BNCCORP, INC. REPORTS FIRST QUARTER NET INCOME OF $1.5 MILLION, OR $0.41 PER DILUTED SHARE

Highlights

• Net income in the first quarter of 2023 was $1.5 million, or $0.41 per diluted share, unchanged from the same period of 2022. For the quarter, the Community Banking segment reported net income of $3.0 million, while the Mortgage Banking segment reported a net loss of $1.2 million.¹
• Mortgage revenue decreased to $1.9 million in the first quarter of 2023 compared to $4.1 million during the same period of 2022.
• Net interest margin increased to 3.97% for the first quarter of 2023 compared to 2.80% during the first quarter of 2022.
• Total deposits declined by 5.8% and non-interest bearing deposits declined by 5.8% from December 31, 2022, primarily due to seasonal activity.
• No borrowings were outstanding as of March 31, 2022, unchanged from December 31, 2022. Estimated liquid assets remain strong at $152.5 million with an additional $149.1 million of borrowing capacity at March 31, 2023.
• New loan origination activity during the first quarter of 2023 resulted in a $13.6 million, or 2.2%, increase in loans held for investment.
• Loans held for investment-to-deposit ratio increased to 81.6% from 74.2% at December 31, 2022 and 61.3% at March 31, 2022.
• Allowance for credit losses as of March 31, 2023 was 1.42% of loans held for investment compared to 1.43% as of December 31, 2022.
• Non-performing assets slightly increased to $1.5 million as of March 31, 2023, compared to $1.4 million as of December 31, 2022.
• Tangible common equity ratio was 11.55% on March 31, 2023 compared to 10.63% on December 31, 2022.

BISMARCK, N.D., May 2, 2023 /PRNewswire/ -- BNCCORP, INC. (BNC or the Company) (OTCQX Markets: BNCC), which operates community banking and wealth management businesses in North Dakota and Arizona as well as mortgage banking offices in Illinois, Kansas, Arizona, and North Dakota, today reported financial results for the first quarter ended March 31, 2023.

Management Commentary

"The first quarter of 2023 saw a continuation of the positive community banking trends we experienced in 2022," said Daniel J. Collins, BNC's President and Chief Executive Officer. "We believe this is due to focusing on our core strengths: our strong community banking relationships, our sensible lending practices and a stable forward-looking position in the marketplace. By continuing to leverage these attributes, we successfully grew our loans held for investment portfolio by $13.6 million, or 2.2%, in the quarter following strong loan growth in 2022. During 2022 and in the first quarter of 2023, for example, we saw a substantial increase in net interest income, driven by increased loan balances, disciplined deposit pricing, repricing of current loan yields, and exceptional front line customer service. We believe this approach remains viable. While the industry continues to find its footing in an environment of rising interest rates and assertive regulatory action to mitigate inflation pressures, we continue to prosper by relying on our strengths and by remaining ever-vigilant on credit quality, liquidity levels and controlling costs." 

Mr. Collins continued, "Last year, we undertook a top-to-bottom review of our mortgage business. While this segment of our business has been a strong contributor to our top and bottom lines over the years, its 2022 results were negatively affected by rising interest rates and market volatility. In the first quarter of 2023, we continued to experience those impacts even as the unsettled nature of the mortgage industry made forecasting its future somewhat speculative. For these reasons, on April 12, 2023 we reached a definitive agreement with First Federal Bank under which First Federal will purchase certain operating assets and assume certain liabilities of our mortgage division and we will exit the residential mortgage origination business."

Collins continued, "Looking ahead to the balance of 2023, we expect our community banking business relationships to continue to grow. We expect to continue a measured trend of loan growth and to protect our strong financial position. Credit quality continues to be a critical metric for us as a good indicator of future performance and to assess our balancing of opportunity and risk. This inherently conservative approach has served us well over the years and will continue to be our guiding star in 2023 and beyond. We remain confident that our superior customer service and broad range of financial products will continue to meet the needs of existing and future clients."

2023 Versus 2022 First Quarter Comparison

Net income in the first quarter of 2023 was $1.5 million, unchanged from the same period of 2022. First quarter earnings per diluted share was unchanged year-over-year at $0.41 per share. The first quarter of 2023 produced higher net interest income, higher bank charges and service fees, and lower non-interest expense compared to the same period of 2022. Results were offset by lower mortgage banking revenue and an increased provision for credit losses when compared to the 2022 period.

