BNCCORP, Inc. (BNCC)

[Enterprising Investor]

BNCCORP, INC. Reports Second Quarter Net Income Of $2.2 Million, Or $0.50 Per Diluted Share (7/28/14)

2014 Second Quarter

- Net income rises 23% sequentially from 2014 first quarter; declines 11% from 2013 second quarter

- Net interest income increases by $1.7 million, or 38%, compared to 2013 second quarter

- Non-interest income decreases due to lower mortgage banking revenues compared to 2013 second quarter

- Non-interest expense decreases compared to 2013 second quarter

- Total assets increase 7.1% from year-end

- Book value per common share increases to $16.64 at June 30, 2014 compared to $15.45 at March 31, 2014 and $14.45 at December 31, 2013

- Year-to-date net income is $4.0 million or $0.91 per diluted share

- Company to redeem high-cost subordinated debentures

BISMARCK, N.D., July 28, 2014 /PRNewswire/ -- BNCCORP, INC. (BNC or the Company) (OTCQB Markets: BNCC), which operates community banking and wealth management businesses in North Dakota, Arizona and Minnesota, and has mortgage banking offices in Illinois, Kansas, Nebraska, Minnesota, Arizona and North Dakota, today reported financial results for the second quarter ended June 30, 2014.

Net income for the 2014 second quarter was $2.207 million, or $0.50 per diluted share. This compares to net income of $2.476 million, or $0.62 per diluted share, in the second quarter of 2013 and net income of $1.792 million or $0.41 per diluted share in the first quarter of 2014. Results for the second quarter of 2014 primarily reflect lower non-interest income due to the impact of interest rates on mortgage banking revenues, which is causing a shift from refinance originations to purchase originations in the market. This was partially offset by significantly higher net interest income and lower non-interest expenses when compared to the prior year second quarter. Included in non-interest expense, for the recent quarter, are non-recurring costs of approximately $356 thousand related to the redemption of high-cost subordinated debentures. The second quarter of 2014 also included a reversal of previous provisions for loan losses which increased pre-tax earnings by $400 thousand. Nonperforming assets decreased to $5.0 million, or 0.55% of total assets, at June 30, 2014, compared to $6.7 million, or 0.79% of total assets, at December 31, 2013.

Timothy J. Franz, BNCCORP President and Chief Executive Officer, said, "We had a solid quarter in several respects. We continue to improve net interest income and reduce noninterest expense. While the interest rate environment caused mortgage banking revenues to decline from the second quarter of 2013, as expected, we have successfully transformed this business as purchase originations outnumber refinance originations almost two to one this quarter and our recurring sources of noninterest income continue to climb."

Mr. Franz added, "We continue to focus on growing our core banking operations and our pipeline of loans held for investment, an indicator of future loan growth, remains robust. I personally visited the North Dakota 'Oil Patch' twice this quarter and have witnessed the incredible nascent economic vitality of the area first-hand. This region has unique possibilities and obstacles, but we are clearly in the right place at the right time. Our people are energized and we look forward to capitalizing on the opportunities before us."

Second Quarter Results

Net interest income for the second quarter of 2014 was $6.323 million, an increase of $1.740 million, or 38%, from $4.583 million in the same period of 2013. Second quarter interest income rose year over year as the average balance of interest earning assets increased by $112.2 million to $856.3 million from $744.1 million, when compared to the second quarter of 2013. The average loans held for investment increased $57.5 million, or 21.0%, compared to the prior year second quarter. On average, loans held for sale decreased by $45.7 million when compared to the second quarter of 2013 due to lower mortgage banking activity. The decrease in net interest income resulting from this lower balance was more than offset by the net interest income resulting from an increase of $113.8 million in average investment securities during the same period. The net interest margin in the second quarter of 2014 increased to 2.96% compared to 2.47% in the same period of 2013. The yield on earning assets increased to 3.41% in the second quarter of 2014, compared to 3.00% in the second quarter of 2013.

Interest expense decreased despite exceptional growth in deposits as we have been able to lower the rates paid on deposits. The cost of interest bearing liabilities declined to 0.55% in the current quarter, compared to 0.64% in the same period of 2013. The cost of core deposits at the Bank were 0.18% in the current quarter compared to 0.24% in the same period of 2013.

Pre-tax earnings increased by $400 thousand in the second quarter of 2014 due to a reversal of previous provisions for credit losses. This reflects the continued improvement of our credit quality and a successful restructuring of an impaired loan in the second quarter, which consequently used less of the allowance for loan losses than previously anticipated and led to recognition of the reversal.

