BNCCORP, INC. Reports Second Quarter Results

BISMARCK, N.D., July 30 /PRNewswire-FirstCall/ -- BNCCORP, INC. (BNC or the Company) (Pink Sheets: 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 quarter ended June 30, 2010.  

BNC's 2010 second quarter results were significantly impacted by a fraud loss on assets serviced by others. As previously reported, the Bank discovered fraudulent activity by the servicing company in mid-April of this year. While the Bank is currently pursuing remedies, and taking such actions as are believed to be reasonably available to mitigate related losses, the Bank determined in the second quarter to record a loss of $(26.231) million.

Accordingly, net loss for the 2010 second quarter was $(25.221) million, or $(7.79) per diluted share. This compared to net income of $523 thousand, or $0.06 per diluted share, in the second quarter of 2009. The quarterly results also reflect lower net interest income, higher non-interest income, lower non-interest expenses excluding the impact of the fraud loss on assets serviced by others and lower costs for credit and real estate.

Gregory K. Cleveland, BNCCORP President and Chief Executive Officer, stated, "Unfortunately, our results this quarter were significantly impacted by the fraudulent actions of a third-party entrusted to service assets on our behalf. We have been pursuing available remedies since we learned of this fraudulent activity and we will continue to do so. We have verified that this fraud loss is isolated to the actions of this single servicing company and are not indicative of any other credit quality concerns within our loan portfolio."

"Our focus on the Company's capital base and enhancing core earnings capacity has given us the resiliency to face up to this challenge. We maintain "well-capitalized" capital ratios at the Bank despite the losses due to the servicing company's actions. Non-interest income rose during the quarter and non-interest expenses other than the servicing loss declined. Our work on other problem assets is yielding results as nonperforming assets have declined steadily during 2010.  We will remain focused on improving capital, reducing problem assets and resolving the issues related to the fraud as effectively as possible."

Second Quarter Results

Net interest income for the second quarter of 2010 was $5.813 million, a decrease of $1.803 million, or 23.7%, from $7.616 million in the same period of 2009. The net interest margin for the current period decreased to 3.20% from 3.68% in the same period of 2009. The reduction in net interest income reflects lower interest rates and balances of investments and loans, higher balances of liquid cash equivalents, which aggregated $29.7 million at quarter end and a reversal of accrued interest aggregating $287 thousand on the assets serviced by others.

The provision for credit losses was $1.500 million in the second quarter of 2010, down from $2.000 million in the second quarter of 2009. Nonperforming loans have decreased steadily in 2010.

Non-interest income for the second quarter of 2010 was $5.560 million, an increase of $1.215 million, up 28.0% from $4.345 million in the same period of 2009. Gain on sales of investment securities aggregated $1.368 million during the recent quarter compared to $968 thousand in the second quarter of 2009. The portfolio reflected net unrealized gains at the end of June. The opportunity to sell assets at attractive prices can vary from period to period. Mortgage banking revenues rose by $763 thousand, or 36.9%, from the second quarter of 2009, to $2.829 million, as low interest rates and government sponsorship in the secondary market have created conditions that favor mortgage banking.

Non-interest expenses in the second quarter include the fraud loss on assets serviced by others of $(26.231) million. Excluding this loss, non-interest expense decreased by $647 thousand, or 6.9%, to $8.743 million in the second quarter of 2010 compared to $9.390 million in the same period of 2009. This decrease primarily relates to lower costs related to foreclosed assets partially offset by expanded professional costs incurred to address the servicing loss and non-performing assets. Other real estate costs aggregated $278 thousand, a decrease of $1.395 million compared to the second quarter of 2009. Professional service costs increased by $581 thousand in the second quarter of 2010 compared to the second quarter of 2009.

Tax expense of $120 thousand was recognized during the second quarter of 2010. Although the Company has net operating loss carryforwards for federal tax purposes, a provision for taxes was recorded in 2010 to address state tax obligations. The tax expense in the second quarter of 2009 was $48 thousand and the effective tax rate was 8.4%.

