BNCCORP, INC. Reports 2011 Fourth Quarter Net Income of $1.392 Million, or $0.31 Per Diluted Share

BISMARCK, N.D., Jan. 26, 2012 /PRNewswire/ -- BNCCORP, INC. (BNC or the Company) (OTC Markets: BNCC), which operates community banking and wealth management businesses in Arizona, Minnesota and North Dakota, and has mortgage banking offices in Illinois, Kansas, Nebraska, Missouri, Minnesota and Arizona, today reported financial results for the fourth quarter and year ended December 31, 2011.  

Net income for the 2011 fourth quarter was $1.392 million, or $0.31 per diluted share. This compared to net income of $528 thousand, or $0.06 per diluted share, in the fourth quarter of 2010. The 2011 fourth quarter results reflect lower net interest income and non-interest income offset by reduced costs for credit losses and lower non-interest expenses when compared to the fourth quarter of 2010. Nonperforming assets decreased by $6.4 million, or 28.1%, since September 30, 2011, and nonperforming assets have decreased by $14.3 million, or 46.6%, since December 31, 2010.

Gregory K. Cleveland, BNCCORP President and Chief Executive Officer, said, "We have consistently stated that our focus is managing capital, liquidity and credit quality. During 2011 we improved the capital ratios of the Bank considerably, maintained a liquid balance sheet, and significantly reduced problem assets. These areas will remain our priorities for the foreseeable future."

Mr. Cleveland continued, "We continue to believe the global economic environment will be challenging until individuals, businesses and governments reduce debt to manageable levels. In the United States the current regulatory environment remains in flux and these conditions are particularly challenging for banking entities. We do not expect these conditions to evaporate in the near term."

"It is significant that we successfully generated profits in 2011 despite challenging conditions. We start 2012 in better condition than we started 2011, and very importantly a significant part of our business is in North Dakota, which is one of the few markets in the world experiencing robust growth," Mr. Cleveland further noted.

Fourth Quarter Results

Net interest income for the fourth quarter of 2011 was $5.009 million, a decrease of $335 thousand, or 6.3%, from $5.344 million in the same period of 2010. The reduction in net interest income was influenced by reduced assets and the continuing low interest rate environment. During the fourth quarter the average balance of earning assets was approximately $610.2 million compared to average earning assets of approximately $695.7 million, in the fourth quarter of 2010. The yield on earning assets was approximately 4.15% in the fourth quarter of 2011 compared to 4.36% in the fourth quarter of 2010.  The net interest margin for the current quarter increased to 3.26% from 3.05% in the same period of 2010. The margin was lower in the last quarter of 2010 because we harbored large cash balances at that time to facilitate the pending sale of branches.

The provision for credit losses was $250 thousand in the fourth quarter of 2011, compared to $1.000 million in the 2010 period. Nonperforming loans have decreased $11.7 million, or 65.5%, from $17.9 million at December 31, 2010, to $6.2 million at December 31, 2011.

Non-interest income for the fourth quarter of 2011 was $5.410 million, a decrease of $1.114 million, or 17.1% from $6.524 million in the same period of 2010. Mortgage banking revenues, which aggregated $4.191 million, decreased by $971 thousand, or 18.8%, from the fourth quarter of 2010. While low interest rates and government sponsorship in the secondary market have created conditions that recently have favored mortgage banking, the housing market remains problematic and the future role of government appears uncertain, which indicates that the level of mortgage banking revenues may be uncertain in future periods. Gains on sales of investment securities were $99 thousand during the recent quarter compared to no gains on sales of investment securities in the fourth quarter of 2010. The opportunity to sell assets at attractive prices can vary significantly from period to period. The 2011 fourth quarter included gains on sales of loans of $117 thousand compared to $159 thousand in the same period of 2010. Despite the decrease in the recent quarter, the secondary market for SBA loans is currently acquisitive and loans can be sold for attractive prices. We anticipate gains on sales of SBA loans will continue in 2012.

Non-interest expense decreased by $1.585 million, or 15.3%, to $8.755 million in the fourth quarter of 2011 compared to $10.340 million in the same period of 2010. The expense reduction reflects a decline in compensation of $526 thousand, or 12.2%, reflecting management's efforts to control costs. Professional fees decreased by $495 thousand, or 31.0%, primarily due to lower volume in mortgage banking operations. Other real estate costs were relatively stable, decreasing by $28 thousand, or 3.2%, as valuation adjustments on foreclosed assets were consistent quarter to quarter. Occupancy costs also decreased by $243 thousand, or 33.6%, due to the relocation of certain operations to smaller and less expensive locations and the sale of one branch in the first quarter of 2011. Regulatory costs decreased by $216 thousand, or 41.2%, due to lower deposit balances resulting from our branch sale in early 2011, which decreased depository premiums paid by BNC to the FDIC to insure its deposits.

A tax expense of $22 thousand was recognized during the fourth quarter of 2011 for miscellaneous tax liabilities. The Company has net operating loss carry-forwards for federal tax purposes aggregating $6.099 million. The Company has virtually a full valuation allowance for deferred tax assets and tax loss carry-forwards. No tax expense was recognized during the fourth quarter of 2010.

