available for sale classified according to their contractual maturities at December 31, 2020, 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 $ $ 4,996 - 35,652 135,025 175,673 $ $ 5,063 - 37,874 140,780 183,717 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. Debt securities available for sale with estimated fair values of $53.8 million and $80.6 million at December 31, 2020, and 2019, 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 (losses) 2020 2019 71,958 2,207 (1,079) 1,128 $ $ 263,218 3,389 (4,685) (1,296) $ $ The following table shows the Company’s gross unrealized losses and fair value of debt 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 2020 Description of Securities U.S. government sponsored entity mortgage-backed securities issued by FNMA/FHLMC U.S. government agency small business administration pools guaranteed by SBA Total temporarily impaired securities # 4 - 4 Fair Value Unrealized Loss $ 10,507 $ (153) - - $ 10,507 $ (153) Fair Value Unrealized Loss $ - - 28,323 (1,155) $ 28,323 $ (1,155) # - 4 4 # 4 4 8 Fair Value Unrealized Loss $ 10,507 $ (153) 28,323 (1,155) $ 38,830 $ (1,308) 56 BNCCORP, INC. Annual Report 2020 Description of 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/FHLMC Other commercial mortgage- backed securities Asset-backed securities State and municipal bonds Total temporarily impaired securities Less Than 12 Months 12 Months or More Total 2019 Fair Value Unrealized Loss $ 4,779 $ (7) 14,140 (142) 507 (1) 35,047 25,756 - 13,780 (261) (672) - (450) # 1 2 1 5 3 - 3 # - 5 - - - - - Fair Value Unrealized Loss $ - $ - 37,493 (2,094) - - - - - - - - - - Fair Value Unrealized Loss $ 4,779 $ (7) 51,633 (2,236) 507 (1) 35,047 25,756 - 13,780 (261) (672) - (450) # 1 7 1 5 3 - 3 15 $ 94,009 $ (1,533) 5 $ 37,493 $ (2,094) 20 $ 131,502 $ (3,627) 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 2020 or 2019. 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 2020 2019 $ $ 1,807 2,394 4,201 $ $ 1,807 1,844 3,651 BNCCORP, INC. Annual Report 2020 57 NOTE 4. Loans The composition of loans 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 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 held for investment 2020 2019 $ $ $ 250,083 165,994 190,939 102,064 81,783 8,603 21,748 571,131 (241) 570,890 (10,324) 560,566 $ $ $ 137,114 162,592 193,203 46,799 82,498 10,449 12,656 508,197 372 508,569 (8,141) 500,428 To accommodate customers whose financing needs exceed the Bank’s lending limits, the Bank sells loan participations on a nonrecourse basis to outside financial institutions and derecognizes the portion of the loan balance sold. At December 31, 2020, and 2019, loan participations sold on a nonrecourse basis to outside financial institutions totaled $130.4 million and $152.2 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 Total 2020 2019 54,129 105,828 30,706 190,663 $ $ 51,641 110,597 31,894 194,132 $ $ 58 BNCCORP, INC. Annual Report 2020 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 2020 Land and Land SBA Consumer Development Construction Total $ 2,366 $ 3,502 $ 1,131 $ 853 $ 187 $ 102 $ 8,141 980 (88) 17 829 (453) 45 639 - 9 121 (38) 12 (26) - 9 127 - - 2,670 (579) 92 $ 3,275 $ 3,923 $ 1,779 $ 948 $ 170 $ 229 $ 10,324 Commercial and Industrial Commercial Real Estate 2019 Land and Land SBA Consumer Development Construction Total $ 1,937 $ 3,558 $ 845 $ 928 $ 225 $ 199 $ 7,692 554 (125) - (69) - 13 357 (82) 11 (7) (97) 29 (38) - - (97) - - 700 (304) 53 $ 2,366 $ 3,502 $ 1,131 $ 853 $ 187 $ 102 $ 8,141 Balance, beginning of period Provision (reduction) Loans charged off Loan recoveries Balance, end of period Balance, beginning of period Provision (reduction) Loans charged off Loan recoveries Balance, end of period The following table shows the balance in the allowance for credit losses at December 31, 2020, and December 31, 2019, 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, 2020 Commercial and industrial Commercial real estate SBA Consumer Land and land development Construction Total December 31, 2019 Commercial and industrial Commercial real estate SBA Consumer Land and land development Construction Total Allowance For Credit Losses Gross Loans Held for Investment Impaired Other Total Impaired Other Total $ 762 $ - 597 - - - $ 2,513 3,923 1,182 948 170 229 3,275 3,923 1,779 948 170 229 $ 1,606 $ 164,388 $ - 982 24 - - 190,939 101,082 81,759 8,603 21,748 165,994 190,939 102,064 81,783 8,603 21,748 $ $ 1,359 $ 8,965 $ 10,324 $ 2,612 $ 568,519 $ 571,131 $ 497 172 59 - - - $ 1,869 3,330 1,072 853 187 102 $ 2,366 3,502 1,131 853 187 102 1,610 1,448 380 37 5 - $ 160,982 191,755 $ 162,592 193,203 46,419 82,461 10,444 12,656 46,799 82,498 10,449 12,656 $ 728 $ 7,413 $ 8,141 $ 3,480 $ 504,717 $ 508,197 BNCCORP, INC. Annual Report 2020 59 Performing and non-accrual loans The Bank’s key credit quality indicator is the loan’s performance status, defined as accrual or non-accrual. Performing loans are considered to have a lower risk of loss and are on accrual status. Non-accrual loans include loans on which the accrual of interest has been discontinued. Accrual of interest is discontinued when the Bank believes that the borrower’s financial condition is such that the collection of 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): 2020 Current 31-89 Days Past Due 90 Days or More Past Due And Accruing Total Performing Non-accrual Total Commercial and industrial: Business loans $ 70,033 $ Agriculture Owner-occupied commercial real estate