Net loss available to common shareholders was $(25.552) million, or $(7.79) per share, for the second quarter after accounting for dividends accrued on preferred stock and the amortization of issuance discounts on preferred stock. These costs aggregated $331 thousand in the second quarter of 2010. Net income available to common shareholders in 2009 was $196 thousand, or $0.06 per diluted share.

Fraud Loss on Assets Serviced by Others

In April of this year, the Company discovered fraudulent activity by a third-party servicing company.  Since April, the Company and its advisors have been diligently investigating this matter.  In the second quarter, the Company determined the scope of the fraud losses and recorded a loss of $26.231 million.  The Company is pursuing available remedies, and to taking such other actions that may be reasonably available for the mitigation of losses associated with this matter.  We have notified the proper authorities and our fidelity insurance carriers. The Company has approximately $15 million of insurance coverage and recently filed a claim. Our internal and external investigations have confirmed that this fraudulent activity was limited to a single 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.

The following table reconciles the net loss available to common shareholders as prepared in accordance with generally accepted accounting principles to our determination of adjusted earnings:

The Company is providing adjusted earnings (loss) 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, which was recognized in the second quarter of 2010.

Six Months Ended June 30, 2010

Net interest income for the six month period ended June 30, 2010 was $12.151 million, a decrease of $2.347 million, or 16.2%, from $14.498 million in the same period of 2009. The net interest margin for the current period decreased to 3.24% from 3.57% in the same period of 2009. The reduction in net interest income reflects lower interest rates and balances of investments and loans, higher balances of liquid cash equivalents, which aggregated $29.7 million at quarter end and a reversal of accrued interest aggregating $287 thousand on the assets serviced by others.

The provision for credit losses was $3.500 million in the first six months of 2010, compared to $3.700 million in the first six months of 2009. Management continues to monitor the credit portfolio diligently.

Non-interest income for the first six months of 2010 was $11.846 million, an increase of $3.805 million, up 47.3% from $8.041 million in the same period of 2009. Gain on sales of investment securities aggregated $3.873 million during the first six months of 2010 compared to $1.871 million in the first half of 2009. The portfolio reflected net unrealized gains at the end of June. The opportunity to sell assets at attractive prices can vary from period to period. Mortgage banking revenues rose by $1.522 million, or 43.6%, from the first half of 2009, to $5.014 million, as low interest rates and government sponsorship in the secondary market have created conditions that favor mortgage banking.

Excluding the fraud loss on assets serviced by others, non-interest expense decreased by $225 thousand, or 1.3%, to $17.225 million for the six month period ended June 30, 2010 compared to $17.450 million in the same period of 2009. This decrease primarily relates to lower costs related to foreclosed assets partially off set by expanded professional costs incurred to address the servicing loss and non-performing assets. Other real estate costs aggregated $732 thousand, a decrease of $1.848 million compared to the first half of 2009, as the Company continues to reduce carrying values of other real estate. Professional service costs increased by $849 thousand in the first half of 2010 compared to the first half of 2009.

Tax expense of $72 thousand was recognized during the six month period ended June 30, 2010. Although the Company has net operating loss carryforwards for federal tax purposes, a provision for taxes was recorded in 2010 to address state tax obligations. The tax expense in the first six months of 2009 was $250 thousand and the effective tax rate was 18.0%.

Net loss available to common shareholders was $(23.686) million, or $(7.22) per share, for the six months ended June 30, 2010 after accounting for dividends accrued on preferred stock and the amortization of issuance discounts on preferred stock. These costs aggregated $655 thousand in the first six months of 2010. Net income available to common shareholders in 2009 was $546 thousand, or $0.17 per diluted share.