Net income available to common shareholders was $1.036 million, or $0.31 per diluted share, for the fourth quarter of 2011 after accounting for dividends accrued on preferred stock and the amortization of issuance discounts on preferred stock. These costs aggregated $356 thousand in the fourth quarter of 2011 and $341 thousand in the same period of 2010. Net income available to common shareholders in the fourth quarter of 2010 was $187 thousand, or $0.06 per diluted share.

Fraud Loss on Assets Serviced by Others

As previously reported, the Company discovered fraudulent activity in April of 2010 by an external company that was servicing residential mortgage loans for BNC. Subsequently, the Company and its advisors have been diligently addressing this matter. Our internal and external investigations have confirmed that this fraudulent activity was limited to this external servicing company and that no bank employees were involved in, or were aware of, this wrongful conduct by the servicing company. As such, we believe the fraud losses are not indicative of other credit quality problems within our loan portfolio.

In 2010, we submitted claims under our fidelity insurance policies seeking to recover the insured portion of these losses. The policies together provide for total coverage of $15 million. However, in the fourth quarter of 2010, our insurance carriers commenced a declaratory judgment action against the Company in an Arizona federal court seeking a judicial determination that the losses associated with the servicing fraud are not covered by the policies. We have subsequently countersued the insurance carriers for failure to honor the policies and for acting in bad faith.  We intend to vigorously pursue our claims to recover amounts due under the insurance policies and for losses incurred as a result of the carriers acting in bad faith. While management believes we have strong claims, there can be no assurances as to the outcome of this litigation, or if we will recover all or any portion of the insured amounts.

The Company is providing adjusted earnings in addition to reported results prepared in accordance with generally accepted accounting principles in order to present financial information without the impact of the fraud loss on assets serviced by others. The following table reconciles the net income (loss) available to common shareholders as prepared in accordance with generally accepted accounting principles to our determination of adjusted earnings:

Year Ended December 31, 2011

Net interest income in 2011 was $19.477 million, a decrease of $3.795 million, or 16.3%, from $23.272 million in the same period of 2010. The net interest margin for 2011 decreased to 3.11% from 3.20% in 2010. The reduction in net interest income was influenced by reduced assets and the continuing low interest rate environment. In 2011, the average balance of earning assets was approximately $563.3 million compared to average earning assets of approximately $727.6 million in 2010. The yield on earning assets was approximately 4.11% in 2011 compared to 4.61% in 2010, while the cost of funds was 1.22% in 2011 compared to 1.66% in 2010.

The provision for credit losses was $1.625 million in 2011, compared to $5.750 million in 2010. Nonperforming loans have decreased $11.7 million, or 65.5%, to $6.2 million at December 31, 2011, from $17.9 million at December 31, 2010.

Non-interest income in 2011 was $20.237 million, a decrease of $3.736 million, or 15.6% from $23.973 million in 2010. Mortgage banking revenues decreased by $2.139 million, or 15.9%, from $13.424 million in 2010, to $11.285 million. Gains on sales of investment securities aggregated $2.830 million in 2011 compared to $4.390 million in 2010. The opportunity to sell assets at attractive prices can vary from period to period. Wealth management revenues decreased to $1.282 million in 2011 compared to $2.133 million in 2010 as we have exited certain product offerings. Bank fees and service charges decreased by $315 thousand in 2011 as we sold deposits in early 2011. These decreases were partially offset by increases in gains on sales of loans which increased by $1.056 million in 2011, primarily related to higher sales of SBA loans.

Non-interest expense decreased by $3.398 million, or 9.1%, to $33.859 million in 2011, compared to $37.257 million in 2010 (excluding the fraud loss on assets serviced by others). The expense reduction reflects a decline in compensation of $1.108 million, or 6.9%, reflecting management's efforts to control costs. Professional fees decreased by $761 thousand, or 15.0%, due to lower volume in mortgage banking operations in 2011. Other real estate costs decreased by $412 thousand, or 15.2%, as valuation adjustments on foreclosed assets were lower in 2011. Charges to revalue foreclosed assets can vary significantly in an environment where real estate values are declining. Occupancy costs also decreased by $857 thousand, or 29.7%, due to the relocation of certain operations to smaller and less expensive locations and the sale of one branch in the first quarter of 2011. Regulatory costs decreased by $209 thousand, or 10.7%, due to lower deposit balances resulting from our branch sale in early 2011, which decreased depository premiums paid by BNC to the FDIC to insure its deposits. These decreases were partially offset by an increase in marketing costs of $187 thousand primarily due the promotional activity in mortgage banking operations.

Tax expense was $22 thousand in 2011 as we recognized exposure for miscellaneous tax liabilities. The Company has net operating loss carry-forwards aggregating $6.099 million for federal tax purposes. The Company virtually has a full valuation allowance for deferred tax assets and tax loss carry-forwards. Tax expense in 2010 was $72 thousand, or 0.3% of pre-tax losses.

