BNCCORP, Inc. (BNCC)

[norweger1979]

BNCCORP, INC. Reports 2016 Fourth Quarter Net Income To Common Shareholders Of $1.4 Million, Or $0.41 Per Diluted Share

BISMARCK, N.D., Jan. 30, 2017

2016 Highlights

-- Full year net income to common shareholders was $7.2 million, or $2.03 per diluted share

-- Total assets at 2016 year-end were $910.4 million

-- Loans held for investment increased $34.7 million, or 9.1%, to $414.6 million at December 31, 2016

-- Deposits were $752.6 million at 2016 year-end

-- Provision for credit losses was $0 in the fourth quarter and $800 thousand for the full year 2016

-- Non-performing assets were 0.29% of total assets at year-end 2016

-- Book value per common share at December 31, 2016 rose to $21.47 from $20.12 at December 31, 2015


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 Illinois, Kansas, Missouri, Minnesota, Arizona and North Dakota, today reported financial results for the fourth quarter and year ended December 31, 2016.

Net income available to common shareholders in the 2016 fourth quarter was $1.447 million, a decrease of $151 thousand versus $1.598 million in the same period of 2015. Fourth quarter 2016 diluted earnings per share were $0.41, compared to $0.46 in the fourth quarter of 2015. The comparison between the fourth quarters of 2016 and 2015 mainly reflected increased net interest income, decreased non-interest income largely due to lower revenue on sales of loans and Small Business Investment Company (SBIC) revenue, and higher non-interest expense primarily related to mortgage banking growth, legal costs, and investments in technology.

Net interest income in the 2016 fourth quarter increased by $396 thousand, or 6.4%, from the same quarter in 2015, due to the growth of loans held for investment, higher yields on earning assets, and improved net interest margin.

Non-interest income in the fourth quarter of 2016 decreased by $455 thousand, or 8.5%, from the same period in 2015, as higher mortgage banking revenues were offset by lower gains on sales of loans and SBIC revenues, both of which can vary significantly from period to period.

Non-interest expense increased by $761 thousand, or 8.2%, in the fourth quarter of 2016 compared to the prior year period, due to higher mortgage volume related costs, investments in technology, which improved services to customers, and continued investment in talent to support future revenue growth.

The provision for credit losses was $0 in the fourth quarters of 2016 and 2015. The ratio of nonperforming assets to total assets was 0.29% at December 31, 2016, compared to 0.09% at December 31, 2015. The allowance for loan losses was 2.00% of loans held for investment at December 31, 2016, compared to 2.27% at December 31, 2015.

Book value per common share at December 31, 2016 rose to $21.47 from $20.12 at December 31, 2015. Excluding accumulated other comprehensive income, book value per common share at December 31, 2016 was $20.98 compared to $18.93 at December 31, 2015. Since year-end 2010, book value per common share has increased $16.38, or 321.8%, equating to a 27% annual compounded rate of growth.

Management Comments

Timothy J. Franz, BNC President and Chief Executive Officer, said, "In a challenging year for the national economy and our region, BNC exhibited profitability, capital strength and asset quality. Our net interest income continued to improve and credit losses remained low in the fourth quarter of a year during which BNC's longer term shareholders were significantly rewarded."

Mr. Franz continued, "In 2016 we continued to improve our core banking by growing loans held for investment by approximately 9% while maintaining exceptional credit quality metrics. The growth in loans and credit quality successes were achieved despite the challenging economic conditions in western North Dakota. We captured value with our mortgage banking operations and continued to fortify our balance sheet by growing capital. We are pleased to see our shareholder value increase as a result of our performance in recent years and look forward to continued success."

Fourth Quarter Results

Net interest income for the fourth quarter of 2016 was $6.613 million, an increase of $396 thousand, or 6.4%, from $6.217 million in the same period of 2015. Overall, the net interest margin increased to 3.04% in the fourth quarter of 2016 from 2.96% in the fourth quarter of 2015.

