BNCCORP, INC. Reports 2011 Third Quarter Net Income of $1.594 Million, or $0.38 Per Diluted Share

BISMARCK, N.D., Oct. 24, 2011 /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 third quarter ended September 30, 2011.  

Net income for the 2011 third quarter was $1.594 million, or $0.38 per diluted share. The 2011 third quarter results reflect lower net interest income, which was more than offset by higher non-interest income, reduced costs for credit losses and lower non-interest expenses when compared to the third quarter of 2010. Nonperforming assets decreased by $2.2 million, or 8.7%, since June 30, 2011 and nonperforming assets have decreased $10.6 million, or 31.8%, since September 30, 2010. As previously reported, the third quarter of 2010 resulted in net income of $438 thousand, or $0.03 per diluted share.

Gregory K. Cleveland, BNCCORP President and Chief Executive Officer, stated, "We are pleased to report net income improved significantly this quarter. We have steadily increased regulatory capital and reduced nonperforming assets throughout the first nine months of 2011 and will continue to focus on capital, credit and liquidity for the remainder of the year."

Mr. Cleveland continued, "We have consistently expressed concern about macroeconomic factors since 2008. Economies around the world continued to demonstrate several signs of weakness this quarter. We 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 creates headwinds for banking entities. Fortunately, a significant part of our business is in North Dakota, which is one of the few markets in the world that is growing."

Third Quarter Results

Net interest income for the third quarter of 2011 was $4.612 million, a decrease of $1.165 million, or 20.2%, from $5.777 million in the same period of 2010. The net interest margin for the current period decreased to 3.11% from 3.27% 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 third quarter the average balance of investments increased by $7.6 million, or 3.5%, as we continue to deploy cash reserves built in previous periods.

The provision for credit losses was $275 thousand in the third quarter of 2011, compared to $1.250 million in the 2010 period. Nonperforming loans have decreased $2.2 million, or 20.5%, from $10.9 million at June 30, 2011, to $8.7 million at September 30, 2011. Since September 30, 2010, nonperforming loans have decreased $14.1 million, or 61.9%.

Non-interest income for the third quarter of 2011 was $6.074 million, an increase of $471 thousand, or 8.4% from $5.603 million in the same period of 2010. Mortgage banking revenues, which aggregated $2.744 million, decreased by $504 thousand, or 15.5%, from the third 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 mortgage banking revenues may decline over the longer term. Gains on sales of investment securities were $1.535 million during the recent quarter compared to $517 thousand in the third quarter of 2010. The opportunity to sell assets at attractive prices can vary significantly from period to period. The 2011 third quarter included gains on sales of loans of $410 thousand compared to $212 thousand in the same period of 2010. 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 for the foreseeable future. Wealth management revenues decreased in the third quarter of 2011 compared to the same period in 2010 as we have exited certain product offerings. Revenues in the third quarter benefited from receipt of $300 thousand on a SBIC investment. Receipts of this nature will be infrequent.

Non-interest expense decreased by $873 thousand, or 9.0%, to $8.819 million in the third quarter of 2011 compared to $9.692 million in the same period of 2010. The expense reduction reflects a decline in compensation of $257 thousand, or 6.8%, reflecting management's efforts to control costs. Occupancy costs also decreased by $252 thousand, or 34.3%, 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 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. Other real estate costs decreased by $329 million, or 30.0%, as valuation adjustments on foreclosed assets are lower in the third quarter of 2011. These decreases were partially offset by marketing costs, which increased by $124 thousand, or 37.7%, primarily in our mortgage banking division.

A tax benefit of $2 thousand was recognized during the third quarter of 2011 for miscellaneous state refunds received. The Company has net operating loss carryforwards for federal tax purposes aggregating $5.666 million. Due to the Company's full valuation allowance and its tax loss carryforwards, the Company is not likely to record significant income tax expense for several profitable periods. No tax expense was recognized during the third quarter of 2010.

Net income available to common shareholders was $1.240 million, or $0.38 per diluted share, for the third quarter of 2011 after accounting for dividends accrued on preferred stock and the amortization of issuance discounts on preferred stock. These costs aggregated $354 thousand in the third quarter of 2011 and $337 thousand in the same period of 2010. Net income available to common shareholders in the third quarter of 2010 was $101 thousand, or $0.03 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 these 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 available to common shareholders as prepared in accordance with generally accepted accounting principles to our determination of adjusted earnings:

Nine Months Ended September 30, 2011

Net interest income for the nine month period ended September 30, 2011 was $14.468 million, a decrease of $3.460 million, or 19.3%, from $17.928 million in the same period of 2010. The net interest margin for the current period decreased to 3.06% from 3.25% 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 first nine months of 2011, the balance of investments increased by $90.8 million, or 66.3%, as we have deployed cash reserves built in previous periods.

The provision for credit losses was $1.375 million in the first nine months of 2011, compared to $4.750 million in the first nine months of 2010. Nonperforming loans have decreased by 51.5%, or $9.2 million, since December 31, 2010, and management continues to monitor the credit portfolio diligently.

