/C O R R E C T I O N -- BNCCORP, INC./

In the news release, BNCCORP, INC. Reports First Quarter Net Income Of $4.3 Million, Or $1.21 Per Diluted Share, issued 30-Apr-2020 by BNCCORP, INC. Gains on sales of securities were $975 thousand in the first quarter of 2020. In the press release issued April 30, 2020, gains on sales of securities during the first quarter were incorrectly reported as $975 million (instead of $975 thousand) in the fourth paragraph of the release. Gains on sales of securities were correctly reported as $975 thousand elsewhere in the press release. The corrected release follows:

BNCCORP, INC. Reports First Quarter Net Income Of $4.3 Million, Or $1.21 Per Diluted Share

BISMARCK, N.D., April 30, 2020 /PRNewswire/ --

Highlights

• Net income in the first quarter of 2020 was $4.3 million, or $1.21 per diluted share, compared to $1.4 million, or $0.40 per diluted share, in the first quarter of 2019.
• Return on assets was 1.78% and return on equity was 17.59% for the quarter ended March 31, 2020, compared to a return on assets of 1.01% and return on equity of 11.41% for the year ended December 31, 2019.
• Nonperforming assets to total assets were 0.31% at March 31, 2020, compared to 0.21% at December 31, 2019.
• Tangible book value increased $1.83 per share to $29.22 at March 31, 2020 from $27.39 at December 31, 2019.

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, Michigan, Arizona, and North Dakota, today reported financial results for the first quarter ended March 31, 2020.

Net income in the first quarter of 2020, was $4.302 million, compared to $1.438 million in the same period of 2019. First quarter 2020 earnings per diluted share rose to $1.21 from $0.40 in the first quarter of 2019. The increase in net income from the year-ago period primarily reflected slightly higher net interest income, significantly increased mortgage revenues and gains on sales of securities, partially offset by higher non-interest expense and a higher effective tax rate.

Net interest income in the first quarter of 2020 increased by $469 thousand, or 6.7%, from the same quarter in 2019. Interest income decreased as the impact of loan growth was offset by lower investment securities balances. Interest expense decreased as average deposit balances and cost of funds were lower than during the same period in 2019 and subordinated debt was redeemed in the fourth quarter 2019.

Non-interest income in the first quarter of 2020 increased by $6.292 million, or 139.8%, from the same period in 2019. In the first quarter of 2020, mortgage banking revenues were $8.616 million, $5.529 million higher than during the same period a year ago. Gains on sales of securities were $975 thousand during the first quarter of 2020 as compared to $64 thousand in the first quarter of 2019.

Non-interest expense in the first quarter of 2020 increased by $2.325 million, or 24.0%, when compared to the first quarter of 2019 due to increases in mortgage banking operating costs.

The provision for credit losses was $550 thousand in the first quarter of 2020 and $0 in the first quarter of 2019. The ratio of nonperforming assets to total assets was 0.31% at March 31, 2020, compared to 0.21% at December 31, 2019. The allowance for loan losses was 1.63% of loans and leases held for investment at March 31, 2020, compared to 1.60% at December 31, 2019.

Tangible book value per common share at March 31, 2020 was $29.22, compared to $27.39 at December 31, 2019, an increase of $1.83 per common share.

COVID-19 Pandemic

During the first quarter of 2020, the COVID-19 Coronavirus was declared a global pandemic event.  While it is too early to estimate the full economic impact of this pandemic, we anticipate a significant decline in economic activity affecting a broad array of industries. Community banks like BNC will be impacted by the pandemic. BNC is operating in an environment with more uncertainty, lower interest rates, higher credit risk, and higher unemployment, which may impact banking operations.

Management Comments

Timothy J. Franz, President and Chief Executive Officer, said, "We delivered strong first quarter results with net income of $4.3 million and diluted earnings per share of $1.21, resulting in a 1.78% return on average assets and a 17.59% return on average equity. Delivering these results is positive for BNC's shareholders.  However, as the quarter ended a significant amount of our energy and focus was directed to operating during a global pandemic."