Interest income increased 7.1%, to $7.417 million, for the quarter ended December 31, 2016, compared to $6.923 million in the fourth quarter of 2015. This increase is the result of higher yields on higher average earning assets. The yield on average interest earning assets increased to 3.41% in the fourth quarter of 2016 from 3.30% in the fourth quarter of 2015. The average balance of interest earning assets increased by $32.9 million. Average loans held for investment increased by $59.7 million year-over-year, and the average balance of loans held for sale was $21.6 million higher, while investments were $32.8 million lower. Despite the overall decrease in average investments, we have increased our investment in tax-exempt municipal securities in recent years, which aggregated $87.7 million at December 31, 2016, due to the relatively attractive attributes of these securities in the context of our overall portfolio, balance sheet management activities, and the value provided via reduced income tax expense.

Interest expense in the fourth quarter of 2016 was $804 thousand, an increase of $98 thousand from the same period in 2015. The cost of interest bearing liabilities remained essentially flat at 0.47% in the current quarter compared to 0.44% in the same period of 2015. Management increased its utilization of short-term FHLB advances as flexible borrowings in 2016.

Provision for credit losses was $0 in the fourth quarters of 2016 and 2015.

Non-interest income for the fourth quarter of 2016 was $4.872 million, a decrease of $455 thousand, or 8.5%, from $5.327 million in the fourth quarter of 2015. Mortgage banking revenue increased during the quarter when compared to the fourth quarter of 2015, although this was offset by lower revenues such as gains on the sale of loans and SBIC revenues, which can vary significantly from period-to-period. Mortgage banking production resulted in revenues of $3.573 million in the fourth quarter of 2016, compared to $3.067 million in the fourth quarter of 2015. Gains on sales of SBA loans were $1 thousand in the fourth quarter 2016, compared to $433 thousand in the prior year fourth quarter. SBIC revenues were $111 thousand in the fourth quarter of 2016 versus $709 thousand during the same period of 2015.

Non-interest expense for the fourth quarter of 2016 increased $761 thousand to $10.001 million, from $9.240 million in the fourth quarter of 2015. This increase is primarily related to mortgage banking, legal costs, and investments in technology and personnel to serve our customers and support growth.

In the fourth quarter of 2016, income tax expense was $37 thousand, compared to $474 thousand in the fourth quarter of 2015. The effective tax rate was 2.5% in the fourth quarter of 2016, compared to 20.6% in the same period of 2015. The decrease in the effective tax rate in the fourth quarter of 2016 is due to the relatively high proportion of tax-exempt income to pre-tax income in the period, as previously anticipated gains on sales of loans and SBIC revenues were delayed to periods later than anticipated.

Net income available to common shareholders was $1.447 million, or $0.41 per diluted share, for the fourth quarter of 2016. Net income available to common shareholders in the fourth quarter of 2015 was $1.598 million, or $0.46 per diluted share, after accounting for dividends paid on preferred stock. There were no preferred stock costs in the fourth quarter of 2016, due to the redemption of the preferred stock in the fourth quarter of 2015, versus $232 thousand in the fourth quarter of 2015.

Year Ended December 31, 2016

Net interest income in 2016 was $26.003 million, an increase of $658 thousand from $25.345 million in 2015. Interest income grew by $1.431 million in 2016 compared to 2015. Overall, yields on earning assets increased to 3.42% in 2016, compared to 3.26% in the same period of 2015, along with slightly higher average earning assets in 2016 compared to 2015. Average loans held for sale and loans held for investment increased by $3.1 million and $48.8 million, respectively, while cash and investments decreased by $52.0 million on a year-over-year basis. Overall, the net interest margin increased to 3.03% in 2016 from 2.96% in 2015.