Commercial real estate SBA Consumer: Automobile Home equity 1st mortgage Other Land and land development Construction 27,079 67,206 190,939 101,082 21,087 12,144 11,694 36,829 8,603 21,748 Total loans held for investment 568,444 Loans held for sale 249,880 $ 58 13 - - - - - - 4 - - 75 203 Total gross loans $ 818,324 $ 278 $ - - - - - - - - 1 - - 1 - 1 $ 70,091 $ 1,412 $ 27,092 67,206 190,939 101,082 21,087 12,144 11,694 36,834 8,603 21,748 - 193 - 982 10 - - 14 - - 71,503 27,092 67,399 190,939 102,064 21,097 12,144 11,694 36,848 8,603 21,748 568,520 2,611 571,131 250,083 - 250,083 $ 818,603 $ 2,611 $ 821,214 60 BNCCORP, INC. Annual Report 2020 2019 Current 31-89 Days Past Due 90 Days or More Past Due And Accruing Total Performing Non-accrual Total Commercial and industrial: Business loans $ 75,907 $ Agriculture Owner-occupied commercial real estate Commercial real estate SBA Consumer: Automobile Home equity 1st mortgage Other Land and land development Construction 29,877 54,947 193,203 46,382 24,118 9,650 12,678 35,884 10,444 12,656 Total loans held for investment 505,746 Loans held for sale 137,114 $ 189 37 25 - 36 47 - - 84 - - 418 - Total gross loans $ 642,860 $ 418 $ - - - - - - - - - - - - - - $ 76,096 $ 1,610 $ 29,914 54,972 193,203 46,418 24,165 9,650 12,678 35,968 10,444 12,656 - - - 381 15 - - 22 5 - 77,706 29,914 54,972 193,203 46,799 24,180 9,650 12,678 35,990 10,449 12,656 506,164 2,033 508,197 137,114 - 137,114 $ 643,278 $ 2,033 $ 645,311 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 2020 2019 $ $ 167 - 167 $ $ 140 - 140 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, 2020, the Company had $554.7 million of loans categorized as pass rated loans. This compares to $489.8 million at December 31, 2019. 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, 2020, the Company had $9.1 million of loans categorized as watch list loans compared to $9.2 million at December 31, 2019. 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 in full on the basis of currently existing facts, conditions and values questionable, and there is a higher probability of loss. At BNCCORP, INC. Annual Report 2020 61 December 31, 2020, the Company had $5.2 million of substandard loans and $2.1 million of doubtful loans. This compares to $7.8 million of substandard loans and $1.5 million doubtful loans as of December 31, 2019. 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, 2020 and 2019 (in thousands): 2020 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 SBA Total impaired loans with an allowance recorded Impaired loans without an allowance recorded: Commercial and industrial: Owner-occupied commercial real estate SBA Consumer: Automobile Other Total impaired loans without an allowance recorded TOTAL IMPAIRED LOANS $ $ $ $ $ 2,004 $ 1,413 $ 753 719 762 597 $ 1,417 $ 729 2,757 $ 2,132 $ 1,359 $ 2,146 $ $ 203 338 $ 193 263 21 30 10 14 592 3,349 $ $ 480 2,612 $ $ - - - - - 1,359 $ $ $ $ 217 273 11 17 518 2,664 $ $ - - - - - - - - - 62 BNCCORP, INC. Annual Report 2020 2019 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 Commercial real estate SBA Total impaired loans with an allowance recorded Impaired loans without an allowance recorded: Commercial and industrial: Business loans SBA Consumer: Automobile Other Land and land development Total impaired loans without an allowance recorded TOTAL IMPAIRED LOANS $ $ $ $ $ $ 2,004 1,762 121 $ 1,417 1,448 101 $ 497 172 59 $ 1,429 1,476 103 3,887 $ 2,966 $ 728 $ 3,008 $ 248 338 18 42 137 783 4,670 $ $ $ $ 193 279 15 22 5 514 3,480 $ $ - - - - - - 728 $ $ $ $ 221 280 16 27 16 560 3,568 $ $ - 75 - 75 - - - - - - 75 Troubled Debt Restructuring (TDR) Included in net loans 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 Owner-occupied commercial real estate SBA Commercial and industrial: Business loans Commercial real estate SBA Accrual Non-accrual Total Allowance 2020 $ $ $ $ - - - - - Accrual 1,448 - 1,448 $ $ $ $ 1,413 193 360 1,966 2019 Non-accrual 1,417 - 380 1,797 $ $ $ $ 1,413 193 360 1,966 1,417 1,448 380 3,245 $ $ $ $ Total 762 - 56 818 Allowance 172 497 59 728 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 a TDR 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. BNCCORP, INC. Annual Report 2020 63 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, 2020, there was one new TDR with a pre-modification and post modification balance of $230 thousand. For the year ended December 31, 2019, there was one new TDR with a pre-modification and post modification balance of $279 thousand. Loans that were non-accrual prior to modification remain on non-accrual for at least six months following modification. Non-accrual TDR loans that have performed according to the modified terms for six months may be returned to accruing status. Loans that were accruing prior to modification remain on accrual status after the modification as long as the loan continues to perform under the new terms. The following table indicates the effect on interest income 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 2020 2019 $ $ 144 - 144 $ $ 187 75 112 There were no additional funds committed to borrowers who are in TDR status at December 31, 2020, and December 31, 2019. A TDR is 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, 2020, and December 31, 2019, 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). At December 31, 2020, loans modified consistent with Section 4013 of the CARES Act totaled $42 million. The majority of these modified loans (55%) are in the hotel industry. Other services to the hospitality industry and the accommodation and food service industry comprise another 10% and 8% of CARES Act modified loans, respectively. Approximately 25% of these modified loans will reach the end of their payment modification period by March 31, 2021, with the remaining 75% of payment modifications expiring by June 30, 2021. Economic conditions, including pandemic-related challenges, may result in the Company agreeing to additional loan modifications to assist borrowers consistent with CARES Act legislation extended through January 1, 2022. The modifications made by the Company are consistent with Section 4013 of the CARES Act. These loans were current as of December 31, 2019, and as a result, are not currently subject to troubled debt restructuring accounting standards. 