BNCCORP, INC. Reports 2012 Second Quarter Net Income Of $5.0 Million, Or $1.42 Per Diluted Share

BISMARCK, N.D., July 30, 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, Arizona and North Dakota, today reported financial results for the second quarter ended June 30, 2012.  

Net income for the 2012 second quarter was $5.030 million, or $1.42 per diluted share. This compared to net income of $649 thousand, or $0.09 per diluted share, in the second quarter of 2011. The 2012 second quarter results reflect higher non-interest income, partially offset by lower net interest income and higher non-interest expense when compared to the second quarter of 2011. Provisions for credit losses and OREO valuation allowances aggregated $1.000 million in the second quarter of 2012 and $700 thousand in the second quarter of 2011. Credit quality continued to improve as nonperforming assets declined to $12.8 million at June 30, 2012, compared to $14.5 million at March 31, 2012, $16.3 million at December 31, 2011 and $24.8 million at June 30, 2011.

Gregory K. Cleveland, BNCCORP President and Chief Executive Officer, said, "We are generally pleased with our second quarter results because we executed on our key initiatives, particularly as it relates to improving capital and stabilizing credit quality. Our quarterly mortgage banking revenues were exceptional and we expect mortgage banking revenues to be elevated for the foreseeable future due to the prevailing favorable interest rate environment.  That said, mortgage banking revenues of this magnitude will not be the norm, particularly in higher rate environments."

Mr. Cleveland continued, "During the second quarter the Federal Reserve issued proposed capital standards for community banks.  It is apparent that common and preferred equity will be viewed favorably and that regulators have a dim assessment of subordinated trust preferred debt. The Federal Reserve also reviewed our proposed capital offering and we anticipate approval in the third quarter. Once the offering is completed, our tangible common equity will improve to a more satisfactory level and we will be well positioned to operate in an environment where high capital ratios will be the norm."

Second Quarter Results

Net interest income for the second quarter of 2012 was $4.399 million, a decrease of $297 thousand, or 6.3%, from $4.696 million in the same period of 2011. The net interest margin for the recent quarter decreased to 2.75%, compared to 3.07% in the same period of 2011. Net interest income was impacted by the low interest rate environment which reduced the yield on assets to 3.69% in the second quarter of 2012, compared to 4.09% in the second quarter of 2011. The cost of interest bearing liabilities was 1.19 % in the current quarter, compared to 1.24% in the same period of 2011. The interest cost of liabilities in the second quarter of 2012 included $269 thousand of previously deferred costs associated with $30 million of brokered deposits. These costs were recognized when we exercised our option to call the deposits in order to replace them with lower cost deposits. During the second quarter of 2012 the average balance of earning assets was approximately $643.7 million, compared to approximately $613.7 million in the second quarter of the prior year. Assets increased as we have started to deploy capital.

The provision for credit losses was $0 in the second quarter of 2012, compared to $500 thousand in the 2011 period. The provision is lower in the second quarter of 2012 because nonperforming loans have stabilized, aggregating $4.9 million at June 30, 2012, compared to $5.0 million at March 31, 2012, $6.2 million at December 31, 2011 and $10.9 million at June 30, 2011.

Non-interest income for the second quarter of 2012 was $10.753 million, an increase of $6.036 million, or 128.0% from $4.717 million in the same period of 2011. Non-interest income reflected a significant increase in mortgage banking revenues, which benefitted from low interest rates. Second quarter mortgage banking revenues aggregated $9.393 million, an increase of $7.106 million, or 310.7%, compared to the second quarter of 2011. Mortgage banking revenues included realized gains on sales of loans which aggregated $5.482 million in the second quarter of 2012, compared to $2.287 million in the same quarter of 2011, primarily due to a higher volume of loans sold. Unrealized gains, which are also included in mortgage banking revenue, aggregated $3.910 million in the second quarter, compared to $0 in the second quarter of 2011. The unrealized gains resulted from a new hedging strategy where loans are sold on a mandatory delivery basis. Delivering loans on a mandatory basis generally improves margins in the mortgage banking operations. In the near term, we expect mortgage banking revenues to be elevated. Over a longer horizon, the strength of mortgage banking is less certain as interest rates will inevitably rise. There were $98 thousand of gains on sales of investment securities during the recent quarter, compared to $835 thousand in the second quarter of 2011. The opportunity to sell assets at attractive prices can vary significantly from period to period. The 2012 second quarter included gains on sales of SBA loans of $281 thousand, compared to $412 thousand in the same period of 2011. The secondary market for SBA loans is currently acquisitive and loans can be sold for attractive prices.