In 2016, interest expense increased $773 thousand, to $3.343 million from $2.570 million in 2015. In 2016 and 2015, BNC redeemed $33.4 million and $20.0 million, respectively, of callable brokered certificates of deposit, at a cost of $233 thousand and $87 thousand, respectively. Excluding the costs to redeem these brokered deposits, interest expense increased by $627 thousand in 2016 compared to 2015. The cost of interest bearing liabilities increased to 0.49% in 2016, from 0.40%, in 2015. The increase in interest expense was primarily due to the issuance of subordinated debt in the fourth quarter of 2015, an increase in retail certificates of deposit balances, partially offset by the effects of redeeming brokered deposits, and increased utilization of short-term FHLB advances as flexible borrowings in periods of higher mortgage lending volume. The cost of core deposits increased to 0.23% in 2016, from 0.16% in 2015, as retail certificates of deposits have increased in recent quarters.

Provision credit losses was $800 thousand in 2016. A reversal of previous provisions for credit losses increased pre-tax earnings by $400 thousand in 2015.

Non-interest income in 2016 was $25.777 million, an increase of $827 thousand, or 3.3%, from $24.950 million in 2015. The increase primarily relates to a $3.251 million, or 20.1%, increase in mortgage revenue, which was partially offset by a decrease in gains on sales of assets of $1.830 million. Mortgage banking revenues were $19.465 million and $16.214 million in 2016 and 2015, respectively. Mortgage revenue can be influenced significantly by interest rates and seasonal factors. During 2016, we recorded a net gain on sales of investments and loans aggregating $963 thousand, compared to a $2.793 million net gain on sales of such assets in the same period of 2015. Excluding gains on sales of investments and loans, non-interest income increased $2.657 million or 12.0%.
Non-interest expense in 2016 was $41.193 million, an increase of $3.649 million, or 9.7%, from $37.544 million in the same period of 2015. This increase is primarily related to mortgage banking, legal costs, and investments in technology and personnel to serve our customers and support growth.

During 2016, we recorded a tax expense of $2.631 million, equating to an effective tax rate of 26.9%. We recorded tax expense of $3.945 million during 2015, which resulted in an effective tax rate of 30.0%. The decrease in the effective tax rate in 2016 is due to tax-exempt income being higher relative to pre-tax income during the recent year.

There were no preferred stock costs in 2016, due to the redemption of the preferred stock in the fourth quarter of 2015, versus $1.656 million in 2015.

Net income available to common shareholders was $7.156 million, or $2.03 per diluted share, in 2016. Net income available to common shareholders in 2015 was $7.550 million, or $2.16 per diluted share, after accounting for dividends paid on preferred stock.

Assets, Liabilities and Equity

Total assets were $910.4 million at December 31, 2016, an increase of $6.2 million, or 0.7%, compared to $904.2 million at December 31, 2015. Loans held for investment aggregated $414.7 million at December 31, 2016, an increase of $34.8 million, or 9.2%, since December 31, 2015. In addition, mortgage loans held for sale as of December 31, 2016 were down $10.8 million from December 31, 2015. Investment balances decreased $19.2 million from year-end 2015.

Total deposits were $752.6 million at December 31, 2016, compared to $780.4 million at December 31, 2015, as BNC redeemed $33.4 million of brokered deposits in 2016. Core deposits, which include recurring customer repurchase agreement balances, have increased by $4.2 million, or 1.0%, to $765.1 million at December 31, 2016 from $760.9 million as of December 31, 2015. The continued growth of our Arizona core deposits was partially offset by a decrease in North Dakota deposits. The Company has generally utilized Federal Home Loan Bank short term advances, with an average cost of 0.58%, as flexible borrowings in 2016.

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Trust assets under management or administration increased 10.1% to $273.6 million at December 31, 2016, compared to $248.4 million at December 31, 2015.

Capital

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

At December 31, 2016, our capital ratios exceeded all regulatory capital thresholds, including thresholds that incorporate fully phased in conservation buffers.