Net interest income for the first quarter of 2023 was $8.4 million, an increase of $1.5 million, or 22.2%, from $6.9 million in the first quarter of 2022. The year-over-year increase was primarily driven by growth in loans held for investment and overall higher yields that were partially offset by an increase in the cost of deposits and subordinated debentures. Net interest margin increased to 3.97% in the 2023 first quarter from 2.80% in the year-earlier period.

First quarter interest income increased by $2.7 million, or 37.0%, to $10.0 million in 2023, compared to $7.3 million in the first quarter of 2022. The increase is the result of higher yields on interest-earning assets and a $63.1 million quarter-over-quarter increase in average loan balances. As a result of these improvements, the yield on average interest-earning assets improved to 4.71% in the first quarter of 2023, compared to 2.96% in the 2022 first quarter. It is noteworthy that the Company's variable rate assets have started to re-price in step with interest rate movements by the Federal Reserve as well as in response to higher yields on new loan originations.

The average balance of interest-earning assets in the first quarter of 2023 decreased by $138.0 million versus the same period of 2022, primarily due to a $171.4 million decrease in interest-bearing cash, a $31.0 million decrease in debt securities, and a $31.0 million decrease in average loans held for sale. These decreases were partially offset by a $94.1 million increase in average loans held for investment. Interest income from loans held for investment increased $2.0 million on a quarter-over-quarter basis. Interest income from loans held for sale decreased $25 thousand primarily due to lower average balances, partially offset by a 2.72% increase in yield. Interest income from debt securities was $365 thousand higher compared to the same period of 2022 as yields increased by 1.19% quarter-over-quarter.

Interest expense in the first quarter of 2023 was $1.6 million, an increase of $1.2 million from the 2022 period. The 2023 first quarter average balance of deposits decreased by $123.8 million when compared to first quarter 2022. The primary driver of the decrease in average balances was the movement of deposits off the balance sheet at the end of the first quarter of 2022 through the use of an associated banking network. The cost of interest-bearing liabilities was 1.04% during the first quarter of 2023, compared to 0.21% in the same period of 2022. The cost of core deposits in the first quarters of 2023 and 2022 was 0.68% and 0.15%, respectively, as the Company continues to manage its overall cost of deposits while staying focused on maintaining liquidity.

As of March 31, 2023, credit metrics remained stable with $1.5 million of nonperforming assets, representing a 0.17% nonperforming assets-to-total-assets ratio. These results are comparable to the $1.4 million in nonperforming assets, a 0.15% ratio of nonperforming assets-to-total-assets held on December 31, 2022. The Company recorded a $240 thousand provision for credit losses in the first quarter of 2023 compared to releasing $550 thousand of provision in the first quarter of 2022. The allowance for credit losses decreased slightly to 1.42% of loans held for investment on March 31, 2023, compared to 1.43% on December 31, 2022.

The Company adopted ASU 2016-13, Measurement of Credit Losses on Financial Instruments, on January 1, 2023, and applied the standard as a cumulative effect adjustment to retained earnings. At adoption, the Company recorded a $125 thousand increase to the allowance for credit losses, which was comprised of a $64 thousand decrease in the allowance for loan losses and a $189 thousand increase to the allowance for unfunded commitments. The after-tax impact resulted in a $94 thousand decrease to retained earnings. The tax effect resulted in an increase to deferred tax assets.

Non-interest income for the first quarter of 2023 was $3.6 million, compared to $5.5 million in the 2022 first quarter. The decrease was driven by a reduction in mortgage banking revenues to $1.9 million in the first quarter of 2023 versus $4.1 million in the same prior-year period. Consistent with the overall performance of the industry, the Company's mortgage business was negatively impacted by higher interest rates and higher home values which impacted both purchase and refinance originations. BNC funded 338 mortgage loans in the first quarter of 2023 with combined balances of $137.6 million. That compares to funding 760 mortgage loans with combined balances of $300.2 million in the first quarter of 2022. Bank charges and service fees were $492 thousand higher quarter-over-quarter due to higher letter of credit fees and from the movement of deposits to one-way sell positions. Through the use of an associated banking network, the Company is able to generate fee income on deposits that are not otherwise deployed. The deposits are placed with another financial institution by the associated banking network to meet their liquidity needs, but can be recaptured for future liquidity use by the Company at any time. Finally, despite healthy growth in new assets, wealth management revenues decreased $49 thousand, or 9.1%, largely due to elevated distributions and a decrease in asset values during 2022. Assets under administration were $368.6 million at March 31, 2023 compared to $396.0 million at March 31, 2022.