Net income available to common shareholders was $2.814 million, or $0.86 per diluted share, in 2011 after accounting for dividends accrued on preferred stock and the amortization of issuance discounts on preferred stock. Net loss available to common shareholders was $(23.398) million, or $(7.13) per share, in 2010, largely reflecting the fraud loss on assets serviced by others.

Assets, Liabilities and Equity

Total assets were $665.2 million at December 31, 2011, a decrease of $81.9 million, or 11.0%, compared to $747.1 million at December 31, 2010. This decrease can primarily be attributed to the sale of certain assets consummated on March 11, 2011, resulting in the transfer of $65.7 million of loans. Excluding the impact of the sale, loans held for investment decreased by $57.3 million as we have implemented measures to reduce our exposure to credit risk and concentrations within certain segments of our loan portfolio. Investment securities have increased by $105.6 million since December 31, 2010 as we have invested a portion of our liquidity. The investment portfolio has net unrealized gains aggregating $4.145 million as of December 31, 2011.

Total deposits were $576.3 million at December 31, 2011, decreasing by $84.8 million from 2010 year-end. This decrease can primarily be attributed to the transfer of certain liabilities consummated on March 11, 2011, resulting in the transfer of $107.4 million of deposits. Excluding the impact of the sale, deposit balances increased by $22.6 million. This increase relates primarily to growth in our North Dakota branches.

Other borrowings decreased by $7.7 million in 2011.

Total equity was $41.9 million at December 31, 2011 and $37.3 million at December 31, 2010. The book value per common share was $6.42 as of December 31, 2011, compared to $5.09 as of December 31, 2010. Excluding unrealized gains and losses on the investment portfolio, the book value per common share was $5.64 as of December 31, 2011, compared to $4.57 as of December 31, 2010.

Trust assets under supervision were $228.9 million at December 31, 2011, compared to $223.8 million at December 31, 2010.

Regulatory Capital

Banks and their bank holding companies operate under separate regulatory capital requirements.

At December 31, 2011, BNCCORP's tier 1 leverage ratio was 7.59%, the tier 1 risk-based capital ratio was 13.71%, and the total risk-based capital ratio was 17.56%. Tangible common equity at December 31, 2011 was 3.17%.  

At December 31, 2011, BNC National Bank had a tier 1 leverage ratio of 9.41%, a tier 1 risk-based capital ratio of 16.95%, and a total risk-based capital ratio of 18.22%. Tangible capital to tangible assets for BNC National Bank was 10.12%.

In 2010, the Bank entered into a formal agreement with the Office of the Comptroller of the Currency (the OCC) which focused on credit related issues. During the fourth quarter of 2011, the Bank's formal agreement with the OCC was removed.

Asset Quality

Challenging economic conditions have led to elevated credit risk throughout the banking industry. As a result, the Company is carefully monitoring asset quality and taking what it believes to be prudent and appropriate action to strengthen its credit metrics.

Nonperforming assets declined significantly to $16.3 million at December 31, 2011, compared to $30.6 million at December 31, 2010. The ratio of total nonperforming assets to total assets was 2.45% at December 31, 2011, compared with 4.09% at December 31, 2010. The provision for credit losses and other real estate costs decreased to $3.400 million in 2011, from $8.133 million in 2010.

Nonperforming loans declined to $6.2 million at December 31, 2011, compared to $17.9 million at December 31, 2010. The ratio of the allowance for credit losses to total nonperforming loans as of December 31, 2011 was 172%, compared with 83% at December 31, 2010.

The allowance for credit losses was $10.6 million at December 31, 2011 and $14.8 million at December 31, 2010. The allowance for credit losses as a percentage of total loans at December 31, 2011 was 2.94%, compared with 3.84% at December 31, 2010. The allowance for credit losses as a percentage of loans and leases held for investment at December 31, 2011 was 3.63%, compared with 4.21% at December 31, 2010. The allowance for credit losses as a percentage of loans decreased because nonperforming loans decreased.

At December 31, 2011, BNC had $24.2 million of classified loans, $6.2 million of loans on non-accrual and $10.1 million of other real estate owned. At December 31, 2010, BNC had $47.6 million of classified loans, $17.9 million of loans on non-accrual and $12.7 million of other real estate owned.

BNCCORP, INC., headquartered in Bismarck, N.D., is a registered bank holding company dedicated to providing banking and wealth management services to businesses and consumers in its local markets. The Company operates community banking and wealth management businesses in Arizona, Minnesota and North Dakota from 15 locations. BNC also conducts mortgage banking from 12 locations in Illinois, Kansas, Nebraska, Missouri, Minnesota and Arizona.  

This news release may contain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the financial condition, results of operations, plans, objectives, future performance and business of BNC. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of our management and on information currently available to management are generally identifiable by the use of words such as "expect", "believe", "anticipate", "plan", "intend", "estimate", "may", "will", "would", "could", "should", or other expressions. 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 and income, 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; competition for our customers from other providers of financial services; possible adverse effects of changes in interest rates, including the effects of such changes on derivative contracts and associated accounting consequences; risks associated with our acquisition and growth strategies; and other risks which are difficult to predict and many of which are beyond our control. In addition, 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.

(Financial tables attached)

SOURCE BNCCORP, INC.