Mr. Franz continued, "With the challenges of the COVID-19 pandemic upon us, BNC is assisting our customers, serving our local communities and operating in a manner that reduces health risks for all. To minimize the spread of COVID-19, we are successfully serving customers with internet and mobile banking products. We are also encouraging customers to use drive-through facilities.  When necessary, access to our branch lobbies has been available by appointment. BNC's active efforts to provide loan deferrals and Paycheck Protection Program (PPP) loans offer respite to customers addressing economic challenges brought about by the pandemic.  I thank our highly dedicated teams on behalf of BNC and our customers for their extraordinary efforts. We are committed to continuing to help our customers and maintaining a healthy work force while we continue to create value for shareholders. We believe that BNC's solid capital position, liquidity, longstanding emphasis on asset quality, and focus on serving our customers, employees and community will be important strengths as we navigate this difficult period."

First Quarter 2020 Comparison to First Quarter 2019

Net interest income for the first quarter of 2020 was $7.424 million, an increase of $469 thousand, or 6.7%, from $6.955 million in the same period of 2019. The increase from the year-ago period primarily reflected the positive impact of deleveraging through deposit reduction and the redemption of subordinated debt in the fourth quarter of 2019.  The net interest margin increased to 3.28% in the first quarter of 2020 compared to 2.99% in the first quarter of 2019.

Interest income decreased $126 thousand, or 1.38%, to $9.002 million in the first quarter of 2020, compared to $9.128 million in the first quarter of 2019, as the impact of  higher average loan balances was offset by reduced interest income from investment securities sold to deleverage the balance sheet and fund elevated mortgage loan activity. The yield on average interest earning assets was 3.98% in the first quarter of 2020, compared to 3.93% in the first quarter of 2019. The average balance of interest earning assets in the first quarter of 2020 decreased by $32.8 million compared to the same period of 2019, primarily due to the decrease in average investment securities partially offset by the increase in average loans. The average balance of loans and leases held for investment increased by $45.5 million, yielding $380 thousand of additional interest income, while the average balance of mortgage loans held for sale was $99.9 million higher than the same period of 2019, resulting in $791 thousand of additional interest income. The average balance of investment securities in the first quarter of 2020 was $251.1 million or $174.7 million lower than in the first quarter of 2019, while the interest income thereon was $1.1 million lower than the prior period.

Interest expense in the first quarter of 2020 was $1.578 million, a decrease of $595 thousand from the same period in 2019. The cost of interest-bearing liabilities was 0.88% in the current quarter, compared to 1.12% in the same period of 2019. Interest expense on deposits decreased as a result of lower balances as the Company deleveraged certain higher cost deposits. The cost of core deposits in the first quarter of 2020 and 2019 was 0.69% and 0.85%, respectively. Interest expense was also $159 thousand lower in the 2020 first quarter due to the redemption of $10 million of subordinated debt in the fourth quarter of 2019.  Based on deposit repricing executed late in the first quarter of 2020, BNC anticipates its cost of deposits will be under 0.50% to start the second quarter. 

At the end of the first quarter 2020, credit metrics remained stable with a 0.31% nonperforming loans to total asset ratio.  Due to the uncertain economic impact the COVID-19 pandemic will have on borrowers, the Company recorded a $550 thousand provision for loan losses in the first quarter 2020. This compares to $0 recorded in the first quarter of 2019.

Non-interest income for the fourth quarter of 2020 was $10.794 million, an increase of $6.292 million, or 139.8%, from $4.502 million in the first quarter of 2019. Mortgage banking revenues were $8.616 million in the first quarter of 2020, an increase of $5.529 million, compared to $3.087 million in the first quarter of 2019, as lower interest rates induced higher mortgage banking origination activity. The fair value of mortgage derivatives decreased late in the quarter as a result of mortgage-backed securities market dislocation and general liquidity concerns by mortgage servicers related to mortgagors being able to defer payments pursuant to the Coronavirus Aid Relief and Economic Security (CARES) Act legislation.  This dislocation appears to have been short-term as mortgage banking originations have been robust in early April and margins have normalized. Gains on sales of debt securities were $975 thousand in the first quarter of 2020, compared to gains of $64 thousand in the same period of 2019.  Debt securities balances can change from period to period depending on shifting liquidity requirements for loan growth or other corporate purposes.  Therefore, gains and losses on sales of assets and earnings from certain investments can vary significantly from period to period. 