Assets, Liabilities and Equity

Total assets were $751.1 million at June 30, 2010, a decrease of $117.0 million, or 13.5%, compared to $868.1 million at December 31, 2009. Loans held for investment decreased by $36.6 million as the Company's efforts have been focused on reducing exposure to credit risk. Repayments on, and sales of, investment securities reduced investment balances by $55.5 million since the beginning of the year. Loans held for sale and participating interests in mortgage loans decreased by $20.6 million primarily due to the fraud loss on assets serviced by others.

Total deposits were $670.4 million at June 30, 2010, decreasing by $85.6 million from 2009 year-end. Core deposits aggregated $589.8 million, $640.2 million and $601.3 million at June 30, 2010, December 31, 2009 and June 30, 2009, respectively. The decline in core deposits is part of the Company's strategy to reduce higher cost certificates of deposit and emphasize lower cost non-interest bearing checking, and money market accounts. The balances of lower cost deposits increased by approximately $30.0 million during the first half of 2010. This increase was offset by a decline in our higher cost time deposits of $115.5 million.

Other borrowings decreased by $15.7 million, during the first half of 2010, as the Company focused on reducing its higher cost debt. Available borrowing capacity from the FHLB was in excess of $79.9 million as of June 30, 2010.

Total equity was $37.2 million at June 30, 2010, compared to $57.3 million at December 31, 2009.

The book value per common share was $5.12 as of June 30, 2010, compared to $11.24 as of December 31, 2009.

Trust assets under supervision were $365.2 million at June 30, 2010, compared to $342.5 million at December 31, 2009. The increase in assets under supervision relates to growth in our employee benefit areas and appreciation of securities in 2010.

Regulatory Capital

Banks and their bank holding companies generally operate under separate regulatory capital requirements. At June 30, 2010, BNCCORP's tier 1 leverage ratio was 5.89%, the tier 1 risk-based capital ratio was 8.22%, and the total risk-based capital ratio was 11.62%. Tangible common equity at June 30, 2010 was 2.22%.

At June 30, 2010, BNC National Bank had a tier 1 leverage ratio of 7.17%, a tier 1 risk-based capital ratio of 9.95%, and a total risk-based capital ratio of 11.23%. Tangible capital to tangible assets for BNC National Bank was 7.85%.

Asset Quality

Challenging economic conditions have led to elevated credit risk throughout the lending 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.

The Company's provision for credit losses and other real estate costs was $1.740 million in the second quarter of 2010, declining from $3.914 million in the second quarter of 2009. Nonperforming assets decreased in the first six months of the year by $6.1 million, or 14.2%.

The allowance for credit losses was $18.2 million, $18.0 million and $10.3 million at June 30, 2010, December 31, 2009 and June 30, 2009, respectively. The allowance for credit losses as a percentage of total loans at June 30, 2010 was 3.48%, compared with 3.11% at December 31, 2009 and 1.70% at June 30, 2009. The allowance for credit losses as a percentage of loans and leases held for investment at June 30, 2010 was 3.78%, compared with 3.49% at December 31, 2009 and 1.88% at June 30, 2009. The ratio of the allowance for credit losses to total nonperforming loans as of June 30, 2010 was 74% compared to 50% at December 31, 2009 and 35% at June 30, 2009. The ratio of total nonperforming assets to total assets was 4.93% at June 30, 2010, compared with 4.97% at December 31, 2009.

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. At December 31, 2009, BNC had $54.2 million of classified loans, $35.9 million of loans on non-accrual and $7.3 million of other real estate owned. At June 30, 2009, BNC had $57.4 million of classified loans, $29.2 million of loans on non-accrual and $13.0 million of other real estate owned. While the amount of classified loans and non-accrual loans are elevated compared to historical amounts, the number of non-accrual loans is relatively small.

Since December 31, 2009, other real estate has increased by $5.1 million, as certain nonperforming loans have migrated into foreclosure.

BNC has concentrations in real estate loans and mortgage banking relationships as shown in the table on page 16.

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 18 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.

(Financial tables attached)

SOURCE BNCCORP, INC.