BNCCORP, Inc. (BNCC)

[Enterprising Investor]

BNCCORP, INC. Reports Third Quarter Net Income Of $2.0 Million, Or $0.43 Per Diluted Share (10/27/14)

2014 Third Quarter Highlights

- Net income increases $1.5 million, or 306.8%, compared to 2013 third quarter

- Net interest income increases by $2.1 million, or 46.2%, compared to 2013 third quarter

- Non-interest income increases by $868 thousand, or 22%, compared to 2013 third quarter, excluding non-recurring non-interest income item

- Non-interest expense increases by $640 thousand, or 7.9%, compared to 2013 third quarter, excluding non-recurring non-interest expense items

- Book value per common share increases to $17.18 at September 30, 2014 compared to $14.45 at December 31, 2013

- High-cost subordinated debentures of $7.5 million redeemed in third quarter of 2014

- BNCCORP, INC. adds Mr. Nathan Brenna to Board of Directors

BISMARCK, N.D., Oct. 27, 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, Minnesota, Arizona and North Dakota, today reported financial results for the third quarter ended September 30, 2014.

Net income for the 2014 third quarter was $1.981 million, or $0.43 per diluted share. This compares to net income of $487 thousand, or $0.05 per diluted share, in the third quarter of 2013. Results for the third quarter of 2014 primarily reflect substantially increased net interest income largely due to higher balances of earning assets and a rise in net interest margin. Non-interest income and non-interest expense increased compared to the third quarter of 2013, excluding non-recurring items. The third quarter of 2014 also included a reversal of previous provisions for loan losses which increased pre-tax earnings by $200 thousand as credit quality continues to improve.

Timothy J. Franz, BNCCORP President and Chief Executive Officer, said, "We had a solid quarter and have made significant strides forward, particularly when compared to the unsettled business environment in the third quarter one year ago. Our core bank is growing and mortgage banking has largely shifted away from refinancing activity toward purchase originations. These improvements are resulting in higher net interest income and improved non-interest income. As a result of hard work, our credit risk profile is currently very good."

Mr. Franz added, "While our improvement has been noteworthy, challenges remain. Balancing loan growth and credit risk requires constant diligence and mortgage banking operations dependent on purchase activity introduces seasonality to a complicated business segment. We are focused on these challenges and believe our ability to grow deposits and the pipeline of loans held for investment should continue to drive performance. Most importantly, our people have the talent and motivation to continue creating value."

Third Quarter Results

Net interest income for the third quarter of 2014 was $6.749 million, an increase of $2.133 million, or 46.2%, from $4.616 million in the same period of 2013. Third quarter interest income rose year over year as the average balance of interest earning assets increased by $95.5 million to $845.8 million from $750.3 million, when compared to the third quarter of 2013. The average loans held for investment increased $54.3 million, or 19.6%, compared to the prior year third quarter. On average, loans held for sale decreased by $14.4 million when compared to the third 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 $92.5 million in average investment securities during the same period. The net interest margin in the third quarter of 2014 increased to 3.17% compared to 2.44% in the same period of 2013. The yield on earning assets increased to 3.54% in the third quarter of 2014, compared to 2.94% in the third quarter of 2013.

Interest expense decreased $153 thousand or 16.2% despite growth in deposits as we have been able to lower the rates paid on deposits. The redemption of $7.5 million of 12.05% subordinated debentures reduced interest expense by approximately $106 thousand in the third quarter of 2014. The cost of interest bearing liabilities declined to 0.47% in the current quarter, compared to 0.61% in the same period of 2013. The cost of core deposits was 0.17% in the current quarter compared to 0.22% in the same period of 2013.

A reversal of previous provisions for credit losses increased pre-tax earnings by $200 thousand in the third quarter 2014 as credit quality continues to improve.

Non-interest income for the third quarter of 2014 was $4.814 million, a decrease of $187 thousand, or 3.7%, from $5.001 million in the third quarter of 2013. Excluding the impact of non-recurring insurance proceeds aggregating $1.055 million in 2013, non-interest income in the third quarter of 2014 increased by $868 thousand or 22.0%. Mortgage revenue of $2.782 million was up $360 thousand compared to $2.422 million in the third quarter of 2013. Although the mortgage banking market is significantly influenced by interest rates and federal policies, we have successfully transformed this business as purchase originations now exceed refinance originations. The focus on purchase originations may result in a more seasonal business, particularly in our more northern locations. The 2014 third quarter included gains on sales of SBA loans of $688 thousand, compared to $301 thousand in the same period of 2013. Other recurring sources of fee income increased by smaller but steady amounts.