Non-interest expense for the first quarter of 2020 increased $2.324 million, or 24.0%, to $12.006 million, from $9.682 million in the first quarter of 2019. The increase is directly attributed to mortgage operations.

In the first quarter of 2020, income tax expense was $1.359 million, compared to $337 thousand in the first quarter of 2019. The effective tax rate was 24.0% in the first quarter of 2020, compared to 19.0% in the same period of 2019.  The increase in the effective tax rate for the full year of 2019 is due to higher pre-tax revenues and lower non-taxable interest income from municipal securities.

Net income was $4.302 million, or $1.21 per diluted share, in the first quarter of 2020. Net income in the first quarter of 2019 was $1.438 million, or $0.40 per diluted share.

Assets and Liabilities

Total assets were $1.042 billion at March 31, 2020, an increase of $76.1 million, compared to $966.8 million at December 31, 2019. This increase is primarily due to increased mortgage loans held for sale balances and increased cash balances resulting from higher deposit balances and the sale of investment securities.  Loans and leases held for investment aggregated $515.9 million at March 31, 2020, an increase of $7.3 million, or 1.4%, since December 31, 2019.  We anticipate loans and leases held for investment will increase in the second quarter as PPP loans are funded.  As of April 24, 2020, BNC had funded 516 PPP loans totaling $86.7 million. In addition, BNC has approximately 150 open applications in various stages ready for the second round of funding that was recently approved by Congress. Loans held for sale as of March 31, 2020 were higher by $39.9 million when compared to December 31, 2019 due to higher mortgage loan funding in 2020.  Investment securities decreased $41.9 million from year-end 2019, while cash and cash equivalent balances increased $54.5 million.

Total deposits increased $76.2 million to $896.7 million at March 31, 2020, from $820.5 million at December 31, 2019. In the first quarter 2020, we asserted our ability to bring back approximately $50 million of deposits previously moved off our balance sheet in the deleveraging activities of the fourth quarter of 2019.  The return of these deposits and sale of investment securities has resulted in cash balances of $65.0 million after increasing loan balances $47.2 million at the end of the first quarter. We anticipate a portion of this cash may be used to fund PPP loans and mortgage loans held for sale as our mortgage banking business remains robust.   Funded PPP loans will increase deposits until borrowers utilize loan proceeds.

The table below shows total deposits since 2016:

At March 31, 2020, the balances of FHLB advances were $0, compared to $17.0 million at December 31, 2019.

As the first quarter of 2020 ended, BNC had a relatively liquid balance sheet.  See a condensed summary of our balance sheet as of March 31, 2020 below:

Trust assets under management or administration decreased 13.6%, or $51.2 million, to $326.5 million at March 31, 2020 from $377.8 million at December 31, 2019.  This decrease is due to volatility and declines in financial markets related to COVID-19 concerns, which may reduce wealth management revenues in future periods.  Since January 1, 2016, assets under management or administration have increased by approximately $78.2 million, or 31.5%.

Asset Quality

The allowance for credit losses was $8.4 million at March 31, 2020, compared to $8.1 million at December 31, 2019. The allowance as a percentage of loans and leases held for investment at March 31, 2020 increased to 1.63% from 1.60% at December 31, 2019.

Nonperforming assets, consisting primarily of loans, were $3.2 million at March 31, 2020 and $2.0 million at December 31, 2019. The ratio of nonperforming assets to total assets was 0.31% at March 31, 2020 and 0.21% at December 31, 2019.

