BNCCORP, INC. Reports Second Quarter Net Income of $649 Thousand, or $0.09 Per Diluted Share

BISMARCK, N.D., July 26, 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 Iowa, Kansas, Nebraska, Missouri, Minnesota and Arizona, today reported financial results for the second quarter ended June 30, 2011.  

Net income for the 2011 second quarter was $649 thousand, or $0.09 per diluted share. The 2011 second quarter results reflect lower net interest income and non-interest income, offset by significant improvements in costs for credit losses and non-interest expenses when compared to the second quarter of 2010. Nonperforming assets decreased $7.5 million, or 23.2%, since March 31, 2011 and nonperforming assets have decreased $12.1 million, or 32.8%, since June 30, 2010. As previously reported, the second quarter of 2010 resulted in a net loss of $(25.221) million, or $(7.79) per diluted share, when results were significantly impacted by a charge of $26.231 million related to a fraud loss on assets serviced by others.  

Gregory K. Cleveland, BNCCORP President and Chief Executive Officer, stated, "Our results for the 2011 second quarter reveal that BNC is a profitable, resilient financial institution that remains dedicated to serving the financial needs of its marketplace. We are pleased that nonperforming assets decreased significantly this quarter and expect them to trend lower as the year progresses. While our capital ratios at the Bank have improved significantly since the beginning of the year, we will continue to manage capital, credit and liquidity intensely as the economic environment remains challenging."

Mr. Cleveland continued, "Recently the river systems in North Dakota and further down the Missouri River have experienced floods and water levels not witnessed for decades. Thus far, the impact on BNC appears manageable, but for many of our employees, and the communities we serve, there will be hardship. BNC will support the communities we serve. I also express appreciation for the extraordinary resolve our employees have exhibited in the last few weeks."

Second Quarter Results

Net interest income for the second quarter of 2011 was $4.696 million, a decrease of $1.117 million, or 19.2%, from $5.813 million in the same period of 2010. The net interest margin for the current period decreased to 3.15% from 3.20% 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 second quarter the average balance of investments increased by $55.8 million, or 34.5%, as we continue to deploy cash reserves built in previous periods.

The provision for credit losses was $500 thousand in the second quarter of 2011, compared to $1.500 million in the 2010 period. In the second quarter nonperforming loans have decreased $9.0 million, or 45.1%, from $19.8 million at March 31, 2011, to $10.9 million at June 30, 2011. Since June 30, 2010 nonperforming loans have decreased $13.8 million, or 55.9%.

Non-interest income for the second quarter of 2011 was $4.717 million, a decrease of $843 thousand, or 15.2% from $5.560 million in the same period of 2010. Mortgage banking revenues, which aggregated $2.287 million, decreased by $542 thousand, or 19.2%, from the second 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; thus continued level of mortgage banking revenues cannot be assured. Gains on sales of investment securities were $835 thousand during the recent quarter compared to $1.368 million in the second quarter of 2010. The opportunity to sell assets at attractive prices can vary significantly from period to period. The 2011 second quarter included gains on sales of loans of $412 thousand compared to no similar gains in the same period of 2010. The secondary market for SBA loans is currently acquisitive and loans can be sold for attractive prices. Wealth management revenues decreased in the second quarter of 2011 compared to the same period in 2010 as we have exited certain product offerings.

Non-interest expense decreased by $481 thousand, or 5.5%, to $8.262 million in the second quarter of 2011 compared to $8.743 million in the same period of 2010 (excluding the fraud loss on assets serviced by others of $26.231 million). The expense reduction reflects a decline in compensation of $238 thousand, or 6.1%, reflecting management's efforts to control costs. Occupancy costs also decreased by $217 thousand, or 31.1%, 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 $253 thousand, or 18.7%, due to lower activity in mortgage banking operations. These factors were partially offset by an increase in regulatory costs, which are generally higher for the financial services industry.

Tax expense of $2 thousand was recognized during the second quarter of 2011. Although the Company has net operating loss carryforwards for federal tax purposes aggregating $8.574 million, a provision for taxes was recorded in the second quarter for miscellaneous state obligations. 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. A tax expense of $120 thousand, or 0.5% of pre-tax loss, was recognized during the second quarter of 2010.

Net income available to common shareholders was $304 thousand, or $0.09 per diluted share, for the second quarter of 2011 after accounting for dividends accrued on preferred stock and the amortization of issuance discounts on preferred stock. These costs aggregated $345 thousand in the second quarter of 2011 and $331 thousand in the same period of 2010. Net loss available to common shareholders in the second quarter of 2010 was $(25.552) million, or $(7.79) 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:

Six Months Ended June 30, 2011

Net interest income for the six month period ended June 30, 2011 was $9.856 million, a decrease of $2.295 million, or 18.9%, from $12.151 million in the same period of 2010. The net interest margin for the current period decreased to 3.12% from 3.24% 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 half of 2011, the balance of investments increased by $83.5 million, or 60.9%, as we have deployed cash reserves built in previous periods.