64 BNCCORP, INC. Annual Report 2020 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 Balance, end of period 2020 2019 - - - - - - $ $ - 281 (316) 35 - - $ $ 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 2020 2019 2,853 16,863 456 9,507 29,679 (15,281) 14,398 $ $ 2,853 17,735 436 9,632 30,656 (14,255) 16,401 $ $ Depreciation and amortization expense totaled $1.4 million and $1.5 million for the years ended December 31, 2020, and 2019, respectively. NOTE 8. Leases The Company has operating leases, primarily for office space, that expire over the next six years. These leases generally contain renewal options for periods ranging from one to five years. The Company has evaluated each individual lease to determine if exercising the renewal option was probable and considered the renewal into determining the lease term and associated payments. The Company’s leases generally do not include termination options for either party to the lease or restrictive financial or other covenants. Payments due under the lease contracts include both fixed and variable payments. The variable payments are for the Company’s proportionate share of the building’s property taxes, insurance, and common area maintenance. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments. The components of lease cost for the years ended December 31 were as follows (in thousands): Operating lease cost Variable lease cost Short-term lease cost 2020 2019 $ $ 995 65 16 1,076 $ $ 969 45 17 1,031 Amounts reported in the consolidated balance sheet as of December 31, 2020, and December 31, 2019, are as follows (in thousands): BNCCORP, INC. Annual Report 2020 65 Operating lease right of use asset Operating lease liabilities As of December 31, 2020 As of December 31, 2019 $ 2,451 2,620 $ 2,638 2,822 Other supplementary information related to leases as of December 31, was as follows (dollars are in thousands): Cash paid for amounts included in the measurement of lease liabilities ROU assets obtained in exchange for lease obligations Reductions to ROU assets resulting from reduction in lease obligations $ $ 1,007 604 791 987 175 1,034 2020 2019 Weighted average remaining lease term Weighted average discount rate As of December 31, 2020 As of December 31, 2019 3.93 years 6.00% 4.94 years 6.00% Maturities of lease liabilities under non-cancellable leases as of December 31, 2020, are as follows (in thousands): 2021 2022 2023 2024 2025 Thereafter Total lease liabilities NOTE 9. Deposits Operating Leases 699 689 555 357 170 150 2,620 $ $ The scheduled maturities of time deposits as of December 31, 2020, are as follows (in thousands): $ 2021 2022 2023 2024 2025 Thereafter 87,524 17,056 6,607 2,741 757 150 $ 114,835 At December 31, 2020, and 2019, the Bank had no time deposits that had been acquired through a traditional broker channel. The Company had no interest-bearing deposits that meet the regulatory definition of a brokered deposit as of December 31, 2020 and $108.0 million as of December 31, 2019. At December 31, 2020, and 2019, the Bank had $24.6 million and $45.7 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): 66 BNCCORP, INC. Annual Report 2020 Savings Interest checking Money market Time deposits 2020 2019 $ $ 20 462 1,162 2,202 3,846 $ $ 24 1,288 3,124 3,104 7,540 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. NOTE 10. Short-Term Borrowings The following table sets forth selected information for short-term borrowings (borrowings with an original maturity of less than one year) as of December 31 (in thousands): Federal Reserve borrowings Repurchase agreements with customers, renewable daily, interest payable monthly, rates ranging from 0.15% to 0.40% and 0.20% to 0.40%, respectively, secured by U.S. Treasury securities and collateralized mortgage obligations issued by FNMA 2020 2019 $ $ - 6,385 6,385 $ $ - 4,565 4,565 The weighted average interest rate on short-term borrowings outstanding as of December 31, 2020, and 2019 was 0.16% and 0.21%, 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, 2020, the $6.4 million of securities sold under repurchase agreements, with a weighted average interest rate of 0.16%, were collateralized by U.S. Treasury securities and collateralized mortgage obligations issued by FNMA having a fair value of $10.1 million and unamortized principal balances of $8.9 million. At December 31, 2019, the $4.6 million of securities sold under repurchase agreements, with a weighted average interest rate of 0.21%, were collateralized by U.S. Treasury securities and collateralized mortgage obligations issued by FNMA having a fair value of $7.9 million and unamortized principal balances of $7.4 million. NOTE 11. Federal