Non-interest expense for the first quarter of 2023 decreased $1.1 million, or 10.3%, to $9.9 million from $11.0 million in the first quarter of 2022. Non-interest expenses related to mortgage operations decreased by $1.7 million, or 31.4%, as management scaled down its operations to match marketplace opportunity. There were 68 full-time equivalent employees engaged in mortgage operations as of March 31, 2023 compared to 140 on March 31, 2022. Combined expenses for community banking and the holding company increased by $515 thousand, or 8.9%, compared to the 2022 period primarily due to higher salary, data processing, and other expenses.

In the first quarter of 2023, income tax expense of $453 thousand was unchanged from the first quarter of 2022. Similarly, the effective tax rate in the first quarter of 2023 was 23.5%, unchanged from the same period of 2022.

Tangible book value per common share on March 31, 2023, was $29.14, compared to $28.19 at December 31, 2022. The increase in tangible book value per common share was driven by increased retained earnings and positive adjustments to the tax-effected fair value of debt securities available for sale as evidenced in the reduction of accumulated other comprehensive losses. The Company's tangible common equity capital ratio was 11.55% on March 31, 2023, compared to 10.63% on December 31, 2022.

Assets and Liabilities

Total assets were $897.3 million at March 31, 2023 versus $943.3 million at December 31, 2022.

Total loans held for investment were $630.2 million on March 31, 2023 compared to $616.6 million on December 31, 2022. Loans held for sale as of March 31, 2023, were $39.6 million, an increase of $1.8 million compared to December 31, 2022. Debt securities decreased $2.4 million from year-end 2022 while cash and cash equivalent balances totaled $15.9 million on March 31, 2023 compared to $74.0 million on December 31, 2022. The reduction in cash and cash equivalents during the quarter is due to increased funding of loans held for investment and the reduction in deposit balances.

Total deposits decreased $47.2 million to $772.4 million on March 31, 2023, from $819.6 million on December 31, 2022. The Company continues to focus on new deposit relationships and is keenly focused on the importance of liquidity.

The following table provides additional detail to the Company's total deposit relationships:

The Company communicated actively with deposit customers in the recent quarter partly in response to national news regarding rate increases, larger regional bank failures, and deposit insurance. We remain highly focused on meeting the service needs of our customers and ensuring our deposit rates reflect changing market conditions. We estimate that deposit insurance and other deposit protection programs secure greater than 70% of our customer's deposit balances. This combined with our strong balance sheet and relationship focused culture has effectively allowed us to maintain a significant deposit base.

In the first quarter of 2023, non-interest bearing deposit balances decreased due to normal seasonal utilization and increased $5.0 million, or 2.6%, when compared to the prior year quarter. Savings, interest checking and money market decreased in the first quarter of 2023 primarily due to normal first quarter cash utilization patterns. The decrease in interest bearing balances when compared to March 31, 2022 is primarily due to BNC's increased utilization of an associated banking network to migrate larger deposit balances off balance sheet. The Company began utilizing the program late in the first quarter of 2022. The decrease in time deposit balances reflect scheduled attrition of maturing time deposits, partially offset by depositors that agreed to renew their time deposits.

Off-balance sheet accounts are primarily utilized to custody larger business customer deposits that require daily access to funds and provide for FDIC insurance coverage. The Company maintained $62.8 million of off balance sheet deposits late in the first quarter of 2022 and proceeded to further expand its use throughout 2022. These off-balance sheet deposits grew to $187.4 million at year-end 2022 and were $125.0 million at March 31, 2023. Off-balance sheet deposits can fluctuate greatly as our customers balance utilization demands evolve. The Company earns non-interest income through the associated banking network for the utilization of these funds.

Trust assets under administration increased 4.5%, or $15.9 million, to $368.6 million at March 31, 2023, from $352.7 million at December 31, 2022. During the first quarter of 2023, the Company benefited from acquiring new assets for administration coupled with market value increases.

Asset Quality

The allowance for credit losses was $8.9 million as of March 31, 2023, versus $8.8 million on December 31, 2022. The allowance as a percentage of loans held for investment on March 31, 2023 decreased slightly from 1.43% as of December 31, 2022 to 1.42% at current quarter end.