At March 31, 2020, BNC had $11.0 million of classified loans, $3.2 million of loans on non-accrual, and $5 thousand other real estate owned or repossessed assets. At December 31, 2019, BNC had $9.3 million of classified loans, $2.0 million of loans on non-accrual, and no other real estate owned or repossessed assets. BNC had $8.0 million of potentially problematic loans, which are risk rated "watch list", at March 31, 2020, compared with $9.2 million as of December 31, 2019.

Although credit losses related to COVID-19 have yet to become clear, credit risk has increased since the beginning of 2020.  We anticipate the provision for credit losses in future periods may be higher than in the recent past.  The Current Expected Credit Losses (CECL) accounting standard will not be applicable to BNC until the first quarter of 2023.  

To assist our borrowers, as of April 24, 2020, BNC has modified approximately $200 million of loans consistent with inter-agency guidance that allow our customers to defer payments for periods from 90 to 180 days. These loans were current at the time of modification and as a result, are not currently subject to troubled debt restructuring accounting standards. As the second quarter of 2020 commenced, the Small Business Administration (SBA) initiated the PPP. Under the PPP, BNC originates loans that are guaranteed by the SBA to provide funds to eligible businesses to assist the borrowers in continuing payroll, rent, and utility payments. While repayment of BNC's PPP loans is guaranteed by the SBA, our customers' debt can be forgiven by the SBA if the borrowed funds are used for purposes prescribed by the PPP.  As of April 24, 2020, BNC had funded 516 PPP loans totaling $86.7 million.  As a result of originating PPP loans, we anticipate interest income on loans will increase in future periods.  In addition to the PPP, the SBA issued a procedural notice in April 2020 announcing it will pay principal and interest on certain SBA loans for a six-month period.  BNC's net balance of SBA loans at March 31, 2020 was $24.2 million, or 4.7% of our loans and leases held for investment.    

BNC's loans and leases held for investment are concentrated geographically in North Dakota and Arizona.  North Dakota and Arizona loans make up 60% and 25% of the total loan portfolio, respectively. The North Dakota economy is influenced by the energy sector and agriculture. Late in the first quarter, oil prices collapsed largely due to global over-supply and reduced demand. An extended period of low energy prices will negatively impact credit quality in North Dakota.  The Arizona economy is influenced by leisure and travel. Late in the first quarter, these activities diminished, primarily due to pandemic-related travel restrictions. An extended slowdown in these industries will negatively impact credit quality in Arizona. BNC's portfolio is constructed of various sized loans spread over a large number of industry sectors, although concentrations of loans in hospitality and real estate make up notable percentages of the portfolio.

The following table approximates our significant concentrations by industry as of March 31, 2020:

The COVID-19 pandemic has impacted all markets as the country shelters in place to contain the spread of the virus. While BNC's primary markets are not currently considered "hot spots", business closures are negatively impacting our commercial customers' ability to generate earnings while our consumer customers are increasingly subject to employment uncertainty. 

The hospitality industry is experiencing unprecedented low hotel occupancy and restaurant utilization. The oil and gas industry is experiencing low oil prices due to COVID-19 related demand issues being further impacted by geo-political disagreements. These COVID-19 influenced economic conditions are expected to negatively impact various industry sectors.

The extent and timing of the pandemic is not determinable at this point. Prolonged periods of COVID-19 pandemic disruption of business production, consumer goods and services consumption and employment could have a material adverse impact on the Company's loan portfolio and operating results. The resulting impact on BNC and its customers will be significantly influenced by the success of currently enacted and future government support programs.

Capital

Banks and bank holding companies operate under separate regulatory capital requirements. At March 31, 2020, our capital ratios exceeded all regulatory capital thresholds, including the capital conservation buffer.

A summary of our capital ratios at March 31, 2020 and December 31, 2019 is presented below:

The Common Equity Tier 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 the Bank's 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.    

