BNCCORP, INC. REPORTS SECOND QUARTER NET INCOME OF $574 THOUSAND, OR $0.16 PER DILUTED SHARE, COMMUNITY BANKING SEGMENT REPORTED NET INCOME OF $2.8 MILLION, OR $0.79 PER DILUTED SHARE

Highlights

• For the quarter, the Community Banking segment reported net income of $2.8 million, or $0.79 per diluted share, unchanged from the same period of 2022.
• The Mortgage Banking segment reported a net loss of $1.9 million for the quarter, including $1.4 million of one-time expenses associated with the sale of assets and assumption of liabilities on June 16, 2023, compared to a net loss of $580 thousand in the 2022 period.
• Net interest margin increased to 3.68% for the second quarter of 2023 compared to 3.31% during the second quarter of 2022.
• There were no outstanding borrowings as of June 30, 2023, unchanged from December 31, 2022. Estimated liquid assets remain strong at $164.4 million with an additional $165.0 million of borrowing capacity at June 30, 2023.
• New loans held for investment origination activity during the second quarter of 2023 resulted in an increase of $10.8 million, or 1.7%, in loans held for investment.
• Loans held for investment-to-deposit ratio increased to 79.7% from 75.2% at December 31, 2022 and 70.3% at June 30, 2022.
• Allowance for credit losses as of June 30, 2023 was 1.40% 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 June 30, 2023, compared to $1.4 million as of December 31, 2022.

BISMARCK, N.D., Aug. 1, 2023 /PRNewswire/ -- BNCCORP, INC. (BNC or the Company) (OTCQX Markets: BNCC), which operates community banking and wealth management businesses in North Dakota and Arizona, today reported financial results for the second quarter ended June 30, 2023.

Management Commentary

"With the sale of our mortgage division completed, we are laser focused on the performance of our core banking franchise. Our liquidity, credit quality, and capital positions remain strong and our customer relationships have proven to be deep," said Daniel J. Collins, BNC's President and Chief Executive Officer. "We saw those strengths at work in the second quarter where, despite the rapid pace of interest rate increases and the economic uncertainty many feel, our quality net loan growth continued."

Mr. Collins continued, "It is noteworthy that competition for deposits increased significantly in the second quarter as national news prompted greater focus on deposit rates. While customers with deposit balances beyond their near-term needs redeployed portions of their cash to high-yielding instruments, here again we see our strong customer relationship focus mitigating some of that impact."

Collins continued, "Looking ahead to the remainder of 2023, we are focused on growing our community banking business relationships as well as reviewing our post mortgage infrastructure. Our objectives are 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 as a good fulcrum on which to balance opportunity and risk. Our inherently conservative approach has served us well over the years and will continue to be our guiding star in 2023 and beyond. Accordingly, 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."

The Community Banking Segment reported net income of $2.8 million, or 0.79 per diluted share, unchanged from the second quarter of 2022. The second quarter of 2023 produced higher net interest income and bank charges and service fees that were offset by lower gains on sales of loans, other income and higher provision for credit losses and non-interest expense compared to the same period of 2022.

The Mortgage Banking Segment reported a net loss of $1.9 million in the second quarter of 2023 compared to a net loss of $580 thousand in the 2022 period. The decrease was driven by a reduction in the mortgage segment revenues to $2.3 million in the second quarter of 2023 versus $4.2 million in the same prior-year period. Non-interest expenses related to mortgage operations decreased by $149 thousand year-over-year, as the Company recorded $1.4 million of expenses associated with the sale of certain assets to and assumption of certain operating liabilities by First Federal Bank on June 16, 2023. The $1.4 million charge was comprised of a $570 thousand accrual for costs to originate and sell the remaining commitments to fund loans, $360 thousand for employee severance costs, $238 thousand for write-downs of fixed asset and contract costs, and $270 thousand for other professional services related to the transaction close. As of June 30, 2023, the Company maintained $67.2 million of mortgage loans held for sale and future commitments to fund mortgage loans of $56.6 million along with the corresponding hedge positions. The Company anticipates final settlement of the loans and hedge positions will occur during the third quarter of 2023.

Consolidated net interest income for the second quarter of 2023 was $8.0 million, an increase of $665 thousand, or 9.0%, up from $7.4 million in the second quarter of 2022. Net interest margin increased to 3.68% in the 2023 second quarter from 3.31% in the year-earlier period. The Community Banking Segment reported a year-over-year increase of $1.1 million, or 15.5%, from $7.0 million in 2022 to $8.1 million in 2023. The 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.