Non-interest expense increased by $1.759 million, or 21.3%, to $10.021 million in the second quarter of 2012 compared to $8.262 million in the same period of 2011. Excluding valuation adjustments on foreclosed real estate, non-interest expense increased by $959 thousand, or 11.9%, to $9.021 million compared to $8.062 million. Compensation costs increased by $824 thousand, or 22.5%, due to higher volume in mortgage banking, adding producers in North Dakota and incentives accrued for our producers. Other real estate costs were $1.112 million, an increase of $756 thousand, or 212.4%, compared to $356 thousand in the second quarter of 2011. This increase results from aggressively addressing nonperforming assets as valuation adjustments on foreclosed assets, which were $1.000 million in the second quarter of 2012 compared to $200 thousand in the same quarter of 2011. Marketing expenses increased due to mortgage banking activities. Other expenses increased to $849 thousand in the second quarter from $661 thousand in the same period for 2011 due to increases in the cost of insurance. These increases were partially offset by lower regulatory costs as depository premiums paid by BNC to the FDIC to insure its deposits decreased after our branch sale in early 2011.

Tax expense, which is primarily related to alternative minimum taxes, was $101 thousand during the second quarter of 2012. In the second quarter of 2012, the Company utilized the remainder of its federal net operating losses and began remitting quarterly estimated tax payments. These payments allow for a reduction in the valuation allowance previously recorded against deferred tax assets. Net deferred tax assets of $906 thousand are now recognized. Tax expense of $2 thousand was recognized during the second quarter of 2011.

Net income available to common shareholders was $4.668 million, or $1.42 per diluted share, for the second quarter of 2012 after accounting for dividends accrued on preferred stock and the amortization of issuance discounts on preferred stock. These costs aggregated $362 thousand in the second quarter of 2012 and $345 thousand in the same period of 2011. Net income available to common shareholders in the second quarter of 2011 was $304 thousand, or $0.09 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.

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:

Six Months Ended June 30, 2012

Net interest income for the first half of 2012 was $9.044 million, a decrease of $812 thousand, or 8.2%, from $9.856 million in the first half of 2011. Low interest rates impacted the net interest margin for the recent six month period, which decreased to 2.87%, compared to 3.04% in the same period of 2011. The yield on earning assets was approximately 3.82%, in the six month period ended June 30, 2012, compared to 4.06% in the same period of 2011. The cost of interest bearing liabilities was 1.19% compared to 1.25% in the first half of 2011. The interest cost of liabilities in 2012 includes $426 thousand of previously deferred costs associated with $50 million of brokered deposits. These costs were recognized when we exercised our option to call the deposits in order to replace them with lower cost deposits. During the first six months of 2012 the average balance of earning assets was approximately $632.9 million, compared to approximately $654.6 million in the same period of the prior year. We sold approximately $65.7 million of assets in March 2011.

The provision for credit losses was $100 thousand in the first six months of 2012, compared to $1.100 million in the first six months of 2011. Nonperforming loans have decreased $1.3 million, or 20.7%, to $4.9 million at June 30, 2012, from $6.2 million at December 31, 2011.