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

Because the PPP SBA loans are guaranteed by the SBA, they are assigned a zero risk-weighting in the determination of risk-based capital coverage and these loan assets will have no direct impact on risk based capital ratios.  The PPP Lending Facility (PPPLF) was created by the FRB to facilitate lending by BNC, and other eligible financial institutions, to small businesses under the PPP.  Under the PPPLF, BNC may borrow from the FRB on a non-recourse basis, pledging PPP loans as collateral.  Interest payable on amounts borrowed under PPPLF is at a rate of 0.35%.  Funding PPP loans using the PPPLF may allow BNC to neutralize the negative effect of PPP loans on leverage capital ratios.

Tangible book value per common share of the Company was $29.22 as of March 31, 2020, compared to $27.39 at December 31, 2019.

Interest Rate and Liquidity Risks

In March 2020, the Federal Reserve Bank (FRB) lowered the federal funds rate from a range of 1.50% - 1.75% to 0% - 0.25%. This resulted in broadly lower rates on assets and liabilities. While BNC's net interest income and net interest margin in the first quarter of 2020 are improved compared to the first quarter of 2019, the significant decreases in interest rates occurred relatively late in the first quarter. Accordingly, the full impact of lower rates is not reflected in the Company's 2020 first quarter results. BNC actively monitors interest rate risk via net interest income simulation.

As of the March 31, 2020 balance sheet, net interest income was simulated for the upcoming 12-month horizon for the five interest rate scenarios in the following table.  Interest rate changes use a 12-month parallel "ramp" methodology.  The "Unchanged" column in the simulation table below reflects interest rates as of March 31, 2020 and therefore reflects the forward estimated impact of the recent March 2020 federal funds 150 basis point reduction, as well as any other reductions in market rates on assets and liabilities, indices, and deposit rate changes to date in response to market conditions. 

The net interest income simulation results for the 12-month horizon are shown below (dollars are in thousands):

Since there are limitations inherent in any methodology used to estimate the exposure to changes in market interest rates, these analyses are not intended to be a forecast of the actual effect on the Company of changes in market interest rates, such as those indicated above. Further, these analyses are based on our assets and liabilities as of March 31, 2020 (without forward adjustments for increases or decreases in total assets) and do not contemplate any future actions we might undertake in response to changes in market interest rates.

The objective of our liquidity risk management processes is to meet present and future financial obligations in a timely manner. To achieve this objective, BNC attempts to maintain adequate liquid assets, liability diversification among instruments, maturities and customers, and access to both collateralized and uncollateralized wholesale sources of funds BNC has the ability to acquire quickly if necessary.

Our measurement of liquidity as of March 31, 2020 included the following sources:

• $56.4 million of cash held at the Federal Reserve
• $22.7 million of ICS One-Way Sell deposits available as a source of funds by converting to reciprocal deposits
• $145.8 million of unencumbered investment securities
• $139.1 million of available capacity for Federal Home Loan Bank advances based on current collateral pledged.

As part of BNC's ongoing liquidity risk management processes, we project cash flows over a 12-month horizon based on our assets and liabilities. We model sources and uses of funds for anticipated events as well as scenario analysis for possible stress events.  In the current environment we anticipate an increase in mortgage loans held for sale could be a use of incremental liquidity should mortgage banking activity sustain at the level experienced during the first quarter of 2020.  Payment deferrals for COVID-19 related loan modifications will reduce in the near-term, the principal and interest cash flows typically available from our existing loans held for investment as a source of funds.  PPP loans will be a use of funds in the near term. BNC may borrow on a non-recourse secured basis under the FRB's PPPLF by pledging PPP loans as an additional source of low-cost liquidity if necessary. In addition, debt portfolio cash flows will provide a source of funds over the coming months if necessary.

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 13 locations. BNC also conducts mortgage banking from 11 locations in Illinois, Kansas, Missouri, Michigan, 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", "at the present time". "plan", "optimistic", "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 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 or the Coronavirus pandemic 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 the Coronavirus pandemic, 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.

This press release contains references to financial measures, which are not defined in GAAP. Such non-GAAP financial measures include tangible common equity to total period end assets ratio. These non-GAAP financial measures have been included as the Company believes they are helpful for investors to analyze and evaluate the Company's financial condition.

(Financial tables attached) 

 

 

 

 

 

 

 

 

 

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