Non-interest expense for the third quarter of 2014 was $8.765 million, a decrease of $686 thousand, or 7.3%, from $9.451 million in the third quarter of 2013. Excluding the impact of non-recurring impairment charge and reductions of post-retirement benefits, which netted to $1.326 million in 2013, non-interest expense in the third quarter or 2014 increased by $640 thousand, or 7.9%. The increase is primarily related to incentive compensation expense related to loan and deposit growth.

In the third quarter of 2014, we recorded income tax expense of $1.017 million equating to an effective tax rate of 33.92%. During the three month period ending September 30, 2014, the Company recorded increased tax expense equating to an annualized effective tax rate of 32.00%. This adjustment results from a different mix of taxable and non-taxable income than anticipated. In the third quarter of 2013, we recorded a tax benefit of $321 thousand as life insurance proceeds of $1.055 million were not taxable.

Net income available to common shareholders was $1.507 million, or $0.43 per diluted share, for the third quarter of 2014 after accounting for dividends on preferred stock. Dividends on the preferred stock aggregated $474 thousand in the third quarter of 2014 and $330 thousand in the same period of 2013. The dividend 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 third quarter of 2013 was $157 thousand, or $0.05 per diluted share.

Nine Months Ended September 30, 2014

Net interest income for the nine month period ended September 30, 2014 was $19.277 million, an increase of $5.445 million, or 39.4%, from $13.832 million in the same period of 2013. The average balance of earning assets during that period was approximately $829.8 million, compared to approximately $738.3 million in the prior year. The net interest margin during the nine month period of 2014 increased to 3.11%, compared to 2.50% during the same period of 2013. The yield on earning assets was 3.53% in the nine month period ended September 30, 2014, compared to 3.04% in the same period of 2013. The cost of interest bearing liabilities was 0.53%, in the first nine months of 2014, compared to 0.65% in the same period of 2013. As noted above, we repaid $7.5 million of high cost subordinated debentures in the third quarter of 2014 and the cost of core deposits was 0.18% in the first nine months of 2014 compared to 0.25% in the same period of 2013.

A reversal of previous provisions for credit losses increased pre-tax earnings by $800 thousand in the first nine months of 2014. A provision for credit losses of $700 thousand was recorded in the same period in 2013.

Non-interest income for the first nine months of 2014 was $14.459 million, a decrease of $10.218 million, or 41.4%, from $24.677 million in the same period of 2013. Excluding the impact of non-recurring insurance proceeds aggregating $1.055 million in 2013, non-interest income in the first nine months of 2014 decreased by $9.163 million or 38.8% compared to the first nine months of 2013. Non-interest income was particularly influenced by lower interest rates in 2013 as mortgage banking revenues were $8.455 million in the first three quarters of 2014, a decrease of $8.958 million, or 51.4%, compared to the same period in 2013. Gains on sales of investments in the first nine months of 2014 were $528 thousand compared to $1.247 million in the same period of 2013. Gains on sales of SBA loans were $1.688 million in the first nine months of 2014, compared to $1.408 million in the same period of 2013. Gains and losses on sales of loans and investments can vary significantly from period to period. Bank fees and service charges and wealth management revenues grew 6.3% and 14.0%, respectively, reflecting growth of our core banking and wealth management services.

Non-interest expense for the first nine months of 2014 was $25.742 million, a decrease of $2.165 million, or 7.8%, from $27.907 million in the same period of 2013. Excluding the impact of the non-recurring impairment charge and reduction of post-retirement benefits, which netted to $1.326 million in 2013, non-interest expense in the first nine months of 2014 decreased by $839 thousand, or 3.2%. The reduction is primarily driven by lower mortgage related variable costs as well as lower regulatory assessments. Included in other expenses in the first nine months of 2014 is $356 thousand of costs recorded related to the subordinated debt redemption.

During the nine month period ended September 30, 2014, we recorded tax expense of $2.814 million, which resulted in an effective tax rate of 32.00%. Tax expense of $3.154 million was recorded during the nine month period ended September 30, 2013, which resulted in an effective tax rate of 31.85%. During the third quarter of 2014, the Company increased the effective tax rate from 31.00% to 32.00% due to a different mix of taxable and non-taxable income than anticipated.