Home Loan Bank Advances As of December 31, 2020, the Bank had $30.9 million FHLB advances outstanding. At December 31, 2020, the Bank had loans with unamortized principal balances of approximately $172.0 million and securities with unamortized principal balances of approximately $13.0 million pledged as collateral to the FHLB. As of December 31, 2019, the Bank had $17.0 million FHLB advances outstanding. At December 31, 2019, the Bank had loans with unamortized principal balances of approximately $171.6 million and securities with unamortized principal balances of approximately $46.8 million pledged as collateral to the FHLB. As of December 31, 2020, the Bank has the ability to draw advances up to approximately $84.8 million based upon the aggregate collateral that is currently pledged, subject to additional FHLB stock purchase requirement. BNCCORP, INC. Annual Report 2020 67 NOTE 12. Other Borrowings The following table presents selected information regarding other borrowings at December 31 (in thousands): Unsecured Borrowing Lines: 2020 BNC National Bank lines (1) $ 34,500 $ - $ 34,500 Line Outstanding Available Secured Borrowing Lines: BNC National Bank line BNCCORP line $ 2,161 $ 1,102 $ 124,709 10,000 $ - - 1,102 10,000 Collateral Pledged Line Outstanding Available Total 11,102 (1) The unsecured BNC National Bank Lines consists of three separate lines with three institutions in individual amounts of $12.5 million, $10 126,870 11,102 $ $ $ $ - million, and $12 million. At December 31, 2020, the pledged collateral for the secured BNC National Bank line was comprised of commercial real estate loans and the pledged collateral for the secured BNCCORP line is the common stock of BNC National Bank. Unsecured Borrowing Lines: 2019 BNC National Bank lines (1) $ 34,500 $ - $ 34,500 Line Outstanding Available Secured Borrowing Lines: BNC National Bank line BNCCORP line $ 2,271 $ 2,157 $ 102,955 10,000 $ - - 2,157 10,000 Collateral Pledged Line Outstanding Available Total 12,157 (1) The unsecured BNC National Bank Lines consists of three separate lines with three institutions in individual amounts of $12.5 million, $10 105,226 12,157 $ $ $ $ - million, and $12 million. At December 31, 2019, the pledged collateral for the secured BNC National Bank line was comprised of commercial real estate loans and the pledged collateral for the secured BNCCORP line is the common stock of BNC National Bank. NOTE 13. Guaranteed Preferred Beneficial Interests in Company’s Subordinated Debentures In July 2007, the Company 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, 2020, and December 31, 2019, was 1.63% and 3.50%, respectively. The subordinated debentures mature on October 1, 2037. The subordinated debentures may be redeemed at par and the corresponding debentures may be prepaid at the option of BNCCORP, subject to approval by the Federal Reserve Board. 68 BNCCORP, INC. Annual Report 2020 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 BNC National 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. Dividends or share repurchase authorizations by the Company require the Company to consult with the Federal Reserve Board. In December 2020, the Company’s Board of Directors declared an $8.00 per share special cash dividend payable on February 1, 2021. In addition, the Board of Directors approved a 175,000 share repurchase authorization. NOTE 15. Regulatory Capital and Current Operating Environment BNCCORP and BNC National 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, BNCCORP and BNC National 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 may also impose capital requirements that are specific to individual institutions. The requirements are generally above the statutory ratios. At December 31, 2020, the capital ratios exceeded all regulatory capital thresholds and maintained sufficient capital conservation buffers to avoid limitations on certain types of capital distributions. The capital amounts and ratios presented below for December 31, 2020, and December 31, 2019, 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 2020 Total Risk-Based Capital: Consolidated $ 135,496 17.88 % $ 60,611 ≥8.00 % $ N/A N/A % $ N/A BNC National Bank 126,515 16.72 60,534 ≥8.00 75,668 10.00 50,848 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) 126,015 117,046 16.63 15.47 45,458 45,401 ≥6.00 ≥6.00 111,011 117,046 126,015 117,046 14.65 15.47 11.74 10.92 34,094 34,050 42,923 42,872 ≥4.50 ≥4.50 ≥4.00 ≥4.00 Consolidated BNC National Bank 118,213 124,694 11.01 11.62 N/A N/A N/A N/A N/A 60,534 N/A 49,184 N/A 53,590 N/A N/A N/A 8.00 N/A 6.50 N/A 5.00 N/A N/A N/A 56,512 N/A 67,862 N/A 63,456 N/A N/A N/A% 6.72 N/A 7.47 N/A 8.97 N/A 5.92 N/A N/A BNCCORP, INC. Annual Report 2020 69 Actual For Capital Adequacy Purposes To be Well Capitalized Amount in Excess of Well Capitalized Amount Ratio Amount Ratio Amount Ratio Amount Ratio 2019 Total Risk-Based Capital: Consolidated $ 117,817 17.13 % $ 55,023 ≥8.00 % $ N/A N/A % $ N/A BNC National Bank 109,044 15.88 54,940 ≥8.00 68,675 10.00 40,369 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) 109,675 100,902 15.95 14.69 41,268 41,205 ≥6.00 ≥6.00 94,669 100,902 109,675 100,902 13.76 14.69 10.65 9.81 30,951 30,904 41,205 41,142 ≥4.50 ≥4.50 ≥4.00 ≥4.00 Consolidated BNC National Bank 96,159 102,837 9.95 10.65 N/A N/A N/A N/A N/A 54,940 N/A 44,639 N/A 51,427 N/A N/A N/A 8.00 N/A 6.50 N/A 5.00 N/A N/A N/A 45,962 N/A 56,263 N/A 49,475 N/A N/A N/A% 5.88 N/A 6.69 N/A 8.19 N/A 4.81 