Non-interest income for the second quarter of 2014 was $5.361 million, a decrease of $2.991 million, or 35.8%, from $8.352 million in the second quarter of 2013. The decrease primarily relates to a decline in mortgage banking revenues, which aggregated $3.391 million, compared to $6.744 million in the second quarter of 2013. Although the mortgage banking revenues continue to be significantly impacted in 2014 by interest rates that are higher than in 2013, we have successfully transformed this business as purchase originations now exceed refinance originations by almost two to one. The focus on purchase originations may result in a more seasonal business, particularly in our more northern locations. The 2014 second quarter included gains on sales of SBA loans of $760 thousand, compared to $352 thousand in the same period of 2013. This increase is consistent with expectations as our SBA operations experienced temporary delays in the first quarter of 2014. Other recurring sources of fee income increased by smaller but steady amounts.

Non-interest expense for the second quarter of 2014 was $8.887 million, a decrease of $172 thousand, or 1.9%, from $9.059 million in the second quarter of 2013. As discussed in more detail below, noninterest expense includes $356 thousand of costs related to the planned redemption of subordinated debentures. Excluding the redemption costs, non-interest expense decreased by $528 thousand or 5.8% in the quarter compared to the second quarter of 2013.

In the second quarter of 2014, we recorded income tax expense of $990 thousand. The effective tax rate was 30.97%. We recorded income tax expense of $1.400 million in the second quarter of 2013, which resulted in an effective tax rate of 36.12%. The 2014 effective tax rate reduction relates primarily to the impact of tax exempt investments made in the second half of 2013.

Net income available to common shareholders was $1.732 million, or $0.50 per diluted share, for the second quarter of 2014 after accounting for dividends accrued on preferred stock. Dividend expense on the preferred stock aggregated $475 thousand in the second quarter of 2014 and $327 thousand in the same period of 2013. The dividend expense associated with $20.1 million of preferred stock increased as the annual dividend rate increased to 9% from 5% in February 2014. Net income available to common shareholders in the second quarter of 2013 was $2.149 million, or $0.62 per diluted share.

Six Months Ended June 30, 2014

Net interest income in the first half of 2014 was $12.528 million, an increase of $3.312 million, or 35.9%, from $9.216 million in the first half of 2013. We grew assets steadily in the first six months of 2014. The average balance of earning assets during that period was approximately $821.8 million, compared to approximately $732.2 million in the prior year. The net interest margin during the first six months of 2014 increased to 3.07%, compared to 2.54% during the same period of 2013. The yield on earning assets was 3.53% in the six month period ended June 30, 2014, compared to 3.09% in the same period of 2013. The cost of interest bearing liabilities was 0.56%, in the first half of 2014, compared to 0.67% in 2013. The cost of core deposits at the Bank were 0.18% in the first half of 2014 compared to 0.26% in the same period of 2013.

A reversal of previous provisions for credit losses increased pre-tax earnings by $600 thousand in the first six months of 2014. The reduction relates to $200 thousand in net recoveries in the first quarter of 2014 and continued improvement in credit quality and the successful restructuring of an impaired loan in the second quarter of 2014. We continue to maintain an allowance to loans ratio of 2.44% as of June 30, 2014.

Non-interest income for the first six months of 2014 was $9.645 million, a decrease of $10.031 million, or 51.0%, from $19.676 million in the same period of 2013. Non-interest income was significantly influenced by interest rates as mortgage banking revenues were $5.673 million, a decrease of $9.318 million, or 62.2%, compared to 2013. Gains on sales of investments in the first half of 2014 were $528 thousand compared to $1.210 million in the same period of 2013. Gains on sales of SBA loans were $1.000 million in the first six months of 2014, compared to $1.107 million in the same period of 2013. Gains and losses on sales of loans and investments can vary significantly from period to period. We also experienced an increase in bank fees and service charges of $80 thousand, or 6.2%, when comparing the first half of 2014 to the first half of 2013, reflecting growth in deposits and new accounts.

Non-interest expense for the first six months of 2014 was $16.977 million, a decrease of $1.479 million, or 8.0%, from $18.456 million in the same period of 2013. As discussed in more detail below, noninterest expense includes $356 thousand of costs related to the planned redemption of subordinated debentures. Excluding redemption costs, non-interest expense was lower by $1.835 million or 9.9% in the first six months of 2014 compared to the first half of 2013.

During the six month period ended June 30, 2014, we recorded tax expense of $1.797 million which resulted in an effective tax rate of 31.00%. Tax expense of $3.475 million was recorded during the six month period ended June 30, 2013, which resulted in an effective tax rate of 35.69%. The 2014 effective tax rate reduction relates primarily to the impact of tax exempt investments made in the second half of 2013.

Net income available to common shareholders was $3.152 million, or $0.91 per diluted share, for the six months ended June 30, 2014 after accounting for dividends accrued on preferred stock. These costs aggregated $847 thousand in the first six months of 2014 and $651 thousand in the same period of 2013. Net income available to common shareholders for the first six months ended June 30, 2013 was $5.610 million, or $1.62 per diluted share. The costs associated with $20.1 million of preferred stock increased in February of 2014 when the rate of dividends increased to 9% from 5%.

Assets, Liabilities and Equity

Total assets were $903.0 million at June 30, 2014, an increase of $59.9 million, or 7.1%, compared to $843.1 million at December 31, 2013. The increases in recent periods have been funded primarily by growing deposits in North Dakota as this region is experiencing robust economic conditions.