Non-interest income for the first six months of 2012 was $16.450 million, an increase of $7.697 million, or 87.9% from $8.753 million in the same period of 2011. Non-interest income was significantly influenced by mortgage banking revenues, which aggregated $13.640 million in the first half of 2012, an increase of $9.290 million, or 213.6%, compared to the first half of 2011. Mortgage banking revenues included realized gains on sales of loans which aggregated $9.729 million in the six month period ended June 30, 2012 compared to $4.350 million in the same period of 2011. This increase can be attributed to historically low rates which resulted in higher volume of loans sold. Unrealized gains, which are also included in mortgage banking revenue, aggregated $3.910 million in the first half of 2012 compared to $0 in the same period of 2011. The unrealized gains resulted from a new hedging strategy where loans are sold on a mandatory delivery basis, as noted previously. There were $98 thousand of gains on sales of investment securities in the first half of 2012, compared to $1.196 million in the first half of 2011. The opportunity to sell assets at attractive prices can vary significantly from period to period. The first six months of 2012 included gains on sales of SBA loans of $619 thousand, compared to $900 thousand in the same period of 2011. The secondary market for SBA loans is currently acquisitive and loans can be sold for attractive prices.

Non-interest expense increased by $2.408 million, or 14.8%, to $18.693 million in the first six months of 2012 compared to $16.285 million in the same period of 2011. Excluding valuation adjustments on foreclosed real estate in the first half of 2012 and 2011, non-interest expense increased by $1.108 million, or 7.0%, to $16.993 million compared to $15.885 million. Compensation costs increased by $524 thousand, or 6.8%, primarily due to higher compensation costs in mortgage banking, adding producers in North Dakota and incentives. Other real estate costs were $1.940 million, an increase of $1.263 million, or 186.6%, compared to $677 thousand in the first half of 2011. This increase results from aggressively addressing nonperforming assets as valuation adjustments on foreclosed assets, which were $1.700 million in the six months ended June 30, 2012 compared to $400 thousand in the same period of 2011. Professional fees increased by $234 thousand, or 12.7%, due to higher volume in mortgage banking. Marketing expenses also increased due to mortgage banking activities. Other expenses increased to $1.686 million in the first half of 2012 from $1.070 million in the same period of 2011 primarily due to increases in the cost of insurance. These increases were partially offset by lower regulatory costs as depository premiums paid by BNC to the FDIC to insure its deposits decreased after our branch sale in early 2011.

Tax expense, which is primarily related to alternative minimum taxes, was $103 thousand during the six month period ended June 30, 2012. As of June 30, 2012 the Company has utilized all of its federal net operating losses and has begun remitting quarterly estimated tax payments. These payments allow for a reduction in the valuation allowance previously recorded against deferred tax assets. Net deferred tax assets of $906 thousand are now recognized. Tax expense of $2 thousand was recognized during the six month period ended June 30, 2011.

Net income available to common shareholders was $5.878 million, or $1.78 per diluted share, for the six months ended June 30, 2012 after accounting for dividends accrued on preferred stock and the amortization of issuance discounts on preferred stock. These costs aggregated $720 thousand in the first six months of 2012 and $684 thousand in the same period of 2011. Net income available to common shareholders for the six months ended June 30, 2011 was $538 thousand, or $0.16 per diluted share.

Assets, Liabilities and Equity

Total assets were $698.0 million at June 30, 2012, an increase of $32.8 million, or 4.9%, compared to $665.2 million at December 31, 2011. Cash and investment securities have increased by $54.9 million since December 31, 2011 as we are emphasizing liquidity. The investment portfolio has net unrealized gains aggregating $4.917 million as of June 30, 2012 compared to unrealized gains of $4.145 million as of December 31, 2011. Loans held for investment decreased by $9.4 million as we have implemented measures to reduce our exposure to credit risk and concentrations within certain segments of our loan portfolio. Loans held for sale have decreased by $13.6 million since 2011 as investors have been able to reduce their back log.

Total deposits were $596.5 million at June 30, 2012, increasing by $20.2 million from 2011 year-end. This increase relates primarily to growth in our North Dakota branches and funds held in escrow related to the pending issuance of common stock.

Total equity was $48.7 million at June 30, 2012 and $41.9 million at December 31, 2011. The book value per common share was $8.44 as of June 30, 2012, compared to $6.42 as of December 31, 2011. Excluding unrealized gains and losses on the investment portfolio, the book value per common share was $7.52 as of June 30, 2012, compared to $5.64 as of December 31, 2011. At June 30, 2012 the tangible common equity as a percent of assets was approximately 3.99%.

On February 16, 2012 we announced a capital offering which is expected to generate up to $17.020 million of gross proceeds on the sale of 9.2 million shares at $1.85 per share. The sale of shares is subject to regulatory approval. We expect the sale to be consummated in the third quarter of 2012. Assuming the sale was completed as of June 30, 2012, the pro forma book value per diluted common share would be approximately $3.49. Excluding unrealized gains and losses on the investment portfolio, the pro forma book value per diluted common share would be $3.24 as of June 30, 2012. At June 30, 2012 the pro forma tangible common equity as a percent of assets would be approximately 6.26%.

Trust assets under supervision were $212.7 million at June 30, 2012, compared to $228.9 million at December 31, 2011.

Regulatory Capital

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

At June 30, 2012, BNCCORP's tier 1 leverage ratio was 8.43%, the tier 1 risk-based capital ratio was 15.56%, and the total risk-based capital ratio was 18.84%.

At June 30, 2012, BNC National Bank had a tier 1 leverage ratio of 10.13%, a tier 1 risk-based capital ratio of 18.58%, and a total risk-based capital ratio of 19.84%.

As previously disclosed, our holding company entered into a memorandum of understanding with the Federal Reserve Bank (the Fed) in 2010 that restricts payments related to the company's common stock, preferred stock and debt without prior written permission from the Fed. At June 30, 2012 we have accrued deferred amounts aggregating $7.0 million related to preferred stock dividends and interest payable.

In the second quarter of 2012 the Federal Reserve Bank issued proposed regulatory standards for community banks which appears to incorporate many of the capital requirements addressed in the Basel III framework. We have not completed assessment of the proposed standards, but it is generally believed the proposed standards will impose higher capital ratios.

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 to $12.8 million at June 30, 2012, from $14.5 million at March 31, 2012, $16.3 million at December 31, 2011 and $24.8 million at June 30, 2011. The ratio of total nonperforming assets to total assets was 1.84% at June 30, 2012, 2.09% at March 31, 2012, 2.45% at December 31, 2011 and 3.92% at June 30, 2011. The provision for credit losses and other real estate costs was $1.000 million in the second quarter of 2012 and $700 thousand in the second quarter of 2011.

Nonperforming loans declined to $4.9 million at June 30, 2012, from $5.0 million at March 31, 2012, $6.2 million at December 31, 2011 and $10.9 million at June 30, 2011. The ratio of the allowance for credit losses to total nonperforming loans as of June 30, 2012 was 216%, compared with 210% at March 31, 2012, 172% at December 31, 2011 and 101% at June 30, 2011. The provision for credit losses decreased to $0 in the second quarter of 2012, compared to $500 thousand in the second quarter of 2011 due to the decline of problem loans.

The allowance for credit losses was $10.6 million at June 30, 2012, $10.6 million at December 31, 2011 and $11.0 million at June 30, 2011. The allowance for credit losses as a percentage of total loans at June 30, 2012 was 3.12%, compared with 2.94% at December 31, 2011 and 3.22% at June 30, 2011. The allowance for credit losses as a percentage of loans and leases held for investment at June 30, 2012 was 3.72%, compared with 3.63% at December 31, 2011 and 3.53% at June 30, 2011.

At June 30, 2012, BNC had $14.0 million of classified loans, $4.9 million of loans on non-accrual and $7.9 million of other real estate owned. 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 June 30, 2011, BNC had $29.8 million of classified loans, $10.9 million of loans on non-accrual and $14.0 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 14 locations. BNC also conducts mortgage banking from 13 locations in Illinois, Kansas, Nebraska, Missouri, Minnesota, Arizona and North Dakota. 

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.