On a consolidated basis, second quarter interest income increased 37.3%, from $7.8 million to $10.7 million. This increase improved the yield on average interest-earning assets substantially in the second quarter of 2023, growing to 4.90% compared to 3.50% in the 2022 second quarter. The Community Banking Segment reported interest income of $10.5 million in the second quarter of 2023 compared to $7.4 million for the 2022 quarter. The increase was the result of higher yields on interest-earning assets and an $83.8 million quarter-over-quarter increase in the average balance of loans held for investment and higher yields on cash and debt securities. It is noteworthy that the Company's variable rate assets have continued to re-price in step with interest rate movements by the Federal Reserve. Furthermore, the Company is receiving higher yields on new loan originations.

Consolidated interest expense in the second quarter of 2023 was $2.7 million, an increase of $2.2 million from the 2022 period. The cost of core deposits in the second quarters of 2023 and 2022 was 1.20% and 0.16%, respectively. Within the Community Banking Segment, the 2023 second quarter average balance of deposits decreased by $4.7 million when compared to second quarter of 2022. The cost of interest-bearing liabilities was 1.54% during the second quarter of 2023, compared to 0.21% in the same period of 2022. The Company continues to actively manage its overall cost of deposits well below the prevailing brokered deposit rates offered by national brokerage firms while staying focused on maintaining strong liquidity levels.

As of June 30, 2023, credit metrics remained stable with $1.5 million of nonperforming assets, representing a 0.16% 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 $165 thousand provision for credit losses in the second quarter of 2023 compared to no provision in the second quarter of 2022. The allowance for credit losses decreased slightly to 1.40% of loans held for investment on June 30, 2023, from 1.43% on December 31, 2022.

Non-interest income for the Community Banking Segment during the second quarter of 2023 was $2.0 million, compared to $2.6 million in the 2022 second quarter. Bank charges and service fees were $132 thousand higher quarter-over-quarter due to higher letter of credit fees and from the movement of deposits to one-way sell positions. Fees derived from the movement of deposits off the balance sheet began late in the first quarter of 2022 and can fluctuate significantly based on our customer's use of their excess funding. The Company experienced a significant decrease in the level of off-balance sheet deposits during the second quarter of 2023. As of June 30, 2023, off-balance sheet deposits amounted to $4.8 million compared to $187.5 million as of June 30, 2022. 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 reclaimed for future liquidity use by the Company at any time. Gains on sales of loans decreased period-over-period by $217 thousand as the premiums available on sale of the guaranteed portion of SBA loans has become less attractive in recent quarters. Other income decreased by $528 thousand when comparing the second quarter of 2023 to 2022 as the Company recorded gains on the sale of the Golden Valley, MN location in the second quarter of 2022.

Non-interest expense for the Community Banking Segment during the second quarter of 2023 increased $273 thousand, or 4.6%, to $6.2 million from $5.9 million in the second quarter of 2022. The increase is primarily due to higher salary, data processing, and occupancy expenses. These higher costs reflect normal inflationary increases as well as assuming a greater percentage of shared service costs because of significantly reduced mortgage banking operations compared to the prior year period. Shared service costs will continue to increase in the Community Banking Segment as the Mortgage Banking Segment winds-down.

In the second quarter of 2023, income tax expense on a consolidated basis was $176 thousand, compared to $617 thousand in the second quarter of 2022. The effective tax rate was 23.5% in the second quarter of 2023, unchanged from the same period of 2022.

Tangible book value per common share on June 30, 2023, was $28.87, 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 11.05% on June 30, 2023, compared to 10.63% on December 31, 2022.

The Community Banking Segment reported net income of $5.8 million in the first six months of 2023, compared to $5.0 million in the same period of 2022. In the first six months, earnings per diluted share was $1.63 versus $1.40 in the first six months of 2022. The first half of 2023 produced higher net interest income and higher bank charges and service fees compared to the same period of 2022. These results were offset by lower wealth management revenue, gains on sale of loans, other income and an increased provision for credit losses and higher non-interest expense when compared to the 2022 period.

The Mortgage Banking Segment reported a net loss of $3.1 million in the first six months of 2023 compared to a net loss of $1.1 million in the same period of 2022. The decrease was driven by a reduction in mortgage segment revenues to $4.3 million in the first half of 2023 versus $8.8 million in the prior-year period. Non-interest expenses related to mortgage operations decreased by $1.8 million year-over-year, which included $1.4 million of expenses associated with the sale of certain assets to and assumption of certain operating liabilities by First Federal Bank on June 16, 2023.