A summary of our capital ratios at December 31, 2016 and December 31, 2015 is presented below:


December 31 2016, December 31 2015



BNCCORP, INC (Consolidated)

Tier 1 leverage 9.47% 9.00%

Total risk based capital 19.96% 20.07%

Common equity tier 1 risk based capital 13.90% 13.57%

Tier 1 risk based capital 16.78% 16.72%

Tangible common equity 8.13% 7.62%



BNC National Bank

Tier 1 leverage 9.67% 9.45%

Total risk based capital 18.41% 18.71%

Common equity tier 1 risk based capital 17.16% 17.45%

Tier 1 risk based capital 17.16% 17.45%



The CET 1 ratio, which is generally a comparison of a bank's core equity capital to 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.

The Company routinely evaluates the sufficiency of capital in order to ensure compliance with regulatory capital standards and be a source of strength for the Bank. We manage capital by assessing the composition of capital and the amounts available for growth, risk or other purposes.

Book value per common share of the Company was $21.47 as of December 31, 2016, compared to $20.12 at December 31, 2015. Book value per common share, excluding accumulated other comprehensive income, was $20.98 as of December 31, 2016, compared to $18.93 at December 31, 2015.

Asset Quality

The allowance for credit losses was $8.3 million at December 31, 2016, compared to $8.6 million at December 31, 2015. The allowance for credit losses as a percentage of total loans at December 31, 2016 was 1.82%, compared to 2.00% at December 31, 2015. The allowance as a percentage of loans and leases held for investment at December 31, 2016 was 2.00%, and at December 31, 2015 was 2.27%.

Nonperforming assets of $2.7 million at December 31, 2016, are up from $2.1 million at September 30, 2016, and up from $807 thousand at December 31, 2015. The ratio of nonperforming assets to total assets was 0.29% at December 31, 2016, 0.23% at September 30, 2016, and 0.09% at December 31, 2015. Nonperforming loans of $2.4 million at December 31, 2016, are up from $1.9 million at September 30, 2016, and up from $565 thousand at December 31, 2015. The increase in nonperforming assets during 2016 relates to one relationship greater than $1 million in the energy sector, which was partially charged off in the third quarter, and several other relationships which were deemed to be non-performing during the fourth quarter.

At December 31, 2016, BNC had $12.9 million of classified loans, $2.4 million of loans on non-accrual, $214 thousand of other real estate owned, and $4 thousand of repossessed assets. At December 31, 2015, BNC had $9.8 million of classified loans, $390 thousand of loans on non-accrual, and $242 thousand of other real estate owned. BNC had $9.4 million of potentially problematic loans, which are risk rated "watch list", at December 31, 2016, compared with $7.9 million as of December 31, 2015. The increase in classified loans since the beginning of the year relates primarily to three relationships in western North Dakota.

As evidenced by our nonperforming asset ratios and delinquency rates, as of December 31, 2016, the decrease in oil and agricultural commodity prices have yet to have a significant negative effect on our credit quality. However, the economic activity in western North Dakota is subdued relative to a few years ago. Prolonged periods of lower agricultural and oil prices could have an adverse economic impact on the North Dakota economy, commodity dependent businesses, and our loan portfolio. Oil prices most directly impact the underlying collateral for our oil exploration and production (E&P) loans. Loans outstanding for the purpose of and secured by E&P in North Dakota were approximately $9.7 million, or 2.4% of total loans held for investment, at December 31, 2016, compared to $11.7 million, or 3.1%, of loans held for investment, at December 31, 2015. In addition to E&P loans, loans to customers serving the energy industries in western North Dakota are impacted by protracted low energy prices, as depressed energy prices in recent periods have reduced economic activity and collateral values in western North Dakota. Customers in, or serving the North Dakota agricultural sector have been experiencing lower commodity prices for multiple years, which has had a dampening effect on economic activity in the region.

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 17 locations. BNC also conducts mortgage banking from 14 offices in Illinois, Kansas, Missouri, Minnesota, Arizona and North Dakota.


http://www.bnccorp.com/54304/mirror/