Non-interest income for the first nine months of 2011 was $14.827 million, a decrease of $2.622 million, or 15.0% from $17.449 million in 2010. Mortgage banking revenues decreased by $1.168 million, or 14.1%, from $8.262 million in 2010, to $7.094 million. Gains on sales of investment securities aggregated $2.731 million during the first nine months of 2011 compared to $4.390 million during the first nine months of 2010. The opportunity to sell assets at attractive prices can vary from period to period. The investment portfolio continues to have net unrealized gains as of September 30, 2011. The gains on sales of loans aggregated $1.310 million in the first nine months of 2011, related to sales of SBA loans, compared with $212 thousand in gains on sales of loans in the first nine months of 2010. Wealth management revenues decreased in 2011 compared to 2010 and this trend is expected to continue as we have exited two lines of business within the wealth management operations.

Non-interest expense decreased by $1.813 million, or 6.7%, to $25.104 million in the first nine months of 2011, compared to $26.917 million in the first nine months of 2010 (excluding the fraud loss on assets serviced by others). The expense reduction reflects a decline in compensation of $582 thousand, or 4.9%, reflecting management's efforts to control costs. Occupancy costs also decreased by $614 thousand, or 28.4%, 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. Professional fees decreased by $266 thousand, or 7.7%, due to lower activity in mortgage banking operations in the first nine months of 2011. Other real estate costs decreased by $384 million, or 21.0%, as we continue to revalue foreclosed real estate. Charges to revalue foreclosed assets can vary significantly in an environment where real estate values are declining.

No tax expense was recognized during the nine month period ended September 30, 2011. The Company has net operating loss carryforwards aggregating $5.666 million for federal tax purposes. Due to the Company's full valuation allowance and its tax loss carryforwards, the Company is not likely to record significant income tax expense for several profitable periods. Tax expense in the first nine months of 2010 was $72 thousand, or 0.3% of pre-tax losses.

Net income available to common shareholders was $1.778 million, or $0.54 per diluted share, for the nine months ended September 30, 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 $(23.585) million, or $(7.19) per share, for the nine months ended September 30, 2010.

Assets, Liabilities and Equity

Total assets were $669.5 million at September 30, 2011, a decrease of $77.6 million, or 10.4%, 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 $53.1 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 $90.8 million since December 31, 2010 as we have invested a portion of our liquidity.

Total deposits were $572.6 million at September 30, 2011, decreasing by $88.5 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 branch sale, deposit balances increased by $18.9 million. This increase relates primarily to growth in our North Dakota branches.

Other borrowings decreased by $615 thousand in the first nine months of 2011. Available borrowing capacity from the FHLB was approximately $55.9 million as of September 30, 2011 and the Company had no FHLB advances outstanding at quarter end.

Total equity was $39.9 million at September 30, 2011 and $37.3 million at December 31, 2010. The book value per common share was $5.85 as of September 30, 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 $5.22 as of September 30, 2011, compared to $4.57 as of December 31, 2010.

Trust assets under supervision were $221.9 million at September 30, 2011, compared to $223.8 million at December 31, 2010.

Regulatory Capital

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

At September 30, 2011, BNCCORP's tier 1 leverage ratio was 7.63%, the tier 1 risk-based capital ratio was 13.21%, and the total risk-based capital ratio was 17.15%. Tangible common equity at September 30, 2011 was 2.87%.  

At September 30, 2011, BNC National Bank had a tier 1 leverage ratio of 9.46%, a tier 1 risk-based capital ratio of 16.33%, and a total risk-based capital ratio of 17.60%. Tangible capital to tangible assets for BNC National Bank was 9.65%.

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 $22.7 million at September 30, 2011, compared to $30.6 million as of December 31, 2010 and $33.3 million at September 30, 2010. The ratio of total nonperforming assets to total assets was 3.39% at September 30, 2011, compared with 4.09% at December 31, 2010 and 4.45% at September 30, 2010.

Nonperforming loans declined to $8.7 million at September 30, 2011, compared to $17.9 million at December 31, 2010 and $22.7 million at September 30, 2010. The provision for credit losses and other real estate costs decreased to $900 thousand in the third quarter of 2011, from $2.250 million in the third quarter of 2010.

The allowance for credit losses was $11.0 million, $14.8 million and $16.8 million at September 30, 2011, December 31, 2010 and September 30, 2010, respectively. The allowance for credit losses as a percentage of total loans at September 30, 2011 was 3.17%, compared with 3.84% at December 31, 2010 and 3.29% at September 30, 2010. The allowance for credit losses as a percentage of loans and leases held for investment at September 30, 2011 was 3.70%, compared with 4.21% at December 31, 2010 and 3.76% at September 30, 2010.

The ratio of the allowance for credit losses to total nonperforming loans as of September 30, 2011 was 127%, compared with 83% at December 31, 2010 and 74% at September 30, 2010.

At September 30, 2011, BNC had $25.1 million of classified loans, $8.7 million of loans on non-accrual and $14.0 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. At September 30, 2010, BNC had $52.4 million of classified loans, $22.7 million of loans on non-accrual and $10.6 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.

SOURCE BNCCORP, INC.