Net income available to common shareholders was $4.659 million, or $1.34 per diluted share, for the nine months ended September 30, 2014 after accounting for dividends on preferred stock. The dividends aggregated $1.321 million in the first nine months of 2014 and $981 thousand in the same period of 2013. The costs associated with $20.1 million of preferred stock increased in February of 2014 when the dividend rate increased to 9% from 5%. Net income available to common shareholders for the first nine months ended September 30, 2013 was $5.767 million, or $1.66 per diluted share.

Assets, Liabilities and Equity

Total assets were $899.7 million at September 30, 2014, an increase of $56.6 million, or 6.7%, 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 $335.4 million at September 30, 2014, $317.9 million at December 31, 2013 and $294.9 million at September 30, 2013, increased by $40.5 million, or 13.7%, since September 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. 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 $774.3 million at September 30, 2014, increasing by $67.8 million, or 9.6%, from September 30, 2013. Core deposit balances were $720.0 million at September 30, 2014, $658.7 million at December 31, 2013 and $641.7 million at September 30, 2013.

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In August 2014, we redeemed $7.5 million of subordinated debentures. These debentures accrued interest at 12.05%. Redemption costs of $356 thousand were accrued in the second quarter of 2014. The significant reduction in interest expense has a positive impact on earnings and capital.

Trust assets under management or administration decreased to $255.9 million at September 30, 2014, compared to $256.2 million at September 30, 2013. This decrease is a direct reflection of market depreciation, as 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.

Capital

Banks and their bank holding companies operate under separate regulatory capital requirements. At September 30, 2014, BNCCORP's tier 1 leverage ratio was 10.13%, the tier 1 risk-based capital ratio was 20.22%, and the total risk-based capital ratio was 21.48%.

At September 30, 2014, BNCCORP's tangible common equity as a percent of assets was 6.51% compared to 5.79% at December 31, 2013. Common shareholders' equity at September 30, 2014 was $58.7 million and we had preferred stock and subordinated debentures outstanding which aggregated $36.1 million at September 30, 2014.

Book value per common share of the Company was $17.18 as of September 30, 2014, compared to $14.45 at December 31, 2013. Book value per common share, excluding accumulated other comprehensive income, was $16.12 as of September 30, 2014, compared to $14.89 at December 31, 2013.

At September 30, 2014, BNC National Bank had a tier 1 leverage ratio of 10.12%, a tier 1 risk-based capital ratio of 20.34%, and a total risk-based capital ratio of 21.60%. At September 30, 2014, tangible common equity of BNC National Bank was 10.56% 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 $1.2 million at September 30, 2014, down from $6.7 million at December 31, 2013. The ratio of nonperforming assets to total assets was 0.13% at September 30, 2014 and 0.79% at December 31, 2013. Nonperforming loans were $130 thousand at September 30, 2014, down from $5.6 million at December 31, 2013.

The allowance for credit losses was $8.7 million at September 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 and the allowance coverage relative to nonperforming and classified loans. While the recent decreases in oil and agricultural commodity prices have yet to have a significant negative effect, prolonged declines could have a detrimental economic impact on the North Dakota economy. The allowance for credit losses as a percentage of total loans at September 30, 2014 was 2.30%, compared to 2.81% at December 31, 2013. The allowance for credit losses as a percentage of loans and leases held for investment at September 30, 2014 was 2.59%, compared to 3.10% at December 31, 2013.

At September 30, 2014, BNC had $9.5 million of classified loans, $130 thousand of loans on non-accrual and $1.1 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 September 30, 2013, BNC had $13.0 million of classified loans, $10.1 million of loans on non-accrual and $2.2 million of other real estate owned.

BNCCORP, INC Adds Director

Mr. Nathan P. Brenna was added to the Company's Board of Directors in September 2014. Mr. Brenna has a distinguished legal background having represented clients across the country for more than a decade. During his legal career, Mr. Brenna represented BNC on several matters and, as a result, has familiarity with BNC's history. In 2007, Mr. Brenna returned to his roots to operate a large farming and ranching operation in northwestern North Dakota. These operations are located near BNC's branches in the oil producing regions of North Dakota where he is also active in community service. Mr. Brenna's background should contribute a valuable perspective on matters of corporate governance, and an insight into local community and business issues.

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 12 offices in Illinois, Kansas, Minnesota, Arizona and North Dakota.

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