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. NOTE 16. Revenue from Contracts with Customers 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 2020 2019 $ $ $ 577 941 824 2,342 1,794 - 1,794 40 663 703 81,115 85,954 $ 760 998 856 2,614 1,708 27 1,735 49 972 1,021 23,761 29,131 (a) This revenue is not within the scope of ASC 606, and includes fees related to mortgage banking operations, gains on sale of loans, net gains (losses) on sale of debt securities, revenue from investments in SBIC, and various other transactions. The Company had no material contract assets or remaining performance obligations as of December 31, 2020. Total receivables from revenue recognized under the scope of ASC 606 were $487 thousand and $460 thousand as of December 31, 2020, and December 31, 2019, respectively. These receivables are included as part of the Other assets line on the Company’s Consolidated Balance Sheets. 70 BNCCORP, INC. Annual Report 2020 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, 2020 Total Level 1 Level 2 Level 3 183,717 250,083 19,098 452,898 189 3,448 3,637 $ $ $ $ 5,063 - - 5,063 - - - $ $ $ $ 178,654 250,083 19,098 447,835 189 3,448 3,637 $ $ $ $ Carrying Value at December 31, 2019 Total Level 1 Level 2 Level 3 265,278 137,114 4,358 406,750 21 299 320 $ $ $ $ 4,994 - - 4,994 - - - $ $ $ $ 260,284 137,114 4,358 401,756 21 299 320 $ $ $ $ $ $ $ $ $ $ $ $ Twelve Months Ended December 31, 2020 Total Gains/(Losses) $ $ $ $ 1,128 5,698 12,370 19,196 (3,149) (168) (3,317) Twelve Months Ended December 31, 2019 Total Gains/(Losses) $ $ $ $ (1,296) 2,844 2,051 3,599 128 (89) 39 - - - - - - - - - - - - - - ASSETS Debt 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 ASSETS Debt 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 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. BNCCORP, INC. Annual Report 2020 71 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. GAAP. 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 2020 Total Level 1 Level 2 Level 3 $ $ $ $ 1,253 - 1,253 Total 2,752 - 2,752 $ $ $ $ Level 1 - - - - - - $ $ $ $ 2019 Level 2 - - - - - - $ $ $ $ 1,253 - 1,253 Level 3 2,752 - 2,752 Total Gains/(Losses) (1,105) - (1,105) Total Gains/(Losses) (473) 35 (438) $ $ $ $ (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. While the overall loan portfolio is not carried at fair value, reserves are allocated, on certain loans, to reflect fair value based on the external appraised value of the underlying collateral, less anticipated costs to sell, or through present value of future cash flow models for impaired loans that are not collateral dependent. The external appraisals are generally based on a sales, income, or cost approach, which are then adjusted for the unique characteristics of the property being valued. The valuation of impaired loans are reviewed on a quarterly basis. Because many of these inputs are not observable, the measurements are classified as Level 3. 72 BNCCORP, INC. Annual Report 2020 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 Debt securities available for sale Debt securities available for sale Federal Reserve Bank and Federal Home Loan Bank stock Loans held for sale-mortgage banking Commitments to originate mortgage loans Gross loans held for investment Gross loans held for investment 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, 2020 December 31, 2019 Carrying Amount Fair Value Carrying Amount Fair Value Level 1 Level 1 Level 2 Level 2 Level 2 Level 2 Level 2 Level 3 Level 2 Level 2 Level 2 Level 2 Level 2 Level 2 Level 2 Level 2 $ 12,443 $ 12,443 $ 10,523 $ 5,063 178,654 4,201 250,083 19,098 568,519 2,612 4,721 5,063 178,654 4,201 250,083 19,098 577,323 1,253 4,721 4,994 260,284 3,651 137,114 4,358 504,717 3,480 3,681 10,523 4,994 260,284 3,651 137,114 4,358 505,156 2,752 3,681 $ 1,045,394 $ 1,052,839 $ 932,802 $ 932,513 $ 167,667 685,491 37,285 560 13,338 189 3,448 $ 167,677 686,066 37,285 560 13,338 189 3,448 $ 136,313 684,234 21,565 1,685 7,580 21 299 $ 136,313 684,215 21,565 1,685 7,580 21 299 Level 2 15,004 9,859 15,006 10,834 $ 922,982 $ 918,412 $ 866,703 $ 862,512 Level 2 Level 2 $ $ - - $ $ 181 11 $ $ - - $ $ 225 8 The Company discloses the estimated fair value of financial instruments as it is useful to the reader of financial statements. 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. 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. BNCCORP, INC. Annual Report 2020 73 The contractual amount represents the Bank’s exposure to credit losses in the event of default by the borrower. At December 31, 2020, 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 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 Notes 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, 2020, 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): 2020 2019 Fixed Rate Variable Rate Fixed Rate Variable Rate Commitments to extend credit Standby and commercial letters of credit $ 18,079 236 $ 74,475 834 $ 15,872 85 $ 79,941 653 In addition to the amounts in the table above, mortgage banking commitments to fund loans totaled $598.4 million at December 31, 2020 and $204.9 million at December 31, 2019. Mortgage banking commitments to sell loans totaled $848.5 million at December 31, 2020 and $338.9 million at December 31, 2019. Performance and Financial Standby Letters of Credit As of December 31, 2020, and 2019, the Bank had no outstanding performance standby letters of credit and $3.2 million and $3.4 million, respectively, of financial standby