Past due loans for a period of 31-89 days increased to $1.7 million as of March 31, 2023, compared to $292 thousand as of December 31, 2022. Nonperforming assets, consisting of loans, decreased to $1.5 million on March 31, 2023, compared to $1.4 million on December 31, 2022. The ratio of nonperforming assets-to-total-assets was 0.17% at March 31, 2023 and 0.15% at December 31, 2022. As of March 31, 2023, the Company did not hold any other real estate and held $64 thousand in repossessed assets, both metrics unchanged from December 31, 2022.

As of March 31, 2023, classified loans increased to $4.1 million with $1.5 million of loans on non-accrual. These results compare to year-end 2022 where the Company reported $3.6 million of classified loans and $1.4 million of loans on non-accrual. Similarly, as of March 31, 2023, the Company had $2.3 million of potentially problematic loans, which are risk rated as "watch list", compared with $2.5 million of such loans as of December 31, 2022.

The Company continues to monitor the lingering but diminishing effects of the pandemic and its impact on customers. Additional macroeconomic and geopolitical factors have emerged in recent months and are being monitored for their possible impact on the performance of the loan portfolio.

BNC's loans held for investment are geographically concentrated in North Dakota and Arizona, comprising 59% and 25%, respectively, of the Company's total loans held for investment portfolio.

The North Dakota economy is influenced by the energy and agriculture industries. Changes in energy supply and demand have recently caused an increase in oil prices to the benefit of the oil industry and ancillary services. Potential risks to North Dakota's energy industry include the possibility of adverse legislation and changes in economic conditions that reduce energy demand. Depending on the severity of their impact, these factors could present potential challenges to credit quality in North Dakota.

The Arizona economy is influenced by the leisure and travel industries. Positive trends in both industries have been noted, but an extended slowdown in these industries may negatively impact credit quality in Arizona. While the Company's portfolio includes various sized loans spread over a large number of industry sectors, it has meaningful concentrations of loans to the hospitality and commercial real estate industries.

The following table approximately describes the Company's concentrations by industry as of March 31, 2023 and December 31, 2022, respectively:

The Company's loans to the hospitality industry have shown signs of improved credit quality that are reflected by improved hotel occupancy and restaurant utilization trends. Hotel operators in BNC's loan portfolio are reporting positive trends and, in some cases, stronger balance sheets. Despite these positive indications, labor shortages limit the ability of the industry to fully capitalize on these trends and the potential for inflationary impacts on travel and leisure activities continue to be closely monitored. As of March 31, 2023, the Company's loans related to office space were 3.3% of loans held for investment, concentrated in North Dakota, with only 0.2% within the Arizona market.

While the Company's loan portfolio and credit risk may still be subject to pandemic-related risks, management believes that this potential risk remains qualitatively captured in the Company's allowance for credit losses.

Capital

Banks and bank holding companies operate under separate regulatory capital requirements. As of March 31, 2023, the Company's capital ratios exceeded all regulatory capital thresholds, including the capital conservation buffer.

A summary of BNC's capital ratios at March 31, 2023, and December 31, 2022, 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.

The Company regularly evaluates the sufficiency of its capital to ensure compliance with regulatory capital standards and to serve as 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.

The Company made an election at the adoption of BASEL III to exclude changes in accumulated other comprehensive income from the calculation of regulatory ratios.

The Company currently has an outstanding 175,000 share repurchase authorization with no expiration date set on the authorization. Share repurchases can be made through open market purchases, unsolicited and solicited privately negotiated transactions, or in accordance with terms of Rule 10b-18 promulgated under the Securities Exchange Act of 1934. The Company will not repurchase shares from directors or officers of the Company under the authorization. The Company will contemplate share repurchases subject to market conditions and other factors, including legal and regulatory restrictions and required approvals. No share repurchases have been made under the authorization as of March 31, 2023.

About BNCCORP, INC.

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 and Arizona from 11 locations. BNC also conducts mortgage banking from 7 locations in Illinois, Kansas, 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 current or future pandemics 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 pandemics, 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)

1 On April 12, BNCCORP, INC. announced a definitive agreement with First Federal Bank (First Federal) under which First Federal will purchase certain operating assets and assume certain liabilities of BNC National Bank's mortgage division as part of the Company's strategic decision to exit the residential mortgage origination business. BNC National Bank's mortgage division is principally composed of its Overland Park, Kansas based nationwide consumer direct mortgage platform. The purchase is subject to customary conditions and is expected to close in the second quarter of 2023.

SOURCE BNCCORP, INC.

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