Loans held for investment, which aggregated $324.9 million at June 30, 2014, $317.9 million at December 31, 2013 and $281.5 million at June 30, 2013, increased by $43.4 million, or 15.4%, since June 30, 2013. The economic prosperity in North Dakota provides tail-winds for long-term loan growth. However, these conditions also result in exceptional liquidity for many businesses and our clients in North Dakota are generally predisposed to repay loans on an accelerated basis. For example, in the second quarter of 2014 we received significant unscheduled payments on loans equating to approximately $14 million. While such repayments challenge loan growth in the short term, the economic vitality and appetite for loans continues to be greater in North Dakota than other regions.

Total deposits were $772.9 million at June 30, 2014, increasing by $49.6 million from 2013 year-end. Deposits declined from the end of the first quarter of 2014 by $30.0 million. As previously reported, we experienced a surge in deposits in the first quarter of 2014 when deposits grew by $80 million and, as anticipated, our clients redeployed portions of these funds. The redeployment was partially offset by other depository growth. During the second quarter of 2014, recognizing favorable economic conditions, we exercised our redemption rights to call a $10 million brokered certificate of deposit.

We plan to redeem $7.5 million of subordinated debentures in the third quarter of 2014. These debentures accrue interest at 12.05%. Redemption costs of $356 thousand were accrued in the second quarter of 2014. As a result of the redemption, we expect the full year reduction of interest expense to be approximately $900 thousand in 2015. After the redemption, we will continue to remain in excess of well capitalized levels. Furthermore, the significant reduction in interest expense will have a positive impact on future earnings and capital.

Trust assets under management or administration increased to $262.3 million at June 30, 2014, compared to $249.7 million at December 31, 2013 and $237.4 million at June 30, 2013. Our wealth management business is capturing wealth being created by the exceptionally strong economic conditions in North Dakota, both in managed agency and retirement services and bolstered by strong equity markets.

Capital

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

At June 30, 2014, BNCCORP's tier 1 leverage ratio was 10.66%, the tier 1 risk-based capital ratio was 22.23%, and the total risk-based capital ratio was 23.49%.

At June 30, 2014, BNCCORP's tangible common equity as a percent of assets was 6.28% compared to 5.79% at December 31, 2013. Common shareholders' equity at June 30, 2014 was $56.8 million and we had preferred stock and subordinated debentures outstanding which aggregated $43.6 million at June 30, 2014.

Book value per common share of the Company was $16.64 as of June 30, 2014, compared to $15.45 at March 31, 2014 and $14.45 at December 31, 2013. Book value per common share, excluding accumulated other comprehensive income, was $15.67 as of June 30, 2014, compared to $14.89 at December 31, 2013.

At June 30, 2014, BNC National Bank had a tier 1 leverage ratio of 9.75%, a tier 1 risk-based capital ratio of 20.51%, and a total risk-based capital ratio of 21.77%.

At June 30, 2014, tangible common equity of BNC National Bank was 10.24% of total Bank assets.

In July of 2013, the Federal Reserve issued new regulatory capital standards for community banks which incorporate some of the capital requirements addressed in the Basel III framework and begin to be effective January 1, 2015. We have reviewed estimates of our regulatory capital ratios under the new Basel III framework and expect to be in compliance with these standards.

Asset Quality

Nonperforming assets were $5.0 million at June 30, 2014, down from $6.7 million at December 31, 2013. The ratio of total nonperforming assets to total assets was 0.55% at June 30, 2014 and 0.79% at December 31, 2013. Nonperforming loans were $3.2 million at June 30, 2014, down from $5.6 million at December 31, 2013. The ratio of the allowance for credit losses to total nonperforming loans as of June 30, 2014 was 272%, compared to 175% at December 31, 2013.

The allowance for credit losses was $8.8 million at June 30, 2014, compared to $9.8 million at December 31, 2013. The reduction of the allowance for credit losses reflects stabilized risk in our loan portfolio, strong allowance coverage of nonperforming and classified loans, net recoveries in the first quarter of 2014 and the restructuring of a significant impaired loan in the second quarter. The allowance for credit losses as a percentage of total loans at June 30, 2014 was 2.44%, compared to 2.81% at December 31, 2013. The allowance for credit losses as a percentage of loans and leases held for investment at June 30, 2014 was 2.72%, compared to 3.10% at December 31, 2013.

At June 30, 2014, BNC had $10.4 million of classified loans, $3.3 million of loans on non-accrual and $1.8 million of other real estate owned. At December 31, 2013, BNC had $13.5 million of classified loans, $4.7 million of loans on non-accrual and $1.1 million of other real estate owned. At June 30, 2013, BNC had $13.1 million of classified loans, $10.2 million of loans on non-accrual and $3.0 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 North Dakota, Arizona and Minnesota from 14 locations. BNC also conducts mortgage banking from 13 offices in 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.

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