The provision for credit losses was $1.100 million in the first six months of 2011, compared to $3.500 million in the first six months of 2010. Nonperforming loans have decreased by 39.0%, or $7.0 million, since December 31, 2010, and management continues to monitor the credit portfolio diligently.

Non-interest income for the first six months of 2011 was $8.753 million, a decrease of $3.093 million, or 26.1% from $11.846 million in 2010. Mortgage banking revenues decreased by $664 thousand, or 13.2%, from $5.014 million in 2010, to $4.350 million. Gains on sales of investment securities aggregated $1.196 million during the first six months of 2011 compared to $3.873 million during the first six 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 June 30, 2011. The gains on sales of loans which aggregated $900 thousand in the first half of 2011 related to sales of SBA loans, whereas there was no gain on sales of loans in the first half 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 $940 thousand, or 5.5%, to $16.285 million in the first six months of 2011, compared to $17.225 million in the first six months of 2010 (excluding the fraud loss on assets serviced by others). The expense reduction reflects a decline in compensation of $325 thousand, or 4.1%, reflecting management's efforts to control costs. Occupancy costs also decreased by $362 thousand, or 25.4%, 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 $281 thousand, or 13.3%, due to lower activity in mortgage banking operations in the first six months of 2011. These factors were partially offset by an increase in regulatory costs, which are generally higher for the financial services industry.

Tax expense of $2 thousand was recognized during the six month period ended June 30, 2011. Although the Company has net operating loss carryforwards aggregating $8.574 million for federal tax purposes, a provision for taxes was recorded in 2011 for state tax obligations. 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 six months of 2010 was $72 thousand, or 0.31% of pre-tax losses.

Net income available to common shareholders was $538 million, or $0.16 per diluted share, for the six months ended June 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 $(23.686) million, or $(7.22) per share, for the six months ended June 30, 2010.

Assets, Liabilities and Equity

Total assets were $633.0 million at June 30, 2011, a decrease of $114.1 million, or 15.3%, 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 $48.4 million as we have implemented measures to reduce our exposure to credit risk and concentrations within certain segments of our loan portfolio.

Total deposits were $549.3 million at June 30, 2011, decreasing by $111.8 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 branch sale, deposit balances decreased by $4.4 million. This decrease relates primarily to the withdrawal of one Wealth Management deposit of approximately $12 million which had been temporarily deposited with us.

Other borrowings decreased by $1.8 million in the first half of 2011. Available borrowing capacity from the FHLB was approximately $56.6 million as of June 30, 2011 and the Company had no FHLB advances outstanding at quarter end.

Total equity was $37.3 million at June 30, 2011 and December 31, 2010. The book value per common share was $5.05 as of June 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 $4.67 as of June 30, 2011, compared to $4.57 as of December 31, 2010.

Trust assets under supervision were $241.0 million at June 30, 2011, compared to $223.8 million at December 31, 2010. The increase in assets under supervision relates to appreciation of securities in 2011.

Regulatory Capital

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

At June 30, 2011, BNCCORP's tier 1 leverage ratio was 7.10%, the tier 1 risk-based capital ratio was 12.74%, and the total risk-based capital ratio was 17.43%. Tangible common equity at June 30, 2011 was 2.62%.  

At June 30, 2011, BNC National Bank had a tier 1 leverage ratio of 8.81%, a tier 1 risk-based capital ratio of 15.79%, and a total risk-based capital ratio of 17.06%. Tangible capital to tangible assets for BNC National Bank was 9.67%.

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 $24.8 million at June 30, 2011, compared to $30.6 million as of December 31, 2010 and $37.0 million at June 30, 2010. The ratio of total nonperforming assets to total assets was 3.92% at June 30, 2011, compared with 4.09% at December 31, 2010 and 4.93% at June 30, 2010.

Nonperforming loans declined to $10.9 million at June 30, 2011, compared to $17.9 million at December 31, 2010 and $24.7 million at June 30, 2010. The provision for credit losses and other real estate costs decreased to $700 thousand in the second quarter of 2011, from $1.740 million in the second quarter of 2010.

The allowance for credit losses was $11.0 million, $14.8 million and $18.2 million at June 30, 2011, December 31, 2010 and June 30, 2010, respectively. The allowance for credit losses as a percentage of total loans at June 30, 2011 was 3.22%, compared with 3.84% at December 31, 2010 and 3.48% at June 30, 2010. The allowance for credit losses as a percentage of loans and leases held for investment at June 30, 2011 was 3.53%, compared with 4.21% at December 31, 2010 and 3.78% at June 30, 2010.

The ratio of the allowance for credit losses to total nonperforming loans as of June 30, 2011 was 101%, compared with 83% at December 31, 2010 and 74% at June 30, 2010.

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. 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 June 30, 2010, BNC had $50.0 million of classified loans, $24.7 million of loans on non-accrual and $12.3 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 17 locations. BNC also conducts mortgage banking from 10 locations in Iowa, 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.

FOR FURTHER INFORMATION:
WEBSITE: www.bnccorp.com

(Financial tables attached)

SOURCE BNCCORP, INC.