letters of credit. Performance standby letters of credit are irrevocable obligations to the beneficiary on the part of the Bank to make payment on account in an event of default by the account party in the performance of a nonfinancial or commercial obligation. Financial standby letters of credit are irrevocable obligations to the beneficiary on the part of the Bank to repay money for the account of the account party or to make payment on account of any indebtedness undertaken by the account party, in the event that the account party fails to fulfill its obligation to the beneficiary. Under these arrangements, the Bank could, in the event of the account party’s nonperformance, be required to pay a maximum of the amount of issued letters of credit. The Bank has recourse against the account party up to and including the amount of the performance standby letter of credit. The Bank evaluates each account party’s creditworthiness on a case-by-case basis and the amount of collateral obtained varies and is based on management’s credit evaluation of the account party. 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 74 BNCCORP, INC. Annual Report 2020 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 2020 2019 $ $ 906 1,744 (1,625) 1,025 $ $ 982 200 (276) 906 NOTE 20. Commitments and Contingencies 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, 2020, the Bank may be required to fund $1.2 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. 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 2020 2019 $ $ 12,526 2,517 15,043 (1,146) (26) (1,172) 13,871 $ $ 2,398 619 3,017 (75) (21) (96) 2,921 BNCCORP, INC. Annual Report 2020 75 The reconciliation between income tax expense computed by applying the statutory federal income tax rate of 21.0% is as follows for the years ended December 31 (in thousands): 2020 2019 Statutory federal income tax expense State income taxes, net of federal income tax benefit Tax-exempt interest income Tax-exempt life insurance Other, net Total $ $ 12,282 1,737 (85) (91) 28 13,871 $ $ 2,763 460 (170) (92) (40) 2,921 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 Acquired intangibles Net operating loss carryforwards Other Deferred tax assets Deferred tax liabilities: Unrealized gain on debt securities available for sale Discount accretion on securities Premises and equipment Other Deferred tax liabilities Valuation allowance Net deferred tax assets 2020 2019 2,871 571 122 17 370 3,951 1,985 39 141 343 2,508 1,443 (14) 1,429 $ $ 2,137 501 122 17 318 3,095 121 68 460 312 961 2,134 (14) 2,120 $ $ Subject to certain limiting statutes, the Company is able to carry forward state tax net operating losses aggregating $19 thousand as of December 31, 2020. The state net operating losses expire between 2024 and 2031. Tax years ended December 31, 2017 through 2020 remain open to federal examination. Tax years ended December 31, 2016 through 2020 remain open to certain 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 would be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Also, interest and penalties expense would be 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, 2020, and 2019, the Company did not have any uncertain tax positions. 76 BNCCORP, INC. Annual Report 2020 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 2020 2019 3,563,203 1,580 3,564,783 $ $ $ 44,614 12.52 12.52 $ $ $ 3,526,096 31,489 3,557,585 10,235 2.90 2.88 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 $958 thousand and $734 thousand at December 31, 2020, and 2019, respectively. Advances and other increases of loans to related parties in 2020 and 2019 totaled $349 thousand and $610 thousand, respectively. Loan pay downs and other reductions by related-parties in 2020 and 2019 were $125 thousand and $773 thousand, respectively. Commitments to extend credit to related parties decreased to $174 thousand at December 31, 2020, from $202 thousand at December 31, 2019. The total amount of deposits received from these parties was $1.1million at December 31, 2020, and December 31, 2019. Loans to, and deposits received from, these parties were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than the normal risk of collection. The Federal Reserve Act limits amounts of, and requires collateral on, extensions of credit by the Bank to BNCCORP, and with certain exceptions, its non-bank affiliates. There are also restrictions on the amounts of investment by the Bank in stocks and other subsidiaries of BNCCORP and such affiliates and restrictions on the acceptance of their securities as collateral for loans by the Bank. As of December 31, 2020, 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 2020 and 2019, 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 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 $971,000 and $779,000 for 2020 and 2019, respectively. Under the investment options available under the 401(k) savings plan, prior to January 28, 2008, employees could elect to invest their salary BNCCORP, INC. Annual Report 2020 77 deferrals in BNCCORP common stock. At December 31, 2020, the assets in the plan totaled $40.4 million and included $1.1 million (24,000 shares) invested in BNCCORP common stock. At December 31, 2019, the assets in the plan totaled $32.6 million and included $876,000 (25,000 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. The Company 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 BNCCORP common stock and upon retirement, the plan participant will receive