Consolidated net interest income in the first half of 2023 was $16.5 million, an increase of $2.2 million, or 15.4%, from $14.3 million in the first half of 2022. Net interest margin increased to 3.83% in the 2023 six-month period from 3.05% in the year-earlier period. The Community Banking Segment reported a year-over-year increase of $3.1 million, or 22.7%, from $13.5 million in first half of 2022 to $16.6 million in the comparable 2023 period. The 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.

On a consolidated basis, interest income increased by $5.6 million, or 37.2%, to $20.7 million for the six-month period of 2023, compared to $15.1 million in the six-month period of 2022. For the same periods, the yield on average interest-earning assets improved significantly to 4.81% in the first half of 2023, compared to 3.22% in the 2022 first half. The Community Banking Segment reported interest income of $20.4 million in the 2023 first half compared to $14.2 million in the 2022 first half, an increase of $6.2 million, or 43.6%. The increase is the result of higher yields on interest-earning assets and an $88.9 million increase in average balances of loans held for investment. It is noteworthy that the Company's variable rate assets have continued to re-price in step with interest rate movements by the Federal Reserve and the Company is receiving higher yields on new loan originations.

Consolidated interest expense in the first half of 2023 was $4.2 million, an increase of $3.4 million from the 2022 period. The cost of core deposits in the first six months of 2023 and 2022 was 0.94% and 0.15%, respectively. Within the Community Banking Segment, the average balance of deposits decreased by $60.5 million when compared to the first half of 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 1.22% during the first six months of 2023, compared to 0.20% in the same period of 2022. The Company continues to actively manage its overall cost of deposits well below the prevailing brokered deposit rates offered by national brokerage firms while staying focused on maintaining liquidity.

The Company recorded a $405 thousand provision for credit losses in the first six months of 2023. By comparison, the Company credited provision expense to release $550 thousand of its allowance for credit losses in the first six months of 2022 as pandemic risks subsided. The allowance for credit losses decreased slightly to 1.40% of loans held for investment on June 30, 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 Community Banking Segment in first six months of 2023 was $4.2 million, compared to $4.5 million in the first six months of 2022. The decrease was driven by a reduction in wealth management revenues, gains on sale of loans, and other income that were partially offset by increased bank charges and services fees. Wealth management revenues decreased $81 thousand, or 7.0%, largely due to the mix of fees associated with more conservative investment vehicles. During 2023, the Company has seen increases in assets under administration from new investments in U.S. Treasury securities. Assets under administration were $380.4 million at June 30, 2023 compared to $346.4 million at June 30, 2022. Gains on sales of loans decreased period-over-period by $229 thousand as the premiums earned on sale of the guaranteed portion of SBA loans has become less attractive in recent quarter. Other income decreased by $638 thousand when comparing the second quarter of 2023 to 2022 as the Company recorded gains on the sale of the Golden Valley, MN location in the second quarter of 2022. Bank charges and service fees were $624 thousand higher in the first six months of 2023 due to higher letter of credit fees and from the movement of deposits to one-way sell positions.

Non-interest expense for the Community Banking Segment increased $667 thousand, or 5.5%, to $12.7 million from $12.0 million in the first half of 2022. The increase is primarily due to higher salary, marketing, and other expenses being partially offset by lower regulatory costs and depreciation expense. These higher costs reflect normal inflationary increases as well as assuming a greater percentage of shared service costs because of significantly reduced mortgage banking operations compared to the prior year period. Shared service costs will continue to increase in the Community Banking Segment as the Mortgage Banking Segment winds-down.

During the six-month period ended June 30, 2023, income tax expense on a consolidated basis was $629 thousand, compared to $1.1 million in the first half of 2022. The effective tax rate was 23.5% in the first half of 2023 unchanged from the same period of 2022.

Assets and Liabilities

At the consolidated level, total assets were $929.8 million at June 30, 2023 versus $943.3 million at December 31, 2022.

Total loans held for investment were $641.0 million on June 30, 2023 compared to $616.6 million on December 31, 2022. Loans held for sale as of June 30, 2023, were $67.2 million, an increase of $29.5 million compared to December 31, 2022. Debt securities decreased $9.1 million from year-end 2022 while cash and cash equivalent balances totaled $16.6 million on June 30, 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 and the reduction in deposit balances.

Total deposits decreased $15.1 million to $804.5 million on June 30, 2023, from $819.6 million on December 31, 2022. While the Company continues to enjoy strong and enduring customer relationships, during the second quarter of 2023, the Company experienced elevated levels of customers deploying excess deposit balances to national brokered deposits to capture short-term rates offered in the market, most often by non-bank brokerage firms. Off-balance sheet deposits can fluctuate significantly as the Company experienced in the second quarter of 2023 as a significant portion of these deposits were moved to higher rate opportunities in the short-term markets. 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: