BNCCORP, INC. Reports Second Quarter Net Income Of $2.3 Million, Or $0.52 Per Diluted Share

BISMARCK, N.D., July 28, 2015 /PRNewswire/ -- BNCCORP, INC. (BNC or the Company) (OTCQX Markets: BNCC), which operates community banking and wealth management businesses in North Dakota, Arizona and Minnesota, and has mortgage banking offices in Arkansas, Illinois, Kansas, Nebraska, Minnesota, Arizona and North Dakota, today reported financial results for the second quarter ended June 30, 2015.

Net income for the 2015 second quarter increased to $2.287 million, or $0.52 per diluted share compared to net income of $2.207 million, or $0.50 per diluted share, in the second quarter of 2014. The increase in earnings for the second quarter of 2015 reflected higher net interest income and non-interest income, partially offset by higher non-interest expense. No provision for credit losses was taken in the second quarter of 2015 compared to a reversal of provisions for credit losses, which increased pre-tax earnings by $400 thousand, in the second quarter of 2014. The ratio of nonperforming assets to total assets was 0.11% at June 30, 2015 compared to 0.03% at December 31, 2014. Book value per common share at June 30, 2015 was $19.23 compared to $18.28 and $16.64 at December 31, 2014 and June 30, 2014, respectively.

Timothy J. Franz, BNCCORP President and Chief Executive Officer, said, "We are pleased to have generated a 11.78% return on common equity this quarter, and our 0.99% return on assets is commendable in the current operating environment. The nearly 4% growth in earnings was driven, in particular, by the performance of our mortgage banking business, as well as higher net interest income and net gains on sales of investments. Year to date we have delivered exceptional results and created value for BNC's common shareholders with our earnings per share of $1.30 and a 15.22% return on common equity."

Mr. Franz added, "We continue to closely monitor our clients and the economic conditions in North Dakota. While we have observed energy related activity slowing down in the marketplace, our review of a segment of loans in North Dakota to energy related businesses through the end of the second quarter has not revealed significant credit deterioration. We long understood that energy dependent economies will have fluctuations from time to time and operate accordingly and continue to believe in the North Dakota market."

Second Quarter Results

Net interest income for the second quarter of 2015 was $6.416 million, an increase of $93 thousand, or 1.5%, from $6.323 million in the same period of 2014. Interest income declined slightly by $159 thousand or 2.2% as the $21.2 million increase in average balance of interest earning assets was offset by decreased yields on investments when compared to the second quarter of 2014. Average loans held for investment increased $23.8 million, or 7.2%, compared to the prior year second quarter. On average, loans held for sale increased by $37.5 million when compared to the second quarter of 2014, as lower interest rates have spurred significant refinancing activity in our mortgage banking operations. The yield on earning assets decreased to 3.25% in the second quarter of 2015 compared to 3.41% in the second quarter of 2014. The lower yield on earning assets is the result of lower yields in our investment portfolio as yields have generally declined period-over-period on SBA securities. Overall, the net interest margin declined to 2.93% in the second quarter of 2015 from 2.96% in the second quarter of 2014.

Interest expense in the second quarter of 2015 decreased from the same period in 2014 despite an increase in average deposits of $4.0 million, or 0.5%. The cost of core deposits declined to 0.16% in the current quarter, compared to 0.18% in the same period of 2014. In aggregate, the cost of interest bearing liabilities declined to 0.42% in the current quarter, compared to 0.55% in the same period of 2014 despite incurring $87 thousand of charges related to exercising our right to call $20.0 million of brokered deposits in the second quarter of 2015. The redemption of $7.5 million of subordinated debentures in the third quarter of 2014 reduced the second quarter of 2015 interest expense by approximately $230 thousand.  In addition, our call of $10.0 million of brokered deposits in the second quarter 2014 contributed to reducing interest expense in the current quarter by $27 thousand.

No provision for credit losses was taken in the second quarter of 2015, while a reversal of previous provisions for credit losses increased pre-tax earnings by $400 thousand in the second quarter of 2014.

Non-interest income for the second quarter of 2015 was $6.740 million, an increase of $1.379 million, or 25.7% from $5.361 million in the second quarter of 2014. The increase primarily relates to an 18.4% increase in mortgage banking revenues, which aggregated $4.015 million in the second quarter of 2015, compared to $3.391 million in the second quarter of 2014. Mortgage banking revenues benefited from lower rates in the second quarter of 2015 as we continue to sell residential mortgage loans with servicing released. During the second quarter of 2015, we recorded a net gain on sales of investments of $964 thousand, compared to a $5 thousand net gain on sales of investments in the same period of 2014. The 2015 second quarter included gains on sales of SBA loans of $257 thousand, compared to $760 thousand in the same period of 2014. Gains on sales of investments and SBA loans can vary significantly from period to period.

Non-interest expense for the second quarter of 2015 was $9.658 million, an increase of $771 thousand, or 8.7%, from $8.887 million in the second quarter of 2014. This increase is primarily related to compensation for producers and costs related to higher mortgage banking activity.

In the second quarter of 2015, we recorded a tax expense of $1.211 million, an increase from the $990 thousand income tax expense in the second quarter of 2014. The effective tax rate was 34.62% in the second quarter of 2015 compared to 30.97% in same period of 2014. The higher effective tax rate in the second quarter of 2015 is the result of an adjustment to the annual estimated effective tax rate to achieve a rate of 32% correlating to higher estimated full year taxable income.

Net income available to common shareholders was $1.813 million, or $0.52 per diluted share, for the second quarter of 2015 after accounting for dividends accrued on preferred stock. These costs aggregated $474 thousand in the second quarter of 2015 and $475 thousand in the same period of 2014. Net income available to common shareholders in the second quarter of 2014 was $1.732 million, or $0.50 per diluted share.

Six Months Ended June 30, 2015

Net interest income in the first half of 2015 was $13.023 million, an increase of $495 thousand, or 4.0%, from $12.528 million in the first half of 2014. Interest income decreased by $45 thousand as the $59.5 million increase in the average balance of interest earning assets was offset by lower investment portfolio yields, and a lower yielding mix of loans when compared to the first half of 2014. Average loans held for investment increased $26.2 million, or 8.0%, compared to the first half of the prior year. On average, loans held for sale increased by $30.2 million when compared to the first six months of 2014, as lower interest rates have spurred significant refinancing activity in our mortgage banking operations. The yield on earning assets decreased to 3.28% in the six month period ended June 30, 2015 compared to 3.53% in the same period of 2014. Overall, the net interest margin declined to 2.98% in the first six months of 2015 from 3.07% in the first six months of 2014.

Interest expense during the second quarter of 2015 decreased from the same period in 2014 despite an increase in average deposits of $46.2 million, or 6.1%. The cost of core deposits declined to 0.16% in the first six months of 2015, compared to 0.18% in the same period of 2014. In aggregate, the cost of interest bearing liabilities declined to 0.39% in the first half, compared to 0.56% in the same period of 2014. As previously noted, we recognized increased interest expense associated with exercising our right to call $20.0 million and $10.0 million of brokered deposits, in the second quarter of 2015 and 2014, respectively. However, our redemption of brokered deposits and subordinate debentures in 2014 enabled us to decrease interest expense by $515 thousand during the six month period ending June 30, 2015 when compared to the same time period in 2014.

No provision for credit losses was taken in the first six months of 2015, while a reversal of previous provisions for credit losses increased pre-tax earnings by $600 thousand in the first six months of 2014.

Non-interest income for the first six months of 2015 was $14.391 million, an increase of $4.746 million, or 49.2% from $9.645 million in the same period of 2014. The increase primarily relates to a 67.2% increase in mortgage banking revenues, which aggregated $9.484 million in the first half of 2015, compared to $5.673 million in the same period of 2014. Mortgage banking revenues benefited from lower rates in the second quarter of 2015 as we continue to sell residential mortgage loans with servicing released. During the first six months of 2015, we recorded a net gain on sales of investments of $1.560 million, compared to a $528 thousand net gain on sales of investments in the same period of 2014. The first half of 2015 included gains on sales of SBA loans of $572 thousand, compared to $1.000 million in the same period of 2014. Gains on sales of investments and SBA loans can vary significantly from period to period. 

Non-interest expense for the first six months of 2015 was $19.324 million, an increase of $2.347 million, or 13.8%, from $16.977 million in the second quarter of 2014. This increase is primarily related to compensation for producers and higher mortgage banking activity.

During the six month period ended June 30, 2015, we recorded a tax expense of $2.589 million, equating to an effective tax rate of 32.00%. We recorded tax expense of $1.797 million during the six month period ended June 30, 2014, which resulted in an effective tax rate of 31.00%. The higher effective tax rate is correlated to higher taxable income in the six month period ended June 30, 2015 and estimated full year taxable income.

Net income available to common shareholders was $4.552 million, or $1.30 per diluted share, for the six months ended June 30, 2015 after accounting for dividends accrued on preferred stock. These costs aggregated $949 thousand in the first six months of 2015 and $847 thousand in the same period of 2014. The increase in preferred stock costs is due to the preferred dividend rate increasing from 5% to 9% in the second quarter 2014. Net income available to common shareholders for the first six months ended June 30, 2014 was $3.152 million, or $0.91 per diluted share.

Assets, Liabilities and Equity

Total assets were $904.9 million at June 30, 2015, a decrease of $29.5 million, or 3.2%, compared to $934.4 million at December 31, 2014, and in the second quarter our total assets decreased $74.8 million. In recent years we have experienced asset growth resulting from an increase in deposits.  As discussed in previous press releases, we have been anticipating that some of our North Dakota customers would deploy funds previously deposited with us and some of this activity occurred this quarter.

Loans held for investment aggregated $360.4 million at June 30, 2015, which is essentially unchanged since December 31, 2014. We continue to fund new loans held for investment but we have noticed some North Dakota clients are deferring investment decisions and repaying loans in response to softer economic conditions in the region. Year to date, significant loan pay-offs by North Dakota clients have exceeded $20 million.

Total deposits were $766.2 million at June 30, 2015, a decrease of $84.8 million since March 31, 2015 and a decrease of $45.0 million from 2014 year-end. In the second quarter 2015, recognizing favorable market conditions, we exercised our right to call $20 million of brokered deposits. Core deposit balances were $750.9 million at June 30, 2015 and $773.3 million at December 31, 2014. This decrease was anticipated as noted above.

The table below shows changes in total deposits since 2011:

Trust assets under management or administration increased to $266.6 million at June 30, 2015, compared to $257.4 million at December 31, 2014 as marketing efforts by this department are experiencing success.

Capital

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

In the first quarter of 2015 regulatory capital requirements for community banks changed to incorporate certain of the capital requirements addressed in the Basel III framework. These standards introduced a new requirement, Common Equity Tier 1 ("CET 1"), and increased certain previously existing capital requirements. At June 30, 2015 our capital ratios exceeded all regulatory capital thresholds.

A summary of our capital ratios at June 30, 2015 and a comparison of new and prior regulatory capital requirements are presented below:

The new CET 1 ratio, which is generally a comparison of a bank's core equity capital with its total risk weighted assets, is a measure of the current risk profile of our asset base from a regulatory perspective. The Tier 1 leverage ratio, which is based on average assets, does not consider the mix of risk weighted assets. In recent periods regulators have required Tier 1 leverage ratios that significantly exceed "Well Capitalized" ratio levels. As a result, management believes the Bank's Tier 1 leverage ratio is our most restrictive capital measurement and we are managing the Tier 1 leverage ratio to levels significantly above the "Well Capitalized" ratio threshold.

In addition to regulatory risk based capital standards, we believe that regulators and investors also monitor the capital ratio of tangible common equity to total period end assets.

In recent years we have experienced significant asset growth and have primarily utilized our capital to support growth and profitable operations. The decline in our total asset levels since March 31, 2015 reflects the impact of customers' use of funds previously deposited with BNC, and has resulted in higher levels of capital relative to assets.

Although we anticipate continued long-term growth due, in part, to our strong franchise, we consider this an appropriate time to evaluate whether our current elevated capital level is optimal.

Book value per common share of the Company was $19.23 as of June 30, 2015, compared to $18.28 at December 31, 2014. Book value per common share, excluding accumulated other comprehensive income, was $18.06 as of June 30, 2015, compared to $16.72 at December 31, 2014.

Asset Quality

Nonperforming assets were $964 thousand at June 30, 2015, up from $317 thousand at December 31, 2014. The ratio of nonperforming assets to total assets was 0.11% at June 30, 2015 and 0.03% at December 31, 2014. Nonperforming loans were $722 thousand at June 30, 2015, up from $61 thousand at December 31, 2014.

The allowance for credit losses was $8.6 million at June 30, 2015 and December 31, 2014. While the recent decreases in oil and agricultural commodity prices have yet to have a significant negative effect on our credit quality, prolonged declines could have an adverse economic impact on the North Dakota economy and our loan portfolio.

The allowance for credit losses as a percentage of total loans at June 30, 2015 was 2.07%, compared to 2.11% at December 31, 2014. The allowance for credit losses as a percentage of loans and leases held for investment at June 30, 2015 and December 31, 2014 was 2.38%.

At June 30, 2015, BNC had $7.3 million of classified loans, $286 thousand of loans on non-accrual and $242 thousand of other real estate owned. At December 31, 2014, BNC had $9.1 million of classified loans, $56 thousand of loans on non-accrual and $256 thousand 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 North Dakota, Arizona and Minnesota from 15 locations. BNC also conducts mortgage banking from 14 offices in Arkansas, Illinois, Kansas, Nebraska, Minnesota, Arizona and North Dakota. 

This news release may contain "forward-looking statements" within the meaning of the safe harbor provisions 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", "future" and other expressions relating to future periods. Examples of forward-looking statements include, among others, statements we make regarding our belief that we have exceptional liquidity, our expectations regarding future market conditions and our ability to capture opportunities and pursue growth strategies, our expected operating results such as revenue growth and earnings, and our expectations of the effects of the regulatory environment on our earnings for the foreseeable future.  Forward-looking statements are neither historical facts nor assurances of future performance.  Our actual results and financial condition may differ materially from those indicated in the forward-looking statements.  Therefore, you should not rely on any of these forward-looking statements. 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. 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.

This press release contains references to financial measures which are not defined in generally accepted accounting principles ("GAAP"). Such non-GAAP financial measures include the Company's tangible equity to assets ratio and information presented excluding nonrecurring transactions. These non-GAAP financial measures have been included as the Company believes they are helpful for investors to analyze and evaluate the Company's financial condition.

 (Financial tables attached)