the number of shares of BNCCORP 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. BNCCORP common stock held in the trust related to the Company’s retirement account obligation is recorded in treasury stock and equates to 29,730 and 27,192 shares as of December 31, 2020, and 2019. As of December 31, 2020, the plan obligation totaled $1.3 million and $1.0 million as of December 31, 2019. In December of 2015, the Company adopted a non-qualified deferred compensation plan for directors of BNCCORP. Effective with 2016 service, a director may voluntarily make contributions of earned director compensation to a deferred account that is ultimately payable with BNCCORP common stock at the time of separation from service with the Company. The deferred shares of BNCCORP common stock were 12,581 shares and 9,289 shares as of December 31, 2020, and 2019, respectively. NOTE 25. Share-Based Compensation The Company has two share-based plans for certain key employees and directors whereby shares of BNCCORP 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 BNCCORP 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, 2020, are as follows: Total shares in plan Total shares available 1995 250,000 45,951 2015 50,000 35,133 Total 300,000 81,084 The Company recognized share-based compensation expense of $28,000 and $20,000 for the years ended December 31, 2020, and 2019, respectively, related to restricted stock. The tax benefits associated with share-based compensation was approximately $7,000 for the year ended December 31, 2020, and was approximately $5,000 for the year ended December 31, 2019. At December 31, 2020, the Company had $47,000 of unamortized restricted stock compensation, which is expected to be recognized over a period of three years. Restricted shares of stock granted have vesting and amortization periods of four years. Following is a summary of restricted stock activities for the years ended December 31: 78 BNCCORP, INC. Annual Report 2020 Non-vested, beginning of year Granted Vested Forfeited Non-vested, end of year 2020 $ Number Restricted Stock Shares 1,400 1,000 (700) - 1,700 Weighted Average Grant Date Fair Value Number Restricted Stock Shares 28.78 34.77 28.78 - 32.30 2,100 - (700) - 1,400 2019 $ Weighted Average Grant Date Fair Value 28.78 - 28.78 - 28.78 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 2020 2019 Options to Purchase Shares 21,000 - (21,000) - - - Weighted Average Exercise Price $ 3.00 - 3.00 - - - Options to Purchase Shares 42,600 - (21,600) - 21,000 21,000 Weighted Average Exercise Price $ 3.00 - 3.00 - 3.00 3.00 The total intrinsic value of options exercised during the years ended December 31, 2020, and 2019 was $659 thousand and $581 thousand, respectively. NOTE 26. Segment Reporting The Company determines reportable segments based on the way that management organizes the segments within the Company for making operating decisions, allocating resources, and assessing performance. The Company has determined that it has three reportable segments: Community Banking, Mortgage Banking, and Holding Company. Community Banking The Community Banking segment serves the needs of businesses and consumers through 13 locations in North Dakota, Arizona, and Minnesota. Within this segment, the following products and services are provided: business and personal loans, commercial real estate loans, SBA loans, business and personal checking, savings products, and cash management, as well as trust and wealth management services and retirement plan administration. These products and services are supported through web and mobile based applications. Revenues for community banking consist primarily of interest earned on loans and debt securities, bankcard fees, loan fees, services charges on deposits, and fees for wealth management services. Mortgage Banking The Mortgage Banking segment originates residential mortgage loans for the primary purpose of sale on the secondary market. The segment consists of both a consumer direct channel with locations in Kansas and Michigan utilizing internet leads and a call center to originate residential mortgage loans throughout the United States complimented by a relationship based retail channel with 11 locations in North Dakota, Arizona, Kansas, Illinois and Missouri. Revenues for mortgage banking consist primarily of interest earned on mortgage loans held for sale, gains on sales of loans, unrealized gains or losses on mortgage financial instruments, and loan origination fees. Holding Company The Holding Company segment represents the parent company of BNC National Bank. Revenue for the Holding Company segment primarily consists of interest earned on cash and cash equivalents and management fees charged to BNC National Bank for management services. Interest expense for the Holding Company segment consists of interest expense on the Company’s subordinated debentures. Non-interest expense for the segment includes parent BNCCORP, INC. Annual Report 2020 79 company costs for certain centralized functions such as corporate administration, accounting, audit, consulting, and governance. The Company’s operating segments are presented based on its management structure and management accounting practices. The structure and practices are specific to the Company and therefore, the financial results of the Company’s business segments are not necessarily comparable with similar information for other financial institutions. Community Banking Mortgage Banking Holding Intercompany BNCCORP Company Eliminations (1) Consolidated 2020 Interest income Interest expense Net interest income (expense) Provision for credit losses Net interest income after provision for credit losses Non-interest Income Non-interest Expense Income (loss) before income taxes Income tax expense (benefit) Net income (loss) Total Assets at December 31, 2020 $ 32,482 $ 4,593 $ 3,913 28,569 2,670 25,899 8,478 27,621 6,756 931 5,825 801,519 $ $ 530 4,063 - 4,063 79,874 30,317 53,620 13,405 40,215 271,256 $ $ $ $ 34 358 (324) - (324) 1,891 3,458 (1,891) (456) (1,426) 38,183 $ $ $ $ (563) (563) - - - (4,289) (4,289) - - - (36,827) $ $ 36,546 4,238 32,308 2,670 29,638 85,954 57,107 58,485 13,871 44,614 1,074,131 (1) Intercompany eliminations remove internal shared service costs for intercompany use of funds to originate mortgage loans held for sale and costs related to internal services rendered to segments by centralized function of the Company such as administration, audit, accounting, compliance, governance, consulting, and technology expense. 80 BNCCORP, INC. Annual Report 2020 NOTE 27. Condensed Financial Information-Parent Company Only Condensed financial information of BNCCORP, INC. on a parent company only basis is as follows: Parent Company Only Condensed Balance Sheets As of December 31, (In thousands, except per share data) Assets: Cash and cash equivalents Investment in subsidiaries Receivable from subsidiaries Other Total assets Liabilities and stockholders’ equity: Subordinated debentures Payable to subsidiaries Accrued expenses and other liabilities Total liabilities Common stock, $.01 par value – Authorized 11,300,000 shares; 3,540,522 and 3,514,770 shares issued and outstanding Capital surplus – common stock Retained earnings Treasury stock (128,131 and 153,883 shares, respectively) Accumulated other comprehensive income, net Total stockholders’ equity Total liabilities and stockholders’ equity 2020 2019 37,113 124,711 147 923 162,894 15,004 70 29,591 44,665 35 25,871 86,991 (1,850) 7,182 118,229 162,894 $ $ $ $ 6,736 103,421 1,674 1,015 112,846 15,006 70 1,492 16,568 35 25,831 71,057 (2,115) 1,470 96,278 112,846 $ $ $ $ BNCCORP, INC. Annual Report 2020 81 Parent Company Only Condensed Statements of Income For the Years Ended December 31, (In thousands) 2020 2019 $ 1,839 $ 2,034 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 $ 34 64 1,937 370 1,582 1,065 811 3,828 (1,891) 465 (1,426) 46,040 44,614 $ 37 18 2,089 1,222 1,453 1,157 789 4,621 (2,532) 621 (1,911) 12,146 10,235 82 BNCCORP, INC. Annual Report 2020 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 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 Financing activities: Decrease in long-term borrowings Net cash used in financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year Supplemental cash flow information: Interest paid Income taxes paid 2020 2019 $ 44,614 $ 10,235 (46,042) 30,000 305 1,620 (120) 30,377 - - 30,377 6,736 37,113 443 11,996 $ $ $ (12,146) 10,000 112 (1,772) (135) 6,294 (10,000) (10,000) (3,706) 10,442 6,736 1,392 3,043 $ $ $ BNCCORP, INC. Annual Report 2020 83 This Page Intentionally Left Blank 84 BNCCORP, INC. Annual Report 2020 CORPORATE DATA Investor Relations Email 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 Mark E. Peiler Interim President & Chief Executive Officer (612)-305-2210 Interim Chief Financial Officer (612)-305-2233 Annual Meeting The 2021 annual meeting of stockholders will be held at 8:30 a.m. (Central Daylight Time) on Thursday, June 24, 2021 by virtual meeting. Independent Public Accountants CliftonLarsonAllen LLP 220 South Sixth Street, Suite 300 Minneapolis, MN 55402-1436 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 2020(1) 2019(1) High $35.07 $23.00 $31.99 $45.99 Low $19.00 $15.85 $22.00 $30.18 High $28.35 $30.25 $34.50 $35.20 Low $20.50 $26.90 $27.80 $31.50 (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. BNC National Bank BANK BRANCHES – ND: 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 Crosby 206 South Main Street Crosby, ND 58730 Garrison 92 North Main Garrison, ND 58540 Linton 104 North Broadway Linton, ND 58552 Stanley 210 South Main Stanley, ND 58784 Watford City 205 North Main Watford City, ND 58854 Mandan(2) 2711 Sunset Drive NW Mandan, ND 58554 BANK BRANCHES - AZ Glendale – Charter Address 20175 North 67th Ave Glendale, AZ 85308 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 Moline 800 36th Avenue Moline, IL 61265 Lebanon 1403 West Elm Street Lebanon, Missouri 65336 Farmington Hills 35055 West 12 Mile Road, Suite 140 Farmington Hills, MI 48331 Michael M. Vekich, Chairman of the Board and CEO, Vekich Chartered John W. Palmer, Principal & Managing Member, PL Capital Advisors, LLC Overland Park 7007 College Boulevard Overland Park, KS 66211 (2) Bank branches offering mortgage banking services. Nathan P. Brenna, Owner, Brenna Farm & Ranch Former Attorney Tom Redmann, Retired Loan Officer, Bank of North Dakota Gaylen Ghylin, Retired EVP, Secretary & CFO of Tiller Corporation d/b/a Barton Sand & Gravel Co., Commercial Asphalt Co. & Barton Enterprises, Inc. Tracy J. Scott, Retired Co-Founder of BNCCORP, INC. Directors, BNC National Bank Nathan P. Brenna Gaylen Ghylin John W. Palmer Tom Redmann Tracy J. Scott Michael M. Vekich Daniel J. Collins BNCCORP, INC.322 East Main AvenueBismarck, ND 58501(701) 250-3040www.bnccorp.com2020 ANNUAL REPORT | BNCCORP, INC.Future-Focused2020 ANNUAL REPORTStrong,Stable,

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